Subpoenas issued to financial firms in expanded probe (Reuters)

WASHINGTON (Reuters) – The Justice Department issued civil subpoenas to 11 financial institutions as part of a new effort to investigate misconduct in the packaging and sale of home loans to investors, Attorney General Eric Holder said on Friday.

Holder declined to provide specifics, including the names of the firms.

"We are wasting no time in aggressively pursuing any and all leads," Holder said at a news conference announcing details of a new working group to investigate misconduct in the residential mortgage-backed securities (RMBS) market, "you can expect more to follow."

President Barack Obama said he directed Holder to create the new unit in his State of the Union speech late Tuesday, saying it was needed to "help turn the page on an era of recklessness."

On Friday a slew of federal and state officials appeared at the news conference to provide details about the new group.

Housed within an earlier financial fraud task force that Obama created in 2009, it is expected to be staffed with around 50 attorneys, analysts and agents, officials said.

Some skeptics have questioned whether the new group is largely a political move because the other fraud task force already exists.

Also, the Obama administration has received heat from left-leaning activist groups that believe a separate effort to investigate misconduct in processing foreclosures and servicing home loans may not be rigorous enough to extract a meaningful settlement.

In exchange for providing up to $25 billion in housing relief, much in the form of cutting mortgage debt for distressed borrowers, the top U.S. banks are expected to put behind them government lawsuits about lending and servicing abuses - but not securitization claims.

The banks involved in the discussions include Bank of America, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and Ally Financial Inc.

Those talks have dragged into their second year as some states, including California and New York, criticized the direction of the negotiations and said the proposed settlement would release the banks from too many claims.

The deal appears to be getting closer, with last-ditch efforts to lure the hold-out states to join.

California has said it still has reservations about the deal, but California Attorney General Kamala Harris has met in recent weeks with federal officials in Washington to discuss her concerns about the settlement, people familiar with the matter said.

The attorney general in New York, Eric Schneiderman, was named as a co-chair of the new working group, prompting speculation that the position was partly aimed at persuading him to join the settlement.

In an interview with Reuters, Schneiderman said: "The releases have become narrow enough so that I'm confident a full investigation can go forward." Asked if he was signing on, he said, "Not yet," because "other issues" are still outstanding.

MULTIPLE EFFORTS

At the news conference, U.S. Housing and Urban Development Secretary Shaun Donovan also said that the multistate deal will not prevent the working group from pursuing its own claims about the securitization of home loans.

"We would not be standing here today if we weren't absolutely confident that the releases that are being contemplated were quite narrow, focused on the conduct that was actually investigated," Donovan said.

"There will be concrete actions taken in the next few weeks to confirm we're serious," Schneiderman added in the interview.

Exactly what the new group will tackle is unclear, since the construction and sale of mortgage securities is already the subject of massive government and private lawsuits.

"The simple fact is that this is an election year, and politics will inevitably play a role in every aspect of what is at its core a superfluous investigation," said Richard Gottlieb, who heads the financial industry group at the law firm Dykema.

"Others have already done the leg work, the lawsuits have already been filed, and the courts will already be deciding these issues," said Gottlieb.

The Federal Housing Finance Agency, for example, which oversees Fannie Mae and Freddie Mac, sued 17 large banks last September over losses on about $200 billion of subprime bonds and said the underlying mortgages did not meet investors' criteria.

Speaking at the news conference, U.S. Securities and Exchange Commission enforcement director Robert Khuzami said his agency has already reviewed 25 million pages of documents on related investigations.

"To be clear, investigations into RMBS offerings have been ongoing at the SEC," Khuzami said.

Holder said the Justice Department had discussed the subpoenas with the SEC, and said the new requests do not duplicate earlier efforts from the SEC.

He also responded to criticism that federal enforcers have brought few marquee cases in the aftermath of the financial crisis. Holder said the department has brought around 2,100 mortgage-related cases.

"The notion that there has been inactivity over the course of the last three years is belied by a troublesome little thing called facts," Holder said.

Several top banks, including Bank of America, Citigroup, JPMorgan, RBS Americas and Deutsche Bank, declined to comment when contacted by Reuters about the new working group's efforts.

(Reporting By Aruna Viswanatha and Jim Vicini in Washington, D.C. and Karen Freifeld in New York; Editing by Tim Dobbyn and Matthew Lewis)

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How consumer financial watchdog will expand powers (AP)

WASHINGTON – With its first chief now in place, the new Consumer Financial Protection Bureau will start enforcing rules aimed at reining in abusive mortgage servicers, student lenders and payday-loan companies.

It will be months, though, before the agency can police other areas of consumer finance, such as debt collection and credit-reporting bureaus.

Over Republican opposition, President Barack Obama used a congressional recess appointment Wednesday to install Richard Cordray to lead the consumer finance watchdog. The bureau was created in July as part of the 2010 overhaul of the nation's financial regulations.

The idea behind the new agency was to prevent financial companies, such as mortgage servicers, from exploiting consumers. Such companies, facing scant federal oversight, committed some of the worst consumer abuses before the financial crisis.

In the past, only banks were subject to examination by federal financial regulators. And until now, with no permanent director, the bureau had authority to supervise only big banks.

Senate Republicans had vowed to block Cordray's nomination until the agency's structure was changed to allow closer congressional oversight. But Obama took advantage of the congressional break to install Cordray, a former Democratic attorney general of Ohio.

Cordray said he would immediately "begin working to expand our program to non-banks, which is an area we haven't been able to touch up until now."

That change will likely start within weeks. Agency officials who are supervising big banks have already been trained to examine non-bank financial firms.

Still, some areas of consumer finance will remain outside the bureau's reach. Aside from payday, mortgage and student loan companies, the consumer protection bureau can supervise only non-bank companies it defines as "larger participants" in their markets.

