Allison Kilkenny: Unreported

Subprime Watch: Clinton and McCain Camps Tied to Lenders

Posted in Uncategorized by allisonkilkenny on March 30, 2008

From Glenn Thrush at The Swamp and Lisa Lerer at Politico

Clinton campaign manager was director for failed subprime lender
By: Glenn Thrush

Hillary Rodham Clinton’s campaign manager, Maggie Williams, earned about $200,000 on the board of a Long Island subprime lender that charged prepayment penalties — a practice that Clinton, a critic of the subprime industry, now seeks to eliminate.

Williams, who took over the reins of Clinton’s campaign in early February, served as a director on the board of the Woodbury, N.Y.-based Delta Financial Corp. from April 2000 until the firm declared bankruptcy in December, according to Securities and Exchange Commission records.

She was originally recruited by former New York City Deputy Mayor Bill Lynch, a Delta consultant. Her assignments were to create a new code of “best practices,” and to improve the company’s crisis management operation in the wake of state and federal predatory lending probes that resulted in a $12 million payout to borrowers.

Her hiring coincided with stepped-up Delta outreach efforts in minority communities, where the company made a large number of its loans, an initiative that included parties for homeless children and mortgage seminars in Brooklyn and Queens.

Williams, 53, isn’t the only Clinton insider who made money from an industry the candidate has demonized. A month ago, The Wall Street Journal reported that Clinton ally and former HUD secretary Henry Cisneros grossed more than $5 million in stock sales and board compensation from Countrywide Financial, one of the nation’s largest subprime lenders.

Once a poster child for predatory practices, Delta’s reputation improved substantially until its recent travails, as executives eschewed adjustable-rate mortgages for more stable fixed-rate loans, which have fewer defaults.

To boost revenue in the absence of high-profit adjustable loans, the company charged relatively steep interest rates — 11 percent in 2007 — and levied higher-than-prime-loan closing costs.

And Delta assessed prepayment penalties for borrowers who paid off before their loans matured — a practice Clinton frequently decries on the campaign trail.

“I would eliminate the prepayment penalties that lead to such high rates of default,” Clinton said in a March 24 speech at the University of Pennsylvania. “I would require lenders to take into account the borrower’s ability to pay property taxes and insurance fees when deciding whether to make a loan in the first place.”

Subprime loans come with higher interest rates and are offered to borrowers with poor credit. That lending took off during the housing boom and is one of the underlying causes of the current credit crisis.

Williams downplayed her role at the company, saying, through her assistant, that she served only in “an advisory/oversight capacity.”

In a statement released through Clinton’s campaign, Delta senior vice president Marc Miller said Williams “did not have a role in the day-to-day operations and management.”

Calls to Delta executives, board members and their bankruptcy lawyer weren’t returned. The company’s switchboard and Web site have been deactivated in the last few days.

Williams turned down repeated requests to be interviewed, although her assistant, Amee Patel, provided brief responses to several written questions by e-mail.

Asked if she shared her experiences in the industry with Clinton, Patel responded, “She generally does not discuss her business, board memberships or organizational affiliations with the Senator.”

For her services on the board, Williams was paid around $30,000 per year plus expenses and granted at least 25,000 stock options, according to the SEC.

Records show she was able to cash in some of the options, realizing a profit of about $15,000 during a temporary uptick in Delta’s stock price in July 2007.

“She lost remaining options due to the company bankruptcy,” Patel wrote in an e-mail.

A month later, in August 2007, Delta was hit by a sudden contraction of the credit markets and began a first wave of layoffs. By year’s end, the company had laid off all but 50 of its 1,350 employees after bailout attempts failed and the credit crisis deepened.

Like many African-American leaders, Williams, who served as Hillary Clinton’s top White House adviser from 1993 to 1997, initially had high hopes subprime lending would offer homeowning opportunities to inner-city families long stymied by discriminatory bank practices.

Speaking to Directors & Boards magazine in June 2000, Williams said she excited about offering Delta’s home equity loans to working families trying to move into the middle class.

“There are people who miss payments and have bad credit for all kinds of reasons,” she said. “It is a very middle-American kind of problem, although I believe it does affect poor people disproportionately.”

