Cordray could be banks' worst nightmare

President Obama has picked a less polarizing leader for the new Consumer Financial Protection Bureau. But it's too early to sound the all-clear for financial stocks.

By Jim Cramer Jul 19, 2011 8:50AM

the streetjim cramerBank investors breathed a sigh of relief Monday when Elizabeth Warren, the firebrand Harvard law professor who had a "mad as hell and ain't going to take it anymore" attitude toward financial companies, didn't get the top job at her baby, the Consumer Financial Protection Bureau.


They were so thrilled because they feared the unflappable Warren, who had frequently expressed contempt and anger about the banks and their executives, would decimate bank earnings and serve as a nationally appointed nemesis of the industry.


The sigh of relief is premature. Instead of Warren, President Barack Obama picked Richard Cordray, a former Ohio attorney general, to take the helm at the bureau. Frankly, I think bank investors might end up wishing Warren got the nod.


The nation's attorneys general have been vigorous pursuers of bank wrongdoing, and no one has been more aggressive than Cordray, who has taken aim at all the national banks and been a dramatic supporter of the rights of borrowers against lenders. Cordray has been a total attack dog, going so far as lambasting Wells Fargo (WFC) -- long considered the most responsible actor in the mortgage crisis -- for its attempt to resolve the clogged foreclosure pipeline.

Elizabeth Warren is a polarizing, over-the-top figure who is a lightning rod for controversy, so hot that she created opposition out of nowhere. She was so outrageous that even Obama -- the most anti-bank president since Andrew Jackson -- recognized that her personality could get in the way of doing the job.


Cordray, on the other hand, might be more under the radar screen, but he could be a lot more effective given his prosecutorial abilities. I think Cordray's calculus is simple: The mortgage borrowers didn't do anything wrong and need protection from the rapacious banks, which want to throw them out of their homes without documentation or consideration.


I think Cordray will be in favor of cuts in interest and principal, which would kill the banks' meager earnings and stand the whole mortgage business on its ear.

So, bank investors, don't be so quick to come out of the fallout shelter. Cordray is going to be defaulting borrowers' best friend. Which means he might be the bankers' worst nightmare.


At the time of publication, Cramer had no positions in the stocks mentioned.


Jim Cramer is a co-founder and the chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.


Follow Cramer's trades for his Charitable Trust.


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Jul 19, 2011 1:39PM

The most irresponsible borrowers of *anyone* in the 2008 financial crisis were *Banks*


Just like private households, banks have a responsibility to keep their books in good standing. Which they didn't. They leveraged 10X, 20X, 30X on borrowing. Kept no capital reserves (i.e. no cash in the bank), and made risky bets (like borrowing with limited repayment ability, sound familiar?)


In an inverse debt pyramid, mortgage debt made the *smallest* portion of the problem. And when you look at borrowings, the portion of subprime loans represented a small portion of the market. The portion that were actually bad, was even smaller.


Yet who lost? Banks didn't lose. They had all their bad bets subsidized by US citizens. People on the other hand, had to be foreclosed on and undergo real consequences for their actions. And yet, when the banking sector was asked to accept punishment for being bailed out.....what did they do? Like a little kid the wailed and complained until the parents gave up.

Jul 19, 2011 12:18PM
Meager earnings? These big banks are posting billions in earnings. Many are still writing down their losses from the mortgage meltdown. Eveyrone is going to continue to pay for the corrupt practices and greed of the big banks. " No jobs" is created by the big banks refusal to lend money. All that makes them content, are fees which they can collect.
Jul 19, 2011 12:17PM

I agree that we need to go after our banks more. After all, they are loaning us our own money at 4.5% for the highest qualified borrowers, when the bank is basically getting it for 0% hot off the fed press. Imagine how many people would benefit from being able to at least re-fi down to a ~2% to at least lower the monthly payment on their underwater loans.

As for mortgage borrowers doing wrong, many did but many did not. Those who took 2nd's to buy "toys and travel" and then walked need to pony up. Those that bought within their means only to be laid-off and watch thier homes value plummet deserve a break....i.e...writedown to real value.

