Law Bites http://lawbites.com the latest legal news Sun, 29 Jun 2008 02:59:20 +0000 http://wordpress.org/?v=2.5.1 en The Terror of Truth http://lawbites.com/the-terror-of-truth/ http://lawbites.com/the-terror-of-truth/#comments Sun, 29 Jun 2008 02:59:20 +0000 Law Bites http://lawbites.com/the-terror-of-truth/ I warned you that this idea would spread like a plague, didn't I? No sooner do banks start winning litigation by telling the truth than institutions of higher learning start following suit. Duke University was sued by the University of Louisville for breach of a contract in which the universities had agreed that their football teams would play each other four times. Duke backed out with three games remaining. Duke's defense? As articulated by Above The Law, it was simple: "Our team sucks."

Duke's lawyers argued the Blue Devils, which have a record of 6-45 over the past five seasons, were so bad that any team would be a suitable replacement.

Judge Shepherd agreed in his summary: "At oral argument, Duke (with a candor perhaps more attributable to good legal strategy than to institutional modesty) persuasively asserted that this is a threshold that could not be any lower. Duke's…

]]> Bank Lawyer’s Blog:

I warned you that this idea would spread like a plague, didn’t I? No sooner do banks start winning litigation by telling the truth than institutions of higher learning start following suit. Duke University was sued by the University of Louisville for breach of a contract in which the universities had agreed that their football teams would play each other four times. Duke backed out with three games remaining. Duke’s defense? As articulated by Above The Law, it was simple: “Our team sucks.”

Duke’s lawyers argued the Blue Devils, which have a record of 6-45
over the past five seasons, were so bad that any team would be a
suitable replacement.

Judge Shepherd agreed in his summary: “At
oral argument, Duke (with a candor perhaps more attributable to good
legal strategy than to institutional modesty) persuasively asserted
that this is a threshold that could not be any lower. Duke’s argument
on this point cannot be reasonably disputed by Louisville.”

If this trend keeps up, trial lawyers will have to learn a whole new skill set, and an unfamiliar one at that: complete honesty. How much rust will have to be scraped off the moral engines of shysters everywhere to power up that existential leap into the void? I shudder to contemplate…

Thank all that is right and holy with the world that we still live in a land that honors “truthiness” above “truth,” a land where even a beaten down war hero can still strike the pose.


Other News

]]> http://lawbites.com/the-terror-of-truth/feed/ Anti-DAP Bandwagon Gains Speed http://lawbites.com/anti-dap-bandwagon-gains-speed/ http://lawbites.com/anti-dap-bandwagon-gains-speed/#comments Sun, 29 Jun 2008 02:59:19 +0000 Law Bites http://lawbites.com/anti-dap-bandwagon-gains-speed/ Support for the FHA's efforts to ban seller-funded downpayment assistance (DAP) in connection with FHA-insured loans is gaining steam. The front page of today's The Wall Street Journal had a lengthy article on the subject that showed how certain homebuilders are using DAP to make "100% financing" pitches designed to move unsold inventory.

"I just smell a massive taxpayer burden coming," says Sen. Christopher Bond (R., Mo.), who calls the programs "too good to be true."

No kidding, Chris! Of course, the halls of Congress always smell like something crawled into the ventilation system and died. Upon investigation, it's usually discovered to be the dreams of the American taxpayer, so there's no telling what you're actually smelling.

We've made ourselves clear ad nauseum about our dislike of DAP. Inasmuch as misery loves company, we're happy to report that we're not alone.

"The inescapable fact is that seller-funded down-payment assistance is particularly…

]]> Bank Lawyer’s Blog:

Go_away
Support for the FHA’s efforts to ban seller-funded downpayment assistance (DAP) in connection with FHA-insured loans is gaining steam. The front page of today’s The Wall Street Journal had a lengthy article on the subject that showed how certain homebuilders are using DAP to make “100% financing” pitches designed to move unsold inventory.

“I just smell a massive taxpayer burden coming,” says Sen. Christopher
Bond (R., Mo.), who calls the programs “too good to be true.”

No kidding, Chris! Of course, the halls of Congress always smell like something crawled into the ventilation system and died. Upon investigation, it’s usually discovered to be the dreams of the American taxpayer, so there’s no telling what you’re actually smelling.

We’ve made ourselves clear ad nauseum about our dislike of DAP. Inasmuch as misery loves company, we’re happy to report that we’re not alone.

“The inescapable fact is that seller-funded down-payment assistance is
particularly susceptible to losses,” says Howard Glaser, a
mortgage-industry consultant and former official at the Department of
Housing and Urban Development. “Too often today’s seller-funded loan is
tomorrow’s foreclosure.”

Paul Jackson at Housing Wire gathers the observations of other nay-sayers.

“If the only buyers the builders can bring in right now are those
that require down payment assistance, and they have to get ‘creative’
with marketing to make it happen, you have to wonder if those are the
borrowers we should be putting into homes in this sort of market,” he
said, under condition of anonymity.

“It’s an odd world where the FHA is the riskiest lender, but the truth is that we’d never lend under that sort of criteria.”

[...]

“[T]he DAP programs simply keep contract sales prices inflated,
channel fees into the pockets of ‘nonprofits’ who provide no other
service than laundering money, and result in lower insurance premiums
than FHA should be getting for loans with riskier profiles,” said
well-known blogger Tanta on the Calculated Risk blog, herself a long-time industry participant.