In June, the agency sought public comments on a proposal to supervise major debt collectors, credit reporting bureaus, check cashers, issuers of prepaid debt cards and debt-relief companies. The comment period has ended, and the agency is reviewing the responses. It's not clear how long the review will take.

Once the comments have been reviewed, the proposal must be revised, subjected to further public comment and then approved by the White House. This could take months or years. If the agency's proposal is approved, it will be able to send inspectors to credit bureaus and others that meet the "large participant" definition.

Here's a guide to the powers that the CFPB now holds over different categories of companies:

• Non-bank mortgage lenders and servicers:

These companies have been subject to existing laws and rules, but the agency was unable to supervise them without a permanent director. With Cordray's appointment, the CFPB can have officials monitor mortgage lenders and servicers. That might discourage any from using "robo-signers" to foreclose on borrowers without doing the required paperwork. That practice became widespread over the past decade, and no federal agency was responsible for cracking down.

• Payday lenders:

Companies that make short-term loans to borrowers with weak credit already are governed by federal laws such as the Truth in Lending Act. But there's been no federal oversight to make sure they comply. The CFPB can now send examiners to payday firms it suspects of illegal or abusive practices. The agency wants to make sure they disclose the full cost of a loan upfront so consumers can make an informed choice.

• Private student lenders:

CFPB examiners have gained the authority to examine these companies. The federal government has been cracking down on for-profit education companies whose graduates can't find jobs and have little chance of repayment. The CFPB can now require these lenders to follow existing rules and write new ones intended to guarantee that they lend fairly.

• Prepaid debit card companies, credit bureaus, money-transfer companies, check cashers, debt relief services:

These companies are subject to federal laws. But they've faced little oversight in the past. The CFPB proposed in June identifying major participants in these markets to make sure they're following the rules. It's unclear when that proposal might take effect.

• Big banks:

Banks already are overseen by the bureau, so nothing much will change as a result of Cordray's appointment. Since its creation, the agency has been placing full-time examiners in the nation's biggest banks to enforce laws and rules. It can require them to file regular reports, monitor risks they might pose to consumers and write new rules.

___

Follow Daniel Wagner at www.twitter.com/wagnerreports.

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This time, US fears a financial crisis from abroad (AP)

By PAUL WISEMAN, DANIEL WAGNER and CHRISTINA REXRODE, AP Business Writers Paul Wiseman, Daniel Wagner And Christina Rexrode, Ap Business Writers – Thu Aug 11, 6:48 pm ET

WASHINGTON – Three years ago, a financial crisis triggered by bad mortgage investments spread from U.S. banks to Europe. Panicky financial markets tanked.

Now, fear is running in the opposite direction. Worries about toxic government debt held by European banks have hammered U.S. stocks and threaten to freeze credit on both sides of the Atlantic.

And traders are wondering: Could Europe's government-debt crisis spread through the U.S. financial system?

No one's sure because no one knows how much toxic debt European banks hold — or how much risk that debt poses to U.S. banks. But investors are worried.

The 2008 financial crisis left countries like Greece, Ireland and Portugal holding huge debts. The three have required bailouts from the European Union and the International Monetary Fund totaling $520 billion. Italy and Spain, which are much bigger economies, might need bailouts, too.

As the crisis has intensified, Spanish and Italian interest rates have surged. Escalating rates could throw their economies back into recession — which would worsen their debt loads. This week, the European Central Bank started buying Italian and Spanish debt to try to drive rates back down.

Should Italy or Spain default, European banks that hold their bonds would suffer. Wall Street's fear is that the contagion would imperil U.S. banks that do business with those European banks.

French banks, with huge amounts of Italian and Greek government debt, are especially vulnerable. Shares in Societe Generale, France's No. 2 bank, plunged nearly 15 percent Wednesday on rumors it was teetering under the weight of debts tied to troubled Eurozone economies. The bank rejected the rumors as unfounded.

French regulators on Thursday banned short-selling of bank and insurance company stocks, preventing speculators from betting against them and driving their prices down when rumors flare. Societe Generale's stock recovered 3.7 percent Thursday. But most other European banks fell sharply.

Using data from European Union stress tests on 91 European banks, Fitch Ratings said losses of 50 percent on Greek bonds and 25 percent on Portuguese and Irish bonds wouldn't have made any of four big French banks flunk the test.

Still, investors were rattled this week by rumors that a credit rating agency was about to downgrade French government debt. Without France's AAA credit rating, Eurozone countries might be unable to raise enough money to bail out their weaker neighbors.

What most frightens investors is the worst-case scenario — the one that struck Wall Street in 2008: That banks would stop lending to each other because they're worried about each other's solvency. Since July 21, JPMorgan Chase's stock price has dropped 13 percent. Citigroup's has sunk 25 percent.

Major international banks are so intertwined that once they lose confidence in each other, fear spreads rapidly. And once it does, investors tend to panic and send stock markets plunging.

Rumors like the ones that pummeled Societe Generale and raised concerns about France's creditworthiness are "what panics are made of," says William Longbrake, former chief financial officer at Washington Mutual and now executive in residence at the University of Maryland.

In 2008, "Banks were suddenly afraid to lend to each other because they had no trust in ... other institutions," Longbrake said. "What happened yesterday in France is indicative of the same situation."

"It's starting to feel like it did in 2008," says Peter Tchir, who runs the hedge fund TF Market Advisors. "Someone says something about a bank, and boom — shares are down ... and people are panicking."

That said, 2011 isn't 2008. U.S. banks are sturdier now. They're holding more capital than in 2008, when collapsing home prices and mortgage-backed securities crushed Lehman Bros. and forced the government to rescue insurance giant American International Group. The toxic investments that are spooking markets this time are straightforward government debts, not exotic mortgage investments.

