Crises don’t happen in isolation…financial crises that happen along with currency crises tend to be followed by much more severe recessions.

Massachusetts Sues 5 Major Banks Over Foreclosure Practices

Attorney General Martha Coakley announcing the legal action.


Published: December 1, 2011

Citing extensive abuses of troubled borrowers across Massachusetts, the state’s attorney general sued the nation’s five largest mortgage lenders on Thursday, seeking relief for consumers hurt by what she called unfair and deceptive business practices.

Martha Coakley, with her staff in Boston, accused lenders of “deceptive and unlawful conduct.”

In addition to creating a new and significant legal headache for the banks named in the suit — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and GMAC Mortgage — the Massachusetts action diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials to resolve foreclosure improprieties.

Also named as a defendant in the Massachusetts suit was the electronic mortgage registry known as MERS, an entity set up by lenders to speed property transfers by circumventing local land recording officials.

The attorney general, Martha Coakley, and her investigators contend that the banks improperly foreclosed on troubled borrowers by relying on fraudulent legal documentation or by failing to modify loans for homeowners after promising to do so. The suit also contends that the banks’ use of MERS “corrupted” the state’s public land recording system by not registering legal transfers properly.

“There is no question that the deceptive and unlawful conduct by Wall Street and the large banks played a central role in this crisis through predatory lending and securitization of those loans,” Ms. Coakley said at a news conference announcing the lawsuit. “The banks may think they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”

Ms. Coakley has been among the most aggressive state regulators in her pursuit of financial institutions involved in the credit crisis. In addition to her inquiry into foreclosure improprieties in Massachusetts, she has also conducted far-reaching investigations into predatory lending and securitization abuses.

Since 2009, Ms. Coakley has extracted more than $600 million in restitution and penalties from lawsuits against mortgage originators like Option One and Fremont Investment and Loan and Wall Street firms like Goldman Sachs and Morgan Stanley, which bundled loans into mortgage securities.

Officials at all of the banks issued statements saying they would fight the suit. Most of them also indicated dismay that Massachusetts had taken action during negotiations to reach a settlement over the types of practices highlighted in the case.

“We are disappointed that Massachusetts would take this action now,” said Tom Kelly, a Chase spokesman, “when negotiations are ongoing with the attorneys general and the federal government on a broader settlement that could bring immediate relief to Massachusetts borrowers rather than years of contested legal proceedings.”

Lawrence Grayson, a Bank of America spokesman, said: “We continue to believe that collaborative resolution rather than continued litigation will most quickly heal the housing market and help drive economic recovery.”

And Vickee Adams of Wells Fargo said, “Regrettably, the action announced in Massachusetts today will do little to help Massachusetts homeowners or the recovery of the housing economy in the Commonwealth.”

But as Ms. Coakley made clear during the news conference, her office had come to view as unacceptable the negotiating stance taken by the banks in the protracted settlement talks.

“When those negotiations began over a year ago, I was hopeful that we would be able to reach a strong and effective solution,” she said. “It is over a year later and I believe the banks have failed to offer meaningful relief to homeowners.”

Delaware, Nevada and New York have also objected to the direction the settlement negotiations were taking.

Kurt Eggert, a professor at Chapman University School of Law in California who is an expert in mortgages and securitization, said the Massachusetts lawsuit was a significant step because it opened the banks’ practices to far greater scrutiny than they had been subject to.

“So far the servicers have escaped any real review or punishment for their bad practices because federal regulators have by and large given them a pass on whether they followed the law in foreclosures,” Mr. Eggert said. “This lawsuit argues that they haven’t followed the law and that they can’t just fix all their problems after the fact.”

Among the misconduct cited in the Massachusetts complaint were 14 cases of foreclosures by institutions that had not shown proof that they had the legal right to seize the underlying properties when they did so. All the banks also deceived troubled borrowers, the complaint said, about the loan modification process. For example, some banks incorrectly advised borrowers that they would receive priority treatment if they were more than 90 days delinquent on their loans. Other borrowers were misled when told that they must be more than two months’ delinquent to receive a loan modification, it said.

Although Mr. Eggert said that the banks were likely to argue that a state like Massachusetts had no right to bring such a case against federally regulated institutions, he said that the Dodd-Frank legislation restricted the ability of federal authorities to bar states from acting in such cases.

“If the state can go forward and do real discovery, it will be the first time that anyone has really dug into the servicers’ files to see what they have done,” he added. “The feds conducted an investigation where they looked at very few files, and here the state could demand to see a lot.”

A version of this article appeared in print on December 2, 2011, on page B1 of the New York edition with the headline: Massachusetts Sues 5 Major Banks Over Foreclosure Practices.


Crises don’t happen in isolation…financial crises that happen along with currency crises tend to be followed by much more severe recessions.


A Financial Crisis Needn’t Be a Noose


Published: December 17, 2011

RECESSIONS after financial crises are long and severe, and the subsequent recoveries are protracted. That is the bold conclusion of “This Time Is Different,” the book by Carmen Reinhart and Kenneth Rogoff, and it has become conventional wisdom.