“These schemes also have the effect of artificially inflating
nominal house prices, since the sale price is not the same as the
amount netted, at the end of the day, by the seller,” notes Felix Salmon
in his highly-read economics blog at Portfolio.com. “I’m sure that a
lot of politicians and realtors reckon that house prices need all the
artificial inflation they can get at the moment, but my feeling is that
over the medium to long term, no good can come of [DAP programs].”

As both the WSJ and Housing Wire point out, however, DAP has its defenders, particularly among the ranks of homebuilders and non-profit agencies that financially benefit from the program, as well as from a few politicians in Washington, D.C. who cater to those special interests, including Barney Frank and Maxine Waters. Even Frank, however, admits that DAP won’t be left “untouched” by housing legislation currently being considered by both the House and the Senate.

I hope that it’s not only “touched,” I fervently desire that it be “molested” and left scarred for the rest of its short, miserable life, no matter how politically incorrect that desire might be.


Other News

]]> http://lawbites.com/anti-dap-bandwagon-gains-speed/feed/ A Disturbing Litigation Strategy http://lawbites.com/a-disturbing-litigation-strategy/ http://lawbites.com/a-disturbing-litigation-strategy/#comments Sun, 29 Jun 2008 02:59:19 +0000 Law Bites http://lawbites.com/a-disturbing-litigation-strategy/ The American Banker (paid subscription required) recently put forth the startling proposition that when a bank is sued by a borrower, the best course of action may be...(gasp)...telling the truth! At least, that seems to the lesson of East West Bank (whose very name makes a lie out of the old saw that "never the twain shall meet").

When East West Bank in Pasadena, Calif., was accused of causing a borrower's default and subsequent bankruptcy, the bank offered to settle for $20 million rather than take its chances with a jury.

But the borrower, a seafood importing company, took the case to court, asking for $40 million plus punitive damages.

The gamble did not pay off.

Last month, a Los Angeles jury unanimously ruled that East West, a unit of the $11.8 billion-asset East West Bancorp, was not responsible for Ocean Fresh Trading Inc.'s demise.

The bank prevailed, in part, because it did…

]]> Bank Lawyer’s Blog:

Pinnochio
The American Banker (paid subscription required) recently put forth the startling proposition that when a bank is sued by a borrower, the best course of action may be…(gasp)…telling the truth! At least, that seems to the lesson of East West Bank (whose very name makes a lie out of the old saw that “never the twain shall meet”).

When East West Bank
in Pasadena, Calif., was accused of causing a borrower’s default and
subsequent bankruptcy, the bank offered to settle for $20 million
rather than take its chances with a jury.

But the borrower, a seafood importing company, took the case to court, asking for $40 million plus punitive damages.

The gamble did not pay off.

Last
month, a Los Angeles jury unanimously ruled that East West, a unit of
the $11.8 billion-asset East West Bancorp, was not responsible for Ocean Fresh Trading Inc.’s demise.

The
bank prevailed, in part, because it did not try to hide a conflict of
interest involving an employee, his wife, and an Ocean Fresh competitor.

“The
lesson learned is that banks can get fair trials, too, but you’ve got
to take the high road and be completely up front if something was
amiss,” said Skip Miller, a partner at Miller Barondess LLP in Los Angeles who represented East West in the case.

Walter G. Moeling 4th, a partner with the Atlanta law firm Powell Goldstein LLP,
said the ruling is particularly important given the current
environment; the subprime mortgage crisis, mounting foreclosures, and
the credit crunch have tarnished the banking industry’s reputation,
making it potentially more difficult to win in front of a jury.

“In
this market, there is a pent-up sentiment, ‘I’m not happy with
financial institutions,’ and juries are skeptical whether a bank is
being greedy,” he said. “They think, ‘If this bank isn’t shooting
straight, I’m going to nail them,’ so banks are better off owning up to
their mistakes.”

Man, if that lesson starts spreading, it’s going to make it very uncomfortable for those of us who always advise banks to lie, then do our utmost to suborn perjury. I mean, what’s this profession coming to when people start winning cases without shading the truth? Plus, as Pontius Pilate sneered, “What is ‘truth’?” Talk about shifting paradigms!

The American Banker issued a correction that the bank actually offered the plaintiff less than $20 million to settle. How much less is not stated. Let’s hope it was a lot less, because then whoever decided to reject the offer will feel less like he just stuck his last dollar in a slot machine that rolled up two sevens, then a friggin’ clown’s face. So close, yet so far.

According to the article, the plaintiff’s attorneys “did not return calls for comments.” They’re probably out (a) using a sump pump to transfer Stolichnaya directly from a Russian tanker into their waiting mouths, and (b) drafting an appeal.


Other News

]]> http://lawbites.com/a-disturbing-litigation-strategy/feed/ Above and Beyond http://lawbites.com/above-and-beyond/ http://lawbites.com/above-and-beyond/#comments Sun, 29 Jun 2008 02:59:18 +0000 Law Bites http://lawbites.com/above-and-beyond/ Recently, Ben Worthen's Business Technology Blog at The Wall Street Journal had a short post about what a nice job Kalamazoo County State Bank did in responding to a "phishing" attack on the bank's customers. The attack came to Worthen's attention because Ben received one of the phishing e-mails and, being the reporter he is, he called the bank and spoke with the bank's CEO about it.

