Sen. Tim Johnson, D-S.C., is almost certain to be chairman of the Senate Banking Committee next year, once current chair Chris Dodd, D-Conn., is out of office. Johnson has never had a good reputation with consumer advocates, in large part because he’s opposed nearly every piece of legislation designed to thwart predatory lending.

That perspective is not likely to change with his chairmanship. Johnson just hired a top bank lobbist named Dwight Fettig to be a “senior policy adviser.” Fettig’s clients included some of the chief scumbags that wrecked the economy, secured epic bailouts, and opposed financial reform: the American Bankers Association, JPMorgan Chase, the National Association of Mortgage Brokers and the Vanguard Group hedge fund. Prior to peddling influence on behalf of the too-big-to-fail gang, he was the top “government relations” man at Freddie Mac. During the housing bubble.

By hiring Fettig, Johnson is sending the clearest signal possible to Wall Street: I’ve got your back.

This isn’t Fettig’s first trip through the revolving door. Before entering the bank lobby, he worked as a Johnson aide in the House.

So the bad news is, Congress is totally corrupt. The good news? It already was.

UPDATE:

And hey! Obama’s former Budget Director Peter Orszag just joined Citigroup! It’s really pretty sick. The Republicans just spent an entire year promising to give Wall Street whatever they wanted on anything, but the public still thinks it’s the Democrats alone who are in bed with Wall Street. This is why.

This also is not the Office of Management and Budget’s first turn through the revolving door this year. The current director, Jack Lew, made $1 million running Citi’s Alternative Investments unit into the ground.

The political optics here are just horrible. Obama is pushing a tax cut deal that provides huge benefits for the super-rich . . . as his former budget director take a job as Vice Chairman at Citigroup, thus joining the ranks of the super-rich.

Merry Christmas, Wall Street.

Mike Stark has posted a provocative on-the-street interview with Barney Frank about the recently released Fed data. Frank offers what is now a standard defense of the Fed’s bailout operations: Without them, the economy would have collapsed, so critics should just quit whining. But Frank takes this line a step further, accusing liberal Fed critics of playing into the hands of right-wingers who don’t want to extend any economic relief to anybody for anything, ever. It’s all hooey.

Here’s Frank:

“On the whole, frankly, those who were looking for conspiracies and scandals were disappointed. I think the fact is, what you saw was a series of events that worked pretty well and helped the economy . . . . Would you have had the Fed do nothing? At a time when there was no credit available, would you have had the Fed do nothing? That’s what the right-wing wants.”

First, the “disappointed” critics line massages away the fact that the Fed failed to disclose an enormous amount of information. We still don’t know the credit ratings of collateral accepted at some facilities, and we don’t know the trading prices of securities they accepted as collateral at any of the facilities. Without that information, we can’t determine whether many of these actions were scandalous.

Second, yes– without major government intervention, the economy would indeed have collapsed. Really, the economy collapsed anyway—two years later unemployment is near double-digits—but it’s safe to say the collapse would have been worse had the Fed failed to act. But just because the Fed had to do something doesn’t mean it had to do exactly what it did. There were always other alternatives, and the most obvious would have involved attaching some strings to the bailout facilities.

If you want this money, you have to help homeowners avoid foreclosure, or your executives have to take a hike, or you all have to spend the next month wearing a shirt that reads, “I hijacked the U.S. economy and all I got was this lousy t-shirt.” Just about anything to make clear that aid from the U.S. government came at a price would have been better than, well, nothing.

Frank spends a good deal of the discussion arguing that liberal Fed critics are catering to right-wing agendas:

“My friends on the liberal side shouldn’t always focus on the negative. You’re playing into the hands of the right-wing. You know, it’s the right wing that thinks this is some terrible conspiracy. This was a case of government intervention. The Federal Reserve is a government entity. It intervened substantially to stave off worse damage than we would have gotten, and I think it’s a great mistake for people on the liberal side to engage in this kind of Fed-bashing.”

The Fed had extraordinary powers and was not faced with the choice of whether to intervene, but of how to intervene. I fail to see what is so ultraconservative about objecting to free money for fabulously wealthy criminals/fools who wrecked the economy with predatory loans.

Indeed, it seems to me that the ideological pressure here is really on Frank’s shoulders. When a traditional liberal icon like Frank endorses a bankers-and-brokers-first policy, the public starts to believe that all Democratic policies are just handouts for Wall Street. This was the biggest reason why voters abandoned Democrats at the polls last month. The stimulus and the bailout were all mushed together in peoples’ minds.

But things get really interesting when Stark proposes cutting checks to individuals instead of making loans to the banks. Frank responds:

“You understand how fallacious that is because the money was paid back . . . You acknowledge the money was paid back. Doing what you’re suggesting, cutting everybody a check, they wouldn’t have paid the money back . . . You’re saying instead of lending the banks money, why don’t we give it to individuals? Because then you would have had that much more deficit!”