It'd sure be alot easier to become a producing country again if the cost of living was more inline with the income attainable in manufacturing jobs.



Regardless of how bad Fannie May & Freddie Mack totally screwed up the Financial Industry - anyone who has remained employed throughout the financial crisis and still lost their homes to foreclosure must take responsibility for the fact that they purchased a house that they couldn't afford to pay for. True that Mortgage Companies failed to change their approval Income & Debt ratio's to take into account Government sponsored Inflation of 1). Local Property Taxes, & Utility Company rate increases which were much higher than wage increases. True that they also didn't take into account the fact that people now have Monthly Cell phone bills and Monthly Cable TV & Internet Bills that they didn't used to have. That doesn't change the fact that you have to be able to know how to budget your future expenses BEFORE you buy in order to know IF you can afford to buy!     

Jul 19, 2011 11:02AM
Hot The mortgage borrower's didn't do anything wrong? Yea right, in some cases all they did was commit loan fraud, fail to make payments and let their houses go into foreclosure. Granted there are cases were the banks were too aggressive in pursuing foreclosure but it isn't one sided and the AG's are not impartial parties. They're trying to save their tax bases and find someone with deep pockets to bail out dumb borrowers.  The result will be just what Jamie Dimon said, JPM is going to reduce our mortgage portfolio from $154 billion by at least 90%.  That's not a good sign from the 2nd largest US bank for the US home building and real estate industries.
Jul 19, 2011 4:53PM

JZC - You have pinpointed the true root of the problem: Mortgage originators were willing to give practically everyone with a pulse a loan because they knew that they were going to sell the loan to someone else, therefore they wouldn't be left "holding  the bag" if the loan went bad.  They were simply after the mortgage origination & closing fees.  Then pass the toxic loan onto some other sucker stupid enough to buy it.


If it were illegal to re-sell a mortgage this problem wouldn't have happened.  You can bet that people wouldn't be willing to lend their money to someone unlikely to pay it back.  But if it's someone elses money, then they'll lend all day long.


You're example points out to me that you were irresponsible and immoral.  When the mortgage originator told you to deposit $5k from a relative into your account to make it look like you had the money to qualify, you could have said no.  And therein lies the rest of the problem - you went aloong with it because you wanted that house bad even though you didn't have the money available at that time.  Just because the bank made an immoral suggestion doesn't mean you had to do it.  Two wrongs don't make a right.  You're argument is that the banks are unscrupulous therefore you have the right to be unscrupulous.


You should be the poster child for the problem.  No one has a "right" to things they can't afford.

Jul 19, 2011 4:01PM

@ dontholdyourbreath


Uh... I don't disagree with holding people accountable for borrowing $ or smoking etc.  However, the banks were very culpable in driving up the price of homes.  They wanted people to be able to take out home equity loans, so they assisted in driving up home prices so people could borrow more - albeit as you say for a fee.


I will use my own experience as an example:  I moved to take a job and had a mortgage on a previous home that I put up for sale.  I was renting a town house waiting for my home to sell when my wife found a home she wanted.  Assuming we would not get financed because we had ZERO for a down payment and a mortage on another home, we put in a low bid that was accepted. 


In order to get the financing, the bank and the mortgage lender had me transfer $5k into my checking, from a relative, for 24 hours to "show" that I had $.  Then they lent me 80% for the home and the remaining 20% was given to me by the bank as a home equity loan - even though I didn't own the home yet. 


The bank that asked me to move the $5k into my checking for 24 hours, was the same bank that gave me the 20% home equity loan on a home I didn't own.  The loan office knew I had ZERO down for the home but "massaged" as he called it, the timelines and paperwork to get us the home. 


BTW the loan officer was from 53rd and was on his way to Hawaii after our loan closed - because he was the top loan officer in the Midwest.  Yeah the banks had nothing to do with the housing fiasco....

Jul 19, 2011 12:14PM

How about all of the greedy people who borrowed and couldn't make the payments or chose to strategically default because their property value dropped below their mortgage balance?


