MegaBanks Lose Ground on Ratings of Their Own Companies

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“Everyone is cognizant of the fact that the banks will end up back in the lap of the government should there be a problem,” said Daniel Alpert, managing partner at Westwood Capital LLC, a New York-based investment bank. “What the ratings agency is saying here is that if we had another problem in the next six to 12 months, it’s unlikely the government will once again unilaterally protect bondholders. It’s politically untenable.” Alpert said he holds a small stake in Citigroup.

 

ONCE PARTNERS IN CRIME, RATING AGENCIES TURN ON INVESTMENT BANKS TO BOLSTER THEIR OWN CREDIBILITY

EDITOR’S NOTE: I’m sorry. I can’t resist saying I told you so. The ankle biting begins as that the battle for survival and staying out of jail has just begun. It will be months or even years before the battle to win the “sacrifice your former friends” game is over. The entire illusion of securitization could not have been achieved without the apparent rubber stamp of genuine approval from what appeared to be independent third parties. With the appraisers and rating agencies in the bag, Wall Street was able to pull off the largest heist in history.

And speaking of history, when is it going to dawn on the Obama administration that they may not look so good in the light of history.  For all their good intent, and for all their concern about not disrupting the markets any more, historians will look back on this time and say he could have turned it around by simply telling the truth to the American People, to wit: the mortgages are fake, the mortgage bonds are fake, the balance sheets are lies, the loans were lies, and the government is going to do everything in its power to return BOTH investors and homeowners to the position they were in before this great fraud began.

The lip service to “transparency” does not apparently reach all the way to the top. The administration is still running scared from the sky falling if they actually take down the banks. Instead, they are adopting a laissez faire stance (typically a Republican stance) and just like their Republican friends they are going to see this blow up in their faces. Intentionally taking the banks down is FAR better than just letting them collapse one night or over a weekend. Obama is wasting an opportunity not just for saving the country from decades of heartache while we keep the balloon inflated with nothing but hot air, but for his own campaign where he could show decisiveness and action, now that we already know the megabanks are in fact going to fail miserably.

BofA, Citigroup Among Banks That May Be Lowered by Moody’s

By Donal Griffin and Dakin Campbell – Jun 2, 2011

Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) may be downgraded by Moody’s Investors Service as the rating firm reviews whether the government will limit its support of the largest financial firms.

Ever since the financial crisis, ratings for the banks have been boosted by an assumption that the U.S. would provide extra support if the lenders got into trouble again, the ratings firm said in a statement today. A review by Moody’s will “focus on whether these ratings should be adjusted to remove this unusual uplift and include only pre-crisis levels of government support.”

Investors have regarded the banks as too big to fail after they received government aid in 2008 to keep the financial system from collapsing. Lawmakers have since overhauled regulations and passed the Dodd-Frank legislation to avoid a repeat of bailouts that aided firms including Charlotte, North Carolina-based Bank of America, which received $45 billion.

“Everyone is cognizant of the fact that the banks will end up back in the lap of the government should there be a problem,” said Daniel Alpert, managing partner at Westwood Capital LLC, a New York-based investment bank. “What the ratings agency is saying here is that if we had another problem in the next six to 12 months, it’s unlikely the government will once again unilaterally protect bondholders. It’s politically untenable.” Alpert said he holds a small stake in Citigroup.

Building a Cushion

Bank of America, Citigroup and San Francisco-based Wells Fargo have raised funds from private investors to repay U.S. aid and have been building capital to guard against further declines in housing prices. Moody’s rates Citigroup’s senior unsecured debt at A3, and assigns a rating of A2 to Bank of America and A1 to Wells Fargo. A1 is the fifth-highest of 10 investment-grade ratings and A2 is sixth.

Citigroup welcomes the reassessment of its rating, Chief Financial Officer John Gerspach said in an e-mailed statement, calling his bank one of the best-capitalized financial institutions in the industry. At Bank of America, “our stand- alone rating should be higher given the progress that we’ve made to strengthen our balance sheet, improve our capital and liquidity and reduce our risk profile,” said Jerry Dubrowski, a spokesman for the lender.

Mary Eshet, a spokeswoman for Wells Fargo, said Moody’s review is consistent with its statements from as far back as a year ago and that the bank’s unsupported ratings remain among the strongest in the industry.

