More Stress Test Shenanigans

From Washington’s Blog:

AFP reports:

The Federal Reserve will expand its so-called stress tests of the banking system to ensure they have enough capital during difficult periods, Fed chairman Ben Bernanke said Friday.

Bernanke highlighted the positive impact of stress tests conducted earlier this year on major banks, a move aimed at ensuring their financial health and building confidence.

“Building on the success of this initiative, we will conduct more frequent, broader, and more comprehensive horizontal examinations, evaluating both the overall risk profiles of institutions as well as specific risks and risk-management issues,” Bernanke told a conference organized by the Boston Federal Reserve.

The highly publicized stress tests conducted earlier this year focused on 19 major banks, and indicated 10 needed additional capital.

Bernanke said the Fed would step up efforts to review bank capital requirements to avoid a recurrence of the credit crisis that has spread around the world.

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Obama pushes bailed-out banks to make small business loans

From Raw Story:

President Barack Obama urged US banks Saturday to unfreeze credit for small businesses, calling them “the engine” of the country’s economy.

“Small businesses have always been the engine of our economy – creating 65 percent of all new jobs over the past decade and a half – and they must be at the forefront of our recovery,” Obama said in his weekly radio address.

He added that it was time for large American banks that received government assistance at the height of the current economic crisis “to stand by creditworthy small businesses, and make the loans they need to open their doors, grow their operations, and create new jobs.”

The president recalled that his administration had already provided five billion dollars worth of tax relief to small businesses and guaranteed some of Small Business Administration loans up to 90 percent, which has supported nearly 13 billion dollars in new lending to more than 33,000 businesses.

But he argued that more needed to be done by private banks, particularly now that the situation in the financial sector has stabilized.

Obama said his administration would take “every appropriate step” to encourage the banking sector to resume lending to small businesses.

“Because if it’s one thing we’ve learned, it’s that here in America, we rise and fall together,” the president said. “Our economy as a whole can’t move ahead if small businesses and the middle class continue to fall behind.”

This video was published to YouTube by the White House on Saturday, Oct. 24, 2009.

With AFP.

Real Estate Collapse Entering New Phase: Banks Refusing to Repossess Abandoned Homes, or Even File Foreclosures

From Cryptogon:

October 19th, 2009

Not only are there no bids in some markets, the accumulation of property taxes means that some properties have negative valuations, like a derivative trade that’s gone bad.

Via: Dayton Daily News:

Nobody is sure exactly how many bank walkaways are occurring. For various reasons, they can’t be identified in searches of public real estate and court data without individually pulling case files, experts say.

But nobody questions that they are on the increase.

David Rothstein, a researcher with Policy Matters Ohio, summarized the way they occur like this:

* The lender files a foreclosure, gets the foreclosure judgment in court, takes the property to sheriff’s auction but doesn’t bid on it if no one else does.

* The lender files as above, gets the judgment, sets the sheriff’s auction, then cancels the sale at the last minute.

* The lender files as above but then never requests a sheriff’s auction.

* The lender doesn’t even bother to file foreclosure.

All of these actions leave the foreclosed property in the hands of the original owner who, in many cases, has moved out and is unaware the lender hasn’t taken it.

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Bankers Gone Bad: Financial Crisis Making The Threat Worse

From DarkReading.com:

Seventy percent of financial institutions in the past 12 months have had cases of insider fraud, new survey says

Oct 05, 2009 | 04:11 PM

By Kelly Jackson Higgins
DarkReading

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<span name=”closeTag” value=”“> <!– –> A former Wachovia Bank executive who had handled insider fraud incidents says banks are in denial about just how massive the insider threat problem is within their institutions. Meanwhile, the economic crisis appears to be exacerbating the risk, with 70 percent of financial institutions saying they have experienced a case of data theft by one of their employees in the past 12 months, according to new survey data.

