Most Recent Posts

A federal jury in New York City has found that Fabrice Tourre, the former Goldman Sachs trader who regulators say caused investors to lose $1 billion, is liable in the mortgage securities fraud case filed against him by the Securities and Exchange Commission.

Regulators say Tourre, 34, a native of France who was nicknamed "Fab" in his office, packaged toxic subprime mortgages into a collateralized debt obligation that was sold to investors under the name Abacus in 2007.

"The U.S. Securities and Exchange claims Tourre hid the role of hedge fund Paulson & Co. in selecting the subprime mortgage bonds behind the investment, then made a $1 billion bet they'd fail," Bloomberg News reported earlier this week.

Tourre was found liable on six of the seven charges he faced. In 2010, Goldman Sachs agreed to pay $550 million to settle SEC charges against it in the case. Tourre left the company last year.

The SEC pursued civil charges against Tourre, meaning that his punishment could now range from a fine to a lifetime ban from trading in securities.

Tourre, who had risen to the rank of vice president at Goldman Sachs, "is the only employee of a big American bank to lose a courtroom battle to Wall Street's top regulator," The New York Times reports. Most other cases were settled before coming to a court judgment.

During the trial that lasted more than two weeks, Tourre's defense team did not call any witnesses to testify, a move that had been interpreted as a message to the jury that the regulators had failed to prove their case.

"We're obviously gratified with the jury's verdict and we appreciate their hard work," SEC lead prosecutor Matthew Martens said, according to The Wall Street Journal.

The mortgage giants Fannie Mae and Freddie Mac got hit so hard by the housing crisis that they required a massive federal rescue. Now lawmakers are looking to scale back the two entities' role — and the government's — in the mortgage market.

The Senate Banking Committee is expected to vote Thursday on President Obama's nominee to head the agency that oversees Fannie and Freddie.

The government took them over during the worst of the housing crisis, at a cost to taxpayers of nearly $200 billion. Now that the housing market is recovering, the companies have turned profitable, and they are sending money back to the Treasury.

But many lawmakers remain worried about the government's outsize role in the mortgage market, and they're looking to make a change.

Before Fannie and Freddie were taken over by the government in 2008, they operated in a kind of legal limbo. They were for-profit companies, helping to funnel money into the housing market. But they had an implicit guarantee that if they got into trouble, the government would bail them out.

Tennessee Sen. Bob Corker says that has always been a problem. He says "almost everybody would say" that it's not appropriate to have "private gain and public losses."

"This implicit guarantee is incredibly inappropriate," he says.

New Approaches

Corker, a Republican, and Democratic Sen. Mark Warner of Virginia have crafted a plan to gradually do away with Fannie and Freddie, while handing one of their functions over to a new government agency. That agency would guarantee mortgage-backed securities, to keep money flowing into the housing market. But unlike Fannie and Freddie, the new agency would collect a fee for the government's backing.

The plan includes a number of other safeguards designed to protect taxpayers: Homebuyers would have to make a 5 percent down payment. And the companies issuing mortgage-backed securities would have to hold at least 10 percent capital in reserve. Corker says that's twice as much capital as Fannie and Freddie would have needed to weather the housing crisis without a government bailout.

"If Fannie and Freddie had had 5 percent capital, there would have been no taxpayer contributions," he says.

The Obama administration says it welcomes the bipartisan Senate approach.

Meanwhile, House Republicans, led by Rep. Jeb Hensarling of Texas, have crafted an alternative bill. It would move the government even further out of the mortgage market, leaving only a limited role for the Federal Housing Administration to help first-time homebuyers and low-income families.

But Warner told a gathering at the Bipartisan Policy Center on Wednesday that the House approach is a political nonstarter. He said Hensarling's bill is an "ideologically pure exercise which will never have a single Democrat ever support it."

What Change Could Mean For Homebuyers

Economist Mark Zandi of Moody's Analytics says either bill would result in slightly higher interest rates on home loans.

But Zandi says the increase would be bigger under the House Republicans' bill because the measure would lack a government guarantee.

"More importantly for most Americans, there probably would be very few 30-year, fixed-rate loans out there — at least not for the typical homebuyer," Zandi says. "And the other thing to consider is that in really bad times, if the government really didn't step in, it would be pretty tough to get a mortgage loan for anybody at any time."

House Republicans insist their bill would not end 30-year, fixed-rate mortgages. They note such loans are already available for high-priced homes that are too expensive to qualify for a government guarantee.

But Zandi says the experience in other countries suggests that without a government backstop, long-term fixed-rate mortgages would not be widely available. He also says it's unrealistic to pretend the government would stay out of the mortgage market altogether.

"The reality is that when push comes to shove, if things are really bad, the government will step in," he says. "So it's important that we all understand that, make that explicit, price for it to make sure that taxpayers don't pay for it in the future."

These days, it's Fannie and Freddie who are paying taxpayers. The companies have returned $131 billion in dividends to the Treasury so far.

Corker argues that's one more reason the government should move quickly to wind down the mortgage giants — before lawmakers become too attached to that money, and it becomes harder than ever to cut the cord.

As August begins, retailers are stepping up sales promotions to attract back-to-school shoppers. And several states are offering tax-free shopping to encourage purchases.

But most economists say this year's sales will be slower than last summer's because consumers have been coping with more expensive gasoline and higher payroll taxes.

"This year's back-to-school shopping season appears slightly weaker than last year," economist Chris Christopher, with IHS Global Insight, said of the retail period that ranks second only to the holiday shopping season.

To get consumers in the mood to shop, many retailers started back-to-school advertising and sale pricing weeks ago. The data aren't in yet to show the final impact of those early promotions on July sales.

But traditionally, August is the key month for sales of kids' backpacks, shoes, clothes, lunchboxes and notebooks. Those sales are expected to total $635 for the average family with school-age children, down from last year's $689, according to the National Retail Federation.

Spending is higher for college-bound students, who need more expensive things like computers and textbooks, as well as bedding and beanbag chairs for dorm rooms. This year, the average family with a child in college will spend $837, down from last year's $907, the trade association estimates.

The NRF says school and college shopping combined will add up to $72.5 billion.

Looking To Cut Corners

"As they continue to grapple with the impact of increased payroll taxes, Americans will look to cut corners where they can, but will buy what their kids need," NRF President Matthew Shay said in a statement on the season's outlook.

Examples of corner-cutting include shopping for generic rather than brand-name goods, he said. Roughly 1 in 3 shoppers said in a recent NRF survey that he would do that, as well as wait for sales.

And more people will be heading to discount stores, according to the New York-based International Council of Shopping Centers. A survey done in mid-July by that group showed 9 in 10 consumers plan to shop in discount stores this year, up from 83 percent in 2012.

To give shoppers yet another way to reduce the hit to their pocketbooks, 18 states are offering sales tax holidays this summer.

Enlarge image i

About Phil Plait

Phil Plait is behind the Bad Astronomy on Slate, where he deconstructs misconceptions and explores the wonder of the Universe. He debunks myths and misconceptions about astronomy — and also writes about the beauty, wonder, and importance of fundamental research.

He worked for six years on the Hubble Space Telescope, and directed public outreach for the Fermi Gamma-ray Space Telescope. He is a past president of the James Randi Educational Foundation, and was the host of Phil Plait's Bad Universe, a documentary series on the Discovery Channel.