CONTAMINATED COLLATERAL: THE ACHILLES HEEL FOR BANKERS

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WAIT FOR ARMAGEDDON OR PREVENT IT?

“Thus a decision awaits us which is more a matter of timing than substance. The system is going to collapse in its current form because it is and always was a pyramid scheme. They all fail every time. The question is when. So the only question that remains is whether we will assert ourselves now and start building from within, or pass the opportunity and try to arise from the rubble of what remains when this pyramid collapses under its own weight. Or, put another way, do we want to be the Phoenix that rises out of its own ashes, or the falcon that does what is practical to stay alive and bring home dinner? It seems that the Occupyers have that answer — do it now!” NEIL F GARFIELD, LIVINGLIES.ME

THE BIGGER THE LIE, THE HARDER THE FALL

EDITOR’S NOTE: The simple fact is that they don’t have any collateral in most instances and their assets are accordingly grossly overstated on their balance sheet. And the fact remains, no matter how they try to spin it, that Wall Street simply dipped into the pockets of people’s savings, pensions and taxes, pretended the money was their own, and then convinced people to borrow their own retirement money in ways that could never be paid.Now they claim to be creditors to whom the debt is owed even though the money came from the very person they claiming owes them still more money. And they are getting paid very well to assume this position while the average person of even substantial means is being ordered to “assume the position” to take it again.
With credit card interest at 20%-30%, private student loans going to 18%, and home equity being an irresistible target for Wall Street game players, people are now left without any meaningful amount of savings, a decrease in the amount of their pension plans, and a nearly permanent block to ever getting out of debt. And Wall Street is still successfully positioning itself as the injured party to whom the debt is owed. According to them, the Occupyers just lack the sophistication to understand why the Banks are not at fault for anything.
In truth our reliance on self-governance by Wall Street was misplaced the moment we allowed them to go public and transfer the risk to the public. In the end the people always get the shaft no matter which way they turn and no matter which “class”they think they are in. Each person is getting shafted by the Banks under the current infrastructure regardless of whether they think of themselves as an investor, a consumer, a creditor or a debtor.
The collateral claimed by banks is irretrievably broken by their own intervention in the chain of title. But the really pernicious quality of this mess is that people are under the gun by virtue of debt that was forced upon them using their own money. The cost of servicing that debt that steadily increased just as wages stagnated. But by “giving” people the money to buy things, the banks created the appearance of real commerce. In reality most of the commerce was built on debt — but the other side of the equation is never mentioned. The debt arose not just because someone borrowed money but also because someone loaned the money. And the parties who loaned the money were and remain the people themselves who, as a class of taxpayers, savers and pensioners, are the same on BOTH SIDES OF EVERY TRANSACTION.
If you ask the average 401k person whether he would have taken money out to purchase something, their answer is almost always negative. Yet placed in the hands of money managers who were institutional investors, these same people in fact did borrow the money indirectly without any knowledge of what place they held in the securitization hierarchy. They were dead last. As the source of the funds, they had a sure loss coming eventually whether it was a mortgage, credit card, or student loan debt. Then, encouraged by promises of never-ending replacement loans, they accepted loan products that were unworkable. The result is that they have no money to pay their debt because their own money was used to create the debt and now of course that money is gone — into the pockets of Bankers as fees and profits — they are guaranteed to have diminished capacity to pay off the debt.
Bankers always resist regulation. And “free market” believers are drawn into the narrative by ideology and the mistaken factual belief that the lenders, as a class and the borrowers, as a class, are not one and the same. Ask one of these bankers or “free market” enthusiasts whether Wall Street should be allowed unlimited access into the pension funds and taxpayer funds to lend people their own money, raking off absurd profits, and they would probably not be able to sustain any argument against regulation. To be sure, in the interest of financial liquidity, the function of Wall Street has a value and they should be paid for their services — a real amount based upon real service.  
The problem arose when through deregulation the goal of liquidity became the only goal. That is why, in the absence of regulation, courtesy of legislation passed in 1998, Wall Street was the only one at the table who could  pursue self-interest. Everyone else had to go through their gate if they wanted to do anything. And so they were allowed to issue private currency in a very public way, drawing upon funds from hardworking people who had earned the pensions that awaited them and then, in pursing their interests for ever increasing profits and fees, produced a stupid amount of liquidity that exceeded real money issued by all the governments around the world. They didn’t just exceed it. They issued 12 times the amount of real money in the world.
Now in order to make the profits they intended, they are demanding that taxpayer money be used to cover the profits and fees they think they earned. Every time we do that the taxpayer is paying another dollar toward pornographic profits, salaries and bonuses on Wall Street, while our lives, our infrastructure and our prospects crumble under the weight of a financial infrastructure that must collapse at some point because there literally is not enough money in the world to cover the paper issued by Wall Street.
Thus a decision awaits us which is more a matter of timing than substance. The system is going to collapse in its current form because it is and always was a pyramid scheme. They all fail every time. The question is when. So the only question that remains is whether we will assert ourselves now and start building from within, or pass the opportunity and try to arise from the rubble of what remains when this pyramid collapses under its own weight. Or, put another way, do we want to be the Phoenix that rises out of its own ashes, or the falcon that does what is practical to stay alive and bring home dinner? It seems that the Occupyers have that answer — do it now!

