Today, October 09, 2010

Except me, of course….

I’m referring to the “why”.

There’s an old-school journalism standard – it’s called the “Five Ws”:

  • Who?
  • What?
  • Where?
  • When?
  • Why?

Some add a sixth, an “H” – “How?”

We know the answers to five of the six “W”s on Foreclosuregate:

  • Who: Major financial institutions, including all of the “big banks” and investment banks, both in the United States and overseas.
  • What: First, they failed to perfect their security interests as required by law, and they included bad loans in securitization pools on purpose, both of which are violations of either fiduciary duty, old-fashion fraud, or both.  Now they’re filing bad paperwork with courts across the land, constituting perjury, fraud upon the courts, counterfeiting and more.
  • Where: Everywhere.  There are now 40 State Attorneys General that are looking into coordinated action on the second part of this scandal, as it is resulting in people being evicted from their homes under questionable pretense.
  • When: The first part took place from 2003 to 2008, roughly.  The second is happening now.
  • WHY: The question nobody is asking – or answering.

I’ll take this one, because it’s simple, it’s obvious, and it’s documented.  I also talked about it in some detail at the end of 2007, where I wrapped up the year and put out my 08 forecast.  I said at the time:

Lets say that you have 1,000 mortgages that youve written to all sorts of people. Their actual risk if defaulting on their mortgages is reasonably low, especially when you look at all 1,000 of them as a pool, instead of each individual mortgage. Lets say for the sake of argument that the actual risk premium that is, the reasonable cost of the money compared to a risk free investment such as US Treasury bonds, is 200 basis points that is, a 2% higher interest rate fairly compensates for the risk you wont pay.


So I have a pool of mortgages that was made when the 10 year Treasury bond was yielding 5%, and the fair return on that pool is 7%. All is good.

Or is it?

Well, no. See, everyone who touches that pool wants a piece of the action. If Im an investment bank I cant possibly do this work for free, so I want 25 basis points of that 200 for my profit in putting all these together and managing them.

Then there is the company that services the loans. They take the payments from each homeowner and make sure that theyre correctly accounted for. This requires staff, phones, computers, etc. They too want to be paid lets call that another 25 basis points.

So now we have 150 basis points left of margin over the 10 year Treasury rate. If we sold slices of this debt off, at best we could allow a coupon that reflected that 150 basis points.

Unfortunately greed got into the equation.

The banks figured out that they could structure these 1,000 mortgages into different tranches with different characteristics. If you take all the money coming in and look at this as one big pool, that gives everyone only one thing to buy. But if we take that pool and split it up into a bunch of different levels of risk, we can now offer slices that have different levels of return.

For instance, we could draft some documents that say that if the total amount of money due isnt paid (by everyone) that the first risk of people not paying would fall on a certain class of the buyers. These buyers would get a much higher coupon payment, but theyd take much higher risk, because no matter which Joe doesnt pay their mortgage, these people would eat it preferentially, while those above them with a lower grade of risk would keep getting their payments.

This is the essence of the Mortgage-backed security, or MBS.

But remember no matter how you slice this whole deal up only 200 basis points of profit is in there over treasuries to make. You can change who eats the losses and how much the various fingers in the pie get to siphon off, but you cant change the total amount of profit available.


Wall Street figured out that YOU CAN IF YOU ARE WILLING TO CHEAT.

All you have to do is find someone who will run your deal through a computer program and grade the quality of its debt. If you can find someone who will claim that the total risk of the deal is lower than it actually is, you make out like a bandit, because instead of 200 basis points of actual profit you suddenly find another 50 or 100!

The problem is that the real risk DID NOT CHANGE.

See the problem?  I hate to drag up a nearly-three-year old posting on this, but it’s right there under your nose, and it was always going to lead to something like what we’ve had happen in the second instance.


And the more-complicated and obfuscated the better, because that obfuscation reduces the risk you will get caught – at least in the short term.

Unfortunately nothing fixes a Ponzi Scheme beyond the short term.

