Mortgage Servicers: Getting Away With The Perfect Crime?

National Memo, Mon, 11/28/2011 - 12:40pm —

Matt Stoller

Without prosecutions, there’s nothing keeping fraud from becoming a standard business practice.

In 2004, the FBI warned Congress of an “epidemic of mortgage fraud,” of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America.

Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. Even Tim Geithner noted that Lehman had “air in the marks” in its valuations of asset-backed securities, as the bankruptcy examiner’s report showed that accounting manipulation to disguise the condition of the balance sheet was a routine management tool at the bank. There’s a reason Charles Ferguson got an Academy Award for his work on the documentary Inside Job.

And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. U.S. Attorney Preet Bharara has brought minor civil suits against banks, but nothing significant, and no criminal indictments for the Ponzi scheme of the last four years.

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.

Here’s how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isn’t supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isn’t a one-off; it’s programmed. It’s the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? It’s the perfect crime, and many of the victims had paid every single mortgage payment.

A lack of criminal prosecutions means that unethical business practices like this one drive out ethical business practices. After all, why should a bank hire an ethical default servicer that charges a high price for its product when it can pay nothing to one that simply extracts from investors and homeowners?

The joke that is the U.S. Attorney network has become very old and very stale. And unfortunately, because of Attorney General Eric Holder, that joke is on us.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson. The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Did Drug Firms Hire Gingrich To Back Medicare Drug Benefit?

National Memo Mon, 11/28/2011 - 10:33pm —

by Joe Conason

To look closely at Newt Gingrich is to see a failed statesman who pocketed tens of millions of dollars by exploiting his political celebrity and government connections over the past decade or so. Although the former Speaker never registered as a lobbyist, the corporations that financed his “for-profit” think-tank and his consulting firm weren’t simply charmed into writing those enormous checks.

But for Republican primary voters, Gingrich’s blatant buckraking may not be nearly as troubling as what he helped his corporate masters to achieve on Capitol Hill. Having accepted large sums from major drug companies as well as PhRMA, the industry lobbying group, he reportedly helped to push through the Bush administration’s Medicare drug benefit – which is anathema to the right-wing Tea Party voters whose support he is now courting.

As the Washington Post and other outlets have reported in recent days, the estimated take from Gingrich Inc., the conglomerate of Newt-centered consulting, publishing, and propaganda activities that he founded after leaving Congress in 1999, ranges upward of $110 million. He points out that he has written (or had ghost-written) about a dozen best-selling books and a number of television documentaries, and that he has also earned top dollar by delivering speeches – much like his old nemesis Bill Clinton (who has devoted a large proportion of his similarly huge earnings to charity and foundation work).

The largest proportion of the Gingrich bonanza, however, evidently derives from the Center for Health Transformation, an unusual profit-making “think-tank” in Washington, where most such organizations are not-for-profit; and the Gingrich Group, his consulting company which gave corporations “advice” while it supposedly refrained from traditional lobbying for legislation. He also operated a tax-exempt non-profit called American Solutions, which he seems to have used largely to finance millions of dollars worth of travel by private jet and limousine for himself and third wife Callista.

The “group” took in lucrative fees from the corporate likes of mortgage giant Freddie Mac, which paid Gingrich around $1.8 million over several years to help with troublesome Republicans seeking to shut down the government-backed firm. The “center” dispensed advice, videos, and conferences on health care to a huge variety of companies in the health field, which paid annual “dues” ranging from $5000 to $200,000 depending on their size after its doors opened in 2003. Familiar pharma names such as Astra Zeneca and Novo Nordisk were major customers, along with the official PhRMA lobby.

Precisely what the center did for these exorbitant sums is not clear, but some commentators suspect that its activities skirted lobbying even if it avoided the narrowest definition of that business. In his defense, both Gingrich and his friends have insisted he did nothing that could be construed as supporting legislation on behalf of a client.

Yet xonservative journalist Tim Carney, writing for the Washington Examiner, reports that the former Speaker used his connections on the Hill to promote passage of the Medicare drug bill, also known as Medicare Part D, in 2003 – which was designed to protect drug company profits no matter how high the cost to consumers and taxpayers. According to Carney, Gingrich was hired “by someone in the industry” during the contentious debate over the bill, when his successors in the House Republican leadership notorious twisted many arms in their own caucus to achieve passage.”

“Three former Republican congressional staffers told me that Gingrich was calling around Capitol Hill and visiting Republican congressmen in 2003 in an effort to convince conservatives to support a bill expanding Medicare to include prescription-drug subsidies,” Carney writes.
“Conservatives were understandably wary about expanding a Lyndon Johnson-created entitlement that had historically blown way past official budget estimates. Drug makers, on the other hand, were positively giddy about securing a new pipeline of government cash to pad their already breathtaking profit margins.”

There is much more to be found in the archives and bank accounts of Newt, Inc., from his relationship with the Chamber of Commerce to his advocacy of policies that benefited his corporate clients, whether or not he actually lobbied directly for them. But his promotion of the Medicare expansion may be his greatest vulnerability for the moment, as he assumes the front-runner position.

