During his campaign for president, Donald Trump repeatedly knocked opponent Hillary Clinton for the highly paid speeches she gave for Wall Street's Goldman Sachs. Now Trump has named Steven Mnuchin, who spent 17 years with Goldman Sachs, as his candidate for treasury secretary. He had been Trump's finance chairman.
At Goldman Sachs, Mnuchin specialized in trading distressed bank assets. This generally involves government-subsidized sweetheart deals, because the Federal Deposit Insurance Corporation (FDIC) or some similar government agency picks up the tab for the lousy assets of a bank being seized by the government. An existing bank, or a group of investors, takes the good assets and the deposits, and the government agency picks up the losers.
After he left Goldman, Mnuchin helped put together a group of investors to buy IndyMac Bank, a scandal-plagued lender that had been seized by the Federal Deposit Insurance Corporation. IndyMac had been one of the largest lenders to collapse in the Great Recession of 2007–2009. "The Mnuchin group paid FDIC $1.5 billion for the bank, far less than the value of IndyMac's assets," reported The Nation magazine.
Mnuchin and a bunch of billionaires got a special "shared loss" agreement from the FDIC that reimbursed the billionaires for much of the cost of foreclosing on people who had gotten their mortgages from IndyMac. Within a year, the billionaires had paid themselves dividends of $1.57 billion, says The Nation.
IndyMac was renamed OneWest Bank. It turned around and bought the seized La Jolla Bank, "getting the FDIC to agree again to additional 'loss share' arrangements so the billionaires had little if anything to lose. According to a news release from the Federal Deposit Insurance Corporation, La Jolla Bank was seized on February 19, 2010. OneWest Bank got all the deposits of around $2.8 billion and assets of about $3.6 billion.
There was a revealing sentence in that news release: "The FDIC estimates that the cost to the Deposit Insurance Fund will be $882.3 million." I doubt if that is the only loss the government took, because it must have taken a beating on the agreement to subsidize foreclosure losses.
La Jolla Bank had done some smelly banking. On September 25, 2015, I reported in the Reader that Amalia Martinez, head of Small Business Administration lending at the seized bank, had pleaded guilty to conspiracy to misapply bank funds. Martinez admitted that she and other senior bank officials accepted cash and kickbacks from borrowers to issue hundreds of millions of dollars to borrowers "that they knew they were unlikely to repay," reported the Reader. The La Jolla Bank executives overlooked red-flag information when approving fraudulent loan applications. On one occasion, a construction-industry executive handed $100,000 in cash to a senior bank official who distributed it to Martinez and others.
When the borrowers defaulted, the bank would issue even more bad loans to cover up the original ones. Martinez was the fourth to be charged in the case. So the government probably got stung for more than a billion dollars for such hanky-panky. But Mnuchin and his friends raked in big bucks.
When Congress looks into Mnuchin next year, it is essential that these deals be examined publicly.