This is what you, and investors, were sold as the premise underlying the paper that was written going out the next 30 years – the proffered term of the loans.  Investors were sold this by the banks, homebuyers were sold it by mortgage brokers and Realtors, and books were published by so-called “experts” that all devolved, in the end, to the making of this claim:

That of course was never going to happen, and it didn’t.

But all bankers have a copy of Excel on their desktop.  They also have calculators, and most of them have an HP12c, which makes this simple too: 1.10 <ENTER> 29 yx = 15.8631.  Multiply that by the starting value of the house, and there’s your number.

Basic mathematics folks.

So what we have here are two answers to “Why?”

  1. The deals were un-economic unless someone cheated.  That is, there’s only so much risk-adjusted “spread” in a particular lending transaction.  The common law of business balance says that nobody ever works for free, and as a consequence the more hands that touch a deal the more that profit is dissipated among those hands.  In a competitive market where multiple entities compete for business this means that the true yield available to at least some of the investors would always have to understate the risk of default, and therefore someone was always going to get screwed.  On balance there’s nothing unlawful about that, so long as you properly and fairly disclose everything about the deal – there’s nothing that stops you from buying a thing that is disadvantageous to you.  We take this risk every day when we, for example, buy a pack of cigarettes.  The “pleasure” (such as it were) from smoking may come with a horrific cost (lung cancer); it was only when the Tobacco Companies tried to conceal this risk that they were held responsible.
  2. As the pyramid grew higher, the number of good borrowers was exhausted.  To keep the charade going it was necessary to fund loans to “patsies” – the infamous “fog-a-mirror” lending. That would have been ok too, except that the lenders actively concealed the fact that the loans they were stuffing into the securities did not meet the standards under which they sold those resulting MBS to investors.

So between #1 and #2, we have two things that would not be illegal if they were properly and fully disclosed, but if they were fairly and fully disclosed there would have been no money in securitizing these loans, as nobody would have bought them.

To sell them, they had to cheat.  And when the “caught” part of the cheating became apparent as housing prices started to collapse, they attempted to cheat again to cover up the earlier cheating, which is what you’re seeing now.

I wish I could tell you there’s a simple way out of this.  There isn’t.  Someone is going to get hosed; the question is “who”?

Right now, if we let the banksters get away with this, the answer will be you. You will be the one who is hosed when your pension fund and annuity collapse.  You will be the one who is hosed when you try to sell your home five years from now and find you can’t get a title insurance policy, as the chain of title has been hopelessly corrupted.  And you will be the one who is hosed as The Fed and The Federal Government try to throw more deficit spending and “Quantitative Easing” into the economy in a desperate attempt to fill in what is in fact a black hole in the center of these institutions’ balance sheets, resulting in insane devaluation of the dollar and commodity price ramps that double (or more) the cost of your food and fuel.

The only fair resolution is for the institutions that did the cheating to eat the consequences.  That means unwinding all the “Bogus Assignee for Intervening Assets” games, all the notes that were not actually conveyed, and all the loans that were intentionally stuffed into securities with full knowledge, or willful blindness, that they did not meet the underwriting criteria put forward in the offering circulars or pooling and servicing agreements.

This will inevitably drop those loans back on the “Big Banks.”  They will then have to eat whatever loss is embedded in those loans.  In many cases the losses will be 50% of the face value of the loan or more.  It is also the only reasonable way to get both borrowers and lenders in the same room to negotiate whatever is in the best interest of both parties.

The banks will not be able to sustain these losses.  But Dodd-Frank, the new “Financial Reform” law, has a solution to this – the new Resolution Authority.  A cramdown of debt-to-equity can be performed.  It will wipe out shareholders and some classes of bondholders but it is the only fair resolution on a financial basis.

We also must look to criminal law where there is a referable charge for those people – including those all the way up the line to the executive suites – who knew of these events and did nothing to stop them, instead choosing to pocket phantom profits that in fact never existed.

We cannot allow this to go further folks.  It is entirely unreasonable to expect the American People to fund another bailout to the tune of over a trillion dollars.  It is equally unreasonable to expect the American People to sit still while the bailout we did fund went not to clean up the mess, but to try to paper it over and lie about what had happened and what was to come.  And if we don’t get on the ass of the politicians, prosecutors and judges now you can bet the banksters will try to find some way through the legislature to make this all retroactively legal by bribing them with campaign “contributions”, as they have many times in the past.

