Liability of Participants in Securitization Chain

The reason for this requirement of transparency and the cutting edge of claiming or clawing back the illicit profits is simple: in a true fair and free market, the lender would know his risk and the borrower would understand the terms. Both would be on alert if unusual fees, profits and kickbacks were known to be present and would seek other arrangements. So TILA is really meant to protect both the borrower (primarily) and any would be investor advancing the real money.Here is a project for someone out there and a rich topic for forensic analysis for those who are not timid about securitization. I know Brad is planning to address this in the forensic workshop along with other speakers (including me). Research the AIG liabilities, who is making claims and who is getting paid. As I have stated numerous times on these pages, the hapless investors advanced money under the mistaken notion that their risk was insured. They were not mistaken about the presence of insurance and hedge products, but they were easily misled as to who received the benefit of the insurance — middlemen (investment bankers included) who sold them the mortgage backed securities. And they were easily misled into thinking that their money was being used to fund mortgages. Much of the money investors advanced went to pay fees, profits and premiums for insurance that paid off handsomely to the investment banker or some other party in the securitization chain.

You might ask “what difference does this make to the homeowner/ borrower?” The answer lies in TILA and other lending laws, rules and regulations. Long ago laws were enacted to protect homeowners from unseen unscrupulous and unregulated lenders posing through sham relationships with shell corporations or through financial institutions that would be paid a fee to pose as the lender. The transactions were called “table-funded” because of the image of an unknown lender reaching around the “lender” at closing and putting the money on the table for the homeowner to borrow.

Reg Z and other interpretations of TILA have made it clear that any pattern of conduct involving table-funded loans is by definition presumed to be predatory. And to stop this practice of hiding undisclosed parties and undisclosed fees, the law provides for payment to the borrower of all such undisclosed fees, profits, kickbacks etc. that were associated with the loan transaction but not revealed to the borrower. And there are provisions for receiving treble damages, interest, and attorney fees.

So now we get to the point. The payment of proceeds to any party in the securitization chain on contracts or policies paid for from the proceeds of the loan transaction would therefore be due to the borrower.

If another party gets and tries to keep the money (or title or property) they are, in the eyes of the law, usually held to be holding such money in constructive trust for the beneficiary (the homeowner borrower). Obviously the amount of that payment must be calculated by some professional with the information at hand as to the amount paid to participants in the securitization chain where your loan was used as the basis (along with many others) for the entire transaction.

But never lose sight of the fact that the basic transaction was simply a loan from the investor to the homeowner. None of the investment bankers, servicers, aggregators, trustees etc were parties in interest to your transaction with the investor. Thus none of them has the right or power to retain any proceeds, property, title, fees, profits, kickbacks or anything else unless it was disclosed to you and you agreed to it.

The reason for this requirement of transparency and the cutting edge of claiming or clawing back the illicit profits is simple: in a true fair and free market, the lender would know his risk and the borrower would understand the terms. Both would be on alert if unusual fees, profits and kickbacks were known to be present and would seek other arrangements. So TILA is really meant to protect both the borrower (primarily) and any would be investor advancing the real money. The glitch here is that I think the investors have claims against the same money paid to Goldman et al and that a court determination needs to be made as to how to allocate those proceeds. One thing is sure — the answer must not and cannot be that it is the intermediaries who never had any risk in the game and who were getting paid every time the money or “asset” was presumed to move, whether that was actual or just an illusion.

February 27, 2010

A.I.G. Posts Loss of $11 Billion on Higher Claims

The American International Group said on Friday that it lost about $11 billion last year, surprising analysts and showing the long-term risks inherent in the types of large, complex insurance coverage that the company once pioneered.

To increase its reserves to pay future claims, the company set aside $2.7 billion on a pretax basis, accounting for a big portion of its loss. This indicates that A.I.G. is experiencing significantly larger claims than it expected when it sold the insurance, most of it more than seven years ago, long before its government rescue in late 2008.

Fitch Ratings responded by putting the company’s property and casualty subsidiaries on a negative watch for their financial strength ratings. Financial strength ratings are indicators of an insurer’s ability to pay claims, and are separate from credit ratings.