And U.S. banks have limited direct exposure — $39 billion — to the riskiest European countries, Portugal, Ireland, Italy, Greece and Spain, according to first-quarter U.S. government data analyzed by SNL Financial. That figure, a small fraction of U.S. banks' total assets, includes holdings of government debt and loans to banks and corporations.

But many worry that European governments aren't prepared to solve their crisis. Germany and other healthy countries, for instance, are balking at putting enough money in the European Union's rescue fund to rescue one of the larger countries.

The broader fear is that one of them, such as Italy, will default and damage European banks whose reach extends to the United States.

All that "could trigger a chain reaction whose final repercussions would be very difficult to predict," says Domenico Lombardi, senior fellow at the Brookings Institution.

Complicating the problem is that indebted European countries have tried to reduce debt by cutting spending. Those spending cuts tend to weaken their economies. The result is that their debt can get bigger, not smaller.

White House spokesman Jay Carney expressed confidence Thursday that "Europe's institutions have the capacity to handle this situation."

Still, the vulnerability of U.S. banks goes beyond their direct holdings of European debt, said Christopher Whalen, managing director at Institutional Risk Analytics. U.S. banks also rely on fees from European bank and corporate clients. And they run the risk they won't be able to collect on financial bets they've entered into with European banks.

Similar fears contributed to the panic that engulfed Wall Street in the fall of 2008.

Troubles with money-market mutual funds also worsened Wall Street's crisis three years ago. Investors withdrew their money once they realized the funds were exposed to losses on Lehman Brothers. Short-term credit markets that corporations rely on froze up.

Large U.S. money-market funds had 49.6 percent of their holdings in certificates of deposits, commercial paper and other instruments from European banks at the end of June, according to Fitch.

U.S. money market funds have been slashing their exposure to banks in the Eurozone. Their holdings of Eurozone bonds declined about 10 percent in July, to $340 billion from $378 billion, according to research from J.P. Morgan Securities LLC.

The Investment Company Institute, a mutual fund trade group, says U.S. funds have no holdings in the three bailed-out countries — Greece, Portugal, Ireland — and little exposure to Spain and Italy.

"Fund managers have been aware of these issues and have been taking actions for a long time to reduce their exposures to potential risks in Europe," said Sean Collins, senior director at the investment institute.

But Fitch has warned that if credit froze up, money market funds would find it difficult to avoid losses.

___

Associated Press Writers Martin Crutsinger and Marcy Gordon in Washington and David McHugh in Frankfurt, Germany, contributed to this article.

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S&P threatens downgrade of U.S. financial companies (Reuters)

NEW YORK (Reuters) – Standard & Poor's on Friday raised the pressure on debt negotiators in Washington, saying it could downgrade insurers, securities clearinghouses, mortgage agencies and a laundry list of other firms without a deal soon to lift the debt ceiling and cut the deficit.

While S&P had already made clear it could downgrade the United States' sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills.

The Treasury took the last available step Friday to try and extend that borrowing capacity.

S&P on Friday put on review for possible downgrades a range of powerful financial firms -- many of them little known to the public but crucial to the country's financial infrastructure. U.S. government securities are central to the operations of most of the companies cited.

They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the residential mortgage market.

S&P characterized its targets as "entities with direct links to, or reliance on, the federal government."

Separately, the agency said the four remaining U.S. nonfinancial companies with triple-A ratings were not affected by the downgrade threat.

'WARNING SHOT'

"S&P is firing a warning shot, saying the entire financial clearing system is in question," said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

He raised the prospect of a financing squeeze for financial institutions if Treasury debt is downgraded. S&P said Friday it still sees the risk of default as "small, though increasing."

Nik Khakee, an S&P analyst who worked on the team assessing the clearinghouses, emphasized that the decline for the triple A-rated companies from "outlook negative" to "creditwatch negative" -- signaling a 50 percent chance of a downgrade within three months -- directly follows a similar change for the debt of government securities.

Earlier this week, Moody's also put its U.S. credit rating on review for a possible downgrade.

Some investors downplayed the chances of a severe market reaction if the United States is downgraded, given that the market has known this could be coming.

"Do you think China is going to sell all their Treasuries when they find out the ratings are lowered? They know the situation, they've known it all along," said James Melcher, founder and president of Balestra Capital Ltd, a global-macro investment manager based in New York. "They cannot sell a significant amount of their Treasuries without running interest rates up to 20 percent or more; they would be shooting themselves in the foot."

ONUS ON WASHINGTON

Many of the firms put on review for a possible downgrade were quick to turn the focus back on President Barack Obama and the congressional leaders trying to hash out a deal to stave off a debt default.

"Whatever happens will have nothing to do with us, and everything to do with Washington. The hope on everyone's part is obviously that Washington gets its act together so that both their rating and ours can remain where they belong -- at AAA," said Patrick Korten, a spokesman for insurer Knights of Columbus, which was included on the negative watch list.

A spokesman for Goldman Sachs, parent company to Goldman Sachs Mitsui Marine Derivative Products LP, declined to comment. A spokesman for New York Life said S&P told it no financial institution can carry a higher rating or outlook than its sovereign rating, and that the insurer believes its rating to be fully justified.

Northwestern Mutual said it remained "completely confident" in its financial strength.

Other insurers on the list were not immediately available to comment.

Another broad group in S&P's sights is the clearinghouses, which guarantee contracts tied to everything from oil contracts to shares of Google Inc and are critical to U.S. financial market stability.

"It's not unexpected and we don't see this as a reflection on how OCC conducts its business," said Jim Binder, spokesman for the Options Clearing Corp, which clears U.S. options or futures for 14 exchanges. "It's all about what's going on in Washington."

The U.S.-based Depository Trust & Clearing Corporation, which provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at $33.9 trillion, said the S&P action was expected.

