Kimberly Miller, Palm Beach Post

There is little to prevent another housing run-up and subsequent bust as long as there are people who want to get rich quick, said the chief economist of AIG during a business conference Tuesday at the Palm Beach County Convention Center.

Ardavan Mobasheri, who spoke to about 100 people gathered for a real estate discussion at the International Economic Forum of the Americas, said the financial crisis that began in 2008 can “easily trace its roots to the excesses of the housing market” but can’t as easily be stopped from happening again.

“So long as individuals have the liberty and freedom to be greedy, the speculative bubbles will be inevitable, and we’ll have to deal with the outcome of the bursting of that bubble,” Mobasheri said. “There is no measure we can take to prevent investors who want in a short period of time to become rich.”

AIG, a multinational insurance company, was a major contributor to the economic crisis when it imploded in September 2008. A credit rating downgrade required it to put up billions of dollars in cash collateral, which triggered a lack of liquidity. Its federal bailout package of $182.3 billion was the single largest of any company in U.S. history. AIG has paid back billions of dollars. Its remaining debt to the Troubled Asset Relief Program is about $35.7 billion.

Although there is no cure for greed, changes in mortgage application requirements and underwriting guidelines will help thwart a repeat of the multitude of bad loans granted during the housing boom, said Lawrence Yun, chief economist for the National Association of Realtors, who spoke during the same session as Mobasheri.

“Back in 2005 investors came in with exotic mortgages and liar loans, but that’s not the case today,” Yun said. “These investors are coming in solidly with cash deals.”

Yun was optimistic about a housing recovery, predicting Florida existing-home prices will jump 10 percent by the end of 2012.

Several Realtors in the session said bidding wars are again commonplace and that they are having trouble finding homes for traditional buyers, especially those getting a loan instead of using cash. One Realtor told the panelists she worries that another mini-bubble is forming.

“The home is on the market for $115,000 and people are bidding $150,000,” she said. “It’s not a fair game for people trying to purchase with financing.”

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Alison Frankel, Reuters

U.S. District Judge Mariana Pfaelzer of federal court in Los Angeles is poised to deliver a ruling in AIG’s mortgage-backed securities case against Countrywide that could have an impact on just about every company headquartered in New York. The issue: How long do N.Y. businesses have to bring fraud claims? Are they entitled to the benefit of the state’s generous six-year statute of limitations? Or, as Countrywide argues in a supplemental motion to dismiss filed on March 23, are companies headquartered in New York instead restricted to the generally stingier time limits in their states of incorporation?

To understand how this question arose in AIG’s MBS case, we have to back up a few steps. It’s no secret that in MBS litigation, there’s no more potent defense than arguments that investors waited too long to file suit. It’s a quick, clean way to excise big chunks of a plaintiff’s case, particularly because federal securities claims, with exceptions for American Pipe tolling (if you don’t know, don’t ask), are generally time-barred after three years under the statute of limitations or the more-obscure-until-MBS-litigation statute of repose. That’s why we’ve seen so many MBS plaintiffs — including AIG and the satellite insurance companies that are also plaintiffs in its Countrywide suit – assert state-law fraud claims in addition to federal securities claims.

New York has a notably generous six-year statute of limitations for fraud. It also has what’s known as a “borrowing” provision to prevent forum shoppers from taking advantage of that big window for fraud claims. The provision isn’t exactly a model of clarity, but it holds that other states’ time limits generally apply unless “the cause of action accrued in favor of a resident of the state.” You have to be a New York resident, in other words, to benefit from the state’s statute of limitations.

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The Vietnam War gave us the expression, “We had to destroy the village in order to save it.” The same kind of thinking might help explain the U.S. bank rescues of 2008: We had to save the banks in order to sue them.

Last week, the conservator for Fannie Mae and Freddie Mac filed lawsuits against 17 financial institutions to recover losses on faulty mortgage bonds sold to the two government- backed housing financiers. One of the defendants was Ally Financial Inc., the lender formerly known as GMAC that once was the finance arm of General Motors Co.

If the Federal Housing Finance Agency recovers damages from Ally for Freddie Mac, it will be a win for taxpayers. Yet it also will be a loss. That’s because Ally is still majority-owned by the U.S. Treasury.

It’s a ridiculous situation, for sure. Then again the FHFA is doing what it’s supposed to do: preserve and conserve the assets of Fannie and Freddie. It’s not the agency’s fault that Congress passed the Troubled Asset Relief Program and gave the Treasury Department new powers to keep Ally and its ilk alive.

Congress could have let those companies die, as they deserved to. It didn’t, though. So now the inevitable claims are working their way through the courts. The government’s roles as both a referee and a player in the financial markets remain as conflated as ever.