Shares of A.I.G. fell nearly 10 percent Friday, or $2.74, to close at $24.77.

Officials of A.I.G. said claims were growing faster than reserves in just two lines of insurance and emphasized that it still had ample resources over all to pay claims.

A.I.G.’s chief executive, Robert H. Benmosche, said in a statement that despite the losses, “Our team has made great progress during the year in executing our strategic restructuring plan.” The plan involves shrinking the sprawling company to a more manageable size, and generating money to repay the federal government.

As a bright spot, Mr. Benmosche cited a rebound in the annuities sold by its life insurance companies.

The insurer’s 2009 result was just a small fraction of the record-breaking loss of $100 billion that it reported for 2008, when its large derivatives portfolio nearly toppled the company, leading to the government bailout.

Much of last year’s loss came from a fourth-quarter charge taken to reflect a restructuring of its bailout — a one-time charge that A.I.G. has been warning about for months. As part of a debt-for-equity swap with the Federal Reserve Bank of New York, the company removed part of its Fed loan as an asset on its balance sheet, producing a pretax charge of $5.2 billion. That charge was not connected with the company’s core insurance operations.

But the increase in reserves shifts attention to the insurance business. When insurance companies find that the reserves that they have set aside to pay future claims are inadequate, they take money from earnings to add to their reserves.

A.I.G. said it was advised to do so by its own actuaries and outside consultants after a thorough year-end review. The step seemed to vindicate, at least in part, a study last November by the Sanford C. Bernstein & Company research firm, which found a big shortfall in A.I.G.’s reserves for its property and casualty businesses.

Those businesses have been renamed Chartis and are expected to be the backbone of the company after its revamping. The company said the additional reserves were all for Chartis.

The Bernstein analyst, Todd R. Bault, had predicted that A.I.G. would have to “take some kind of a reserve charge” before it could offer shares of Chartis to investors, as it has said it would do to help raise money to pay back the government. He said the shortfall appeared to be in lines of insurance where claims develop slowly, over many years, like workers’ compensation.

Two lines of business accounted for about 90 percent of the addition to reserves, according to Robert S. Schimek, Chartis’s chief financial officer. They are excess workers’ compensation and excess casualty insurance.

When a company writes excess insurance, it offers to stand behind a primary insurer, and pay claims if something so serious happens that the primary insurance is exhausted. Such events are notoriously hard to predict, and Mr. Schimek called it “among the most complex lines of business to reserve for.”

Mr. Schimek said that the company significantly reduced selling excess workers’ compensation in the early 2000s. But the claims from business already on its books will take years to reveal their true cost, he said.

The company’s best estimate of the reserves needed for all property and casualty business is now about $63 billion, he said.

The addition to the reserves and the restructuring of its federal rescue package caused A.I.G.’s fourth-quarter results to be well off those earlier in the year, when the company had even swung to quarterly profits. For the fourth quarter, A.I.G. lost $8.87 billion, or $65.71 a share. That compared with a loss of $61.66 billion, or $459 a share, in the period a year earlier. Analysts surveyed by Thomson Reuters had forecast a loss of just under $4 a share.

In his statement, Mr. Benmosche said his team was “increasingly confident” over the long term and the sale of its other businesses was still on track.

A.I.G. plans to sell shares in its biggest international life insurance company, the American International Assurance Company, on the Hong Kong stock exchange this year. It has also been negotiating the sale of another international life insurance company, known as Alico, to MetLife. The talks have proceeded slowly because of questions about a possible tax liability and who would pay it, according to people briefed on the negotiations.

The first $25 billion in proceeds from those sales will be directed to repay the New York Fed.

9 Responses

  1. Christy

    It is not a good situation that you describe. Mr. Garfield is the expert that might want to address this. But I would like to point out – How can borrower tender money if they do not know who the money will be tendered to? Also, in rescission, all costs paid must be returned to the borrower. This includes closing costs and all interest paid on the loan since origination. This could be a substantial some of money that would be deducted from the money owed in a successful rescission. And, if the rescission is successful, there could be monetary damages which could cover the rest of the money owed in rescission. Also, cases should not be “dismissed” based on rescission claims only – there has to other claims.

    Only a suggestion. I am not a lawyer. Maybe Neil will address this for you.