Frank gets the best of this argument because Stark proposes cutting checks instead of making loans. But what if the Fed had offered everyone in the country a loan at zero or near-zero percent interest, on the condition that individuals put up sufficient collateral? This is a (very) charitable way of describing what the Fed did to support the banking system. If the same courtesy had been extended to individuals, I’m sure plenty of people would have defaulted. But certainly not everybody– zero percent loans are actually pretty easy to pay back. And for those people who did in fact default, the Fed could have simply held onto the collateral to avoid taking a loss.

It’s not obvious that this policy ends up working wonders—plenty of people would have been unable to post collateral, and for many who could, the risk of losing the lawnmower in order to pay the heating bill for another couple of months isn’t really a great deal. There’s no way to gauge whether the additional spending generated could have brought the unemployment rate down very much. And of course, personal loans wouldn’t have helped debt-burdened homeowners very much. But then again, neither did any of the policies the Fed actually implemented!

And it is obvious that the government wouldn’t end up taking a big loss on a big direct-lending-to-actual-people policy. As a result, crowing about the government turning a profit on the Fed’s bailout facilities is really very silly. That doesn’t stop Frank from doing it, however:

“It came back with interest! . . . The Fed is making money off that.”

You don’t have to endorse Michelle-Bachmann-dystopia to object to the Fed’s bailouts.

Watch the whole thing:

Kevin Drum gives a pretty thorough analysis of President Obama’s open assault on the mainstream Democratic Party at yesterday’s press conference, and declares that “programmatic liberalism is dead.” I think that’s more than a little exaggerated, but regardless, it’s not a fair description of the policies at stake in Obama’s lousy tax deal. The tax deal is fundamentally about whether the United States still believes it has a basic commitment to protect its most vulnerable citizens from harm. For so basic an intuition to be the subject of political negotiation should be abhorrent to anybody of any ideological stripe in today’s United States. The deal is not a signal of strength or weakness on the left or the right, it is a symbol of rank political cynicism.

Protecting the most vulnerable members of society is not a liberal idea. It is the basic moral intuition of every philosophical and religious tradition but two: cruel interpretations of Friederich Nietzsche, and a brand of libertarianism far more radical than anything in contemporary American politics. Republicans were threatening to cut off unemployment benefits and a poverty tax credit for families with children. Let me emphasize: poverty relief for children.

These policies should never, ever be the subject of political negotiation. Obama could have raised a fuss, he could have publicly shamed his adversaries for threatening a basic moral building block of a decent society. Instead, he offered absurd giveaways to the rich that have not only been the ire of “the professional left,” but of the mainstream Democratic Party for almost a decade. Nearly every Democrat in Congress is now wondering if a primary challenge will be the result of support for this deal. And Obama now has the gall to chastise “the left” for being outraged.

A decent society takes care of its poor. Committing to conservative political thinking does not require one to believe that the poor should suffer for no reason. The number of poor families in the United States has gone up dramatically during the worst recession since the Great Depression, just as the number of unemployed parents has skyrocketed. These problems are caused by major structural economic problems, not by laziness or recklessness on the part of families (and even if it were only the result of laziness or recklessness, a decent society would not take that out on the children of the lazy and reckless). Amid mass poverty, any policymaker should support poverty relief.

This is a moral intuition even more fundamental than the commitment to equality of opportunity—the root belief that a decent society does not let its members endure extreme suffering needlessly. It is not egalitarian, it is not Marxist, it is not socialist, it is not liberal. It is just something a decent society does. It can be described with economic language, but it is not fundamentally an economic problem, unless short-term poverty relief somehow results in total economic calamity. Needless to say, the United States faces no such crisis from aiding its poor.

But Obama did not make this case. He didn’t even try. He entered a room with Republican leaders, and returned to announced they had been given everything they wanted.

Shortly before the deal was announced, Gretchen Morgenson and Louise Story of The New York Times ran a numbers on how the Bush tax cuts affect Wall Street bonuses. For every $1 million in bonus payouts, they calculated, the Bush tax cuts allow Wall Streeters keep an additional $40,000 to $50,000 in income.

The price Republicans demanded for allowing the United States to participate in the basic moral foundation of every decent society the world over was $40,000 for every $1 million in Wall Street bonuses. That should be appalling to liberals and conservatives alike, and a President who does not go to the mat to shame his opponents under such circumstances is bound to lose respect among his followers.

Via a link to a prior post, Kevin defines “programmatic liberalism” as the Progressive Era of 1911 – 1919, the New Deal of the 1930s, and the 1960s. All of these involved significant restructurings of the United States government and its institutions. This is not the sort of thing under discussion in the tax debate. Not even close.

“Should the poor be sustained?” Is a much different question than, “Is it the proper jurisdiction of government to regulate X given recent events?” All kinds of ideological issues can play into regulatory questions. But for quite literally centuries, there has been a broad moral consensus about the right of the poor to live (this glosses over racism and sexism, of course). The “professional left” is not demanding new institutions or government functions. It’s demanding that our society actually be a society.