Just because the banks were selling rope, didn't mean that mortgage borrowers should buy the rope and place it around their necks.  Borrowers took a gamble and lost.  I'm tired of people lambasting the banks.  No one held a gun to borrowers' heads and forced them to sign the mortgage documents & now because things turned against them, they go out and hire attorneys to get them out of paying their mortgages on technicalities.


How about not buying things that you can't afford or blaming others when a gamble turns against you?

Jul 19, 2011 4:58PM
Georgia Mom 32 - Banks didn't dupe people - people duped themselves.  What are you going to tell me next: that cigarrette companies dupe people into smoking, and liquor companies dupe people into drinking?  Or perhaps during the 70's people were duped into disco dancing, mood rings, bell bottoms & shag carpet?  Most times in life, bad things happen to stupid, undisciplined people lacking common sense.
Jul 19, 2011 5:37PM
I am joining the National Strike on October 5th and you should too. The 10 minute strike is intended to send a message that we are fed up with Congress, the banks and the crooks on Wall Street. Here's what's happening. On Wed. Oct. 5th at 11:30 am eastern time everyone will stop what they are doing for 10 minutes. Workers will stop working, truckers and drivers in cars will pull to the side of the road. People at home will turn off their TVs and Radios. If you are in a car or truck near a city hall, state capitol building or the capitol in Washington DC go there and park. At 11:30 am Eastern time start honking your horn.

89% of the people in this country are fed up with government, the crooks in banks and on wall street. If they don't get the message we will stop working for an hour in November. Tell your friends and coworkers to join the national strike on Oct. 5th.

Jul 19, 2011 4:57PM
Breach of the Implied Covenant of Good Faith and Fair Dealing:  Used widely in insurance law, has expanded into franchise law and can be applied to what Banks have done in the area of Mortgage Backed Securities.  Breach...says that one party to contract cannot do ANYTHING that prevents the other party from enjoying the fruits of the contract.  When the Banks made loans (contracts) then participated in MBS activity, which they should have recognized as a dangerous practice, they  brought the economy to the brink of "going over the edge" resulting in massive economic downturns, including loss of jobs, by which borrowers were using to hold up their end of  the contract.  When the Banks participated in MBS activity they Breached the Implied Covenant of Good Faith and Fair Dealing.  Knowledge of Bank activity in MBS now show this to be the case.
Jul 19, 2011 4:41PM
Sorry. I will never feel sorry for the banks. My husband and I are relatively well-off, but the banks and the mortgage brokers who tried to get us to buy more house than we could afford are EXACTLY who is to blame. Luckily, I married a smart man who knew not to get in over our head... But that didn't stop the banks and brokers from trying to get us to buy something over the top. As a new wife, I wanted the pie-in-the-sky dream house, and we absolutely could have signed on the dotted line 5 years ago and gotten something ridiculous. We didn't ... but think of how many homeowners were DUPED into thinking they could afford that dream house. I almost was.
Jul 19, 2011 3:40PM
I hope Cordray is tough on the banks.  Because our politicians are so beholding to banks and oil companies based upon lobbying and contributions, the public has been at the mercy of their attitude that profits come first, and who cares about the ordinary citizen.  The foreclosure crisis was initiated by the profit motive of banks and their loan products.  By securitizing loans, and using them as a trading tool, banks made a great deal of money initially, and ultimately it became difficult to determine who was holding the bag, investors or the banks, and how the loan would ultimately be serviced. Therefore, when mortgage loans defaulted, the borrower was unable to determine who could assist with a defaulted loan, the bank's representative, or an employee of a servicing company.  So often, the borrower's ability to find someone in authority to discuss possible alternatives to save their home became so difficult that the homeowner felt that there was no hope, and gave in to the note holder's collection efforts.  This attitude continues and I often see the consequences when I conduct residential foreclosure mediations.  As concerns big oil, unless someone reigns these folks in by beefing up our antitrust and other regulatory laws, and strictly enforcing them, the general public is without hope.  I mention big oil because investment divisions of banks have found methods to securitize transactions pertaining to oil, which seems to be unregulated.  Many financial reporters/writers are attributing the high price of gasoline in part to oil related securities, and the lack of regulation thereof.  The general public is suffering due to our sad economy, and the banks and oil companies, due to their unchecked profit motives, are worsening the situation.  Indeed, I hope Mr. Cordray will be tough.  
Jul 19, 2011 2:54PM
Jul 19, 2011 5:36PM
I generally say that the least govt is the best govt.  However, in a system designed to work with checks and balances, until the alliance between big govt and big busn to destroy small bun is ended, we need some controls on big busn.
Jul 19, 2011 5:32PM