Jim MacPhee, CEO of the bank, was well aware of the problem by the time we reached him. He tells the Business Technology Blog that his bank’s "phone lines lit up like a Christmas tree" as soon as the email went out. When he arrived at work Wednesday morning, his voicemail was full, as were the mailboxes of most of his staff. Many of the calls were from concerned customers, but there were also calls from people who didn’t have accounts at his…

]]> Bank Lawyer’s Blog:

Above_and_beyond
Recently, Ben Worthen’s Business Technology Blog at The Wall Street Journal had a short post about what a nice job Kalamazoo County State Bank did in responding to a “phishing” attack on the bank’s customers. The attack came to Worthen’s attention because Ben received one of the phishing e-mails and, being the reporter he is, he called the bank and spoke with the bank’s CEO about it.

Jim MacPhee, CEO of the bank, was well aware of the problem by the time
we reached him. He tells the Business Technology Blog that his bank’s “phone lines lit up like a Christmas tree” as soon as the email went
out. When he arrived at work Wednesday morning, his voicemail was full,
as were the mailboxes of most of his staff. Many of the calls were from
concerned customers, but there were also calls from people who didn’t
have accounts at his bank, but who wanted to make sure that he was
aware that someone was using the bank’s name to commit fraud.

The phony e-mail wasn’t generated by the bank, or by a hacker who breached the bank’s system and was using the bank’s e-mail. It was just the usual phishing fraud: “they just used widely available software to make the email appear like
it came from the bank. Basically, they were picking on the bank.”

While cautious lawyers might have told Mr. MacPhee to keep the bank’s involvement to a minimum (subject to its duties to file a SAR and otherwise report the incident, as required by applicable law), luckily for the bank and its customers, Mr. MacPhee decided to go the extra mile.

But while KCS Bank may be off the hook legally, it has a responsibility
to its customers to resolve the situation, MacPhee tells us. So it
worked with the bank’s Internet Service Provider to track the email to
a computer in Virginia, and managed to shut down the 800 number,
although it was operational for nearly 24 hours. MacPhee also posted a
warning on the bank’s Web site announcing that criminals had targeted
the bank’s customers.

“Doing the right thing.” It’s good for the reputation, and just look what this little bank got out of the deal by doing it: a feature in a main stream business publication that shows how much it values its customers. Of course, Mr. MacPhee ends the article with a wish for its customers’ welfare that might be raising the bar a bit too high. Nevertheless, it’s always good to hope for the best.

“We just hope no one is stupid enough to fall for it,” he says.

A cynic might respond with H.L. Mencken’s famous line: “Nobody ever went broke underestimating the intelligence of the American public.” Being eternal optimists, we’ll decline to do so and instead, join Mr. MacPhee and hope for the best.


Other News

]]> http://lawbites.com/above-and-beyond/feed/ Lawyers All The Way Down http://lawbites.com/lawyers-all-the-way-down/ http://lawbites.com/lawyers-all-the-way-down/#comments Sun, 29 Jun 2008 02:59:18 +0000 Law Bites http://lawbites.com/lawyers-all-the-way-down/ If the old adage that "bad facts make bad law" is true, then perhaps a correct corollary is that "bad times make good lawsuits." The recent firings and demotions of highly placed executives at very large financial institutions like Wachovia and Washington Mutual may have started a "trickle down" effect that has led to "rifts" between officers, directors and shareholders of much smaller community banks, rifts that have, in turn, led to litigation. At least, that's apparently been the case in Atlanta.

The housing market's collapse has opened rifts and created new tensions within metro banks' leadership ranks, stressing organizations recently accustomed only to growth.

The trend of new bank formation has given way to CEOs and directors now resigning and, at one bank, shareholders suing.

[...]

At Alpharetta-based Alpha Bank & Trust, a group of shareholders are attempting to change the bank's strategic direction and board changes through a…

]]> Bank Lawyer’s Blog:

Turtles
If the old adage that “bad facts make bad law” is true, then perhaps a correct corollary is that “bad times make good lawsuits.” The recent firings and demotions of highly placed executives at very large financial institutions like Wachovia and Washington Mutual may have started a “trickle down” effect that has led to “rifts” between officers, directors and shareholders of much smaller community banks, rifts that have, in turn, led to litigation. At least, that’s apparently been the case in Atlanta.

The housing market’s collapse has opened rifts and created new
tensions within metro banks’ leadership ranks, stressing organizations
recently accustomed only to growth.

The trend of new bank formation has given way to CEOs and directors now resigning and, at one bank, shareholders suing.

[...]

At Alpharetta-based Alpha Bank & Trust, a group of shareholders are
attempting to change the bank’s strategic direction and board changes
through a lawsuit, filed May 27 in Fulton County Superior Court, after
that bank dismissed its founding CEO earlier this year. Alpha Bank
opened in 2006, rapidly expanding its real estate loan portfolio in
2007 as the building boom slowed.

[...]

Bankers said the real estate market’s rapid downturn added
pressures that can dramatically change how a bank’s leadership works
with each other, sometimes catastrophically.