And so Obama’s assault on what he called “purist” and “sanctimonious” left cannot be viewed as anything but outrageous. MoveOn and DailyKos and FireDogLake are not actually demanding leftist positions on tax policy—their opponents are threatening outright brutality, and the President of the United States is not seriously challenging those threats. Obama’s willingness to capitulate does reveal the man’s fundamental human compassion—but it also portends serious dangers. The next major negotiation, as Matt Yglesias and Mike Konczal have emphasized, will be over raising the federal debt ceiling. If it is not raised, the United States will have no choice but to default on its debt, and the global economy will collapse. If Obama is willing to throw up the Bush tax cuts to preserve the basic moral foundation of society, then he will certainly offer anything to prevent mere economic Armageddon. With this deal, the President has signaled that whenever a difficult choice arrives, he will roll over.

Here’s a leftist tax position: restore tax rates on millionaires to Johnson-era levels of 90 percent, and use that money to guarantee free college education for the children of families earning less than $50,000 a year. Nobody on the “professional left” is demanding that right now. We’re demanding that the basic functioning of society not be ransomed away in the name of bigger bonuses, and that negotiations over economic and tax policy not allow the most vulnerable members of society to be used as bargaining chips.

So perhaps this is what Kevin means. Now that a Democratic president is willing to cave on negotiations about the moral foundation of society, liberals cannot hope for serious economic progress for several decades. I see things otherwise. Two years ago, pundits were forecasting the end of conservatism as it has been practiced for 30 years. “Liberal” thought is not dead. Our president is simply ineffective.

President Barack Obama and Congressional Republicans are ready to mortgage the American economy to billionaires in exchange for a few months of unemployment benefits. This deal is easily the gravest economic outrage of the Obama presidency to date, and signals that other political assaults on the economy are ahead.

The basic deal: One year of unemployment benefits, a $40 billion extension of the anti-poverty tax credit, a $120 billion tax cut for workers and some additional tax cuts for American businesses that are already sitting on $1 trillion in cash and refusing to hire new people. In exchange, we get the Bush tax cuts for billionaires, plus an estate tax even more regressive than the worst estate tax implemented by George W. Bush. A few billion for the poor, hundreds of billions for the rich, and nothing—nothing – that will alleviate epic unemployment. It may even fail to prevent the economy from deteriorating further. The best I can say for it is that it will prevent things from getting too much worse.

David Dayen at Firedoglake does some number-crunching and finds $116 billion of actual new stimulus in this deal. He acknowledges that this is a charitable figure, because $56 billion of that total comes from extending unemployment benefits—meaning “not cutting them off”– not exactly a “new” program. Under either calculation, the result is pathetic. The George W. Bush stimulus from 2008 was $160 billion, and featured a roughly similar approach to the stimulative measures in this one: putting money in workers’ pockets. It’s better than not putting money in workers’ pockets, but it’s simply not enough.

This is it, folks—the only economic aid package we are going to see until 2012. If it passes, both parties will praise it as a great bipartisan victory, and critics demanding further economic relief will be told to give it time to “work,” as the worst recession since the Great Depression grinds on and on and on. It will be the stimulus package disaster all over again. And remember, Americans actually liked the stimulus plan when it was enacted. Today, most Americans already want to see the Bush tax cuts for billionaires expire.

The actual consequences of this deal, of course, will be more severe than the political fallout in 2012. We’ll soon hear about “tough choices” facing the country as a result of our allegedly out-of-control budget deficit (bond interest rates, shmond interest rates!). Now that raising taxes on the rich has been taken off the table, those “choices” will translate to devastating cuts in Social Security. After agreeing to useless tax cuts for the rich in the name of economic “stimulus,” Wall Street executives and Congressional Republicans will demand Social Security be slashed, further sabotaging our demand-starved economy, and actually starving our senior citizens.

The United States does not have a deficit problem, with or without the Bush tax cuts for billionaires. Interest rates on U.S. Treasury bonds are at record lows, and aren’t going anywhere with Europe, the U.K. and Japan in serious fiscal distress, and with China buying up as much U.S. debt as it can in order to support its own economy.

But that doesn’t mean the Bush tax cuts for billionaires will be without consequences. Asset bubbles don’t just materialize out of thin air. They occur when a few people have loads of money to invest, while most people don’t have the money to buy things. When most people can’t buy things, the rich can’t invest their money in productive enterprises—however good somebody’s new product may be, it can’t be sold to people who are broke. So investments flow to things that aren’t actually very useful, inflating their value—things like the stock market in the 1990s and the housing market in the Bush years. There are other factors, of course, but severe inequality is a key component.

Right now demand in the economy is much, much weaker than it was in the ’90s or the naughties, and we have a too-big-to-fail banking industry that not only receives generous bailouts, but cannot even be bothered to follow the law in carrying out foreclosures. Extending the Bush tax cuts without seriously addressing unemployment, big finance and foreclosures is asking for another asset bubble. And that’s how we get to a real fiscal problem: another bubble, another round of epic bailouts for banks that are bigger than those we bailed out in 2008 and 2009.