"Changing the outlook on various financial institutions is common practice for ratings agencies when the outlook on a sovereign is changed," DTCC said in a statement. DTCC runs the National Securities Clearing Corporation and the Depository Trust Company.

Freddie Mac also declined to comment. Fannie Mae did not immediately respond to requests for comment.

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Ally Financial delaying $6 billion IPO: sources (Reuters)

NEW YORK (Reuters) – Ally Financial, an auto and mortgage lender majority owned by the U.S. government, is delaying a $6 billion IPO due to bad market conditions, two sources familiar with the situation told Reuters.

The roadshow for the initial public offering was expected to launch late this week or early next week, which would have brought the company public before the U.S. July 4 holiday.

The S&P 500 index (.SPX) closed up 0.74 percent at 1,289 on Thursday, but had lost more than 6 percent in the last six days while Nasdaq had nearly erased its gains for the year.

Ally Financial's IPO is expected to raise around $6 billion, including both common stock and convertible securities, one of the sources said. It will move ahead when the market improves, that source said.

The other source said that the IPO could now come in late July or early August, or after the September U.S. Labor Day holiday.

The sources declined to be named as the information is not public. Ally and the U.S. Treasury declined comment.

Bad mortgage loans forced the U.S. Treasury to pour $17.2 billion into Ally during the financial crisis. It has recovered some of that money through repayments and dividends and continues to hold a 73.8 percent stake in Ally, formerly known as GMAC.

The U.S. government is currently in the process of exiting other remaining financial crisis-era investments including GM and AIG.

It began exiting top U.S. automaker General Motors Co (GM.N) with a record $23.1 billion IPO last November. In May, it sold 15 percent of its stake in insurer American International Group Inc (AIG.N).

GM shares closed on Thursday at $29.45, or 10.8 percent below their $33 IPO price.

AIG's shares have also retreated since its $8.7 billion share sale. That sale raised less than the $10 billion to $20 billion some banking sources had suggested earlier in the year.

Apart from the Treasury, Ally's stockholders include private equity firm Cerberus Capital Management, with a 9 percent stake, and GM, which owns 4 percent directly and 6 percent through a trust.

Citi, Goldman Sachs, JPMorgan, Morgan Stanley, Barclays Capital and Deutsche Bank Securities are the underwriters on the IPO.

(Reporting by Clare Baldwin and Paritosh Bansal; editing by Carol Bishopric, Bernard Orr)

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Military Families Find Signs of Progress in the Fight Against Financial Exploitation (The Motley Fool)

By Chris Birk, Special to The Motley Fool Chris Birk, Special To The Motley Fool – Mon May 30, 8:39 pm ET

Military members and their families sacrifice a great deal to keep America safe.

The strain of service can take a devastating toll on finances. Fiscal predators prey on this demographic, and military members are more likely to be financially overleveraged than their civilian counterparts.

A renewed commitment to protecting military families from financial exploitation has been a long time coming. The newest front in this battle has the potential to turn the tide and boost education and resources for service members nationwide.

Federal and military officials recently unveiled the Office of Servicemember Affairs, a new consumer protection agency focused solely on service members and their families. The OSA is part of the Consumer Financial Protection Bureau, an independent watchdog organization created last year by Congress.

The OSA is working with the Department of Defense to ensure that military members and their families receive consistent and clear financial education and to monitor complains and questions. It's also fostering communication among federal and state agencies to improve consumer protections for military families.

The agency is headed by Holly Petraeus, wife of Gen. David Petraeus, the current commander of U.S. forces in Afghanistan.

"We understand that military life can have some extra challenges, such as deployment and frequent moves, and that those challenges can sometimes have powerful financial repercussions," Holly Petraeus wrote in a welcome letter to military families. "Our men and women in uniform should be able to do their jobs without having to worry about falling victim to unfair or deceptive financial practices."

Being financially overwhelmed can make service members and their spouses more vulnerable to unscrupulous companies seeking to take advantage of them.

A recent survey from the FINRA Investor Education Foundation featured some sobering findings:

Nearly one in three enlisted personnel or junior NCOs had used payday loans, auto-title loans, or other risky borrowing practices in the previous five years.About 15% of those surveyed had both a mortgage and a credit card balance of at least $10,000.More than half made only the minimum payment on credit cards, and almost a third of respondents reported a late payment in the past year.More than a third had difficulties covering monthly expenses and billsOnly half were saving for predictable life events such as retirement or a child's college education.

These issues are more than just financial problems. Fiscal concerns on the home front can negatively affect service members in the field and even jeopardize mission readiness.

Finances are consistently ranked as one of the top three stressors for service members, ahead of things such as deployments, family, and even war. Nearly three-quarters of Naval security clearance revocations and denials in 2007 were tied directly to fiscal management issues, according to the CFPB.

"Soldiers who are distracted by financial issues at home are not fully focused on fighting the enemy," Army Secretary John McHugh's wrote last spring.

Holly Petraeus and her colleagues continue to meet with military families, using their input to help shape OSA initiatives. Educating service members and teaching them how to make sound financial decisions is a cornerstone of the agency's mission.

It's also an ethos that professionals in the financial world and civilians across the country should take to heart -- not just on Memorial Day, but every day of the year. Military members and their families have dedicated their lives to serving our country.

We can serve them with openness, education, and a commitment to rooting out those who would dishonor their sacrifice for the sake of an easy dollar.

Guest contributor Chris Birk is director of content and communications for Veterans United Home Loans, the nation's leading dedicated VA lender. The Missouri-based company has worked with more than 500,000 military families since its 2003 inception and serviced more than $1 billion in VA loans in the last year alone.