“It can destroy an organization,” said Sonny Deriso, chairman of
Buckhead-based Atlantic Capital Bank and longtime bank executive and
attorney. “When everyone’s squared off, it’s too late to be settled
amicably.”

According to one expert opinion, much of the “squaring off” may be the result of the unrealistic expectations of investors who’ve not been through a prolonged economic down cycle in their short, sweet lives.

Deriso said that infighting can be worse among Atlanta banks that
were created during the boom solely to be sold after a few years of
operation.

“Many shareholders and management did this to grow something that
could turn around and sell, and you can’t do that right now. It becomes
a long-haul prospect that many may not be comfortable with,” he said.

Rather than facing reality and accepting the fact that even old hands didn’t foresee that this freight train would jump the tracks so suddenly and violently, and just buckling down and settling in until the economy improves, many dissatisfied bankers and investors are turning to America’s favorite weapon of mass destruction: trial lawyers. No one should be surprised that this is the result in a nation raised on Short Attention Span Theater.

Stephen Hawking’s A Brief History of Time begins with an anecdote.

A well-known scientist (some say it was Bertrand Russell) once gave a public lecture on astronomy. He described how the earth orbits around the sun and how the sun, in turn, orbits around the center of a vast collection of stars called our galaxy.
At the end of the lecture, a little old lady at the back of the room
got up and said: “What you have told us is rubbish. The world is really
a flat plate supported on the back of a giant tortoise.”
The scientist gave a superior smile before replying, “What is the
tortoise standing on?” “You’re very clever, young man, very clever,”
said the old lady. “But it’s turtles all the way down!”

No, mam, it’s lawyers all the way down.


Other News

]]> http://lawbites.com/lawyers-all-the-way-down/feed/ Risk Mitigation And Subprime http://lawbites.com/risk-mitigation-and-subprime/ http://lawbites.com/risk-mitigation-and-subprime/#comments Sun, 29 Jun 2008 02:59:17 +0000 Law Bites http://lawbites.com/risk-mitigation-and-subprime/ Not surprisingly, some mitigation firms think that one way to resolve the credit crisis is to use more risk mitigation services. Naturally, we at Bank Lawyer's Blog believe that the key to resolving the crisis is to  pay more billable hours to bank lawyers.

At least one risk mitigation expert seems to support the theory of some observers that when it comes to subprime, there was "a whole lot of fraud goin' on."

Risk mitigation firm Digital Risk LLC, Maitland, Fla., has found 50% to 60% of the subprime and alternative-A mortgages from the last few years that it has examined due to contract breaches contain significant misrepresentation or fraud, according to Bruce Miller, who was recently named to head the company's New York-based structured finance consultancy practice.

Mr. Miller, the former founder of Credit Suisse's conduit and credit products group, said traditional methods of analyzing such loans have…

]]> Bank Lawyer’s Blog:

Not surprisingly, some mitigation firms think that one way to resolve the credit crisis is to use more risk mitigation services. Naturally, we at Bank Lawyer’s Blog believe that the key to resolving the crisis is to  pay more billable hours to bank lawyers.

At least one risk mitigation expert seems to support the theory of some observers that when it comes to subprime, there was "a whole lot of fraud goin’ on."

Risk mitigation firm Digital Risk LLC, Maitland, Fla., has found 50%
to 60% of the subprime and alternative-A mortgages from the last few
years that it has examined due to contract breaches contain significant
misrepresentation or fraud, according to Bruce Miller, who was recently
named to head the company’s New York-based structured finance
consultancy practice.

Mr. Miller, the former founder of Credit Suisse’s conduit and credit
products group, said traditional methods of analyzing such loans have
proved insufficient and he has come to believe that every
subprime/alt-A loan originated in the past few years should get a
third-party review. Information on original loan "tapes" for these
mortgages cannot be counted on, he said, adding that he feels rating
agencies, as well as other market participants, have largely been
"defrauded" when it comes to this information.

Payment histories that were once commonly seen as a good way to size
up loan quality are no longer enough because they may, for example,
show a borrower has a fairly good track record and only one 30-day
delinquency on its loan while hiding the fact that the same borrower
owns five other properties he has been flipping, Mr. Miller said.

Without knowing what percentage of alt-A and subprime mortgages that Digital Risk "examined due to contract breaches," it’s impossible to determine whether or not the problem of misrepresentation or fraud is widespread or not. The fact that Digital Risk is making a living from reviewing loan portfolios where the investor is alleging (we assume) breach of representations and warranties in the loan sale agreement is support for our previous posts on the increasing incidences of loan repurchase demands by loan purchasers.

I have to admit that I’m not sure I believe that there are many borrowers out there with a "good track record" as far as payment history is concerned but who are also flipping five other properties. I’m not saying it hasn’t occurred, I’m merely saying that the possibility wouldn’t necessarily motivate a loan purchaser to drop a bundle of cash on Digital Risk. Nevertheless, you can’t blame the guy for making his pitch.

He’s also dissing automated valuation models.

Automation valuation models at the ZIP code/metropolitan statistical
area level also may be insufficient ways to size up such loans, which
really need to be analyzed in terms of the individual property as well
as in terms of whether a pattern of fraud has been detected in the
region if one wants to derive any value from them, said Mr. Miller.
"Everything revolves around getting as granular as possible. Otherwise
it’s the classic ‘garbage in, garbage out.’"