Today, banks are facing huge losses from foreclosure fraud, and asset valuations based on outrageously optimistic home prices that have not come to fruition (translation: banks are pretending big losses are big profits). This is a problem that can be solved, and one that will not wreak economic havoc if investors are forced to help bear the costs of solving it. But so far policymakers have only attempted to address the issue by papering over the problem for banks, with many actively encouraging more and faster foreclosures (read: deflation).

More Bush tax cuts, more unemployment and more bad banking. So we beat on, boats against the current, borne back ceaselessly into the past.

The data from the Federal Reserve audit is full of frightening revelations about U.S. economic policy and those who implement it. When Wall Street went off the rails in the fall of 2008, policymakers told the public we had a certain kind of problem, knowing all along that the actual nature of the problem was very different—and far more severe. This was a terribly destructive lie. Had policymakers fully explained the scope of Wall Street’s 2008 troubles, today’s problems with foreclosure fraud would simply not exist.

Here’s the basic issue. As Lehman Brothers, AIG and other major financial firms teetered on the verge of collapse, the Fed and the Treasury Department insisted that the trouble on Wall Street was one of “liquidity.” That’s a finance term meaning, “the banks are fine, but everybody is confused.” Banks have lots of money in long-term assets, but can’t convert those long-term assets into short-term cash.

In retrospect, that view was clearly an error. The bank held hundreds of billions of dollars worth of subprime mortgage assets, which were not merely worthless in the panic-stricken view of the financial mob, but worthless, full stop. At the time many people argued that the financial system faced not a liquidity crisis, but a liquidity crisis and a solvency crisis. That is to say, even if the government had helped the banks deal with day-to-day problems, the banks were still fundamentally unable to pay their debts. They were not merely illiquid, but insolvent.

I stole this perspective on the financial crisis from Mike Konczal, and the same basic framework was portrayed very forcefully by Nobel Prize-winning economist Paul Krugman in 2008 and 2009. Krugman’s major concern was that the U.S. would end up with a handful of dominant “zombie banks”—firms which were kept alive by government aid, but which were fundamentally insolvent, and unable to support the economy with productive lending.

The truth has been far worse than Krugman predicted. Not only are today’s major banks unable to support the economy, they are actively sabotaging the middle class with fraudulent foreclosures. This is a direct result of policymakers’ failure to address the fundamental solvency problem in 2008 and 2009. And what’s worse, it appears that the Federal Reserve was aware of the solvency problem, even as its top officials publicly insisted that the bailed out banks were fine.

To fix a liquidity crisis, the Fed has had a longstanding policy of offering short-term, low interest loans. In exchange for these loans, the Fed demands high-quality collateral. That’s as it should be: if a bank is truly experiencing a liquidity crisis, there is a public interest in keeping it afloat so it can meet its financial obligations.

And so in 2007 and 2008, the Fed created several facilities to ease liquidity based on this principle. The trouble is, starting on Sept. 15, 2008—right when Lehman Brothers was going under—the Fed started accepting total garbage as collateral for its loans. Not just a little bit of garbage, either. According to data released by the Fed yesterday, the central bank accepted $1.32 trillion in collateral rated “junk bond” status or lower, starting Sept. 15, through it Primary Dealer Credit Facility alone. That compares to $8.95 trillion in total loans extended through the Primary Dealer outlet from March 2008 through May 2009. From Sept. 15 onward, the Fed lend out $7.60 trillion through this window alone, meaning that a full 17 percent of its lending from this point was backed by junk bonds, or worse.

These total figures are somewhat exaggerated—the facility in question offered overnight loans, and many banks chose to roll-over their loans from one day to the next. Nevertheless, the collateral comparison is apt. However you measure it, nearly one-fifth of the Fed’s lending through this facility was backed by junk bonds.

What does all this mean? The Fed knew it was facing a solvency crisis, even as it publicly insisted that Wall Street was merely dealing with a liquidity issue. If the Fed had truly believed Wall Street only faced liquidity troubles, it would not have allowed major banks to pledge junk bonds as collateral for loans. And indeed, for months, the Fed did not allow banks to put up junk bonds as loans. But things changed when Lehman Brothers went under.

The Fed and the Treasury had to do something in the fall of 2008. But to fix liquidity without fixing solvency was a grave error. By denying the solvency crisis, major bank executives who had run their companies into the ground were allowed to keep their jobs, and shareholders who had placed bad bets on their firms were allowed to collect government largesse, as bloated bonuses began paying out soon after.

But the banks themselves still faced a capital shortage, and were only kept above those critical capital thresholds because federal regulators were willing to look the other way, letting banks account for obvious losses as if they were profitable assets.

So based on the Fed audit data, it’s hard to conclude that Fed Chairman Ben Bernanke was telling the truth when he told Congress on March 3, 2009, that there were no zombie banks in the United States.

“I don’t think that any major U.S. bank is currently a zombie institution,” Bernanke said.