Shirley Inscoe, who spent 21 years at Wachovia handling insider fraud investigations and fraud prevention, says banks don’t want to talk about the insider fraud, and many aren’t aware that it’s an “epic problem.”

“There needs to be more training around this issue,” says Inscoe, who co-authored a book about bank insider fraud called Insidious — How Trusted Employees Steal Millions and Why It’s So Hard for Banks to Stop Them, which publishes later this month. “We are seeing a huge increase in this country of organized crime rings threatening individuals who work in financial institutions and making them [commit fraud on their behalf],” she says.

Meanwhile, according to a new survey by Actimize, nearly 80 percent of financial institutions worldwide say the insider threat problem has increased in the wake of the economic downturn. “A significant number of folks are being impacted more than a couple of years ago,” which is when the last survey was conducted, says Paul Henninger, director of the financial crimes product group at Actimize. The Actimize survey found that only 28 percent of financial institutions had not suffered an insider breach in the past 12 months.

“The severe recession has put these employees into a position to cross the line,” he says.

Interestingly, it’s not the stereotypical offshore or outsourced employee who’s most risky to their organizations. Nearly 70 percent of financial institutions say their full-time employees are most likely to pose an insider fraud threat, versus 10 percent of part-timers, 8 percent of outsourced workers, 6 percent of temporary workers, and 5 percent of offshore employees, according to the survey.

Nearly 60 percent of the respondents in the survey ranked tellers and traders as the highest risk of insider fraud, followed by administrative/back office (55.74 percent), technology (34.43 percent), executive/senior management (29.51 percent), call center (29.51 percent), and line of business (26.63) employees.

The typical profile of the banker fraudster that Inscoe and co-author BC Krishna say typically commit these crimes is one of a bank’s top performers, who is well-versed in its operations and how to circumvent them and remain under the radar.

But some security measures for limiting user access to sensitive data, such as minimizing user privileges, don’t apply cleanly for banks. “What makes this problem interesting is that these employees need to have these privileges — branch managers, customer service representatives, call center workers,” Memento’s Krishna says. “If you take them away, they can’t do their jobs…a teller needs user privileges to go in and change an address, for example. It’s impossible to implement dual controls — you’d create customer service problems. The best thing they can do is proactively monitor and look for signs that user entitlements aren’t being abused.”

And in most insider fraud cases at banks, the employee has the motivation (think financial pressure, revenge) and the opportunity. Many of these cases start out with the insider intending to repay the money they moved or stole, Inscoe says. “In every situation I’ve been aware of, the person has been intending to repay the money, almost like a short-term loan they’re giving themselves,” she says. Unfortunately, the scam continues and the person never actually gives back the money, Inscoe adds.

Some banks are also missing a key element of the insider threat, too, she says. “Some are only focused on internal fraud if money is involved. I have a huge problem with that,” Inscoe says. So if an employee is caught surfing customer data, they don’t bother pursuing the case because no money was lost or stolen, she says.

“But for all they know the employee was selling that data to an external crime ring, incurring huge losses,” she says. “And it breaks the customer’s trust in their financial institution [if these cases are overlooked]. I have a real problem if banks say the only real insider fraud is if they see hard dollar loss.”

‘Should Have Been Caught Long Ago’
Nearly half of the banks in the Actimize survey say they are losing 1 to 4 percent of their total revenues to insider fraud, and the biggest challenges to meeting the threat are cost/expense (67 percent), data availability/access (55.77 percent), availability of tools (46 percent), and general resources/priorities (46 percent).

Inscoe and Krishna’s book, meanwhile, explores several real insider fraud cases, including that of “Donna Lee Munson,” a former assistant vice president of a bank in Georgia. The authors interviewed Munson (which is not her real name), who was convicted of stealing nearly $200,000 from her bank, in their book just prior to her serving her 18-month sentence at a federal prison. Munson transferred small amounts of money from bank customers’ CD’s to her own account over a period of time, with the intention to pay it back. “I never took any cash. Cash seemed wrong to me. Cash seemed like a tool of my job. But the paper part of it just seemed different,” she said in the book interview.