Well, "garbage in, garbage out" is a good general statement as to most aspects of the subprime mortgage market over the last five years. On the other hand, how much "getting granular" an investor can afford might depend, ultimately, on how solvent the seller is. If your seller is listed on the "Implode-O-Meter," then the expected recovery on a lawsuit for breach of contract might not justify getting very "granular." Just sayin’.

Speaking of "garbage in, garbage out, it appears that Mr. Miller made money on both ends of this business cycle.

Mr. Miller also noted that due diligence firms’ role has changed dramatically since the days when he founded the Credit Suisse conduit and credit products unit. "It’s not just due diligence on the inbound/new origination [business], it’s a very different role," he said, noting also that demand for advisory/consulting work of this nature has grown notably in the last 18-24 months.

That’s certainly an example of being able to hit the sweet spot no matter what the market throws at you, isn’t it? Just like attorneys, investment bankers turned risk mitigation experts can make money no matter which way the economic winds blow.


Other News

]]> http://lawbites.com/risk-mitigation-and-subprime/feed/ Exercise In Futility http://lawbites.com/exercise-in-futility/ http://lawbites.com/exercise-in-futility/#comments Sun, 29 Jun 2008 02:59:17 +0000 Law Bites http://lawbites.com/exercise-in-futility/ When consumer advocates last year called for a 60-to-90 day nationwide moratorium on residential loan foreclosures, we thought that it was a dumb idea. Holden Lewis of Bankrate.com also questioned the utility of such  a moratorium and asked an embarrassing question.

For example, if a six-month halt to all foreclosures merely delayed a consumer's foreclosure for six months instead of preventing it, that homeowner would rack up seven months of unpaid interest charges instead of one month.

Who would be responsible for paying the extra amount: the servicer, the investors who own the loan, the borrower?

Our guess was "the lender."

A Massachusetts law that went into effect last month extends from 30 to 90 days the "right-to-cure period" before a lender on a 1-to-4 family mortgage loan can foreclose on a defaulting borrower. According to Housing Wire, the immediate effect of the law was to reduce the number of foreclosures,…

]]> Bank Lawyer’s Blog:

Dumb_laws
When consumer advocates last year called for a 60-to-90 day nationwide moratorium on residential loan foreclosures, we thought that it was a dumb idea. Holden Lewis of Bankrate.com also questioned the utility of such  a moratorium and asked an embarrassing question.

For
example, if a six-month halt to all foreclosures merely delayed a
consumer’s foreclosure for six months instead of preventing it, that
homeowner would rack up seven months of unpaid interest charges instead
of one month.

Who would be responsible for paying the extra amount: the servicer, the investors who own the loan, the borrower?

Our guess was "the lender."

A Massachusetts law that went into effect last month extends from 30 to 90 days the "right-to-cure period" before a lender on a 1-to-4 family mortgage loan can foreclose on a defaulting borrower. According to Housing Wire, the immediate effect of the law was to reduce the number of foreclosures, but guess what? Homeowners aren’t curing their defaults and, therefore, the lull is expected to be temporary. Once the additional 60-day right-to-cure period expires, the  number of foreclosures will shoot right back up.

"We are in the midst of a foreclosure tsunami here in Massachusetts,
and this storm is not going away any time soon," said Sheila
Farragher-Gemma, co-founder of ForeclosuresMass.com. "The new filing
requirements have created a situation similar to the eye of a hurricane
— it may seem calm now, but the storm will come raging back with even
more force in the days ahead."

Farragher-Gemma said that "nothing has changed in the Massachusetts
real estate market," and that the extension likely won’t do much beyond
extend the inevitable for most troubled homeowners.

Actually "something HAS changed" in Massachusetts. Lenders who otherwise could have taken title to the collateral earlier are being forced to eat an extra two months of interest, while borrowers get to live another sixty days payment-free, even though delinquent. All this was expected. This is another classic example of a state law that serves no purpose other than to make it appear that government officials are actually accomplishing something, when what they’re really doing is sticking it to lenders. In an election year, that’s a demagogue’s favorite trick.

One more reason not to make mortgage loans in Massachusetts.


Other News

]]> http://lawbites.com/exercise-in-futility/feed/ The Good, The Bad, And The Clueless http://lawbites.com/the-good-the-bad-and-the-clueless/ http://lawbites.com/the-good-the-bad-and-the-clueless/#comments Sun, 29 Jun 2008 02:59:16 +0000 Law Bites http://lawbites.com/the-good-the-bad-and-the-clueless/ Over the last couple of weeks, we've seen a demonstration of venality and/or ignorance at the top of the food chain in our nation's capital and a demonstration of impressive competence among the rank and file. We'll take them in reverse order.

The Wall Street Journal's Damian Paletta had a front page article the week before last on the FDIC's seizure of the insolvent First Integrity Bank in small town Staples, Minnesota. It's an excellent "fly-on-the-wall" account of how some old and, I assume, new hands at the FDIC stage the logistical maneuver of taking down a broke bank with minimal muss and fuss. It demonstrates how much nuts-and-bolts competence exists among the career types who toil away day after day in these agencies below the radar screen of the main stream media. Political appointees come and go, often with minimal lasting effect. It's the grunts in the…

]]> Bank Lawyer’s Blog:

Incompetence
Over the last couple of weeks, we’ve seen a demonstration of venality and/or ignorance at the top of the food chain in our nation’s capital and a demonstration of impressive competence among the rank and file. We’ll take them in reverse order.