As Bernanke spoke those words banks had been pledging junk bonds as collateral under Fed facilities for several months. From March 4, 2009 through May 12, 2009, when the Fed data stops, only two institutions borrowed money from the Fed’s Primary Dealer window: Bank of American and Citigroup. They borrowed almost every day, pledging junk bonds as collateral. Bernanke either knew this, or should have known it as a major public official.

This is the heart of today’s foreclosure fraud crisis. Banks are foreclosing on untold numbers of families who have never missed a payment, because rushing to foreclosure generates lucrative fees for the banks, whatever the costs to families and investors. This is, in fact, far worse than what Paul Krugman predicted. Not only are zombie banks failing to support the economy, they are actively sabotaging it with fraud in order to make up for their capital shortages. Meanwhile, regulators are aggressively looking the other way.

The Fed had to fix liquidity in 2008. That was its job. But as major banks went insolvent, the Fed and Treasury had a responsibility to fix that solvency issue—even though that meant requiring shareholders and executives to live up to losses. Instead, as the Fed audit tells us, policymakers knowingly ignored the real problem, pushing losses onto the American middle class in the process.

I frequently disagree with Megan McArdle, but her WikiLeaks post yesterday on struck me as simply delusional. The basic argument: megabank financiers haven’t committed any crimes, because if they had, we’d already know about it. There’s a kind of efficient-market-hypothesis ring to this, and like the efficient-market-hypothesis, it has no basis in reality. As a result of this reasoning, McArdle doesn’t think that the upcoming WikiLeaks release of bank documents will spark much in the way of criminal prosecutions. Here’s Megan:

Prosecutors have been trawling through their internal documents pretty heavily, looking for something that might help them run for higher office make a case against malfeasant bankers.  They haven’t found much, which is why one of their most high profile cases fell apart.  You can decide for yourself whether this is because there was no criminal activity, or because bankers have had a decade of prosecutorial aggression to learn not to write anything down.

This is just wrong. Prosecutors are not trawling heavily through the internal documents of major banks. Most prosecutors aren’t white-collar crime experts, much less financial crime experts. To nail a bank, they need help from federal banking regulators. And while the SEC has slightly stepped up its enforcement game, it isn’t recommending cases for prosecution. Literally. It has recommended a grand total of zero cases for prosecution against big banks and their executives—even though the SEC itself believes that banking executives have committed some truly egregious crimes.

How do we know? From the SEC’s civil fraud suits. In finance, criminal fraud is essentially identical to civil fraud—you just need more evidence for a criminal conviction than you do to win a civil lawsuit. The SEC has brought civil cases against Goldman Sachs, Citigroup, Bank of America and Barclays and settled them all with slap-on-the-wrist zealotry. The Bear Stearns hedge fund case that McArdle links to is small potatoes compared to the accusation the SEC levied against Citigroup: lying to its shareholders about billions of dollars in subprime exposure at the height of the subprime meltdown. The penalty for Citi CFO Gary Crittenden was $100,000—roughly one-half of one percent of his $19.4 million pay in 2007.

The SEC is not alone in its inaction. As of March 3, 2010 bank regulators at the Office of the Comptroller of the Currency and the Office of Thrift Supervision have also failed to recommend a single case for criminal prosecution.

And what happens when regulators actually do turn over cases to the Justice Department? Well, the banks get away with it anyway. Wachovia got caught laundering $380 billion in Mexican drug money, a clear violation of federal law. But what happened to Wachovia? A “deferred prosecution agreement” in which the too-big-to-fail behemoth escaped indictment in exchange for a $160 million fine. No individual is currently being prosecuted in the case. And the U.N. thinks that several other major banks were doing the exact same thing in 2008 as liquidity dried up.

We’ve also had congressional hearings on Lehman Brothers’ Repo 105 scam, mortgage fraud at Washington Mutual, a damning ProPublica investigation into self-dealing in the CDO market, and Felix Salmon’s discovery of abuses in mortgage bond due diligence and disclosure. How can anybody stare at these cases and really, truly believe that banks just never actually committed any crimes? After the savings and loan crisis, more than 1,100 bankers went to jail for financial crime. Can anybody seriously believe that after a crisis several orders of magnitude greater, no major banks or their executives engaged in criminal fraud? Apparently McArdle can.

What’s more, the Government Accountability Office says that bank regulators weren’t even looking at the foreclosure process until this fall, when massive frauds began to be uncovered. If regulators aren’t even looking, they can’t recommend cases to prosecutors.

So essentially, McArdle has assumed away the problem, and in order to do so, she’s ignored dozens of major financial headlines from the past couple of years. For a financial blogger, that’s a case of massive self-delusion.

Sure, prosecutors can make a name for themselves by going after big banks. But they can also have their careers and personal lives totally destroyed by doing so. Sometimes aggressive prosecutors end up like Eliot Spitzer. Just as often, they end up like Eliot Spitzer. It’s much, much safer to target individuals and institutions with less political and economic clout than a major bank or its executives.