Credit-Default Swaps

Credit-default swaps on Citigroup rose 7 basis points to 135.4 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Bank of America’s swaps increased 6.7 basis points to 155.5 basis points.

Wells Fargo’s swaps rose 4.3 basis points to 89 basis points, according to CMA. A rising price indicates more doubt on the part of investors about whether a debtor will meet its obligations.

Moody’s will assess improvements in Bank of America’s and Citigroup’s financial strength, and “this may temper the extent of any ratings downgrades that could result from its review of these firms’ unusual level of systemic support,” the ratings firm said.

In March, under expanded powers granted by Dodd-Frank, the Federal Deposit Insurance Corp. laid out a framework for priority payment of creditors and procedures for filing claims in liquidations of large, complex firms. Congress sought the liquidation authority after the September 2008 bankruptcy of Lehman Brothers Holdings Inc. deepened the credit crisis and highlighted the ties among the largest financial firms.

Liquidation Authority

The move to establish an orderly process for winding down firms was “key” to Moody’s review, Robert Young, managing director with the ratings firm, said in a phone interview.

“Post-Dodd Frank, you evaluate willingness and ability to reduce support or impose losses on creditors,” Young said. “Clearly the intent of the government is to not provide support.” The government’s liquidation authority wouldn’t work as of right now, so Moody’s isn’t prepared to discount government support entirely, he said.

Bank of America and Citigroup “have sizable residential mortgage exposures,” Moody’s said. “Their credit costs could therefore spike if the U.S. economy were to contract again. Further, they continue to face litigation costs related to faulty foreclosure practices.”

Collateral Damage

Downgrades could weaken the banks’ liquidity, limit access to credit markets and pressure businesses that rely on trading revenue, according to regulatory filings. A downgrade by one level at all rating firms could cost Bank of America $1.2 billion for collateral posting and termination payments tied to derivatives and trading agreements, the bank said.

Citigroup said a one-grade reduction of senior and short- term ratings could result in the loss of $8.7 billion in commercial paper funding and $500 million in derivative triggers and margin requirements, and Wells Fargo said it would have been required to post collateral of $1.1 billion as of March 31 had downgrades below investment grade triggered provisions in derivative contracts.

“We would not be surprised to see a one-notch downgrade in Citi and possibly a two notch downgrade in Bank of America’s published senior ratings,” said David Havens, managing director of credit trading at Nomura Holdings Inc., in an e-mail. “This is because Citi has a notch less support, and seems to have less current issues (read: mortgages) than Bank of America.”

Bank of America advanced 5 cents to $11.29 at 4 p.m. in New York Stock Exchange composite trading, leaving it down 15 percent this year. Citigroup gained 36 cents to $40.01, also with a 15 percent drop year to date. Wells Fargo rose 22 cents to $27.16; it’s down 12 percent since Dec. 31.

Bank of New York Mellon Corp. (BK) had the outlook on its debt lowered to “negative” from “stable,” Moody’s said. That brings it in line with other financial firms benefiting from the assumption of government support, including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), all based in New York.

To contact the reporter on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

12 Responses

  1. Justifiable reliance. The rule here stated applies only where there is justifiable reliance upon the misrepresentation of the seller, and physical harm results because of such reliance, and because of the fact which is misrepresented.

    Contract law, the doctrine of promissory estoppel encourages fair dealing in business relationships and discourages conduct which unreasonably causes foreseeable economic loss because of action or inaction induced by a specific promise. Justifiable reliance on the representations of another is the gist of this action

  2. USLegal.com
    ‘Do Not Abandon your property rights’ Copies from USLegal.com

    Intentional Misrepresentation, Fraud, and Gross Negligence …
    The elements of fraudulent misrepresentation are[iv]. A representation that is
    false and pertains to a past or present fact;; A representation that is …

    Negligent Misrepresentation – Duties and Liabilities of …
    A negligent misrepresentation occurs when a person during the course of his/her
    business, profession or employment, gives false information

    Misrepresentation refers to a statement made by a party to a contract that
    induces another to enter into a contract, which can be interpreted, …
    http://definitions.uslegal.com/m/misrepresentation/

    Abandonment of property is the relinquishment of a right or of property with the intention of not reclaiming it or reassuming its ownership or enjoyment. Under some jurisdictions, except in the case of a perfect legal title to a corporeal hereditament, every right or interest in, title to, or ownership of property may be lost by abandonment, and this rule applies to mining rights and privileges. [Ellis v. Brown, 177 F.2d 677 (6th Cir. Ky. 1949)].