Munson said her situation became so out of hand that she was unable to repay the money without arousing suspicion. Munson said banks should have better systems to catch employees like her who use their jobs to steal money. “They should have caught me a long time ago,” she said in the interview.

Report Claims Bailed Out Banks Were Healthy

From CNSNews:

Washington (AP) – The credibility of the government’s $700 billion financial rescue program was damaged by claims a year ago that all of the initial banks receiving support were healthy, a new report contends.

Special Inspector General Neil Barofsky generally found that the government had acted properly in October 2008 as it scrambled to implement the Troubled Asset Relief Program to avert the collapse of the U.S. financial system.

But the report said that then-Treasury Secretary Henry Paulson and other officials were wrong to contend at an Oct. 14 press conference that all nine institutions receiving the first round of support – $125 billion – were sound.

“These are healthy institutions, and they have taken this step for the good of the economy,” Paulson had declared at the time.

Barofsky said that the fact that Citigroup Inc. and Bank of America Corp. soon required billions in additional assistance highlighted the inaccuracy of that claim and raised questions about the whole effort. In addition, Merrill Lynch, which was also in the original nine, was in the process of being acquired by Bank of America because of its weakening financial position.

“Statements that are less than careful or forthright – like those made in this case – may ultimately undermine the public’s understanding and support,” the report said. “This loss of public support could damage the government’s credibility and have long-term unintended consequences that actually hamper the government’s ability to respond to crises.”

In announcing the $125 billion in support to the nine institutions, Paulson had said that by building up the capital reserves of these healthy institutions, it would allow them to resume normal lending to businesses and consumers and help stabilize the financial system.

The nine institutions, including JPMorgan Chase & Co. and Wells Fargo & Co., held about 75 percent of the assets of the U.S. banking system at the time.

A joint statement from Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. also referred to the nine institutions as healthy.

In commenting on Barofsky’s report, the Federal Reserve generally supported the findings, saying “transparency and effective communications are important to restoring and maintaining public confidence, especially during a financial crisis.”

But Assistant Treasury Secretary Herbert Allison Jr., who now heads the bailout program for the government, said that any critique of the announcements made a year ago should take into consideration the unprecedented circumstances facing financial regulators at the time.

“We believe the most important lesson from this history is that quick, forceful action prevented a catastrophic meltdown of the system,” Allison wrote in his response to Barofsky’s findings.

Barofsky serves as the auditor for the Troubled Asset Relief Program, a position that was created by Congress when it passed the $700 billion bailout fund on Oct. 3, 2008.

In his new report, Barofsky reviewed Paulson’s decision to switch the focus of the program from buying up toxic assets from banks to spur new lending to direct injections of capital. The report cited developments that supported Paulson’s contention that financial conditions were deteriorating so quickly that the government did not have the time needed to get the toxic asset program up and running.

The government just announced last week that two large investment funds have raised the minimum amounts needed to begin purchasing toxic assets from banks, a full year after Congress authorized the program.

The new report also provided information on interviews conducted with embattled Bank of America CEO Kenneth Lewis and Paulson and Federal Reserve Chairman Ben Bernanke over their conversations regarding Bank of America’s acquisition of Merrill Lynch.

A congressional committee has investigated whether the government pressured Lewis, who announced this past week that he would leave Bank of America at year’s end, to continue with the merger despite sharply rising losses at Merrill Lynch and to delay revealing those losses.

The report said that it had “found nothing to indicate Treasury and Federal Reserve officials instructed Bank of America executives to withhold the public disclosure of losses,” the report said.

Morgan Stanley’s Mack Proposes Single Global Bank Regulator

From Bloomberg:

By Dakin Campbell

 

Sept. 30 (Bloomberg) — Morgan Stanley Chief Executive Officer John Mack, who struggled to return the bank to profitability amid the financial crisis, said a single regulator should oversee financial institutions worldwide.