None of this proves that WikiLeaks has a set of smoking guns that will take down Bank of America. They might, and they might not. But to believe that a political system almost entirely captured by Big Finance has performed rigorous criminal investigations into Big Finance is ferociously naive.

A rather nauseating statement from a Government Accountability Office report on foreclosures:

Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices, such as whether foreclosures are completed; however, given the ongoing mortgage crisis, they have recently placed greater emphasis on these areas.

You read that right. Bank regulators in the United States were not even looking at foreclosure practices before the media latched onto the foreclosure fraud outbreak. The Office of the Comptroller of the Currency and the Federal Reserve acknowledged this in hearings two weeks ago, but it’s still harrowing to see the degree to which mortgage banking remains totally free of oversight, even after it drove the global economy off a cliff.

The rest of the report is about banks abandoning properties instead of proceeding with a foreclosure sale. Kind of sick– throw a family out, then just abandon the house altogether, don’t even bother to sell it. The GAO says it’s not happening too much, but any sane businessperson would make sure that it never happens. A simple loan modification would cut everybody’s losses here, but the banks can’t be bothered with that. And nobody is bothering the banks about it.

UPDATE:

The behavior by federal bank regulators here is outrageous enough that it deserves a second dose of criticism.

You may recall that there was a tremendous legislative battle earlier this year over the creation of a new Consumer Financial Protection Agency. The bank lobby and regulators at the Fed, the OCC and yes, even the FDIC, all argued that we didn’t need it, while essentially everybody else said we did. The existing regulatory chiefs all made the same basic argument against the CFPA: We have several regulators who oversee consumer protection, and they’re all just great at it. Creating a new agency that focused only on consumer protection would be end up destabilizing the financial system, because regulating consumer protection without looking at bank safety and soundness would jeopardize bank capital levels.

This argument was absurd at the time, most obviously because the existing regulators were simply awful. They totally failed to restrain predatory mortgage lending for nearly a full decade precisely because they considered “safety and soundess” regulation to be their only job. Safety and soundness was construed as “bank profitability”—if a bank had lots of money, it was less likely to fail. In practice, that meant regulators would allow consumer protection violations so long as they made money for the bank. With the mortgage crisis, this consumer protection failure ultimately lead to a safety and soundness catastrophe, but that’s not actually very common. Usually predatory lending is very profitable, which is why banks do it.

So what happened after all the top regulators went out in public and repeatedly screamed that we absolutely can’t allow them to lose their consumer protection authority? They totally ignored consumer protection regulation. Look at the excuse that bank regulators fed to the GAO (emphasis mine):

Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices.

Translation: Even after consumer protection violations wrecked the largest banks in the country, we still don’t look at consumer protection unless it actually hurts a bank’s bottom line, right away, right now.

The amazing thing here is that the legal liabilities from these foreclosure abuses once again could be putting bank solvency on the line. Global economy to Elizabeth Warren: Help!

Also, the link above is to a summary of the GAO report. The full report is here.

Yesterday, The New York Times ran an editorial opposing a new Federal Reserve proposal to eliminate predatory lending penalties. The rule under consideration is the same obscure regulation I blogged about a couple of weeks back, and it’s very encouraging to see major publications paying close attention to the technical workings of regulatory policy. Usually even important rules like this slide right by under the media radar, but this particular rule is a major signal as to how policymakers will deal with the ever-escalating foreclosure fraud problem. Will the Fed and it’s allies stand up for homeowners and the rule of law, even if it means sticking it to the banks? Or will they continue to screw homeowners to preserve capital at too-big-to-fail behemoths?

The Times editorial makes essentially the same argument I did, and it’s totally correct, if I do say so myself. Right now, when a bank is found guilty of illegally withholding information about a mortgage from a borrower, the borrower can “rescind” the loan. They still have to pay off the principal balance, but all profits that the bank would have reaped from the loan—interest, fees, etc.—are nullified, and the bank loses its right to foreclose on the borrower.

This process is called “rescission,” and it reflects a standard feature of contract law that dates back several centuries. If a contract is fraudulent, the minimum proper remedy is to undo the contract. With mortgages, this means the bank gets its money back, but it doesn’t get to keep the profits it would have made from an illegal loan. Restricting borrower access to information is a key tactic in predatory lending, and as The Times notes, rescission is essentially the only federal remedy available to homeowners who have been defrauded.

The Fed is now attempting to eliminate this remedy due to “concern over banks’ compliance costs,” as The Times describes it. This is a rather generous description of the proposal, given the depth and severity of the foreclosure fraud outbreak currently sweeping the country. There are three key places that banks can commit fraud in the mortgage process—when the mortgage is pushed on a borrower, when the mortgage is sold to an investor, and when a bank is collecting payments or foreclosing. Much of the fraudulent activity we see among investors and in the foreclosure process helps cover-up fraud at the original sale of the mortgage to a borrower.

If borrowers cannot obtain relief through rescission, then they have little reason to press claims about fraud in other parts of the mortgage process. This is an enormous gift to the nation’s four largest banks, with major public policy implications that go beyond the very critical problem of rampant, illegal foreclosures. If borrowers don’t press claims about foreclosure fraud, investors will not be able to access key information for filing lawsuits.

