Audit Notes: It’s Wall Street’s Deficit, Dimon Steps In It, Red-Faced Mortgage Bankers

Simon Johnson looks at the “Ruinous Fiscal Impact of Big Banks” over at The New York Times’s Economix blog:

First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.

This rhetoric is misleading at best. At worst it represents a blatant attempt to shake down the public purse.

Johnson puts the blame for the soaring public deficits squarely on the financial sector that caused the recession:

Whatever you think about the effectiveness of the additional fiscal stimulus packages provided to the economy in early 2008 (under President Bush) or starting in early 2009 (under President Obama), remember that the impact of these on the deficit was small relative to the decline in tax revenue.

The total fiscal impact of this cycle of regulatory co-option, as reflected, for example, in the Congressional Budget Office baseline debt forecast (which compares what this was precrisis and what this is now) - is about a 40-percentage-point increase in net federal government debt held by the private sector.

— Looks like JPMorgan and its golden boy Jamie Dimon are in some deep doo-doo.

A judge unsealed a lawsuit by the trustee liquidating Bernie Madoff’s estate and it doesn’t look good for the bank. Diana Henriques of the Times:

What emerges is a sketch of an internal tug of war. One group of senior Chase bankers was pursuing profitable credit and derivatives deals with Mr. Madoff and his big feeder-fund investors, the hedge funds that invested their clients’ money exclusively with him. Another group was arguing against doing any more big-ticket “trust me” deals with a man whose business was too opaque and whose investment returns were too implausible.

Can you guess who won that tug of war?

For much of 2007, the tide was with the Chase bankers designing and selling complex derivatives linked to various Madoff feeder funds. By June of that year, they already had sold at least $130 million worth of the notes to investors.


Even after it had begun to act on its suspicions about Mr. Madoff, Chase did not freeze his bank accounts or alert his regulators — or its own — to the unusual patterns in those accounts, the trustee’s complaint contended. As a result, investors continued to pour their money into Mr. Madoff’s Ponzi scheme until the last moment.

The bank “had only to glance at the bizarre activity” in the Madoff accounts “to realize that Madoff was not operating a legitimate business,” the trustee asserted in the litigation. The money coming in was not from the sale of securities, and the money going out was not for the purchase of securities — at a time when Mr. Madoff was supposedly making billions of dollars in trades as part of his investment strategy.

Indeed, the activity in the Madoff accounts was sharply at odds with his firm’s regulatory filings, which his “relationship managers” at the bank kept in their files and supposedly examined. For example, the Madoff firm’s financial reports listed just over $4.8 million in “cash on hand” in December 2006, although the ending balance in Mr. Madoff’s account at Chase that month was actually $295.4 million.

This one should be fun.

The Wall Street Journal’s Anton Troianovski is good to follow up on the Mortgage Bankers Association headquarters story, reporting that the folks who bought the MBA’s D.C. building for $41 million a year ago just flipped it for $101 million. Wow.

Here’s the backstory on the MBA fiasco: The Journal’s James R. Hagerty reported on the sale last February, noting up high that “the trade group for mortgage lenders is refusing to say exactly how it extracted itself from that predicament.”

Later The Daily Show aired a beautiful takedown of the MBA for strategically defaulting while lecturing struggling homeowners on the evils of strategically defaulting on their homes—even though many of them were hosed by the MBA’s own members.

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Mortgage Bankers Association Strategic Default
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Do these mortgage bankers know what they’re doing or what?

Meantime, read this good Huffington Post report on homeowners who’ve chosen to walk away from their mortgages.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,