In which I eventually dump on Obama for appointing Bill Daley
[Welcome, Naked Capitalism readers! Ya know, somebody in our famously free press really should ask William Daley if he signed off on the program jm describes below -- which Daley must have done if his job as Head of Corporate Responsibility* was for real, and not one of those no-show, "This is s-o-o-o-o not a bribe," reach-around "jobs" so common in our elite. -- lambert]
OK. You all know that Obama's new Chief of Staff was most recently employed at JP Morgan Chase & Co. where he was, among other things, Head of Corporate Responsibility. If you read JPMC's latest corporate responsibility report you will learn that the bank's primary reason for existence is to foster the painting of rainbows and the raising of unicorns. What you will not learn is how this responsible corporation actually conducts its business.
Today, my wife received an e-newsletter from an attorney in the Sacramento area who specializes in real estate law. It was essentially a notification to people in the business about a new tactic Chase is using to squeeze blood from its erstwhile mortgage customers. Bear with me as I attempt to explain, I'm not a professional and I hope this isn't going too far into the weeds.
Typically, if a homeowner with two mortgages is foreclosed upon, the holder of the first mortgage gets title to the property (i.e., this mortgage is secured) and the holder of the second mortgage (which then becomes unsecured) has the right to sue the borrower for the unpaid amount owed on the second loan. However, under California law, when both loans are owned by the same lender, a "merger" of interest occurs. This means the lender gets the property and forfeits any claim to the amount owed on the second mortgage.
To work around this situation, many lenders will sell the second mortgage to a collection company for less than its full face value after default occurs. The buyer of this debt will then try to recover the full amount of the second mortgage, pocketing the difference between the amount collected and the amount paid. However, the homeowner can raise the defense that the collection company knowingly bought a worthless loan (it was no longer secured by the property) and thus is owed nothing. To date it is unclear how successful this defense will be once these cases work their way through the courts. What is clear is that collection companies aren't stupid. They are factoring this uncertainty into how much they're willing to pay for these second mortgages with the ultimate effect being downward pressure on how much the debt is worth on the open market. These loans typically sell for pennies on the dollar.
This makes lenders, like Chase, very sad. How can its executives afford the upkeep on multiple homes, private jets, warehouses of exotic automobiles, etc. if they are getting returns on investment of pennies on the dollar? The answer, of course, is they can't. So, savvy businessmen that they are, they've come up with a new tactic to maximize their returns. They are beginning to sell the first mortgage and keep the second. Since the first is secured, Chase can get a price that is at or near fair market value of the property. Then since they've held the second at full face value all along, they can sue the borrower for the full amount with a much higher likelihood of prevailing in court.
Now, you might think that the borrower took the loan in good faith and Chase is rightfully owed that money. Alas, nothing in contemporary American finance is so black and white. Chase had a hand in financing mortgage brokerages Ameriquest Mortgage and Countrywide Financial. In this report from therealnews.com:
former subprime lenders from Ameriquest, once the country's largest lender, describe a system rife with fraud. They describe how a "by-any-means-necessary" policy pushed employees to cut corners and falsify documents on bad mortgages and then sell the toxic assets to Wall Street banks eager to make fast profits.
And Countrywide has been sued by the Attorneys General of several states for behavior including "unfair and deceptive" practices to get homeowners to apply for risky mortgages far beyond their means" and "mislead[ing] many consumers by misinforming them about the workings of certain mortgages such [as] adjustable-rate mortgages, interest-only loans, low-documentation loans and home-equity loans while telling borrowers they would be able to refinance before the interest rate on their loans adjusted".
It gets worse. According the e-newsletter from the real estate lawyer, clients are telling him that prior to default Chase has held out the possibility of loan modification to the distressed borrowers. To qualify the homeowner has to answer lots of questions about their personal finances in detail. Then, darn it, the borrower is told they don't qualify for the remod and Chase goes through with foreclosure. Later, the bank uses the detailed financial information the borrower provided (under false pretenses) to maximize the settlement in court.
So to sum up, Chase knowingly (they're savvy businessmen, remember) financed risky loans, some of which were all but designed to fail. In other words, the bad debt they are now trying to collect wouldn't have existed without their complicity. And in their attempts to collect the maximum possible amount, they are gaming the legal system and using deceptive means to elicit information from unsophisticated borrowers that will later be used against them in court.
Corporate responsibility, indeed.
Which bring us back to the president and today's announcement concerning his new BFF, Bill Daley. I've been holding off commenting on the "Obama's a conservative" meme because I find it less than satisfying. Obama is not a conservative. My 82 year old father is a conservative. Despite a few less-than-enlightened views on things in general, he is at heart a well intentioned and generous person who has lent a hand on numerous occasions to individuals in need. There is nothing well intentioned or generous about Obama. Neither is there is anything classically conservative about him. What is he conserving? Traditional values? Bullshit. Political comity and collegiality? Only if you share his belief in the superiority of the ruling class. The whole vocabulary of "liberal versus conservative" is utterly inadequate for describing the current dynamic of how we are ruled. The appointment of Daley as his caporegime puts this dynamic on display and shows, without doubt, Obama's true colors [Ha! Colors! I'm a racist]. It doesn't matter which party is in charge. Either way, the powers-that-be will attempt to rob us blind.