The Wall Street Journal’s Damian Paletta had a front page article the week before last on the FDIC’s seizure of the insolvent First Integrity Bank in small town Staples, Minnesota. It’s an excellent "fly-on-the-wall" account of how some old and, I assume, new hands at the FDIC stage the logistical maneuver of taking down a broke bank with minimal muss and fuss. It demonstrates how much nuts-and-bolts competence exists among the career types who toil away day after day in these agencies below the radar screen of the main stream media. Political appointees come and go, often with minimal lasting effect. It’s the grunts in the trenches that keep the wheel turning.

On the flip side of competence we have the shining examples of the Chairmen of the Senate Banking Committee and Budget Committee. Both men received favored loan terms from their favorite mortgage banking whipping boy, yet both tried the Sergeant Schultz defense when called out on it.

Senator Kent Conrad,
Democrat of North Dakota, said Saturday that he would donate $10,500 to
charity and refinance a property loan after suggestions that he and
other prominent Washington figures received preferential treatment from
Countrywide Financial Corporation.      

Though Mr. Conrad,
chairman of the Budget Committee, said he was not aware of any
favoritism shown by the lender that has come under scrutiny in the
mortgage crisis, he said a review of e-mail traffic suggested that the
loan fee for a beach house may have been reduced because of his status,
while a second loan called for an exception by the company.

He’s giving ten grand to Habitat for Humanity and calling it even. I wonder why they didn’t let Jeff Skilling do that?

Chris Dodd, who’s been trying to pass legislation to "fix" the credit crisis and "reform," also got a "Friend of Angelo" loan also claimed he had no idea that his loan terms were below market.

Like Mr. Conrad, Mr. Dodd has said he was unaware of any special
treatment in loans for a town house in Washington and a home in
Connecticut. As chairman of the Senate banking committee, Mr. Dodd has
been central in developing a legislative response to the housing
foreclosure crisis.

I admit, it sounds plausible that Dodd wouldn’t know market loan terms from the Dead Sea Scrolls. That defense has a "if it don’t fit, you must acquit" ring to it.

Although other big wigs, including Alphonso Jackson, Donna Shalala and Richard Hoolbrooke, were also on Angelo’s list, the stories don’t include Dan Walker, the FDIC official featured in Paletta’s story. I guess when it comes to Friend of Angelo loans, the ham-and-eggers need not apply.

UPDATE: 6/16/08: From an editorial in today’s The Wall Street Journal about "FOA" loans made to politicians:

The Countrywide Financial sweetheart loan scandal
continues to grow, spreading to Senators and other Beltway potentates.
We are about to find out if Congress’s passion for investigating
business ethics extends to conflicts of interest and cash that involve
fellow Members.

Take Senator Kent Conrad, the North Dakota Democrat
whose office issued a Friday statement saying that "I never met Angelo
Mozilo." What he did not say then but admitted under later questioning
by a Journal reporter is that, although he may not have had a
face-to-face meeting with the Countrywide CEO, Mr. Conrad had called
Mr. Mozilo and asked for a loan. The result was a discounted loan on
his million-dollar beach house and a separate commercial loan of a type
that residential lender Countrywide did not even offer to other
customers, regardless of the rate.

So after calling the CEO of a company with various
matters before the Senate, asking for a loan and then receiving at
least two sweetheart deals, Mr. Conrad now says: "I did not think for
one moment – and no one ever suggested to me – that I was getting
preferential treatment." Lawyers will immediately wonder if this isn’t
a version of the "ostrich defense," which judges describe during jury
instruction as willful blindness or deliberate ignorance. For what
other reason, besides preferential treatment, would one call the CEO of
the mortgage company? Does Mr. Conrad call August Busch IV when he
wants to buy a six-pack?

Almost as breathtaking is Senator Conrad’s attempt to
use a charitable contribution for the estimated amount of any mortgage
savings – $10,500 – to make the issue go away. So while the Senator
says he did nothing wrong, now that his nonmistake has been discovered
he’ll nonetheless give away the nonspecial treatment cash. There is
ample evidence here to warrant an investigation, including subpoenas
for relevant documents.

[...]

Congress also needs a full accounting of the contacts
between Countrywide and the politicians receiving favors from the
lender. Did Countrywide ask for and receive assistance from the Friends
of Angelo? With Senate Banking Chairman Dodd at the center of the
scandal, ranking member Richard Shelby (R., Ala.) and House Financial
Services Chairman Barney Frank (D., Mass.) will have to lead the
inquiry.

But taxpayers should not have to wait for the results
of an investigation. Democrats in Congress are trying to pass a bailout
for mortgage borrowers and lenders like Countrywide, and they have been
holding reform of Fannie Mae and its cousin Freddie Mac hostage to get
President Bush to agree. Mr. Dodd is one of the main hostage-takers. It
is time he and Mr. Frank dropped this political ransom-taking and
finally subjected Fannie and Freddie to tough oversight. This means
giving a regulator the power to set their capital ratios and portfolio
securities limits, so that taxpayers have some protection against their
potential losses.

