Wall Street Banks Don’t Own Toxic Loans: ABC

NOW AVAILABLE ON AMAZON/KINDLE!!!

This is why it is critically important that (a) you get help in organizing your information (b) getting a forensic analysis, review or even a TILA Audit (c) that you secure a third party expert declaration that puts the the facts in issue and (d) that you aggressively pursue discovery without trying to convince the Judge that the mortgage, note or obligation is invalid.

see how-to-be-an-expert-witness

Everyone seems to be getting it right — including the New York Times lead editorial this morning — except the main point. It’s been said that there are two kinds of truth — reality and the collective perception of reality whether it is wrong or right. see self-dealing-part-ii-investigations-started
REALITY: The main point missed by nearly everyone is that in the securitization of real estate loans — residential and commercial — the Wall Street Banks do not own the toxic loans and never did. The simple ABC is that the loans were executed by homeowners and then trafficked like illegal drugs through middlemen until they ended up in the hands of investors (pension funds, sovereign wealth funds etc.).
The actual amount and movement of money was kept carefully hidden from investors and homeowners, violating Federal, State, and common law. Much of this money actually belongs in the hands of homeowners, investors, and taxing authorities from Federal State and Local governments.

CONSENSUS FALSEHOOD: The banks made loans that were too risky and “relaxed” their underwriting standards. A slew of defaults occurred causing a danger of a run on the banks. [The truth is that risk never entered the picture: there is no risk in arranging a loan (with investor funds) that you know for sure is guaranteed to fail because it will reset to a payment level that the homeowner could never be able to pay under any conceivable circumstances.]

THE INCONVENIENT TRUTH: Profits piled up off-shore that are being repatriated on a gradual basis showing incredible gains at the Wall Street Banks that supposedly lost hundreds of billions of dollars. The truth is they never lost a dime. The truth is the loan was sold multiple times through multiple intermediaries each of whom in each “sale” were paid fees and profits vastly exceeding any prior compensation to those who arranged or made loans prior to securitization.
Second Hidden Yield Spread Premium: As I have pointed out before the hidden yield spread premium was jaw-dropping (when the loans were packaged by the aggregator and then sold to the Special Purpose Vehicle that issued and sold the mortgage-backed securities. This second YSP was sent off-shore to the Bahamas or the Caymans to Structured Investment Vehicles with their own trustees, who scattered the actual depository accounts all around the world. The beneficiaries were the 100 Club — the main players in the creation, promotions and protection of the scheme through government contacts, plausible deniability, and simple non-disclosure sometimes achieved through the sheer complexity of the arrangements.

Nobody wants to acknowledge this fact because it would be admission that the con game is still on and that government is still part of it. They took many trillions of dollars to “bail out” banks that had arranged the bad loans but never underwrote them.

After centuries of lending in which banks made loans and were the obvious source of funds and the obvious losers if the loans went bad, it seems that there is hardly a soul in media, government, or the judiciary that is willing to come right out and say the banks are by nature intermediaries and that they carried their business of intermediation too far (removing the risk for bad loans).

In the old model, prior to Glass Steagel being repealed, the use of money held on deposit (i.e, your checking, savings or CD account) at a depository institution was the source of funds for the loans, thus putting the bank at risk. A bad loan meant that the payback had to be covered by the bank’s capital reserves that were regulated to make sure there was always enough money on hand to satisfy the demands of depositors who needed the use of the money they had deposited into the bank, for safe-keeping.

In fact, the scheme was built upon the premise that by not actually having any risk and by entering into “hedge (insurance) contracts, they could make far more money arranging bad loans than good loans. Logistically they guaranteed their profit by inserting terms into mortgage backed bond indentures that cut the investor out of the bounty.
The result, as always, was that Wall Street won and everyone else lost. 1 in 50 people now are living strictly on food stamps in this country. And the number is rising. Leading the pack are white-haired white people whose numbers are growing exponentially, followed by blacks and Hispanics. Fifty percent of the securitized loans were refi’s. Yet the misconception is that this crisis only affects people who bought houses they could not afford.
January 3, 2010
New York Times Editorial

Avoiding a Japanese Decade

Thankfully, 2009 ended better than it began. Economists talk about green shoots of recovery taking hold. Consumer confidence has improved. Equity markets have soared. But for all the progress, the American economy remains extremely vulnerable.

To understand those economic risks, it is worth considering Japan’s experience in the 1990s. A bursting housing bubble there sparked a banking crisis that was followed by a decade of economic stagnation.

The Japanese government lacked the resolve to do what was necessary. It failed to fix its banks and stopped its early fiscal stimulus before recovery had taken hold, leaving the economy all too vulnerable to outside shocks, including the Asian currency crisis and the dot-com collapse in 2001. Japan’s annual growth rate — which had averaged 4 percent since 1973 — slowed to less than 1 percent, on average, from 1992 to 2003.