    Larcenous intention means the intention to deprive an owner of the value of the property, and appropriate it to the use or benefit of the person taking the property.

    Larceny of property is obtained by the use of misrepresentation especially in getting an owner to hand over something in the belief that it is for temporary purposes. In other words, it is the larceny in which the taker misleads the rightful possessor. This is also termed as larceny by trick and deception.

    Larceny from the person is a larceny in which the goods are taken directly from the person but without any violence or intimidation. The victim will be usually aware of such taking. An example is pick pocketing.

    A larcenous intent at common law exists “Where a man knowingly takes and carries away the goods of another, without any claim or pretense of right, with intent wholly to deprive the owner of them, and to appropriate or convert them to his own use”. [Wilson v. State, 18 Tex. Ct. App. 270, 274 (Tex. Crim. App. 1885)]

    Every robbery embraces a larcenous intent. This means that every robber must intend to steal the property taken. The crucial ingredient of larcenous intent is that the intent be to deprive the owner permanently of his/her property. [Gover v. State, 15 Md. App. 163, 168 (Md. Ct. Spec. App. 1972)]

    Every robbery embraces a larcenous intent. This means that every robber must intend to steal the property taken. The crucial ingredient of larcenous intent is that the intent be to deprive the owner permanently of his/her property. [Gover v. State, 15 Md. App. 163, 168 (Md. Ct. Spec. App. 1972)]

    Single larceny doctrine is a principle of criminal law that taking of different items of property belonging to either the same or different owners at the same time and place constitutes one act of larceny if the theft is part of one larcenous plan.

    For example in State v. Klasner, 19 N.M. 474, 478, 145 P. 679, 680 (1914) it was held that taking nineteen cattle on same day from one area but belonging to different individuals constituted one larceny as a matter of law; State v. Allen, 59 N.M. 139, 140-41, 280 P.2d 298, 299 (1955). Subsequently the doctrine was applied to embezzlement, another form of larceny. The intent of the thief determines the number of occurrences.

    Single larceny doctrine is also known as single-criminal-intent doctrine or single-impulse plan.

  3. Dear edgetraderplus

    First (sub-prime) is a term that is not applicable to the majority of the transactions.

    So a 5th grader can understand …

    INVESTOR as ‘pretender lender’ facilitated taking consumer property during credit inquiry of borrower, and took possession of property in a larcenous manner, posting consumer asset as theirs and placed bids for third party unrelated lenders who had their own credit lines to procure cash in exchange for the asset, and sold back servicing rights to collect payments through ‘mortgage’.

  4. Hey John Cassidy:

    “JOHN CASSIDY: I mean, I agree with that. I don’t think Greenspan is wholly responsible. Obviously, he’s not.

    You know, the investors were responsible; the bankers were responsible; the media was responsible for not reporting more aggressively on this.”

    Hey John, and who gets to take it up the arse, why that would be all those homeowners who were duped into refinancing and buying inflated home prices.

  5. “But you didn’t have to be a genius to know that this couldn’t continue forever and that the question — what happens when prices go down? — should have been asked by a lot of people in the whole system.”

    And now this gal makes the above statement, Alice Rivlin
    Former Vice Chair, Federal Reserve Board

    http://www.pbs.org/newshour/bb/business/july-dec08/crisishearing_10-23.html

    Well, it’s really very simple. The banks and the mortgage industry were all pushing monthly payments. They had everybody viewing debt as a monthly payment you can afford as opposed to the total debt amount. And thus we had option ARM’s, interest only, etc loans. Same is true on your credit cards – low monthly min payment even though your total debt is high and you’ll never pay it off in a lifetime.

    nicely stated Alice:

    “Now, in the old days, the lender really had to watch out that he wasn’t making a bad loan because he might not get repaid. But in this new world, he didn’t have to worry about that. He could sell this loan to somebody else and then take the money and make another loan. So we got the incentives wrong there.”

    AND who do we have to thank in this NEW WORLD ? Oh, could that be Wall Street?