The single gravest threat to bank balance sheets (and bonuses) is a slew of lawsuits from mortgage bond investors. Banks packaged lousy mortgages into bonds and sold them off to investors, often without making proper disclosures to the investors, who subsequently lost a ton of money. Investors are currently organizing to take action against the banks, and in many cases have obvious, open-and-shut fraud claims against Wall Street titans if their cases come to court. But the key is actually getting their case before a judge. To do that, 25 percent of the investors in any bond have to file a lawsuit together. For multi-billion-dollar bond issues, that requires coordination among dozens of different institutions, often from different countries. That’s a difficult technical feat, but investors will be much more likely to participate if they have lots of evidence of fraud before them. That evidence is produced by homeowners pressing their own individual cases. If homeowners don’t go to court because they can’t get anything out of it, the investors will have a harder time organizing.

So the Fed isn’t really concerned about “compliance costs.” This is, in fact, a rather absurd notion. Predatory lending is a form of theft. Imagine if the shoe were on the other foot, and the bank was being robbed. Can you imagine bank robbers complaining about the “compliance costs” of having to give back stolen cash? They  would be laughed out of any courtroom. But the Fed is not only seriously considering such an argument from bankers, it is actively promoting it as official public policy.

The Fed’s proposal is itself illegal. Regulators like the Fed have the right to make rules that enforce laws passed by Congress. When Congress passed the Truth in Lending Act in 1968, it explicitly granted borrowers the right of rescission as a remedy for predatory lending. The Fed is now attempting to interpret that statute to mean that, actually, borrowers have no such right. If the Fed’s proposal is enacted, it will be a 180-degree reversal of the law on the books.

It’s hard to imagine a way for the Fed to disgrace itself any further than it did by failing to rein in the mortgage mess over the past decade. But if it proceeds with this effort to protect banks that engaged in predatory lending, it will not only be guilty of falling down on the job and looking the other way, but of actively encouraging illegal mortgage lending.

Whether the Fed withdraws its proposal or not, this is not what bank regulators are supposed to do, especially in the middle of a foreclosure fraud crisis. Elizabeth Warren and the Consumer Financial Protection Bureau will get formal jurisdiction over these issues in July 2011, and it won’t come a moment too soon. The Fed is proving, once again, that it cannot be trusted to protect the middle class from illegal abuses. Or even simply follow the law itself.

The Republican Party’s newfound political assault on Ben Bernanke is a grim reminder of the actual conservative economic agenda for the next two years. The midterm elections taught Republicans a destructive lesson: With Democrats in power, the worse the economy gets, the better Republicans do at the voting booth. Economic sabotage is the essential Republican strategy for winning the White House in 2012. They will block every effort to actually improve the economy they can, and make a big show out of criticizing any economic aid they can’t block.

The Party’s hypocrisy on the economy has been clear for months. They scream about the deficit when a few billion dollars worth of unemployment benefits are at stake, but deficit worries disappear when the $700 billion in Bush tax cuts for the rich are under discussion. When they do muster an economic defense of the Bush regime, it’s the line that a recession is no time to raise taxes. This is a fundamentally Keynesian argument—a bad Keynesian argument, but Keynes through and through. And it’s the same argument Republicans and conservative pundits deployed to enact the Bush tax cuts back in 2001 and 2003. It’s a bad argument because tax cuts aren’t particularly effective at stimulating the economy, especially when they target the rich. Unemployment benefits, in fact, would be a staggeringly more efficient mechanism, as former John McCain adviser Mark Zandi has repeatedly detailed.

Which brings us to Ben Bernanke, the most conservative candidate that President Barack Obama could possibly have appointed to head the Federal Reserve. The current Republican uproar against Bernanke shields the fact that he is, in fact, a Republican himself. He was a top economic adviser to President George W. Bush, who appointed Bernanke to the Fed’s Board of Governors and eventually to Fed Chairman post. When Obama reappointed him to the job, a handful of Republicans objected on the grounds that Bernanke had approved generous bailouts of financial firms. Nevertheless, a majority of Senate Republicans still voted to reconfirm him—making his reappointment the most popular decision that Obama has made among Republicans. Republicans got their man, and they let him through.

But now Bernanke is taking a beating from conservative pundits and Republican politicians for the Fed’s latest round of “quantitative easing.” It’s not just coming from the crazies, either. Even relatively milquetoast Senators like Bob Corker of Tennessee have threatened to strip the Fed of its mandate to promote full employment. Don’t worry about whether people actually have jobs, you nervous Fed ninnies. Just focus on inflation, whatever the economic cost.

The timing of this argument is particularly instructive, since, right now, we are not experiencing inflation. We are, in fact, dangerously close to deflation, as rampant foreclosures continue to drive down home values.

But the Republican assault is not an attempt to fix the economy or even say intelligible things about the economy. It’s straightforward political payback. Bernanke is directly contradicting the Republican midterm message, exposing the Republican anti-spending mantra as an economic disaster, and Republicans aren’t going to stand for it.