Obama is a blood sucking corporatist scumbag marking time as the imperial manager, doing the will of our owners, until he can retire and take his place on various boards of directors, go on the speaking circuit, maybe do a little discreet lobbying here and there, etc. You know, make some real money. So what if some little people have to suffer and die as a result of his actions. It's the way the big boys do business.
* * *
We believe that corporate responsibility manifests itself in a number of different ways, which you will see outlined in this report. Corporate responsibility is at the heart of the very architecture of our businesses: responsible lending and business practices and what we do every day for our clients — consumers, small- and medium-sized businesses, corporate and institutional clients, governments, not-for-profits — and communities around the world. Corporate responsibility is an important part of our culture, and I encourage you to share your thoughts with us as we do our part to lead the way forward.
Our integrity and reputation depend on our ability to do the right thing, even when it's not the easy thing. The Code of Conduct is a collection of rules and policy statements intended to assist employees and directors in making decisions about their conduct in relation to the firm's business. The Code is based on our fundamental understanding that no one at JPMorgan Chase should ever sacrifice integrity -- or give the impression that they have -- even if they think it would help the firm's business.
The purpose of our Code of Ethics is to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the firm's financial books and records and the preparation of its financial statements. The obligations of this Code of Ethics supplement, but do not replace, the firm's Code of Conduct.
The Board as a whole is responsible for the oversight of management on behalf of the Firm's stockholders. The principal functions of the Board are to oversee processes for evaluating the adequacy of internal controls, risk management, financial reporting and compliance with law and the Firm's code of conduct....
But not, however, the Code of Ethics. Haw. So let's look at the Code of Conduct (PDF) (May 2010):
Each of us is accountable for our actions, and each of us is responsible for knowing and abiding by the policies that apply to us. Managers have a special responsibility, through example and communication, to ensure that employees under their supervision understand and comply with the Code and other relevant policies. ...
Compliance with the Code and with other policies and procedures applicable to you is a term and condition of employment by JPMorgan Chase. ...
In addition, you should report any illegal conduct, or conduct that violates the underlying principles of the Code, by any of our customers, suppliers, contract workers, business partners, or agents. If something doesn’t look right, say something. [italics in original] ....
Matters involving fraudulent acts, including acts by third parties against the firm or personal dishonesty by an employee, must be reported to the Global Security and Investigation Department. ....
We are all expected to conduct the firm's business in accordance with the highest ethical standards, respecting the firm's customers, suppliers, and other business counterparties, dealing responsibly with the firm's assets, and complying with applicable legal and regulatory requirements. ....
You are expected to protect the firm's assets as well as the assets of others that come into your custody. The firm's assets include not only financial assets such as cash and securities and physical assets such as furnishings, equipment and supplies, but also customer relationships. ....
In addition to strict compliance with applicable laws, rules, and regulations, JPMorgan Chase expects its employees and directors to conduct themselves in accordance with general standards of ethical behavior. ...
5.6.1. Fair dealing; respect for human rights
In particular: (a) You should always endeavor to deal fairly and in good faith with the firm’s customers, suppliers, competitors, business partners, regulators, and employees. It is our policy not to take unfair advantage of others through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair dealing practice.
Now, I know this is legal boilerplate written by the shiftiest and priciest weasels there are, and it's designed to let JP Morgan, the corporate person, off the hook in any and all cases. Still, holding out the false promise of a mortgage modification is pretty hard to square with an "expectation" of "ethical behavior," no? Now, I did notice the weasel word "should," which is not the word "must," in section 5.6.1 (a). But "must" is a job for Compliance. Doesn't the Head of Corporate Responsibility sign off on the "shoulds"?
(b) You should observe the firm’s Human Rights Statement, where it is applicable to your business dealings.
So here's JPMorgan Chase's human rights page, where we see that the weasels, possibly over-reaching, have incorporated the UN Declaration of Human Rights by reference. From the UN Declaration of Human Rights:
Article 12. .... No one shall be subjected to arbitrary interference with [their] privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks. ...
Article 17 .... (2) No one shall be arbitrarily deprived of his property.
Surely, at a minimum, Daley was being very well paid to ensure that JP Morgan Chase at least appeared to adhere to the UN Declaration of Human Rights? I mean, isn't holding out the false promise of a loan mod, so as to get information needed to make foreclosure easier, "arbitrary interference"? If it isn't, what is? --lambert