Behold the dangers of contaminated collateral [updated]

Posted by John McDermotton Oct 10 22:06.

Yale University’s Gary Gorton and Guillermo Ordoñez have a new working paper out on the role of collateral in financial crises. This may not pass for exciting news in some places but FT Alphaville is not like other places. Gorton is renowned for his work on shadow banking and wrote an excellent short primer on the recent crisis.

(Update: He’s also, as our commenters point out, the man behind some of the AIG’s risk-management models. Take that as you will, we still think there are some interesting insights in the paper.)

The paper, “Collateral Crises”, uses complicated mathematics we don’t understand want to discuss at this point. But don’t let that put you off: it has some important insights for those interested in the role of information and collateral in the financial system.

First, a very important caveat: the below refers to a model. The empirical evidence presented in the paper is labelled “Very Preliminary and Incomplete” so consider the ideas below as educated musings rather than empirical statements.

The hypothesis is a neat one and although the authors readily admit it’s just one way of looking at recent troubles, it’s an interesting way of thinking about how the crisis hit when it hit.

The argument runs something like this: short-term private funding markets such as money markets or interbank markets work by dealing in “information-insensitive debt”. In other words, there’s buying and selling without anyone worried about adverse selection. Collateral is put down and — assuming it’s AAA — no questions are asked. These ideas have been suggested before (such as here) but this paper is the first to look at its macroeconomic implications.

In particular, it uses this micro model to explain how small shocks can translate into big events. To understand the professors’ logic it’s useful to grasp their version of financial crisis events (our emphasis):

Financial crises are hard to explain without resorting to large shocks. But, the recent crisis, for example, was not the result of a large shock. The Financial Crisis Inquiry Commission (FCIC) Report (2011) noted that with respect to subprime mortgages: ”Overall, for 2005 to 2007 vintage tranches of mortgage-backed securities originally rated triple-A, despite the mass downgrades, only about 10% of Alt-A and 4% of subprime securities had been ’materially impaired’-meaning that losses were imminent or had already been suffered-by the end of 2009” (p. 228-29). Park (2011) calculates the realized principal losses on the $1.9 trillion of AAA/Aaa-rated subprime bonds issued between 2004 and 2007 to be 17 basis points as of February 2011.  The subprime shock was not large. But, the crisis was large…

The authors hypothesise that when these types of collateral markets exist, no useful information is created because it’s too costly (at least for market participants in the short-term) to do so. Thus there’s no information that can help one distinguish between good and bad collateral — between Scandinavian government bonds, say, and AAA-rated sub-prime mortgage bonds.

Indeed, there’s more consumption and lending when there are no questions asked. The longer the boom continues, the more ignorance percolates and bad collateral gets into the system.

When information is not produced and the perceived quality of collateral is high enough, firms with good collateral can borrow, but in addition some firms with bad collateral can borrow. In fact, consumption is highest if there is never information production, because then all firms can borrow, regardless of their true collateral quality. The credit boom increases consumption because more and more firms receive 3financing and produce output. In our setting opacity can dominate transparency and the economy can enjoy a blissful ignorance.

Here’s the problem. The bigger the lie, the harder the fall:

In this setting we introduce aggregate shocks that may decrease the perceived value of collateral in the economy. It is not the leverage per se that allows a small negative shock to have a large effect. The problem is that after a credit boom, in which more and more firms borrow with debt backed by collateral of unknown type (but with high perceived quality), a negative aggregate shock affects more collateral than the same aggregate shock would affect when the credit boom was shorter or if the value of collateral was known. Hence, the size of the downturn depends on how long debt has been information-insensitive in the past.

Gorton and Ordoñez are not rubbishing the importance of leverage — indeed they’re sort of talking about leveraged opacity. But their original argument is that the sub-prime shock was not large and not in itself the cause of the subsequent fall-out. It was the overall reduction in perceived quality of collateral.