President Obama’s economic advisers have learned from Japan’s experience. But they may not have learned enough. (Certainly Congress has not been paying attention.) If they are not careful, they could end up repeating some of the big mistakes that condemned Japan’s economy to a lost decade.

The green shoots are barely out of the ground and Republicans and conservative Democrats in Congress are already demanding that the administration “do something” to cut the budget gap. We worry that the political drumbeat may be too hard to resist. In 1997, after three years of tepid growth, the Japanese government stopped its stimulus: it raised a consumption tax, ended a temporary income tax cut, increased social security premiums and nipped recovery in the bud.

Japan’s other blunder was its unwillingness to fix its banks. Regulators did not force banks and indebted firms to recognize trillions of yen worth of bad loans. Banks trundled along like zombies, squandering credit to keep insolvent firms on their feet. When the Asian currency crisis hit, many undercapitalized banks toppled over.

The Obama administration has not been quite as forgiving with the banks, but it still has been nowhere near aggressive enough. The regulatory reform meant to curb bankers’ destructive risk-taking is moving at a snail’s pace through Congress. While the Treasury has forced banks to raise capital, many — including some of the largest — remain thinly capitalized and weak.

Banks have been unwilling to sell bad assets and take a loss. They remain stuffed with risky commercial and residential mortgages and consumer debt. Bankers, meanwhile, have made things worse by insisting on paying themselves huge bonuses after profiting so handsomely from the taxpayers’ tolerance and largess.

There are two big problems with that. The bankers’ taste for risk has not been in any way quenched. And the American public is, justifiably, fed up. That means if there is another bank crisis — say when the Federal Reserve takes away the punch bowl of low interest rates — it will be a lot harder to get Congress to approve another bailout, no matter how necessary.

The Obama administration has still done a far better job — up to now — in addressing the crisis than Japan’s governments did. As dismal as 2009 was, it pales when compared with what would have happened without the fiscal stimulus and the Fed’s enormous monetary boost.

The White House is now pushing another mini-stimulus plan for next year. Chances are it will need to do a lot more to push reform and boost the economy. If there is an overarching lesson from Japan’s lost decade, it is that half measures don’t pay.

8 Responses

  1. Okay. Believe trafficking occurred. But – someone has to account for the conversion of mortgage loans into securities. Discovery will not work if judge will not grant discovery. Discovery is being denied and curtailed all across America – no matter who is the challenger.

    No one seems to understand that the process of securitization involves the “conversion” of mortgage loans into securities – on SOMEONE’s Balance Sheet!!! Securitization is simply that – a conversion of a loan into a security by accounting gimics.

    Question still remains – no matter how the cash was funneled – who securitized (converted loan into security) through their accounting balance sheet (or off-balance sheet conduit)????

    Why are judges not questioning that loans are not converted to securities by magic??? Security trust SEC documents give the security underwriter on the face of the prospectus. The stated security underwriter must have first purchased the loans in order to securitize (convert from loan into security by accounting – gimic or otherwise). Where are the sale/assignments of loans to the security underwriters – who removed loans from balance sheet in order to convert to securities – held by off-balance sheet conduit??

    What they did with the securities thereafter is really not important – that is their problem. Demand accounting in court for the entity that converted loan (by accounting) into a security. That is, of course, if judge will grant full discovery.

  2. I’m not quite sure where to put this, but it is relevant to the coverup perpetrated from the top of our government.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aXIvW4igKV38

    Geithner’s New York Fed Told AIG to Limit Swaps Disclosure

    By Hugh Son

    Jan. 7 (Bloomberg) — The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

    AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

    The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

    “It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

    Bank Payments

    Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps. The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking.

    The e-mail exchanges between AIG and the New York Fed over the insurer’s disclosure of the transactions show that the regulator pressed the company to keep details out of the public eye. Issa’s comments add to criticism from Republican lawmakers, including Senator Chuck Grassley of Iowa and Representative Roy Blunt of Missouri, who wrote letters in the past two months demanding information from Geithner, 48, about the costs of the AIG bailout.

    Securities Lawyers

    AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.

    “Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do,” said Jack Gutt, a spokesman for the New York Fed, in an e- mailed statement. Gutt said it was appropriate for the New York Fed, as party to deals outlined in the filings, “to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel.”

    Mark Herr, a spokesman for New York-based AIG, declined to comment. Andrew Williams of the Treasury referred questions to the New York Fed.

    Kathleen Shannon, an AIG deputy general counsel, wrote to the insurer’s executives in a March 12, 2009, e-mail about the conflicting demands from the New York Fed and SEC.