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Why So Few Ended Up in Jail After the Financial Crisis (The Motley Fool)

While accepting the Oscar for best documentary earlier this year, Inside Job director Charles Ferguson came out with a bang.

"Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that's wrong," he said.

At least one now has. Lee Farkas, former chairman of mortgage lender Taylor Bean, was convicted last week on 14 counts of conspiracy and fraud. He could spend the rest of his life in prison.

So there's one.

But why no others? After a financial crisis that doubled the unemployment rate and slaughtered wealth around the globe, nobody thinks one executive -- and one few have ever heard of -- was solely to blame. Nor is it how these things usually work out. After the savings and loan crisis of the early '90s, 800 financial executives went to prison. Not only have most bank execs avoided prosecution this time around, but many are still gainfully employed by the banks that ran the economy into the ground.

Why is a difficult question. I think it can be broken down into three parts.

1. The ground troops have been charged
The most disgusting, outright-fraudulent parts of the bubble years didn't take place on Wall Street. It took place on the ground in areas like Orange County and Las Vegas, where mortgage brokers, Realtors, and borrowers lied through their teeth, forged loan documents, and actively pursued screwing over anyone within reach. The industry of selling mortgages was a magnet for some of society's sketchiest characters. As the Financial Crisis Inquiry Commission noted in January, "at least 10,500 people with criminal records entered the [mortgage-broker] field in Florida, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion."

Thousands of mortgage brokers and scam borrowers have indeed been charged, and in many cases jailed. In June 2008, before the financial crisis unraveled, the FBI busted 400 brokers in a single sting. A sting last summer brought One borrower was found guilty of defrauding Bank of America (NYSE: BAC - News) by "recruiting 'straw buyers' to apply for a mortgage loan for a home that he himself intended to occupy, and inflated the value of that home in order to increase the amount of the loan." These guys did the same with loans from JPMorgan Chase (NYSE: JPM - News). These folks forged loan documents submitted to Regions Financial (NYSE: RF - News). All were caught. All were charged. The public hasn't heard their stories because they don't involve the executive suite.

2. Coddling regulators, strapped detectives
That few execs have been charged doesn't mean they're all innocent, of course.

High-level fraud cases are typically referred to the Justice Department by industry regulators. The Department of Health and Human Services, for example, works in tandem with the Justice Department to reel in medical fraud. Same for the Department of Agriculture. And the National Association of Insurance Commissioners.

Bank regulators are different. Since 2000, the Office of Thrift Supervision has not referred a single case of fraud to the Justice Department, according to The New York Times. The Office of the Comptroller of the Currency has referred just three cases.

There could be many reasons for this. The two regulators, though, have a long history of coddling the banks they oversee. They have every incentive to do so: Regulators' existence depend on banks -- or "clients," as the OCC refers to them as -- since fees paid by banks fund their operations. In some cases, banks can shop around for the regulator with the lightest touch.

That's what Countrywide did in 2007. Then-CEO Angelo Mozilo was frustrated with the demands of the OCC. Regulators were getting in his hair. Easy solution: Countrywide changed charters to fall under the purview of a gentler regulator, the OTS. As Connie Bruck of The New Yorker pointed out, the OTS actually lobbied Countrywide to make the switch.

Not that the OCC was a regulatory pit bull itself. When West Virginia tried to sue Capital One (NYSE: COF - News) for credit card abuse in 2005, the company applied for a national charter with the OCC. By doing so, Capital One escaped West Virginia's jurisdiction, and the state lost authority to pursue its case. This wasn't an isolated incident. The OCC stopped Georgia when it attempted to enforce predatory lending laws. New York regulators were intervened while pursuing discriminatory lending investigations. The head of the Financial Crisis Inquiry Commission told former OCC head John Dugan, "You tied the hands of the states and then sat on your hands."

If regulators didn't make it hard enough, the FBI has seen a radical cut in the number of agents available to investigate financial crime. Law enforcement's focus began shifting to health care fraud in the '90s, and to terrorism after 9/11. During the savings and loan crisis, 1,000 FBI agents worked the financial-crimes scene. Today, just 240 do.

3. Stupid isn't illegal
Crime deserves jail time. Idiocy is another issue.

This explains most of why so few major financial executives are behind bars. Blowing up your company isn't necessarily a crime. Leveraging 30-to-1 isn't unlawful. Neither is buying securities backed by homeowners unable to repay. Nor is ignoring caution signs. Or disregarding history. Much of what brought the financial system to its knees was unbelievably stupid and unethical, yet perfectly legal.

Investors were shocked, for example, after discovering Lehman Brothers used an accounting trick called repo 105 to mask the health of its balance sheet. Yet as The Wall Street Journal notes, "SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal."

Not only was this stuff legal, but lucrative. Many executives walked away rich. Filthy rich. This was heads they win, tails you lose, and in either case, jail remains elusive. You can almost hear them laughing now.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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4 Things Missing From Your Financial Aid Offer (The Motley Fool)

Graduation season is here, and the same scene is playing out across the country: High-school seniors line up to accept their diplomas and shuffle away to put in face time with the family before sneaking off to celebrate graduation with their pals. At the same time, pride-filled parents dab away tears of joy that turn to panic-y thoughts during the final measures of "Pomp and Circumstance": Our child got into college; now how the heck are we going to pay for it?

Luckily, there's some relief waiting in the mailbox. Mixed in with the pile of "happy graduation" cards are financial aid offers -- letters outlining who is willing to pay how much and for what to educate your offspring.

In simpler terms, the financial aid package answers the question: "How much are we on the hook to pay for college?" The answer, however, isn't as straightforward as the question. As you wade through the offers, here's a rundown of what you'll see and, even more importantly, what you won't see spelled out.