The fact is that we are incapable of absorbing this on a continuing basis as a nation.  We are currently running deficits of more than 10% of our GDP every year, and have for the last three years, solely to cover up this fraud, as the “stuck” and intentionally mismarked paper is causing catastrophic damage to the normal lending and clearing functions in our economy, in addition to holding prices ridiculously high for both housing and commercial real estate.

The time is now folks.  There’s an election on and candidates are trying to dance around the periphery of this issue without answer the final “W” – WHY – and acting on that.

We, as citizens, must hold their feet to the fire.

13 Responses

  1. “if i had come out with a pyramid scheme like this one, i would be in jail by now.”

    Yep, the only Ponzi scheme ALLOWED is unfolding before us.

  2. When Brooksley Born warned congress back in the early 2000′s (watch the video THE WARNING produced by Frontline), about the total economic chaos that would happen to the American people if congress allowed securitization of mortgage loans to continue, she was ridiculed by congress and when she confronted Alan Greenspan he said he knew that there were big problems but that the “market would work it out” . Some great workout isn’t it?
    Why is the government just now “discovering” this fraud and problem? Isn’t it odd?
    Seems like the same problems that occured when the IRS made tax shelters in the 80′s. Many unsuspecting Americans got into that scam, only to find out that the shelters were later disallowed and those investors had to pay back fines, penalties and all the money they had saved in the fraudulent tax shelters.
    Isn’t this just another scam perpetrated by our government?
    Why did AIG get $175 Billion in Tarp funds to bail out AIG and AIG paid out $175 Billion to the investors of these fraudulent trusts?
    Why does TARP money get funneled through the FDIC and paid to these fraudulent servicers via the “Shared Loss Agreements”
    What is going to happen in April 2011 when the Bureau of Consumer Financial Protection begins operating and consolidates the FDIC, Federal Reserve, OTS, and Federal Trade Commission into one government organization. The bureau will consolidate employees and responsibilities from a host of other regulatory bodies, including the Federal Reserve, the Federal Trade Commission, the Federal Deposit Insurance Corporation and even the Department of Housing and Urban Development.
    Is this all preplanned due to the securitization scam that our government allowed?
    We should all stop making our mortgage payments to show support for the millions of Americans that have been foreclosed on illegally by these crooks

  3. Linda,

    We are paying for our own foreclosure – unless, we are evading taxes.

    Yes, loans have been paid for – but problem is – courts still believe that you owe. It was up to the government to STOP this notion – and stop the courts willy-nilly decisions. There is no cohesive legal precedent across the country. All is left up to the hands of a sole judge – who will decide your individual fate. Some (few) may win – many, many, others will lose. This is because there was no clear mandate by the government. Loan modifications are “voluntary” and, frankly, bogus if executed. There is no direction from the government – EXCEPT – CLEAR THE MARKET OF FORECLOSURES – WHATEVER IT TAKES – WHATEVER FRAUDULENT DOCUMENTS MUST BE USED – JUST DO IT !!! That is what has been communicated and is being incorporated into legal decisions across the country. They know we just do not have the power to stop it. Think – they underestimated the power of the people.

  4. Hello BSE ,we need also orange jump suits for
    CORELOGIC .There is no way , to walk around this
    company. You can not drop a house price $18,000.00
    on one day , and the realtor tells you , we still have
    to lower your price, so the can sell it.
    Another home was droped in one month $ 40,000.00 because the neighbour was sold for $ 600.00 !! and CHASE
    has still the link on there website,What is the deal
    beween this both companies?WHO make the price ?
    Zillow is a joke anyhow , the put on my empty lot
    a house , but a lot of realtors use this pages . It should be shout down , and the prices will rise.

    Very importend to watch the Lawsuit with AG Cuomo
    Ney York against CORELOGIC.