    ‘Reasonable Basis’

    “In order to make only the disclosure that the Fed wants us to make,” Shannon wrote, “we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available.”

    AIG disclosed the names of the counterparties, which included Deutsche Bank AG and Merrill Lynch & Co., on March 15. The disclosure said AIG made more than $27 billion in payments without identifying the securities tied to the swaps or listing the value of individual purchases by each bank, details the Fed wanted to keep out, according to the March 12 e-mail from AIG’s Shannon.

    Earlier that month, Fed Vice Chairman Donald Kohn testified to Congress that disclosure of the counterparties would harm AIG’s ability to do business. The insurer agreed to turn over a stake of almost 80 percent in connection to its bailout.

    ‘No Mention of the Synthetics’

    The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures. The correspondence includes e-mails between AIG’s Shannon and attorneys at the New York Fed and its law firm, Davis Polk & Wardwell LLP. Tom Orewyler, a spokesman for Davis Polk in New York, declined to comment as did Shannon.

    According to Shannon’s e-mails obtained by Issa, the New York Fed suggested that AIG refrain in a filing from mentioning so-called synthetic collateralized debt obligations, which bundled derivative contracts rather than actual loans.

    The filing “reflects your client’s desire that there be no mention of the synthetics in connection with this transaction,” Shannon wrote to Davis Polk on Dec. 2, 2008. “They will not be mentioned at all.”

    AIG had about $9.8 billion of swaps protecting the synthetic holdings as of September 2008, the company said on Dec. 10, 2008. Goldman Sachs said in a press release last month that it was among banks that had losses on synthetic CDOs.

    As part of a bailout that swelled to $182.3 billion, AIG and the Fed created Maiden Lane III, a taxpayer-funded facility designed to remove mortgage-linked swaps from the insurer’s books. Shannon told the New York Fed on Nov. 24, 2008, that AIG executives wanted to publicly disclose details about Maiden Lane the next day.

    ‘Guided by Your Counsel’

    “Do you think it might be feasible to hold off on the Maiden Lane III 8K and press release until next week?” Brett Phillips, a New York Fed lawyer wrote in an e-mail that day. “The thinking is that the Maiden Lane III closing will be a less transparent event, and it might be better to narrow the gap between AIG’s announcement and the New York Fed’s publication of term sheet summaries.”

    “Given the significance of the transaction, AIG would be best served by filing tomorrow,” Shannon wrote. “We will of course be guided by your counsel.” The document outlining the Maiden Lane agreement was posted on Dec. 2, 2008.

    In at least one instance, AIG pushed for documents to be disclosed and then released the information.

    ‘Better Disclosure’

    “We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed,” Peter Bazos, a Davis Polk lawyer wrote on Nov. 25, 2008. “Please let us know your thoughts in this regard.”

    AIG’s Shannon replied that “the better practice and better disclosure in this complex area is to file the agreements currently rather than to delay.” The agreements were included in the Dec. 2 filing.

    More details of the negotiations over swaps payments emerged in November 2009 when Neil Barofsky, the special inspector in charge of policing the Troubled Asset Relief Program, assessed the Fed’s role in the bailout.

    “Federal Reserve officials provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received,” Barofsky wrote in a Nov. 17 report. “The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds.”

    AIG’s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion for Maiden Lane facilities to buy mortgage-linked assets owned or backed by the company.

    To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

    Last Updated: January 7, 2010 06:00 EST

  3. Tuesday, January 5, 2010
    Bondholders Considering Plan to Tell Servicers: “You’re Fired!”

    With lawsuits against servicers grinding a slow path through the court system, investors are looking to make an end-run around the intransigent banks who are refusing to service mortgages in accordance with bondholder wishes. Their solution to break through the gridlock surrounding so-called “toxic” mortgage-backed securities? Use the mechanisms in their pooling and servicing agreements (PSAs)–the agreements that govern the creation, maintenance and payment streams of mortgage-backed securities–to remove conflicted servicers from their roles and insert friendly institutions willing to service the loans consistent with the best interests of the investors.

    According to one group of prominent investors (hereinafter the “Securitization Syndicate”), who asked to remain anonymous because the plan is still in the works, investors with large holdings in mortgage-backed securities are beginning to join forces to petition securitization Trustees to relieve Master Servicers from their posts. Under the terms of most PSAs (which tend to vary little from trust to trust), the Master Servicer is required to service loans in such a way as to maximize investor returns. However, due to recognized conflicts of interest (such as significant holdings in junior mortgages and an interest in accumulating fees from delinquent loans), servicers instead have frequently breached these obligations and refused to liquidate or modify loans that borrowers are incapable of repaying.