Republicans just convinced a lot of voters that socialist intergenerational thief Barack Obama caused high unemployment with his budget busting economic stimulus. Government spending is the villain– not the Wall Street excess or predatory lending that Republicans shepherded for eight consecutive years, not even the generous bank bailouts that Republicans approved.

But last week, Bernanke gave a speech emphasizing that the Fed’s actions to revive the economy require Congressional help. Quantitative easing is basically an interest-free credit card for the U.S. government, allowing it to borrow money at negative real interest rates in order to spend that money on job-creation efforts. Since already record-low interest rates on Treasury bonds haven’t been enough to convince congress that now is the time to borrow and spend, the Fed is driving those rates even lower. But for this credit card to work, Congress has to use it. It has to enact further economic stimulus, spending money to create jobs.

This kind of talk makes Congressional Republicans look stupid. Now it’s not just Barack Obama and his anti-colonialist father who support government spending to boost the economy, it’s a very high-profile Republican economist, too. Obama can’t be a radical socialist when top-ranking Republicans agree with him. And God forbid that Bernanke’s recent statements actually create pressure for Congress to do something about jobs. Lowering unemployment means reelecting Obama.

None of this is to say that Bernanke is some kind of liberal savior, or even a particularly good Fed Chairman. He oversaw bailouts that could have been much more effectively designed, to say the least, and he has not been open about those packages with Congress or the public. He’s resisted calls for Fed transparency and waged misleading attacks on financial reform legislation.

But he isn’t toeing the Republican Party line on Big Bad Government Spending. And Republicans are going to keep hammering him until he does.

A month ago, President Barack Obama vetoed a bill that would have made it far more difficult for borrowers to prove that banks were engaging in foreclosure fraud. The bill was a complex, highly technical bailout for megabanks that have defrauded millions of borrowers, flaunted the rule of law and and driven our economy off a cliff. The legislation passed both houses of Congress quietly and without much attention, but once consumer advocates sounded the alarm, Obama rejected the legislation, and the bill appeared dead.

Not anymore. Despite widespread public anger and presidential rejection, the House will vote on the issue again today in an attempt to override Obama’s veto. The legislation was reintroduced by Rep. Bobby Scott, D-Va. The bill would require every state to accept notary signatures from any other state. This essentially defeats the purpose of notarization itself, since a notary is supposed to attest to having first-hand knowledge of a specific case. If two parties sign a mortgage contract in Ohio, a notary from New York probably wasn’t there to watch it happen.

In foreclosure fraud, this is important because banks are robo-signing documents in order to cover-up problems with their loan documentation. In the GMAC scandal that ignited the recent controversy, a robo-signer named Jeffrey Stephan had hundreds of thousands of these documents notarized in Pennsylvania, even though they concerned foreclosure cases all over the country. If courts have to accept out-of-state notarizations, it becomes much more difficult to demonstrate that GMAC is committing rampant fraud.

The bill would also allow notaries to sign-off on electronic documents– something that also defeats the basic purpose of a notary. A notary is essentially a credible witness, but if they can sign off on electronic documents, they don’t have to be present at the signing of documents to collect fees. Somebody can forge a document, scan it into a computer, and ship it off to a notary for approval, replicating the GMAC scam online. Banks have been using electronic tricks to get around technicalities like “signatures” on “contracts” of late– they scan a signature from one document and electronically copy it to others.

I don’t have much more to say about this issue than I did in October. It’s despicable for Congress to be contemplating a bailout like this for openly criminal activity.

Policymakers in Washington, D.C. are moving all over the place on the foreclosure crisis. Yesterday, key officials from Bank of America and JPMorgan Chase were grilled before the Senate Banking Committee. Consumer advocates and academics repeatedly caught the bank officials lying or misleading Senators about the way banks treat borrowers, and the incentives currently on the books that encourage banks to illegally foreclose on borrowers. Committee members clearly wanted to appear angry– Sen. John Tester, D-Mt., even said “some heads will roll” after hearing that banks actually encouraged borrowers to miss payments, insisting that it was the only way to qualify for a loan modification. This kind of thing happens all the time, and once the borrower actually misses a payment– after being encouraged to do so by the bank– the borrower gets evicted.

But at the same time, the Federal Reserve is pushing a new regulation that would effectively strip borrowers of their only federal remedy to fight illegal predatory lending. Now the House is considering bailing out Wall Street again, directly on the backs of the borrowers they’ve defrauded. We’ll be counting the votes.

UPDATE:

Rep. Scott’s PR guy just told me the Congressman just happened to be around to make a procedural vote. He says Scott “was in the wrong place at the wrong time” and does not support the legislation. David Dayen at Firedoglake argues that this entire reconsideration of the bill is likely a separation of powers dispute between Congress and President Obama regarding the technical procedure Obama used to veto the bill. The legislation may not even come up for a vote. Or it might, for separation of powers purposes, and the result might be bad.