  5. All fine and well.

    As a homeowner, I am more willing to pay on the “back end” in the form of a national budget deficit….bank bailouts….than I am to be forced to grovel to the table to reform a bogus loan that I don’t owe a dime on, has been sold a gazillion times, and I haven’t seen a penny of the profit! My alleged loan is PAID. End of story.

    What am I supposed to prove now? That I am worthy of a second chance? That I have income to support a lower house payment when I haven’t missed a payment in fourteen years?
    On top of being defrauded, this is sheer humiliation! It’s downright insulting.
    I have more than paid for my home by being a good little slave to these schemes.

    If Government can bail out big business, it can certainly bail out the American taxpayer and homeowner, who financed this whole shebang in the first place !! All this rhetoric about breaking the banks and the economy is just a bunch of high-flying smoke to support the ploy to buy time to re-craft the fraud and tip-toe out of the Deluge, hoping no one will be worse for the wear. Threatening us with an alleged worse problem of economic collapse if we don’t concede to your agenda is outright manipulation. Government has money to finance numerous wars and rebuild nations, it can certainly take care of its own people.

    This is not the time to appease lenders by showing how fair we can be by meeting them in the middle. That time has long gone. They had their chance to modify our loans, to reduce principles, and they didn’t! That shows clear intent and profit motive.
    So now they want us to work with the banks, if left to their own devices, and without intervention, would simply continue to steal our homes? (Which they already have on paper.)

    It is cheaper for banks to fess up and grant us our properties that we already own, then to spend millions on lawsuits… no matter if they win or lose….to defend their already corrupt system of doing business as usual. If you are a lender, NOW is your opportunity to REDEEM yourselves BIG TIME.
    Personally, I will never trust another bank as long as I live.

    The monies saved in not having to make payments on these alleged loans will stimulate the economy MORE than putting homeowners on welfare and clouding titles for eons to come. They gave us the phony loans, they can EAT them. They’ve already made the profits and collected the insurance anyway!

    Where is the dignity in our nation??

    We the People sacrifice and struggle our entire lives to be ‘good little citizens’ and buy into these modules of the American Dream, only to be punished by Federal bureaucrats robbing it out from under us so they can save their necks and prolong their criminal deception.
    The courts are equally to blame. In my opinion, attorneys and judges need to step up to plate and get with the program. Education does not stop when you get your J.D. It only begins.
    Honor the laws and honor the people.
    We are all people here, not gods with gavels.
    Get your feet wet.
    Have the guts to do the right thing. Tend to the needs of the people and the rewards will follow.

  6. actually, we need a set of form letters to send to newspapers, judges, gvmt officials, legislators,givernors, the president, etc.

    the flood of letters and calls must be inmense.

    the enemy is using technology, they have perfected the art of robosiginers and use telwmarketing firms to call, email and contact the government, thousands of robo calls, robo emails, Etc. that.is the way they forge through. gwt to know their staffers since they are the ones actually reading, writting the recommenxations to their bosses.

    get to know their secretaries

  7. I agree 10000000%

    we need to apply so much pressure that they will find it hard to breathe. Specially in thise states where the pretender have been successful in buying our court system and legiative branches like Virginia and the District of Columbia

    the people of DC not only have no representation in congress, they also lack constitutional rights. The people in DC deal with non judicials foreclosures and laws that require the victims to pay rent at the pretenders leisure while suing or challenging them in court. the double whammy, i steal your home and now you have to pay me for being thief and profiting from your misery.

    Aftet all this mess, not a single city official all democrats have not uttered a single word.

    i would unederstand it from virginia which prides itself for being a “business friendly” state, but DC?

    what is it they require an act of comgress to stop people crom being kicked out on the curve with fake, forged and criminally fabricated documents.

    we need to make all these elected officials accountable. it is our tax dollars and not the pretenders which pay their cushy salaries, benefits and retirement funds.

    last time I read the constitution, and I hope we still have one, we have the same rights as other individuals and if these companies want to share the same recognition as individuals, as a supreme court decision sometime ago established they were. then they should be punished and investigated yhe same way we are.

    if i had come out with a pyramid scheme like this one, i would be in jail by now.

    i guess this fudging and esoteric investigations are just P.R.?