  6. “I mean, you point out quite correctly that the Federal Reserve had as good an economic organization as exists, and I would say, in the world. If all those extraordinarily capable people were unable to foresee the development of this critical problem, which undoubtedly was the cause of the world problem with respect to mortgage-backed securities, I have to — I think we have to ask ourselves, why is that?

    And the answer is that we’re not smart enough as people. We just cannot see events that far in advance. And unless we can, it’s very difficult to look back and say, why didn’t we catch something?”

    In other words Alan, you are your buddies at the banks & Fed Res are full of shit. You people talk as if you know, but really don’t, how’s that for reality.

    http://www.pbs.org/newshour/bb/business/july-dec08/crisishearing_10-23.html

  7. @etp, I don’t understand those statements, either (about subprime loans).
    I have some other issues with them, but can’t support those raw allegations.

  8. For Mr. Garfield’s Oregon fans: Hooker v Northwest Trustees, B of A, MERS,
    May 25, 2011:

    “Although the trust deed lists MERS as the nominal bene ciary “solely as a nominee for Lender . ..,” (Notice of Removal, Ex. 1, 7), the deed makes clear that MERS is not “the person for whose benefit a trust deed is given,” ORS 86.705(1). Instead, the trust deed con rms that GN holds the beneficial interest. The trust deed lists GN, not MERS, as “Lender.” (Notice of Removal, Ex. 1, 6.) All payments on the loan are owed to GN, not MERS. (Notice of Removal, Ex. 1, 8.) GN, not MERS, “may invoke the power of sale and any other remedies permitted by Applicable Law.” (Notice of Removal, Ex. 1, 18, ~ 22.)

    Defendants appear to argue that rather than requiring the recording of every assignment of the trust deed, the Act allows defendants to instead track every assignment of the trust deed within the MERS system, recording only the final assignment of the trust deed in the county land records. Because the Oregon Trust Deed Act requires the recording of all assignments by the beneficiary, defendants’ argument fails. ORS 86.735(1); see In re McCoy, 2011 WL 477820, at *3 4.

    In fact, the trust deed expressly states, “The Note or a partial interest in the Note (together with this Security Instrument) can be sold one or more times without prior notice to Borrower.” (Notice of Removal, Ex. 1, 16, ‘J[ 20 (emphasis added).) If there were transfers of the beneficial interest in the trust deed, defendants were required to record those transfers prior to initiating a non-judicial foreclosure in the manner provided in ORS 86.740 to 86.755. ORS 86.735(1).

    Considering what is commonly known about the MERS system and the secondary market in mortgage loans, plaintiffs allege sufficient facts to make clear that defendants violated the Oregon Trust Deed Act by failing to record all assignments of the trust deed. 3 Therefore, defendants’ motion to dismiss is DENIED.

    The record demonstrates that in addition to requiring the denial of defendants’ motion to dismiss, plaintiffs are entitled to declaratory relief. Pursuant to my order, defendants submitted the MIN Summary and Milestones for the loan at issue. The MIN Summary demonstrates that on December 9, 2005, Guaranty Bank, FSB transferred the beneficial interest in the trust deed to Wells Fargo Home Mortgage. (Jan. 31, 2011 McCarthy Decl., Ex. 1, 2.) As noted above, the record is silent as to how or when Guaranty Bank acquired any interest in the loan. On July 15, 2006, Wells Fargo transferred the beneficial interest in the trust deed to Bank of America. (Jan. 31, 2011 McCarthy Decl., Ex. 1, 2.) Defendants did not record Guaranty Bank’s transfer of the beneficial interest in the trust deed to Wells Fargo. Defendants’ chain of tit submission therefore demonstrates that defendants violated ORS 86.735(1) by initiating non-judicial foreclosure proceedings prior to recording all assignments of the trust deed in the Jackson County land records.

    While I recognize that plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law regulating non-judicial foreclosure. The Oregon Trust Deed Act “represents a wellcoordinated statutory scheme to protect grantors from the unauthorized foreclosure and wrongful sale of property, whi at the same time providing creditors with a quick and efficient remedy against a defaulting grantor.” Staffordshire Investments, Inc. v. Cal-Western Reconveyance Corp., 209 Or.App. 528, 542, 149 P.3d 150, 157 (2006).