Meanwhile, until it is clear how much Countrywide will
benefit from Senator Dodd’s proposed $300 billion mortgage rescue – and
exactly how Mr. Dodd came to do business with Countrywide – Congress
should call a halt to legislating bailouts. Taxpayers deserve no less.

As Clint Eastwood’s character William Munny told Gene Hackman’s character Little Bill in the movie Unforgiven, right before Munny blew Bill’s head off, "Deserve’s got nothin’ to do with it."

Don’t hold your breath waiting for Congressional investigations of Kent and Dodd. Also, don’t get in the way of the speeding bullet train called "The Bailout Express." Op-Eds in The Wall Street Journal will have as much of an effect on Congress as a lecture from The Decider in Chief.


Other News

]]> http://lawbites.com/the-good-the-bad-and-the-clueless/feed/ The Bozo Factor http://lawbites.com/the-bozo-factor/ http://lawbites.com/the-bozo-factor/#comments Sun, 29 Jun 2008 02:59:15 +0000 Law Bites http://lawbites.com/the-bozo-factor/ Twenty plus years ago, I had been recruited by a large law firm as a lateral hire. At my first quarterly firm dinner, I was sitting next to an especially acerbic fellow lateral hire (and, therefore, one of my favorite co-toilers at the firm) when a senior partner waltzed in wearing a navy blue blazer, pink dress shirt, red-and-green plaid pants and a paisley tie. I watched him walk across the room, booming loudly and obnoxiously every step of the way. My mate, reading the "WTF?" look on my face, turned to me and deadpanned, "The Bozo Factor: every firm's got it."

According to Ben Worthen of the Business Technology Blog, many businesses have it and it applies to IT professionals as well as to legal professionals. It's not clown-like dress and behavior that Worthen's discussing, however. it's incompetence, the kind that causes security breaches.

Hackers enjoy a reputation…

]]> Bank Lawyer’s Blog:

Bozo
Twenty plus years ago, I had been recruited by a large law firm as a lateral hire. At my first quarterly firm dinner, I was sitting next to an especially acerbic fellow lateral hire (and, therefore, one of my favorite co-toilers at the firm) when a senior partner waltzed in wearing a navy blue blazer, pink dress shirt, red-and-green plaid pants and a paisley tie. I watched him walk across the room, booming loudly and obnoxiously every step of the way. My mate, reading the "WTF?" look on my face, turned to me and deadpanned, "The Bozo Factor: every firm’s got it."

According to Ben Worthen of the Business Technology Blog, many businesses have it and it applies to IT professionals as well as to legal professionals. It’s not clown-like dress and behavior that Worthen’s discussing, however. it’s incompetence, the kind that causes security breaches.

Hackers enjoy a reputation as computer whizzes who can break into the
most sophisticated systems. They may be whizzes, but the reason for
their success is that businesses rely on defenses filled with holes big
enough to drive a truck through.

A new study by Verizon’s Business Risk team, which performs
post-breach forensics, looked at the causes of more than 500 data-loss
incidents and concluded that sloppy security procedures were partly to
blame in almost every one. (The study didn’t take into account
incidents where a laptop containing sensitive data was lost or stolen,
because the cause of the breach is self-evident and these incidents
rarely result in fraud or identity theft.) In fact, stupid mistakes are
so common that forensics work is getting boring. "The most difficult
thing for me and my team is that we see company after company fall
victim because of the same basic flaws," Bryan Sartin, vice president
of investigative response at Verizon, tells the Business Technology
Blog. These include failing to update or misconfiguring systems.

What about the "professional hacker" that this blog and others have
hyped for the last year – you know, the guy who tricks employees into
disclosing sensitive information, which he then uses to make off with
reams of data? Turns out he isn’t that big a threat. Verizon concludes
that only 17% of the attacks it investigated were committed by a
highly-skilled hacker, while 54% required little or no technical skill.
And only 15% of attacks committed by outsiders were targeted. More
often, a hacker cast a wide net looking for any company with weak
defenses.

While hackers accounted for 73% of all data breaches – an indication
of how poor defenses are – these outsiders didn’t make off with as much
data as insiders, who accounted for just 18% of breaches, and business
partners – outsourcers, consultants, call-center workers – who
accounted for 39% of breaches. (The total is more than 100% because
some breaches were committed by multiple parties.) In fact, when the
number of attacks and amount of data stolen are combined, business
partners are the biggest threat of all.

Sartin says that in these cases, too, lax security is an issue – a
contractor saw weak defenses and treated them like an opportunity. In
almost every breach he’s investigated the thief "took the path of least
resistance."

I was thinking about "The Bozo Factor" recently while assisting a client in formulating vendor management policies and procedures. One of the principles that the client was adamant about building into its procedures, especially with respect to technology vendors who would have access to customer information, was that due diligence on those vendors had to be rigorous. The institution also would require that a legal review of all contracts with vendors was essential to make certain that the institution was adequately protected from the results of the vendor’s negligence because, no matter how good the due diligence, "stuff happens." Although we didn’t label it "The Bozo Factor," we discussed the fact that even those vendors with great reputations can suffer security breaches. Worthen’s observation that "business partners" are the biggest threat when it comes to security breaches only serves to confirm the client’s cautious approach.