Their title is meant to be ironic. “This time is different” is what policy makers always say before a bubble bursts. Yet each time, according to the authors, the results are fundamentally the same.

But while there are strong patterns in the authors’ mountains of data, this simple summary misses an important fact: There’s dramatic variation in the aftermaths of crises, and much of it is caused by how policy makers respond. This history has important implications today.

Economists have long known that financial crises can devastate an economy for years.

“A Monetary History of the United States,” by Milton Friedman and Anna Schwartz, showed in agonizing detail the impact of uncontrolled banking panics in the Great Depression. And previous studies have shown that recessions that involve crises are, on average, more severe than those that don’t.

The Reinhart-Rogoff study emphasizes common patterns across crises. It eschews complicated statistical techniques, relying instead on simple graphs and averages. And the averages are stunning. For 14 major crises since 1929, the associated decline in real per capita gross domestic product averaged 9.3 percent. For postwar crises, it took an average of 4.4 years for output to return to its pre-crisis level.

But study their charts more closely and you’ll find that those averages mask remarkable variation. Norway had only a slight decline in per capita G.D.P. — around 1 percent — after its 1987 crisis, and output was back to its previous level in just three years. By contrast, real per capita G.D.P. in Argentina fell more than 20 percent in conjunction with its 2001 crisis, and took eight years to recover.

The Depression illustrates the variability vividly. Real per capita G.D.P. fell nearly 30 percent in the United States, and didn’t return to its pre-crisis level for a decade. But in Spain, it fell only 9 percent in the Depression as a whole, and actually rose in the year after its 1931 banking crisis.

There was even huge variation within the United States during this period. The Friedman-Schwartz study found four distinct waves of banking panics in the early 1930s. After the first three, output plummeted. But after the last one, in early 1933, output skyrocketed, with industrial production rising nearly 60 percent from March to July. That time was very different.

What explains the variations? Crises don’t happen in isolation.

They’re often accompanied by other factors, which differ across episodes. For example, financial crises that happen along with currency crises tend to be followed by much more severe recessions.

Likewise, some panics follow particularly big declines in house and stock prices, which have damaging effects on their own. 

The most recent recession would likely have been severe — and the recovery slow — even if the financial system hadn’t been stressed, simply because of the decline in wealth and the climb in household indebtedness.

BUT an even larger determining factor is the policy response.

Why was the Great Depression so much worse here than in Spain? According to an influential paper by Ehsan Choudhri and Levis Kochin, Spain benefited from not being on the gold standard. Its central bank was able to lend freely and increase the money supply after the panic. By contrast, in 1931, the Federal Reserve in the United States raised interest rates to defend its gold reserves and stay on the gold standard, setting off further declines in output and exacerbating the banking crisis.

Likewise, the policy response largely explains why output fell after the American banking panics in 1930 and 1931, but rose after the final wave in early 1933. After the first waves, the Fed did little, and President Herbert Hoover signed a big tax increase to replenish revenue. After the final wave, President Franklin D. Roosevelt abandoned the gold standard, increased the money supply and began a program of New Deal spending.

A 2009 study by the International Monetary Fund concluded that fiscal expansion can mitigate the impact of crises. But the Reinhart-Rogoff study points out that policy makers’ ability to take strong fiscal action depends on whether they start with high levels of debt. In the current episode, China and South Korea have recovered faster, partly because they have taken more aggressive fiscal stimulus measures. They could do that because they entered the crisis in good fiscal health.

The response to troubles in the banking system also matters.

After its banking panic in 1991, Sweden aggressively restored its banks to health. They were nationalized, recapitalized with public funds, and then returned to private control. After three rough years, Sweden grew rapidly, soon returning to its pre-crisis trend.

Japan, by contrast, put off cleaning up its banks after its 1992 crisis. For years, it allowed financial institutions to avoid realizing losses by simply rolling over loans to unproductive or failing companies. Partly as a result, it has struggled almost two decades with anemic growth and deflation. And, unlike Sweden, it is still miles from its pre-crisis trajectory.

So where does this more nuanced interpretation of the evidence leave us?

First, as the extreme cases show, financial crises matter. Left uncontrolled, they can leave an economy in shambles for years. So policy makers need to make the financial system less prone to crises, and to fight panics aggressively when they arise. This is a lesson that European leaders, sitting on the edge of a financial meltdown and dithering over a solution, should keep foremost in their minds. And it’s a cautionary tale for those who’d hinder worldwide attempts at stricter financial regulation.

Second, the importance of the policy response in determining the effects of crises argues strongly against complacency here at home. A country as creditworthy as the United States can continue to use fiscal stimulus to help return the economy to full employment. And, as I argued in a previous column, there’s much more the Fed could be doing. Whether we continue to fester or finally embark on a robust recovery depends on whether we choose to use the tools available.

Finally, governments around the world, including our own, should remember that it helps to be in sound fiscal shape before a crisis hits. When we’re all finally through the current mess, governments should rededicate themselves to fiscal responsibility.

Being careful in good times gives policy makers the ability to fight crises in bad ones.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

A version of this article appeared in print on December 18, 2011, on page BU3 of the New York edition with the headline: It’s a Tangled Mess, But Not a Noose.

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