Great Worries

American International Group Inc. (AIG), still majority-owned by the Treasury Department, last month accused Bank of America Corp. (BAC) of fraud in a suit over losses on mortgage bonds, many of them packaged by Countrywide Financial Corp. One of the markets’ great worries is that Bank of America might not have enough capital to cover all the mortgage-repurchase liabilities it assumed when it bought Countrywide in 2008. The lawsuit by AIG, which is seeking $10 billion, piles on to those concerns.

That AIG filed a lawsuit isn’t the problem. What’s perverse is that the Treasury continues to hold a stake in AIG — three years after it joined with the Fed to save the giant insurer from bankruptcy — while AIG sues a company the Treasury Department oversees. Bank of America wouldn’t even be around for AIG to sue had it not been for the Treasury’s rescue money.

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More trouble piled up for Bank of America Corp. on Monday, as American International Group Inc. sued it for more than $10 billion, saying the bank cheated it by selling residential mortgage-backed securities that were overvalued.

The suit comes on top of similar suits, which together put the bank in a precarious position, analysts say. The bank’s stock dove 20 percent, or $1.66, to $6.51, revisiting levels seen at the nadir of the recession, in March 2009

AIG said Bank of America and two companies that were later gobbled up by the bank, Countrywide and Merrill Lynch, sold the insurance company $28 billion in securities backed by home mortgages between 2005 and 2007, at the height of the housing boom. It said it looked at more than 260,000 of the underlying mortgages, and found that the bank’s “stated metrics” for 40 percent of the securities were false.

In one case, a borrower said she had been the owner of a construction business for 25 years, which would have made her 10 years old when she took ownership, AIG said.

Bank of America denied the allegations, saying AIG was big enough and sophisticated enough to know the risks.

“AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets. It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors,” Bank of America spokesman Lawrence Grayson said.

AIG spokesman Mark Herr shot back: “It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct. Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold.”

AIG shares fell $2.52, or 10 percent, to $22.58. They hit a 52-week low of $22.10 earlier in the day.

In June, Bank of America agreed to pay $8.5 billion to a group of investors for selling them poor-quality mortgage securities. AIG’s suit is separate, but the company is raising questions about whether the settlement went far enough. On Friday, New York Attorney General Eric Schneiderman urged the judge to reject the settlement, calling it unfair.

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Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

“Everything’s fucked up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”

I put down my notebook. “Just that?”

“That’s right,” he said, signaling to the waitress for the check. “Everything’s fucked up, and nobody goes to jail. You can end the piece right there.”

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What’s more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even “one dollar” just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick “The Gorilla” Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Invasion of the Home Snatchers

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. “If the allegations in these settlements are true,” says Jed Rakoff, a federal judge in the Southern District of New York, “it’s management buying its way off cheap, from the pockets of their victims.”

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I’m talking about that odd 13-page “report” issued on Wednesday by the four Republican members of theFinancial Crisis Inquiry Commission. The F.C.I.C., of course, is the 10-member, supposedly bipartisan panel that was created by Congress last year and charged with examining the root causes of the financial crisis.

After a year and a half of hearings, including questioning over 800 witnesses, reviewing millions of pages of documents, and spending some $6 million in taxpayers’ money, its final report is due to be delivered in a month.

Except that in Washington these days, there is no such thing as bipartisan. On every major issue facing the country, Democrats and Republicans have competing narratives. Why should anyone expect anything different when it comes to the origins of the financial crisis?

Although commission members had long made a show of trying to work collaboratively, there was always a fair amount of underlying tension. Some of that tension had to do with the internal dynamics of the commission — the general sense of chaos, for instance, and the supposedly autocratic style of its Democratic chairman, Phil Angelides.

But more recently, it has had to do with the growing tug of war between the commissioners over which financial crisis narrative would win out. The Republican minority, fearing their view would get short shrift, pre-emptively put forward a CliffsNotes version of their theory of the case. In other words, they responded to a report that hasn’t even yet been written, much less read and voted on by the members.

Is there such a word as “presponse?” Perhaps we should coin it to describe what took place this week at the F.C.I.C.

It would all be pretty laughable if it didn’t have serious consequences. But it does. First, with the commission’s Republican members having now issued this public, partisan smoke signal, the final product, no matter how rigorous, will be inevitably dismissed as a Democratic document. As a result, it will have little impact and, once Bill O’Reilly has finished mocking it, will be consigned to the dustbin of history. By creating this partisan rift, the Republicans have succeeded in tarring the entire enterprise.