On Monday, the chair of Gingrich’s Center for Health Transformation estimated its revenues over the past decade at $55 million. Fees are flexible, she said, with “charter memberships” going for an annual fee of $200,000.

Another New Newt?

From a Newsmax reader:
Are the Republicans really dumb enough to nominate possible the most corrupt career politician in their history. This guy has so many skeletons in his closet, he could be a Halloween exhibit at Disneyland. Newt is the most hated politician in the country. He embodies the definition of smarmy, and all the debate skills in the world will not translate well into the day to day minutiae that is running a country without sending it into a deepening chaos. This is a guy who called for the death penalty for anyone caught bringing in 2 oz of marijuana into the country, left his first wife who had put him through school including a PhD and refused to give her child support, making her rely on her church for food money; left the second wife after telling a staffer that she 'wasn't pretty enough to be First Lady', was charged with 80 ethics violations by colleagues in Congress and fined $300K for it (many who abstained from voting did so because they thought the fine wasn't large enough)... I could go on and on. There ARE actual sane, intelligent and reasonable men running for the presidency. Why does the MSM pretend Ron Paul does not exist? Gary Johnson, Buddy Roemer? They cannot be as marginal as this career sociopath, and yet this is what we hear about? Newt's debate skills as presidential timber??? How many pundits do we need to point out the difference between bullshit and honest, detailed answers which show a command of the issues, before we realize Newt is a just another lizard? If Newt Gingrich is elected president, what is left of this country will not survive the fallout, and I mean that phrase literally. He'd be an unmitigated disaster. Can you actually see this guy uniting the country?

Big corporations use loopholes, dodge taxes 2

The Cayman Islands is home to subsidiaries of more than 150 U.S. corporations, including Coca-Cola Co., Intel, HP, Pfizer, Intel, Procter and Gamble and 10 more of the 30 companies in the Dow Jones Industrial Average. Why are they based there?To lower their taxes by clever financial accounting schemes. They employ a variety of strategies like transfer pricing.

This practice called transfer pricing is one of the ways U.S. multinational corporations avoid taxes in the U.S. and other countries. The accounting practice lets companies buy and sell products and services with their own offshore subsidiaries and set prices themselves. Companies abuse transfer pricing by shifting profits overseas to avoid U.S. taxes. They set artificially high prices for imports of products and services provided by their foreign subsidiaries and artificially low prices on exports .

Now these multinationals who have no allegiance to the USA are pushing for a tax break to allow them to bring these profits back to the USA.

These and other forms of financial engineering costs the U.S billions in lost taxes. It is more fully documented in a Bloomberg market report at http://www.killercoke.org/downloads/david_evans_offshore.pdf .

Why Multinationals Pay Little or No Taxes

The U.S. is one of only two nations that taxes its citizens and corporations on their income from wherever it is derived. Anywhere and everywhere in the world. U.S. citizens are also taxed on investments directly or indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBC's. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that a U.S. citizen doing business there will enjoy only low or no taxes on the personal income made. There are simply no PERSONAL income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is telling you a falsehood. The U.S. congress does not care WHERE you make your income, they simply demand their share.

However, corporations are different. They are legal entities holding citizenship in the country where they are organized. For illustration, we will create a company named the Great Widget Company (GWC) and incorporate in the U.S.A. They build manufacturing plants and sell their wonderful widgets in the U.S., Ireland and Germany and taxable profits of $10M are earned in each of the three countries. The chart below illustrates the simple corporate tax liability for GWC.

Country	Cayman Is.	U.S.A.	Germany	Ireland	Total
Taxable Earnings		30,000,000	10,000,000	10,000,000
Nominal Tax		35%	15%	12.5%
Tax		10,500,000	1,500,000	1,250,000	13,250,000
Deduction*		2,750,000			2,750,000
Nominal Tax		7,750,000	1,500,000	1,250,000	10,500,000

* Deduction - The U.S. permits deduction of income taxes paid to other countries

Now we will look at the same calculations if the Great Widget Company was organized in the Cayman Islands and registered in the U.S. as a foreign corporation doing business in the U.S. as the Great Widget Company, USA.

Country	Cayman Is.	U.S.A.	Germany	Ireland	Total
Taxable Earnings	0	10,000,000	10,000,000	10,000,000	30,000,000
Nominal Tax	No Taxes	35%	15%	12.5%
Tax	0	3,500,000	1,500,000	1,250,000	6,250,000
Deduction
Nominal Tax	0	3,500,000	1,500,000	1,250,000	6,250,000

As the above chart shows GWC reduced their taxes from $10,500,000 to $6,250,000 for a tax savings of $4,250,000 or 40% simply by eliminating U.S. taxes on the German and Irish earnings. Couple this with transfer payment accounting and other credits and you're like GE and not paying any taxes

One must bear in mind that our imaginary company is relatively small and operating in only three countries. Just envision the potential savings of very large corporations earning billions of dollars in profits and operating in sixty or seventy countries. Increasing the above profit chart from millions to billions and suddenly the 40% tax savings become significant. It does not require gifted intellect or imagination to understand why nearly twenty thousand companies are registered at Ugland House.