“A better system would be one uber-regulator,” Mack said in an interview in New York for Bloomberg Television’s “Conversations with Judy Woodruff,” parts of which will air today. “We do need an overall systemic-risk management that everyone buys into. It’s not a U.S. systemic boundary — it’s a global systemic risk manager.”

A global regulator would ensure that U.S. banks aren’t subject to tighter regulations than the rest of the world, Mack said. A push for regulation during the financial crisis has weakened as the administration of President Barack Obama pursues other tasks, he said.

Morgan Stanley and Goldman Sachs Group Inc. converted to bank holding companies one week after Lehman Brothers Holdings Inc., Merrill Lynch & Co. and American International Group Inc. collapsed or were rescued in September of last year. Less than a month later, Morgan Stanley took $10 billion from the U.S. government as part of the Troubled Asset Relief Program. It has since paid back the government.

“I think the crisis is over,” Mack said in yesterday’s interview. “What I worry about is that we lose momentum with some of the regulatory changes that we need to go through.”

No Job Growth

While the financial crisis has subsided, economic recovery and job growth may take longer to return, Mack said. Confidence among U.S. consumers unexpectedly fell in September as a rising unemployment rate weighed on households, the New York-based Conference Board said. U.S. unemployment climbed to 9.7 percent in August.

“We’re a ways off in creating jobs and I do think that this is going to be a very slow recovery,” Mack said. “In the developed countries, Western Europe, the United States, I don’t see a lot of growth.”

Mack said in an interview earlier this month that he considers his greatest accomplishment to be leading Morgan Stanley through last year’s crisis. While the firm survived, it has lost money since the third quarter of 2008 and reined in trading as Goldman Sachs earnings surged to a record.

Mack has sought to improve profit and repair divisions that appeared under former CEO Philip Purcell. His strategy of boosting trading risks backfired in 2007 when bad bets led to the firm’s first quarterly loss.

Investing Again

“Whether it was in a much broader sales force or more robust trading groups, there was a time when this firm did not invest in the business,” Mack said in the Woodruff interview. “That’s one of the things we’re doing and we’re doing it now.”

Mack, 64, will step down as CEO at New York-based Morgan Stanley and hand over his title to co-President James Gorman, 51, at the end of the year, he announced earlier this month. Mack will remain chairman for at least two more years.

“For the first six months of the new year, I will not come to any management committee meetings,” Mack said, referring to a pledge he made to Gorman. “I don’t want anyone looking at me and looking at him. They just look at him.”

Morgan Stanley has responded to calls for curbs on compensation amid the crisis by instituting so-called clawback provisions, Mack said. They would allow pay to be clawed back if losses occur later.

Ways to Be Paid

“Wall Street has to be extremely careful on how they compensate people,” Mack said. “What firms need to understand, there are a number of ways you could be paid. You can pay a lot of money in cash or you can leave a lot of that in retained earnings.”

Mack worked his way up in fixed-income sales and trading at Morgan Stanley before becoming president under CEO Richard Fisher in 1993. He encouraged Fisher to sell the firm to Dean Witter Discover & Co., the brokerage firm led by Purcell, only to leave in 2001 after Purcell refused to relinquish power.

Mack helped run Zurich-based Credit Suisse Group AG for three years, leaving after a clash with the board. When Morgan Stanley shareholders and employees helped to oust Purcell in 2005, they turned to Mack.

The full interview will be shown on Bloomberg Television at 6 p.m. New York time on Oct. 2.

Bank President Admitted that All Credit Is Created Out of Thin Air With the Flick of a Pen Upon the Bank’s Books

From Washington’s Blog:

In First National Bank v. Daly (often referred to as the “Credit River” case) the court found: that the bank created money “out of thin air”:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).

Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.

But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book, which means – as we have previously pointed out – that the story we’ve all been told that bank deposits and reserves precede loans is false.