What goes arond comes around.  BOA & WF (through their subprime subsidiaries) have been allied with Freddie & Fannie to rip off the taxpayers for years.  Why should they not pay dearly for their roles in destroying America.  This is the first time I have said "Way to go Obama"

Jul 19, 2011 5:59PM

@ dontholdyourbreath


The BANK that loaned me the 20% HELOC on a home that I didn't own, only wanted to see the $5k in my checking to show that I could access cash if needed.  $5k is not 20% of a $160k loan anyway.  The BANK didn't care if I had 20% down for the home, they wanted to loan me a high interest HELOC to make $. 


In the past the banks required a person to have 20% down so they could ensure they didn't lend to persons who might not be able to pay back the entire loan.  A reserve check on their part to cover potential losses.  However, there is nothing set in stone that says they have too or that it's immoral to purchase a home without a down payment if the banks are willing to do so.  Who puts 20% down on a new car?  Probably should, but if you don't and you get the loan is it immoral?


You say the mortgage originator made an immoral suggestion.  What?  You assume it is immoral to purchase a home without 20% down.  Is it?  Where is that written in the Bible?  The banks wanted to lend to people who were not considered loan-able in the past by the banks standards.  That way home prices would go up because everyone who wanted a home could get one and the shortage of housing drove prices up.  Which in turn, made the home someone bought a year earlier "worth" more so the banks could offer them a Home Equity Line of Credit @ 15%.


Dude the banks were in on the whole thing and you know it.  BTW I am still paying on my home and have never missed a payment - because I knew when I took the loan I could pay it back.

Jul 19, 2011 9:49PM



Yeah, "The BANK that loaned me the 20% HELOC on a home that I didn't own, only wanted to see the $5k in my checking to show that I could access cash if needed".  You had no cash by your own admission.  It was tied up in your other house which you hadn't sold yet.  So, you entered into an agreement to buy another house without any means of paying it at that time.  That is unscrupulous & you are a dirt bag.


You said, "there is nothing set in stone that says they have to or that it's immoral to purchase a home without a down payment if the banks are willing to do so".  Wrong again.  If the bank gives you a gun and some bullets, do you put it to your head and pull the trigger?  I think not.  There is something called discipline and common sense of which you have neither.


Yes, I think it is wrong to purchase a house if you cannot even put down 20%.  Why do you think lenders make buyers who put down less than 20% pay mortgage insurance (PMI)?  It is a fact that people who put down less than 20% are more likely to default.


"Where is that written in the Bible"? - everywhere.  People were greedy. 

You say that the banks were in on the whole thing - no, the banks were simply giving people what they wanted.  People that play with fire get burned - don't blame the matches, dude.


You're the type of person who would sue McDonald's if you spilled a cup of their hot coffee on yourself even though it says on the cup, "Warning, hot coffee, risk of burns.  Caliente."









Jul 19, 2011 2:57PM
Jul 19, 2011 3:40PM

to wingnut42:   You're right, the banks are a charity because people want to borrow money from them and not pay it back.  You're right - the banks are to blame just like McDonald's is to blame when people spill hot coffee on themselves and Smith & Wesson is to blame when someone gets shot and the tobacco companies are to blame when someone gets cancer from smoking cigarettes.


The banks didn't set home prices - the market (people) did.  The banks are in the business of lending money for a fee and that's what they did.  What happens to that money after it is lent is out of their control.  They did not create the problem - the borrowers did.  It's like the theme song from the old tv series Baretta said: "Don't do the crime if you can't do the time".

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