  8. i shoulda copyrighted that stuff. damn ! LOL

  9. @Bob G.
    Thank you for your words. I just wrote my two Senators and the President. I also called the comment line to the President and shortened the message, but essentially, I used YOUR words in this manner:

    Dear Mr. President,
    I am writing to talk about the problem with the banks and foreclosures. I want you to think about this differently.

    Think of this securitized MBS thing as a huge boulder that these guys pushed up to the top of a mountain. The kinetic energy necessary to do this came in the form of trillions of dollars. Now the boulder is starting to come racing and crashing down the mountain. All the potential energy that was stored on the way up, is now going to be released on the way down (has to, laws of physics, dontchaknow). The released energy is also going to be in the form of trillions of dollars. Only this time it is going to be trillions of dollars in wreckage. Who are you going to allow to be in this path of that destruction?

    A real government would haul these banksters in and sit them down around a big conference table and play Prisoner’s Dilemma with them: The first guys to fess up get only two years in prison; the guys that don’t fess up are going to get the term of LIFE without the possibilty of parole upon their convictions.

    The Fed is never going to be able to fix this. The more money it throws at the problem, the more “energy” is going to be pushed into the system. Since energy and matter can neither be created or destroyed, something is going to have to give somewhere along the line. All this monetary energy is going to have to resurface somewhere sometime.

    Please, Mr. President, do the right thing in this equation…please allow it to be the bankers that are in the path of the destruction and not the American people. As, this situation has no happy ending.

    Thank you,
    Karen Pooley

  10. We all need to send our legislators this knowledge and hammer it home.

    You saw what we did with HR 3808…..we can do it again.

    Get on the phone, folks.

  11. Let us order the orange jump suits today.

    QTY 9 Wells Fargo 2 ( XXL ) 3 (XL) 3 (Med) 1 (Sml)
    QTY 7 Bank Of America 3 ( XXL ) 2 (XL) 2 (Med) 2 (Sml)
    QTY 4 Citi Bank 1 ( XXL ) 1 (XL) 2 (Med)
    QTY 8 Chase 1 (XXL) 4 (XL) 2 (Lrg) 1 (Med)

  12. Neil points out again why we should all continue to take action on our own and not wait for someone to help. State AG’s are starting to get it, but I know it is because individuals are taking action and not waiting for the white Knight to show up. We are collecting names and providing information to homeowners to take action on their own and get on a list for any class action suits coming down the pike. Call Robert at 860-599-5557. The more sites like this and others take action and provide information the sooner we can feel safe in out homes again.

  13. Some thoughts…

    1. When I was involved in this stuff, the servicers got 37.5 bp, not 25.

    2. I believe you want to raise your equation to the 30th power, not the 29th.

    3. Bear Stearns in their deals with us had repo agreements that they would exercise. The repo price would be fixed up front. They would sell us a portfolio, for example, with a 10% coupon. When rates fell to 6% or 7% they would buy it back and pocket the spread. So let’s say they sold us the portfolio for $30MM. When rates fell, they would buy it back at $24MM. Then they would probably repackage it and sell it off to another institution and repeat the process.

    4. Think of this securitized MBS thing as a huge boulder that these guys pushed up to the top of a mountain. The kinetic energy necessary to do this came in the form of trillions of dollars. Now the boulder is starting to come racing and crashing down the mountain. All the potential energy that was stored on the way up, is now going to be released on the way down (has to, laws of physics, dontchaknow). The released energy is also going to be in the form of trillions of dollars. Only this time it is going to be trillions of dollars in wreckage. What Neil is saying is true…what we need to do is to make sure that it is the banksters and not us that are in the path of that destruction.

    5. A real government would haul these banksters in and sit them down around a big conference table and play Prisoner’s Dilemma with them: The first guys to fess up get only two years in prison; the guys that don’t fess up are going to get 20-30 years prison upon their convictions.

    6. The Fed is never going to be able to fix this. The more money it throws at the problem, the more “energy” is going to be pushed into the system. Since energy and matter can neither be created or destroyed, something is going to have to give somewhere along the line. All this monetary energy is going to have to resurface somewhere sometime.

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