Here's what's spelled out in your financial aid offer
Most financial aid packages contain a mix of money from different sources:

Free money: This is how schools entice the most attractive students to attend their institutions. College or state government grants and merit scholarships are typically based solely on a student's merit (not financial need) and usually do not have to be repaid. Federal Pell Grants, on the other hand, are based on financial need. Obviously, the best financial aid is the kind you or your kid doesn't need to repay. But most families can't cover the costs of college with free money alone.

Work-study money: Students earn their keep -- and a paycheck from the school and subsidized by the federal government -- by working a campus job. Eligibility for work-study money is based on financial need.

Federal loans: Although all loans have to be repaid, the terms can vary greatly:

A Perkins Loan is made through the school. Interest on a Perkins does not start to accrue until after graduation.Stafford loans -- subsidized (based on financial need) or unsubsidized -- are administered through the federal government. Subsidized Stafford loans have two things going for them: A lower interest rate than the unsubsidized variety, and they don't start accruing while the student is in school. Unsubsidized Stafford loans start accruing interest right away. Although, like the subsidized loan, payment can be deferred until after graduation.Lastly, there are PLUS Loans for parents, designed to help cover costs that scholarships and other aid and loans don't pick up. Interest rates on PLUS loans are usually higher than other types of federal loans.

What they don't say in the financial aid offers
The envelopes may be thick and the documents really wordy, but there's a lot that goes unsaid in financial aid packages. For example:

1. "This is not really our final offer."
The aid package is based on what you filled out on the FAFSA (Free Application for Federal Student Aid) form. Mistakes on that form will carry over into the aid offer, so look to see if there were errors, and contact the school's financial aid office to appeal.

Other times to appeal:

Your family financial situation has changed (job loss, medical expenses, etc.) since you filled out the application.Even if there has been no change, if there exists a particular economic hardship that couldn't be expressed on the FAFSA, let the school know in writing.

On the flip side, if there is part of the offer that isn't right for you or is less appealing (e.g., loans with higher interest rates), you are free to decline parts of the package.

2. "100% coverage doesn't really mean 100% coverage."
Using the school's average costs is a fine place to start to figure out what your child's higher learnin' is going to cost. But averages are averages. And this is one area where you don't want to be surprised by an above-average tab after the first semester.

The cost of college isn't just tuition and room and board. Books can add thousands of dollars to your tab. Depending on the student's major, extras like lab fees, software, and other supplies can also really add up. And these costs -- including tuition -- will likely increase during the four-plus years your child is in school.

Then there's the college's location. Let's assume that your child will come home occasionally to do laundry. Will that simply require a quick cross-town commute, or will you have to pay for planes, trains, and bus fare? Tools like CollegeBoard.com's financial aid awards calculator can help you compare the costliest college costs.

3. "It's just your standard student loan. Only a lot more expensive."
See how the basics of your loans (balance, interest rate, loan term, minimum required payment) stack up with this loan comparison calculator from Finaid.org. The true cost of a loan is in the details the APR (fixed or variable?), fees (processing and servicing), repayment terms, etc. Specifically look out for:

Loans disguised as a free ride: Sometimes the fact that part of the aid is actually a loan is not clearly spelled out. Monthly payment smoke and mirrors: There are a lot of ways to frame a loan to make it look more attractive. (It's similar to the loan sleight-of-hand used at car dealerships when they ask, "How much do you want to spend each month on a car payment?") Of course, monthly payments on a 20-year loan are going to be significantly lower than a loan with a repayment term of 10 years. But over the long haul, you'll pay more because interest is accruing for an additional decade.Conditions of aid. For example, is it based on the student's GPA? What happens if Jr. has a bad semester? How is the money disbursed? Are the terms of the loan based on a parent's credit history? The student's?

4. "Actually, we may be able to cough up more money."
Besides appealing the package because of financial circumstances, you can also ask a school if perhaps there's some extra money back in the stockroom for your student. Search FinAid.org for specific scholarships, grants, loans or other aid you (or the school) might have overlooked and spell them out in your appeal. (But remember, the aid package can be affected by any scholarship money or other outside grants that the student has been awarded.) If a school is particularly interested in wooing your child, they may be willing to dig for extra aid.

Ask questions!
If something isn't spelled out in a financial aid award package, ask! Go to the school's website or contact the financial aid office for answers. Fastweb.com suggests asking the financial aid office these 15 questions to clear fully arm yourself with the information you need to pay for school. After all, it's your money -- and lots of it -- on the line.

Get all the help you need for college in the Fool's Savings Center.

Dayana Yochim is a proud debt-free graduate of her state school in Lawrence, Kansas. (Rock, chalk, Jayhawk!). The Fool has a disclosure policy.

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5 Ways to Put Your Financial House in Order (U.S. News & World Report)

Annual spring cleaning isn't just something everybody should do in their homes. It also applies to our personal finances as well.

As you file away your forms at the end of the tax season, it's a good time to take a closer look at the big picture of your financial structure and tidy up where needed. Here's a checklist of key considerations to help you get started:

Lay a balanced investment groundwork. Does your current asset allocation--the mix of securities in your investment portfolio--still match your risk tolerance and time horizon? Stock market performance over the past few years may have altered the value of your stock holdings above or below the level you had originally intended. If so, consider rebalancing, either by selling some of your stock or bond investments, or by purchasing more stock, bond, or cash investments. Now is also the perfect time to look to other asset classes besides just stocks and bonds.

[See 7 Problems That Could Derail the Global Recovery.]

Create a nest egg for the future. Rather than just hoping you'll have enough for a comfortable retirement, take some time to calculate how much you'll need, and how much you'll need to save. Your financial professional can help you establish a realistic accumulation goal and ensure that you're on course to reach it. There are also many tools online to assist in laying out and tracking your retirement goals and objectives.