Unfortunately, no amount of vendor due diligence will protect a bank from a truely "inside job." The fact that insiders make off with more from security breaches than outside "hackers" is no surprise. We’ve blogged about that "nightmare" previously, where "The Bozo Factor" involved an apparent failure to shut off access to the computer system of the business after the employees’ services were terminated. Of course, even  without any apparent incompetence, "rogue employees" can breach security and even the biggest of the big boys are susceptible. Venality and greed can often trump the best security.


Other News

]]> http://lawbites.com/the-bozo-factor/feed/ HUD Resumes Fight To Delete DAP http://lawbites.com/hud-resumes-fight-to-delete-dap/ http://lawbites.com/hud-resumes-fight-to-delete-dap/#comments Sun, 29 Jun 2008 02:59:14 +0000 Law Bites http://lawbites.com/hud-resumes-fight-to-delete-dap/ After carefully considering an adverse ruling by a federal district court judge over its failure to follow the procedures mandated by the Administrative Procedures Act, HUD has decided to thank the judge for outlining the course of action it now plans to follow in eliminating seller-funded downpayment assistance (DAP).

Last year, a federal judge in the District of Columbia, issued a preliminary injunction against an earlier ban on seller-assisted down-payment gifts proposed by the Department of Housing and Urban Development. The judge ruled that HUD "failed to provide a rational basis in support" of the ban.

HUD spokesman Brian Sullivan said in an interview that the agency, "lost on a technicality. The court gave us a good road map for how to get it done."

Many observers believed that HUD shouldn't have required two federal district court judges (another in California also issued a similar ruling) to tell it…

]]> Bank Lawyer’s Blog:

Hit_me_one_more_time
After carefully considering an adverse ruling by a federal district court judge over its failure to follow the procedures mandated by the Administrative Procedures Act, HUD has decided to thank the judge for outlining the course of action it now plans to follow in eliminating seller-funded downpayment assistance (DAP).

Last year, a federal judge in the District of
Columbia, issued a preliminary injunction against an earlier ban on
seller-assisted down-payment gifts proposed by the Department of
Housing and Urban Development. The judge ruled that HUD “failed to
provide a rational basis in support” of the ban.

HUD spokesman Brian Sullivan said in an interview that
the agency, “lost on a technicality. The court gave us a good road map
for how to get it done.”

Many observers believed that HUD shouldn’t have required two federal district court judges (another in California also issued a similar ruling) to tell it how to properly issue a rule in accordance with the APA. Nevertheless, it’s nice to know that HUD believes that it finally gets it.

According to FHA commissioner Brian Montgomery, it’s a matter of life and death.

“Data clearly demonstrates that FHA loans made to borrowers relying on
seller-funded downpayment assistance go to foreclosure at three times
the rate of loans made to borrowers who make their own downpayments,”
Montgomery said at a National Press Club event.

Such loans are currently one-third of the government agency’s
portfolio, he added, and led the agency to book an additional $4.6
billion in unanticipated long-term losses in an annual re-estimate.

“No insurance company can sustain that amount of additional costs
year after year and still survive,” he argued. “Unless we take action
to mitigate these losses, FHA will soon either have to shut down or
rely on appropriations to operate.”

[...]

Mongtomery said that HUD would reopen to public comment a hotly-contested proposed rule that would look to ban the down-payment assistance program.

“We are concerned about this business because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” he said.

“Given these concerns, we cannot just stand by – we must make our case again.”

As expected, the nonprofit corporations that have been making servicing fees from laundering seller-funded downpayment assistance payments from rendering valuable “services” for homebuilders and borrowers, are crying in their beer.

Losing one third of the FHA’s business that uses downpayment
assistance will deny annually over one hundred thousand qualified
moderate income, minorities, first-time homebuyers and women-headed
households from becoming homeowners,” said Ann Ashburn, president of AmeriDream, Inc., a large down-payment assistance provider.

She argued that denying key groups the ability to purchase a home would further destabilize an already-wobbling housing market.

It shouldn’t come as any surprise to folks like Ms. Ashburn that the overwhelming majority of the American taxpayers who will have to fund the FHA if it runs into financial difficulties is already less than enamored with using the FHA as a tool to bailout imprudent borrowers, lenders and the enabling investors who funded the subprime fiasco. Cutting back on this form-over-substance scam that enables borrowers who otherwise wouldn’t qualify for a government-guaranteed loan to get one, borrowers who are much more likely to default than borrowers who do not receive such assistance, is going to be politically popular with those taxpayers. Ms. Ashburn needs to find herself another scam to use to fleece the taxpaying public. This one is headed, surely albeit slowly, to the dustbin of history.

Brian Montgomery gets it.

“FHA is designed to help stabilize the economy, operating within manageable, low-risk loans,” Montgomery said. “It is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans.

“We don’t want to dramatically enlarge FHA’s portfolio, with a substantial portion of the portfolio problematic, high risk loans that cost homeowners who were careful and bought homes within their means.”

This bad idea would have been blown out of the water already if HUD had been able to follow the Administrative Procedures Act. With the recent changing of the guard at HUD, and the installation of a bureaucrat to head HUD who appears to have bi-partisan support in Congress and doesn’t appear to suffer from the lack of a moral compass as did his predecessor, there’s hope that HUD will manage to get it right this time around and will slam the door on this scheme once and for all.


Other News

]]> http://lawbites.com/hud-resumes-fight-to-delete-dap/feed/