    Although not affecting my conclusion here, the MIN Summary raises an additional concern relevant to numerous cases pending before me. As noted above, GN is listed as Lender on both the trust deed and the note. The MIN Summary, however, makes no mention of GN. In fact, the MIN Summary is silent as to how or when Guaranty Bank became an “Investor” holding the financial interest in the trust deed. (Jan. 31, 2011 McCarthy Decl., Ex. 1, 2.) The MIN Summary indicates only that on December 1, 2005, Guaranty Bank registered the loan in the MERS system. What occurred before registration, and how or when Guaranty Bank obtained any interest in the loan (from GN or another) is not revealed.”

  9. Tuesday 7 June 2011

    Everyonce and a while, I read a comment to the effect that sub-prime mortgages were never really mortgages, so what, a loan instead?

    If that is true, it would seem to represent a substantil defense in FC. Is there anyone who can explain this premise so that a fifth grader could understand it?

    thx…

  10. Rating agencies??? Are you kidding me???

    The same criminals that gave “crap” a triple A rating, and got away with it because–uh–“it’s just my ‘pinion”…

    Makes me want to HURL.

    Criminals rule the world…but not for long…just my ‘pinion.

  11. Looks like the banks are slithering out from under their crimes. We need some more whistleblowers who used to work at the rating agencies and the mega banks singing like a canary.

  12. You better hurry up and get your compaints filed! You want to be at the top of their list when it happens!

    From “The Atlantic Wire”…

    Big Banks Expecting to Pay $20 Billion Each for Mortgage Fraud
    By Adam Clark Estes
    The nation’s five biggest mortgage lenders are anticipating paying at least $20 billion in order to make nice on allegations of foreclosure abuse. Based on recent conversations he’s been leading with the banks, associate U.S. Attorney General Tom Perrelli, says that Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial are all realizing that the $5 billion figure they all floated in May would not be enough to end the probe. According to Shahien Nasiripour at The Huffington Post, Perrelli explained the situation to a bipartisan group of state officials based on recent conversations with each of the firms, and more than anything, the banks–as well as top administration officials like Tim Geithner–are looking for a quick resolution.

    The $20 billion figure actually matches what The Wall Street Journal originally reported that federal had proposed last month when talks of a settlement began. The investigation itself started last month after widespread reports that the top mortgage firms illegally seized homes and possibly lied to local judges in expediting the foreclosure process. The money would go into a fund that would be used to pay back borrowers that the banks had scammed during the mortgage crisis and help those kicked out of their homes to find a new place to live. As The Journal reported in May, the settlement deal must satisfy not only the Department of Justice officials overseeing the conversations but also state attorneys general, the Department of Housing and Urban Development as well as the Federal Trade Commission.

    Nasiripour says that despite the federal officials attempts to move quickly, some state officials are pushing for a deeper investigation. A set of confidential federal audits, he reported last month, show that these same firms may have also defrauded taxpayers by illegally foreclosing on homes purchased with government-backed loans. This in addition to all of the other shady practices that have not yet been revealed at a federal level:

    New York’s top law enforcer, Eric Schneiderman, wants to conduct a complete investigation into all facets of mortgage banking, from fraudulent lending to defective securitization practices to faulty foreclosure documents and illegal home seizures. Delaware recently sent Mortgage Electronic Registration Systems Inc., which runs an electronic registry of mortgages, a subpoena demanding answers to 75 questions.

    Other states are combing through court filings and pulling out files infected by so-called “robo-signing” and potentially-fraudulent claims made by banks, while some are probing the role played by a unit of Lender Processing Services, a firm used by the biggest mortgage companies in foreclosure proceedings.

    Meanwhile, the full scale of the damage caused by the mortgage crisis is yet to be determined. Housing prices continue to plummet and more than a quarter of homeowners owe more on their mortgage than their home is worth. With an estimated two million homes in foreclosure the proposed fund could certainly help a lot of people. And with profits bouncing back the banks could certainly afford to pay. JPMorgan Chase and Wells Fargo, for example, posted 67 percent and 48 percent profit increase in the first quarter of this year.

    Sources
    Foreclosure Fraud Price Tag: $20 Billion, Shahien Nasiripour, Huffington Post
    Confidential Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers, Shahien Nasiripour, Huffington Post
    Banks Float $5 Billion Deal to End Foreclosure Probe, Dan Fitzpatrick, Nick Timiraos and Ruth Simon, Wall Street Journal

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