Check your family's security system. Insurance can help protect you and your loved ones from the costs of accidents, illness, disability, and death. It's an important part of any sound financial plan. However, your individual need for coverage depends on your personal circumstances, including your age, family, and financial situation. A young, single person, for example, may not need much life insurance. A person with a growing family, on the other hand, may need to ensure adequate financial protection for loved ones.

[For more investing and money advice, visit U.S. News Money, or find us on Facebook or Twitter.]

Preserve the assets you've accumulated. You may not enjoy thinking about what will happen after you're gone, but failing to plan could cost your family and loved ones. A sound estate plan can help preserve your assets and keep them from being unnecessarily reduced by taxes. The IRS allows transfers of up to $5,000,000 in assets federally tax free. While that may sound like a limit you'll never approach, if you tally the appreciated value of your retirement assets, your home, life insurance, death benefits not held in trust, and other holdings, you may find otherwise. Your estate plan should include an up-to-date will and may make use of tools for charitable giving and joint ownership of property.

Reduce outstanding debt. While you're putting the rest of your financial plan in order, don't neglect credit card balances or other outstanding debt. Consider ways to either reduce your debt or manage it better. For example, you might be able to save on interest charges by consolidating and transferring your credit card balance or by refinancing your mortgage.

[See The Smaller the Better: Investing in Micro-caps.]

Your financial house is a complex structure that needs regular upkeep. By staying on top of things and keeping your financial house in order, you'll be well on your way to reaching your goals.

Doug Lockwood, CFP is a partner at Harbor Lights Financial Group, a full service wealth-management team that has been dedicated to assisting clients in the accumulation and preservation of their wealth for over eighteen years. He was recently named one of America's Top 100 Financial Advisors by Registered Rep Magazine (August 2010) based on assets under management.

Doug Lockwood is a registered representative with and securities offered and advisory services through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. For more information, go to www.hlfg.com.

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Credit raters triggered financial crisis: panel (Reuters)

By Rachelle Younglai and Sarah N. Lynch Rachelle Younglai And Sarah N. Lynch – Thu Apr 14, 8:00 am ET

WASHINGTON (Reuters) – Moody's Corp and Standard and Poor's triggered the worst financial crisis in decades when they were forced to downgrade the inflated ratings they slapped on complex mortgage-backed securities, a U.S. congressional report concluded on Wednesday.

In one of the most stark condemnations of the credit rating agencies, a Senate investigations panel said the agencies continued to give top ratings to mortgage-backed securities months after the housing market started to collapse.

The agencies then unleashed on the financial system a flood of downgrades in July 2007, the panel said.

"Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligation) ratings were the immediate trigger for the financial crisis," the staff for Senators Carl Levin and Tom Coburn wrote in their report.

The findings come after the Senate's Permanent Subcommittee on Investigations spent two years poring over countless documents and holding hearings on the causes of the crisis. The probe only focused on the two largest rating agencies; it did not study Fitch Ratings.

The report calls for radical reforms to the industry that are authorized in last year's Dodd-Frank financial reform law, but may not be realized.

Dodd-Frank did little to change what some say is an inherent conflict of interest in credit raters' business model, in which the raters are paid by the companies whose products they rate.

The panel's suggested reforms include having the U.S. Securities and Exchange Commission rank the credit raters, based on the accuracy of their ratings.

"WATCHING A HURRICANE"

The Senate panel released internal documents showing how Moody's and S&P failed to heed their own internal warnings about the deteriorating mortgage market.

Emails in 2006 and early 2007 show employees were aware of housing market troubles, well before the massive downgrades in July 2007.

"This is like watching a hurricane from FL (Florida) moving up the coast slowly toward us. Not sure if we will get hit in full or get trounced a bit or escape without severe damage ..." one S&P employee wrote in response to an article on the mortgage mess.

Senate investigators concluded that had Moody's and S&P heeded their own warnings, they might have issued more conservative ratings for the securities linked to shoddy mortgages.

"The problem, however, was that neither company had a financial incentive to assign tougher credit ratings to the very securities that for a short while increased their revenues, boosted their stock prices, and expanded their executive compensation," the report said.

Edward Sweeney, a spokesman for S&P, said in a statement on Wednesday that the Dodd-Frank Act, coupled with the company's own internal reforms, have significantly strengthened the oversight of the industry. He added that the 2007 and 2008 downgrades "reflected the unprecedented deterioration in credit quality, but were not a cause of it."

Michael Adler, a spokesman for Moody's, declined to comment ahead of the report's release.

NO REAL CHANGES YET SEEN

The SEC has been grappling with how to clamp down on the conflicts of interest embedded in the so-called "issuer-paid" model. Congress contemplated radical reforms for the agencies during the drafting of the Dodd-Frank law but in the end passed a sweeping financial regulation bill without them.

Wednesday's report includes emails from employees at both companies that illustrate the pressure that raters came under from investment banks.

An August 2006 email reveals the frustration that at least one S&P employee felt about the dependence of his employer on the issuers of structured finance products, going so far as to describe the rating agencies as having "a kind of Stockholm syndrome" -- the phenomenon in which a captive begins to identify with the captor.

The SEC did take some steps to address conflicts of interest at rating agencies in the past few years.

Although the Dodd-Frank law directs the SEC to write numerous additional regulations for raters, most have yet to be proposed.

And one key rule that did go into effect last July, subjecting credit raters to increased liability, was suspended after credit raters' refusal to include their ratings for asset-backed securities led to a freeze in the secondary market.

The reform has not been reinstated.

(With additional reporting by Kim Dixon; Editing by Steve Orlofsky)

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5 Financial Tips You Should Ignore (U.S. News & World Report)

Have you heard the one about houses being a sure-fire investment? Or the tip that you should close all your credit card accounts? Bad financial advice can circle the web faster than the latest e-mail scam from Nigeria, and some of it originates from personal finance gurus themselves (although their words are often twisted). Here are five popular financial tips you should ignore:

[In Pictures: 10 Smart Ways to Improve Your Budget.]