That is a genuine shame. When the commission was formed last year, there were high hopes that it could act as a modern-day Pecora investigation — which rooted out Wall Street corruption in the wake of the crash of 1929, and helped create the political groundswell for such key reforms as the Glass-Steagall Act. That investigation was led by Ferdinand Pecora, who held the country spellbound through some two years of nonstop investigations. Clearly, this effort isn’t going to come close to that one.

“I think we can officially stop comparing these guys to the Pecora Committee,” said Michael Perino, author of an engaging recent book about Pecora, “The Hellhound of Wall Street.” Mr. Perino added, “It is disparaging to Pecora.”

The second consequence is even more important. Next year, the House of Representatives will be in Republican hands. High on the agenda for the new majority is its own version of financial reform. The Republicans hope to minimize the impact of the Dodd-Frank bill while at the same attacking — and fixing — what they see as the “true” culprit of the financial crisis.

To fix a problem, though, it helps to know what the problem is. The F.C.I.C., with all those witnesses and documents, could have really helped here. But the paper released by the commission’s Republicans this week reads as if they couldn’t be bothered. It simply reiterates longstanding Republican dogma that could have been written without a $6 million investigation. None of which bodes particularly well for the next two years of “financial reform.”

The problem the Republicans want to fix is the two government-sponsored entities, Fannie Mae and Freddie Mac. Without question, Fannie and Freddie need fixing. A week beforeLehman Brothers collapsed in September 2008, both entities were so troubled that they had to be taken over by the federal government. Since then, the G.S.E.’s, as they’re called in Washington, have cost the taxpayer around $150 billion in losses, far more than, say, the American International Group.

They have also, though, served a critical purpose. With the private mortgage market essentially broken, virtually every mortgage made in America, postcrisis, has required a guarantee from Fannie, Freddie or the Federal Housing Administration. With the banks unwilling to make mortgage loans on their own, you simply cannot buy a house in America today without Fannie and Freddie’s help.

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Reversing its oft-repeated position that it was acting only on behalf of its clients in its exotic dealings with the American International Group, Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market.

A senior Goldman executive disclosed the “bilateral” wagers on subprime mortgages in an interview with McClatchy Newspapers, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an “intermediary” responding to its clients’ demands.

The official, who Goldman made available to McClatchy on the condition he remain anonymous, declined to reveal how much money Goldman reaped from its trades with AIG.

However, the wagers were part of a package of deals that had a face value of $3 billion, and in a recent settlement, AIG agreed to pay Goldman between $1.5 billion and $2 billion. AIG’s losses on those deals, for which Goldman is thought to have paid less than $10 million, were ultimately borne by taxpayers as part of the government’s bailout of the insurer.

Goldman’s proprietary trades with AIG in 2005 and 2006 are among those that many members of Congress sought unsuccessfully to ban during recent negotiations for tougher federal regulation of the financial industry.

A McClatchy examination, including a review of public records and interviews with present and former Wall Street executives, casts doubt on several of Goldman’s claims about its dealings with AIG, which at the time was the world’s largest insurer.

For example:

- The latest disclosure undercuts Goldman’s repeated insistence during the past year that it acted merely on behalf of clients when it bought $20 billion in exotic insurance from AIG.

- Although Goldman has steadfastly maintained that it had “no material exposure” to AIG if the insurer had gone bankrupt, in fact the firm could have lost money if the government hadn’t allowed the insurer to pay $92 billion of American taxpayers’ money to U.S. and European financial institutions whose risky business practices helped cause the global financial collapse.

- Goldman took several aggressive steps – including demanding billions in cash collateral – against AIG that suggest to some experts that it had inside information about AIG’s shaky financial condition and therefore an edge over its competitors. While former Bush administration officials said AIG was financially sound and merely faced a cash squeeze at the time of the bailout, McClatchy has reported that the insurer was swamped with massive liabilities and was a candidate for bankruptcy.

A spokesman for Goldman, Michael DuVally, said that the firm followed its “standard approach to risk management” in its dealings with AIG.

“We had no special insight into AIG’s financial condition but, as we do with all exposure, we acted prudently to protect our firm and its shareholders from the risk of a loss. Most right-thinking people would surely believe that this was an appropriate way for a bank to manage its affairs.”

He said that Goldman didn’t have “direct economic exposure to AIG.”

The relationship between Goldman and AIG has drawn intense scrutiny over the past year because several Goldman alumni held senior Treasury Department jobs when the Bush administration guaranteed as much as $182 billion to bail out AIG, $12.9 billion of which AIG paid to Goldman, the most money it paid any U.S. bank.

Read more: http://www.miamiherald.com/2010/06/29/1707514/goldman-admits-it-had-bigger-role.html#ixzz0sL3TCCOP