Financially Ignorant Political Leaders Are Costing Taxpayers Billions Of Dollars

Since starting MFI-Miami five years ago, I have attempted to talk to countless politicians on the state and local level about the financial crisis and it’s long-term impact on local municipalities. These financially ignorant political leaders respond with a confused dog look and respond with, “I don’t get it.” or scramble to get back to the four talking points their party leaders gave them.

Now, five years into the crisis, taxpayers are now feeling the impact of the financial ignorance of these elected officials who refused to educate themselves about how finance works in 21st Century America.

Two years ago, the City of Los Angeles sued Deutsche Bank for being the biggest slumlords in the city because they alleged that the fourth largest bank in the world wasn’t maintaining the homes of nearly 2000 homeowners they had foreclosed on.  They sued Deutsche Bank for letting hundreds of its properties fall into disrepair and as the City claimed bred crime as many properties became graffiti-scarred dens for squatters or criminals.  Things became so charged that City Councilman Dennis Zine told the LA Times, “This particular bank is … helping to destroy communities,” 

Deutsche Bank repeatedly told the City of Los Angeles what they have repeatedly told other municipalities across the U.S. threatening to sue them, “As we have repeatedly advised the Los Angeles city attorney’s office, loan servicers, and not Deutsche Bank as trustee, are contractually responsible for both the maintenance of foreclosed properties and any actions taken with respect to tenants of foreclosed properties,”

Had the LA City Council and/or their attorneys did any basic research with the Securities and Exchange Commission before filing the suit, they would have realized that what Deutsche Bank was claiming was true.  Pooling and Servicing Agreements for 99% of the mortgage-backed securities in the U.S. specifically state that the servicer and the Trust, not the Trustee are responsible for any liabilities that arise from the servicing of the loan from the time they receive the file until they foreclose on the property and sell it as a post-foreclosure REO.

This week, the suit was settled for a paltry $10 million with Deutsche Bank bringing the servicers of each property in question to the table. In their statement, Deutsche Bank said,  “We are pleased that we could bring together the relevant parties to help facilitate a resolution…. The settlement will be paid by the servicers responsible for the Los Angeles properties at issue and by the securitization trusts that hold the properties.”

Then in May, the financially ignorant political leaders of the GOP dominated Michigan Legislature at the behest of the Michigan Bankers Association attempted to shorten Michigan’s post-foreclosure redemption period from six months to two months under the false and unrealistic premise that it would speed up the process of putting foreclosed homes on the properties.

The series of bills introduced by Michigan’s financially ignorant political leaders, state Senator Darwin Booher, who claims to come from a banking background by saying, “It all falls to the bottom line of the bank and the cost of doing business,” 

For a guy who claims to have worked in banking for 40 years at Bank One and JPMorgan Chase, Booher appears to be severely out of touch with 21st century business models of mortgage finance because he’s basing his arguments on outdated mortgage banking models that have not been used since George Bailey was saved by Clarence the Angel.

Booher also seems to be oblivious to what is currently going on in the industry and the mandates being handed down by the U.S. Treasury. What he failed to understand is that had his bills being passed in their original form he would have actually cost banks money.

It wasn’t until I wrote several blogs criticizing these bills and mortgage activists descended on the state capital did members of the legislature pass a drastically hollowed out version of the legislation that left Michigan’s six month redemption period in place.

It is now clear that the financial ignorance of two mayors and an incompetent city council also played into Detroit’s financial demise.  Detroit had UBS and other banks issue nearly a dozen bonds that contained complex derivatives swaps that now appears no one understood. Detroit’s chief financial officer Jack Martin admitted it contributed to Detroit’s problems, “likely contributed to our current problems. It was the way people did business back then.”

Even now, Detroit Emergency Financial Manager, Kevyn Orr was hired by three failed businessmen turned politicians. Rick Snyder ran Gateway Computers into the ground before selling at it a fire sale price to the Taiwanese, State Treasurer Andy Dillon claimed he was “Saviour of Businesses” but in reality was a wannabe “Larry the Liquidator” from the movie, Other People’s Money.  You also have the Speaker of the Michigan House, Jase Bolger who was sued by Wachovia for fraud and had countless run-ins with the IRS and Michigan Treasury.

In 2001, leaders in Jefferson County, Alabama hired Bank One now owned by JPMorgan Chase to issue $3.1 Billion in bonds to help fund its new sewer system.  The arrangements for the new system had interest rates that reset periodically based on the LIBOR Index, similar to adjustable-rate mortgages and similar to the bonds UBS issued for Detroit.  JPMorgan and other banks also sold the county related derivatives to protect against the risk posed by the securities.  JPMorgan Chase earned undisclosed fees of about $120 million due to the ignorance of county leaders and by betting against the Jefferson County just like UBS did to Detroit.

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