A negative aggregate shock reduces the perceived quality of all collateral. This may or may not trigger information production. If, given the shock, households have an incentive to learn the true quality of the collateral, firms may prefer to cut back on the amount borrowed to avoid costly information production, a credit constraint. Alternatively, information may be produced, in which case only firms with good collateral can borrow. In either case, output declines because the short-term debt is not as effective as before the shock in providing funds to firms.

There’s a fair bit to critique here and not just to state the obvious point that credit rating agencies are supposed to provide the sort of information found useful by market participants. Leverage also probably does matter “per se”: it affects the pace in which margin calls come in and funding crises hit. Moreover any notion of intent is missing here — opacity serves some interests more than others.

Still, there are some interesting ideas here and we’ll be cockahoop to see some empirical evidence about the importance of not being able to separate good and bad collateral.

The big sort, rather than the big short.

Update II: Not for the first time, the comments section on an FT Alphaville post are more enlightening than the main text. Scroll down for more, and do contact rob2.7 if you can speak complex mathematics.

Related links:
Shadow banking – from Giffen goods to Triffin troubles – FT Alphaville
Regulating the shadow banking system – Marginal Revolution
Interview with Gary Gorton – Minneapolis Fed
Gary Gorton on Financial Crises – The Browser” href=”http://thebrowser.com/interviews/gary-gorton-on-financial-crises” target=”_blank”>Gary Gorton on Financial Crises – Five Books Interviews

22 Responses

  1. […] CONTAMINATED COLLATERAL: THE ACHILLES HEEL FOR BANKERS Posted on October 15, 2011 by Neil Garfield […]

  2. that’s interesting, marilyn. didn’t know half that stuff.

  3. joann – that is one in a few new slick moves being made by the banksters
    thanks to the absurd lack of transparency with our notes and deeds of trust. I can’t even believe some of the new stuff these guys are pulling, and if I may be so bold, that’s saying something because I’ve seen a lot.
    The ‘wiggle room’ currently enabled is huge and endless and it will never stop because they are organized and the judiciary is either ignorant (not to be confused with stupid) or biased. After reading a new abomination last night, I’m pretty sure the only end to this maelstrom is new legislation to return meaning to laws, particularly those in regard to deeds of trust.
    Never thought I’d say that, as i thought justice could ultimately be found in the laws as they are now. Now I’m not so sure. One way or another, there is something terribly wrong with a homeowner having to beg to learn the true identity of the party, if any, with an interest in his home. There is something terribly wrong with getting a notice of default signed by a party even facially four times removed with no evidence of anyone’s authority to do or sign anything, but who will nonetheless make off with one’s home unless one has a war chest and the brains to go with it. This is not our America.
    My son was born during the Viet Nam era and I swore I would cut off his trigger finger myself before I would see him be used as a hapless pawn in that war. The demonstrations, in which I took part, did not end that war (although admittedly today’s worldwide demonstrations are ‘louder’).
    Will the demonstrations end this one? Got me. We need to give some
    very serious concerted thought to what might. Just a few months ago I was loathe to start or participate in something which would cause even more people to lose jobs. Not today. Bring it on. Every actor in this criminal conspiracy needs to be prosecuted, the assets need to be seized, and damn the cost, or apparently, be damned.

  4. Exactly—ledger of payments to a “loan/mortgage” in some “trust”. NOT AVAILABLE BECAUSE DOES NOT EXIST.

    Unsecured debt. Collection rights ONLY assigned at closing. MASSIVE COVER UP. Pull back the curtain…

  5. Here is something going on in California. Foreclosure notices on only recorded WAMU lender and beneficiary and California Reconveyance Co trustee (owned by Chase) done in those names alone. No fraud paper necessary…. Chase no longer mentioned (used to say Chase successor in interest by way of “purchase” from fdic ect) but because a few found their trusts (undisclosed by Chase) and said wait a minute that was sold to the trust years before and Chase purchased nothing.

    So now the passive non judicial process just got more passive – nothing to question there right? No Calif recording statutes to point to now right? – no need for fraud recording right? -(as if anyone can afford an attorney to ask questions anyway or knows they need one anyway).

    Fraud paper gets noticed in judicial even if ignored. No paper at all used to be a problem in CA if even noticed and questioned by anyone even if ignored. Now its only the recorded guy is foreclosing right?. No surprises to cause any questions right? – no Chase on foreclosure notice – no trust (most people still haven’t a clue their loans were sold at all, never even questioned Chase name on foreclosure notice – and if they do they haven’t a clue what trust bought it and no money to pay anyone else to find out). Interesting development. Hey maybe Countrywide and all the rest can pull off the same stunt.