In the article, Williams said her first tasks were building a new communications operation and learning the ins-and-outs of subprime lending from Hugh Miller, the company’s chief executive.

“Hugh was really my teacher in all of this,” she told the magazine.

If Williams was impressed by the Miller family, others remained skeptical of Delta’s reinvention, with some watchdog groups arguing the company continued to aggressively market high-fee loans to low-income borrowers, driving them deeper into debt.

“There was some improvement after the settlement, but they were still the most aggressive company,” said Matthew Lee, founder of the Bronx-based Fair Finance Watch, a nonprofit that monitors inner-city lending.

McCain Guru Linked to Subprime Crisis
By: Lisa Lerer

The general co-chairman of John McCain’s presidential campaign, former Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today’s economic turmoil.

“A regulatory structure set up for banks in the 1930s needed to change because the nature of business had changed,” the Illinois senator running for president said in a New York economic speech. “But by the time [it] was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.”

Gramm’s role in the swift and dramatic recent restructuring of the nation’s investment houses and practices didn’t stop there.

A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS’s new investment banking arm.

Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and Treasury Department about banking and mortgage issues in 2005 and 2006.

During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.

For his work, Gramm and two other lobbyists collected $750,000 in fees from UBS’s American subsidiary. In the past year, UBS has written down more then $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs.

Gramm did not respond to an e-mail, and was unavailable for comment, according to a UBS spokesman. The bank has no official position on the subprime crisis, the spokesman said, but is a member of the Financial Services Roundtable and other industry groups that are actively lobbying Congress on the issue.

Now, some housing experts and economists see Gramm’s thinking in the recent housing proposal from McCain, the Republican Party’s presumed presidential nominee. Gramm is often a surrogate for the Arizona senator, particularly in meetings focused on the economy. And McCain has hinted he’d consider the former Texas senator for Treasury secretary in a McCain administration.

McCain delievered an economic speech Tuesday that had Gramm’s input, but it was written by domestic policy adviser Douglas Holtz-Eakin.

“Sen. Gramm was one of dozens of folks who Sen. McCain has consulted on the housing issue, including Carly Fiorina and Meg Whitman from eBay,” said McCain campaign spokesman Brian Rogers. “They’ve been friends for years and he values Sen. Gramm’s advice.”

In the speech, McCain rejected the type of aggressive government intervention in the economic meltdown that has been embraced by his Democratic opponents — and even some Bush advisers.

“I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” McCain said. “Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.”

McCain’s campaign later clarified that he would support programs for “deserving” homeowners and reforms that would improve transparency and accountability in capital markets.

Andrew Jakabovics, a housing expert at the liberal Center for American Progress, said McCain’s interpretation of the crisis puts little blame on investment banks for their role in packaging the subprime loans into dangerously complex and ultimately hard to value financial instruments.

“I’d characterize this as the deux ex machina theory of financial products,” Jakabovics said. “He views this as a market problem that manifests at the local level as housing, meaning he’s more likely to argue in favor these guys when they argue for deregulation.”

Wall Street firms are increasingly under scrutiny for contributing to the economic downturn by packaging and selling risky mortgage securities. When the home loans tied to the mortgages defaulted, investors and the banks lost billions, contributing to a widespread credit crunch.

“I think [McCain’s] attitude is the market can basically handle this and government doesn’t need to be heavily involved,” said David Wyss, chief economist at Standard and Poor’s.

McCain and Gramm have a long political history. The two became close when they worked together as senators to defeat Hillary Rodham Clinton’s 1993 health care plan, holding meetings at hospitals and clinics across the country.

In 1996, McCain was national chairman of Gramm’s unsuccessful presidential bid.

In 2000, the duo had a rare parting when Gramm backed his home-state governor, George W. Bush, for president instead of McCain. But they’ve reunited in this presidential race.

Gramm stood by his former Senate colleague in his worst days last summer when his campaign went broke and his candidacy was all but written off by political observers.

Gramm, who had joined the campaign in March as a domestic policy adviser, was among those who helped cut staff and shrink the budgets. He traveled with McCain in Iowa, New Hampshire and South Carolina and stumped for him in Georgia.

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