1. A house is always a good investment. The man who calls himself "Frank Curmudgeon" built a popular website around what he considers to be terrible financial advice. Ask him what the worst is, and he'll tell you it's the idea that "you should borrow up to your eyeballs to buy the biggest house you can, because houses are the magic asset that never lose value." Pre-housing crisis, he says, "just about every mass market personal financial guru out there" advocated some form of that advice. Many people who took it to heart later found themselves unable to afford the houses they had bought, he adds.

2. Avoid credit cards. Contrary to popular myth, credit cards do not spread the plague. In fact, people who take the "credit cards are evil" message to heart can find themselves in trouble when they want to borrow money for a house or car, since lenders want to see some experience with credit. Public relations professional Katherine Kilpatrick says she found it nearly impossible to get a credit card after she graduated from college since she didn't use one while in school.

My 25-year-old coworker ran into the same problem when she tried to take out a mortgage earlier this year and lenders turned her down. The reason, they told her, was that her credit record was simply too light. Since she had paid off her student loans and didn't use much credit elsewhere, they had no way of knowing whether or not she would be responsible with a mortgage. The bottom line: You have to use credit to be able to take out loans, and responsible credit card use can be a good way to do that.

3. All student loan debt is good debt. Zac Bissonnette, author of Debt-Free U, calls this the worst advice ever: "Borrow whatever it takes to go the best school you can. It's an investment in your future." Instead, he urges college students (and their parents) to avoid loans, reject the hype of expensive, private schools, and instead pay for more affordable colleges through a combination of hard work and being savvy.

4. Never take out a 401(k) loan. It might sound blasphemous, but as a new paper from the Michigan Retirement Research Center points out, using 401(k) loans to pay off high-interest rate credit card debt can save money. And if more people felt comfortable using their 401(k) loans to spot themselves cash when they needed it, then they might be more likely to ramp up their savings rate, since they would know they could access the cash if necessary. If you know the rules surrounding 401(k) loans and have a solid plan to pay it back, then this can be a good move.

[See What to Do With Your Old 401(k)]

5. Use home equity loans to pay off credit card debt. In pure mathematical terms, this proposition can make sense, since interest rates on credit cards are usually much higher than home equity rates. But here's why it's a bad idea, as many people, including MSN's Liz Pulliam Weston and Jeremy Vohwinkle of GenXFinance.com, have pointed out: Home equity loans can not only enable a debt-fueled lifestyle, but they can also leave you more vulnerable to foreclosure, bankruptcy, and other over-spending problems.

Readers, what's the worst piece of financial advice you've ever heard?

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.

Browse your computer here

5 Financial Tips You Should Ignore (U.S. News & World Report)

Have you heard the one about houses being a sure-fire investment? Or the tip that you should close all your credit card accounts? Bad financial advice can circle the web faster than the latest e-mail scam from Nigeria, and some of it originates from personal finance gurus themselves (although their words are often twisted). Here are five popular financial tips you should ignore:

[In Pictures: 10 Smart Ways to Improve Your Budget.]

1. A house is always a good investment. The man who calls himself "Frank Curmudgeon" built a popular website around what he considers to be terrible financial advice. Ask him what the worst is, and he'll tell you it's the idea that "you should borrow up to your eyeballs to buy the biggest house you can, because houses are the magic asset that never lose value." Pre-housing crisis, he says, "just about every mass market personal financial guru out there" advocated some form of that advice. Many people who took it to heart later found themselves unable to afford the houses they had bought, he adds.

2. Avoid credit cards. Contrary to popular myth, credit cards do not spread the plague. In fact, people who take the "credit cards are evil" message to heart can find themselves in trouble when they want to borrow money for a house or car, since lenders want to see some experience with credit. Public relations professional Katherine Kilpatrick says she found it nearly impossible to get a credit card after she graduated from college since she didn't use one while in school.

My 25-year-old coworker ran into the same problem when she tried to take out a mortgage earlier this year and lenders turned her down. The reason, they told her, was that her credit record was simply too light. Since she had paid off her student loans and didn't use much credit elsewhere, they had no way of knowing whether or not she would be responsible with a mortgage. The bottom line: You have to use credit to be able to take out loans, and responsible credit card use can be a good way to do that.

3. All student loan debt is good debt. Zac Bissonnette, author of Debt-Free U, calls this the worst advice ever: "Borrow whatever it takes to go the best school you can. It's an investment in your future." Instead, he urges college students (and their parents) to avoid loans, reject the hype of expensive, private schools, and instead pay for more affordable colleges through a combination of hard work and being savvy.

4. Never take out a 401(k) loan. It might sound blasphemous, but as a new paper from the Michigan Retirement Research Center points out, using 401(k) loans to pay off high-interest rate credit card debt can save money. And if more people felt comfortable using their 401(k) loans to spot themselves cash when they needed it, then they might be more likely to ramp up their savings rate, since they would know they could access the cash if necessary. If you know the rules surrounding 401(k) loans and have a solid plan to pay it back, then this can be a good move.

[See What to Do With Your Old 401(k)]

5. Use home equity loans to pay off credit card debt. In pure mathematical terms, this proposition can make sense, since interest rates on credit cards are usually much higher than home equity rates. But here's why it's a bad idea, as many people, including MSN's Liz Pulliam Weston and Jeremy Vohwinkle of GenXFinance.com, have pointed out: Home equity loans can not only enable a debt-fueled lifestyle, but they can also leave you more vulnerable to foreclosure, bankruptcy, and other over-spending problems.

Readers, what's the worst piece of financial advice you've ever heard?

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.

Browse your computer here