  2. Tell us something we don’t already know. Here on living lies and many other sites you read all the damage being done by banks, but we are mostly helpless just reading all the bad news. Do you want to help yourself? Call Robert Ponte to get news about educating yourself and how to fight back and keep your home. 860-599-5557

  3. A quote from my good friend Mario Kenny…

    “They designed their system for the maximum amount of destruction allowable by law.”



  4. thought this might be interesting against Trusts and lenders that do not accept short sales or try to mitigate what they have created. I have not read about this on this site yet; A COMPARATIVE FAULT DEFENSE IN

  5. The 9th Circuit Court in Nevada, Arizona and California are requiring homeowners to prove they can tender the market value of their property upon filing a complaint against a lender for cancellation of the note – rescission. Hundreds of lawsuits are being dismissed when the lender brings a motion to dismiss for failing to tender. How do you get around this Neil?

  6. Let’s not forget that, after bundling those toxic loans (or mere receivables as the case may truly be), the intermediary players made huge nopn-disclosed fortunes betting against them with “financial weapons of mass destruction”: credit default swaps (CDS). Warren Buffet’s claim that, unlike others, he was “responsible” with his “financial weapons of mass destruction” reminds me of the alleged secret Goldman Sachs computer code that, if it “fell into the wrong hands” could be used to manipulate markets. In other words, financial service firms are all equal, but some are more equal than others.

    Gretchen Morgensen at the NY Times takes another fearless crack at the ongoing dangers of CDS’s in today’s edition “It’s Time for Swaps to Lose Their Swagger” at:

  7. Quote from As Berkshire Returns to Form, Buffett Blasts Wall Street
    By SAM GUSTIN on Warren Buffet:

    “The CEOs and directors of the failed companies, however, have largely gone unscathed,” Buffett continued. “Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance.”……….

    In a not-so-subtle dig at profligate Wall Street firms that gambled on risky mortgage-based bets and then begged the federal government to save them, Buffett said Berkshire would never rely on taxpayers – or anyone else – for salvation. He has long decried excessive leverage as little more than irresponsible gambling that puts the entire enterprise at risk.

    Buffett has famously called such products “financial weapons of mass destruction.” How then to explain Berkshire’s use of them? Lack of irresponsible leverage, for starters.

    Off the record (me speaking) – It is the CEOs who benefited during by the wild mortgage loans promotion – homeowners, MBS security investors, and shareholders in public corporations, lost. Investors in MBS securities are also crying fraud. They were not the lender/creditor and they do not reap any profit benefit from foreclosures.

  8. Mr. Neil and staffs;

    Thank so much for your sincere efforts in helping American families like my family. Despite the challenges that we went through, there will be a light at the end of the tunnel. To understand and know my rights as a homeowner to fight for my home is a powerfull tool.
    Is class action lawsuit vialble option for homeowners to fight back or going Pro-Se? MERS owned both of my mortgages and Countrywide was the lender. Can you recommend an attorney firm in Southern CA that I can trust for a class action lawsuit againts Bank Of America dba Countrywide. I missed your seminar last Fall, 2009 here because I am still trying to modify. Recently, I am able to read your blog and understand clearly what had happened from the top on MERS and securitization chains. I am just starting to compile as much information to keep my home. Thank you again for being my American hero.

  9. Agree about “table funding” and undisclosed profits and fees, etc. However, the investment banks (Wall Street) purchased the loans before securitization (pro-rata share in pooled current loan receivables), and after securitization passes through shares of payment streams to security investors. Wall Street funded the loans via warehouse lines of credit to the “table funder” – with pre-arranged agreements to purchase the loans directly. Investors in MBS never fully fund a loan because the investors only purchase a security interest in the “pool” of receivables. Securities are not direct loans to consumers – but rather, are derived from the loans current payment stream. According to new TILA amendment, an investor in securities can never be the “creditor/lender”. Securities are only valid if the pass-through is derived from current loan receivables. The issue for homeowners in default or foreclosure is – who owns the right to collection now- since the loan is no longer a current asset and, therefore, no longer a security or part of any current receivable “pool” pass-through.

    Please correct me if I am wrong.

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