    The problem is that, under the terms of most PSAs, the only party with the power to do anything about a breach of an obligation by a Master Servicer is the Trustee. Trustees are generally large financial institutions that are paid a fee to oversee the flow of money through the securitization waterfall and to carry out certain administrative tasks. Though the Trustee may remove a Master Servicer, because the Trustee was designed to play a fairly passive role, it is not required to enforce servicer breaches on its own initiative.

    Instead, bondholders must petition the Trustee to take action. In this regard, most PSAs require that at least 25% of the Voting Rights (evidenced by beneficial ownership of 25% of the bonds) give notice to the Trustee of a breach by the Master Servicer before triggering any obligations by the Trustee. Only when the Trustee fails to remedy the breach within 60 days after such a petition may the bondholders bring legal action on behalf of the Trust.

    However, most PSAs also provide the following: “The Holders of Certificates entitled to at least 51% of the Voting Rights may at any time remove the Trustee and appoint a successor trustee.” (quoted from the representative PSA for Countrywide Alternative Loan Trust 2005-35CB) Anticipating that the Trustee will not take action against the Master Servicer, and reluctant to engage in yet another protracted legal battle to enforce servicers’ obligations, the Securitization Syndicate is shooting for a more ambitious goal: amass a 51% interest in one securitization so that they may remove the Trustee, appoint a friendly successor, and get that successor to fire the Master Servicer.

    Sound difficult? It will be. Most prudent investors seek to diversify their holdings so that they do not hold too high a percentage in any one securitization, let alone any one asset class. Finding a few investors with large enough holdings in one particular securitization to obtain 51% could be a challenge. Finding institutional investors willing to take on large financial institutions with which they have longstanding relationships–and risk being portrayed as opposed to politically popular loan modifications–may be even harder.

    Yet, according to one member of the Securitization Syndicate, “all it takes is one. What do you think will happen if we tell a Trustee or a Master Servicer, ‘you’re fired’? What will happen the next time we notify a Trustee that we’ve caught a servicer breaching its obligations? I think you’ll find they begin to sit up and take notice.”

    I would tend to agree with this assessment. Many large banks earn significant fees from serving as the Trustee or Master Servicer of securitizations, and would not want to lose those revenues. Further, while many institutional investors may be reluctant to go out on a limb an take on a major bank, just one reported instance of this plan being successful will likely create a chain reaction. Soon, many bondholders will be open to joining forces and taking on Servicers and Trustees who aren’t honoring their fiduciary duties.

    With Treasury officials admitting last month to the failure of their efforts to cajole servicers into modifying loans or working with borrowers to allow short-sales (the sale of the property for an amount less than the amount owed on the mortgage), maybe it’s time that institutional investors take matters into their own hands. Large funds such as CalPERS, whose investment portfolio took a hit of over $56 billion in the last fiscal year, should be eager to find a way to cut their losses and rid their books of their large holdings in mortgage-backed securities.

    This can only be done with the cooperation of servicers, who have the sole power to modify a loan, foreclose, or allow a short sale, and who have generally been responsible for dragging their feet and keeping these loans in stasis. When servicers refuse to service loans in the best interests of the ultimate owners, which they’re contractually-obligated to do, they should be shown the door just like anyone else that fails to perform their basic job functions. The question is whether any of these institutional investors will have the courage to break ranks and stand up to banks that have demonstrated unparalleled influence in Washington and on Wall Street.
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    Posted by Isaac Gradman at 4:34 PM Labels: banks, CalPERS, conflicts of interest, fiduciary duties, investors, loan modifications, pooling agreements, securities, securitization, servicers, short-selling, toxic assets, Treasury, Trustees

  4. Looks like Aurora isn’t really interested in having their fraud department fraud dept. employees actually find and report fraud.

    http://www.denverpost.com/business/ci_14109724

  5. Mr Fox, In your 10 years, of guarding the henhouse, there as been a huge number of chickens, go missing.

    Yes Senator, I recognize there is a problem, and I have requested more foxes, but have been denied resources that I have deemed necessary to correct the problem.

  6. I watched the video mentioned below by StopGOVTwaste and i nearly *&^%$ my pants with anger and stopped short of throwing up all over my keyboard and display! and two of those traitors are back up with the Govt. “advising” on what to do with the very same sh*&^( they created!!!! I don’t know what to think anymore, in fact i can’t even think!!!!!

  7. “The Warning” – Frontline PBS
    *Long before the meltdown, one woman tried to warn about a threat to the financial system;

    http://video.pbs.org/video/1302794657/

  8. I agree with you great post. My question is where are these 3rd party experts bc I could sure use one

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