    Disclosure of the trust (not just trustee bank – they own nothing) and requirement of judicial or heck AG or congressional or MS Warren examination of assignments to the trust starting with originator to sponsor seller to depositor to trust needs to be law immediately and if they don’t exist – proof of the original funding and proof the the further sales. State statutes, UCC, trust law, tax law and all the rest require it. Verification that a mortgage is still in a trust or that it ever was actually sold to a trust in a true sale needs to be verified. It should be made law, emergency law -foreclosure moritorium until it is law. Trustees on deed of trust or trustee banks for the trust have bare legal title only. They own nothing. QWRs plural here first got Chase as answer, then got trustee bank – no disclosure of trust (have this anyway) and all the rest deemed confidential or unavailable. OK if WAMU FA is “beneficiary” where did the payments go? Let’s see the servicer payments to the trust. Ms. Harris – Gov. Brown?

  6. NY State’s definition of Forgery
    HomeAlcoholic Beverage ControlCriminal ProcedurePenal LawVehicle & TrafficSunday, October 16, 2011
    Find a word or phrase on this page:

    ARTICLE 170
    FORGERY AND RELATED OFFENSES
    Section 170.00 Forgery; definitions of terms.
    170.05 Forgery in the third degree.
    170.10 Forgery in the second degree.
    170.15 Forgery in the first degree.
    170.20 Criminal possession of a forged instrument in the third degree.
    170.25 Criminal possession of a forged instrument in the second degree.
    170.27 Criminal possession of a forged instrument in the second
    degree; presumption.
    170.30 Criminal possession of a forged instrument in the first degree.
    170.35 Criminal possession of a forged instrument; no defense.
    170.40 Criminal possession of forgery devices.
    170.45 Criminal simulation.
    170.47 Criminal possession of an anti-security item.
    170.50 Unlawfully using slugs; definitions of terms.
    170.55 Unlawfully using slugs in the second degree.
    170.60 Unlawfully using slugs in the first degree.
    170.65 Forgery of a vehicle identification number.
    170.70 Illegal possession of a vehicle identification number.
    170.71 Illegal possession of a vehicle identification number; presumtions.
    170.75 Fraudulent making of an electronic access device in the
    second degree.

    S 170.00 Forgery; definitions of terms.
    1. “Written instrument” means any instrument or article, including
    computer data or a computer program, containing written or printed
    matter or the equivalent thereof, used for the purpose of reciting,
    embodying, conveying or recording information, or constituting a symbol
    or evidence of value, right, privilege or identification, which is
    capable of being used to the advantage or disadvantage of some person.
    2. “Complete written instrument” means one which purports to be a
    genuine written instrument fully drawn with respect to every essential
    feature thereof. An endorsement, attestation, acknowledgment or other
    similar signature or statement is deemed both a complete written
    instrument in itself and a part of the main instrument in which it is
    contained or to which it attaches.
    3. “Incomplete written instrument” means one which contains some
    matter by way of content or authentication but which requires additional
    matter in order to render it a complete written instrument.
    4. “Falsely make.” A person “falsely makes” a written instrument when
    he makes or draws a complete written instrument in its entirety, or an
    incomplete written instrument, which purports to be an authentic
    creation of its ostensible maker or drawer, but which is not such either
    because the ostensible maker or drawer is fictitious or because, if
    real, he did not authorize the making or drawing thereof.
    5. “Falsely complete.” A person “falsely completes” a written
    instrument when, by adding, inserting or changing matter, he transforms
    an incomplete written instrument into a complete one, without the
    authority of anyone entitled to grant it, so that such complete
    instrument appears or purports to be in all respects an authentic
    creation of or fully authorized by its ostensible maker or drawer.
    6. “Falsely alter.” A person “falsely alters” a written instrument
    when, without the authority of anyone entitled to grant it, he changes a
    written instrument, whether it be in complete or incomplete form, by
    means of erasure, obliteration, deletion, insertion of new matter,
    transposition of matter, or in any other manner, so that such instrument
    in its thus altered form appears or purports to be in all respects an
    authentic creation of or fully authorized by its ostensible maker or
    drawer.
    7. “Forged instrument” means a written instrument which has been
    falsely made, completed or altered.
    8. “Electronic access device” means a mobile identification number or
    electronic serial number that can be used to obtain telephone service.

    S 170.05 Forgery in the third degree.
    A person is guilty of forgery in the third degree when, with intent to
    defraud, deceive or injure another, he falsely makes, completes or
    alters a written instrument.
    Forgery in the third degree is a class A misdemeanor.

    S 170.10 Forgery in the second degree.
    A person is guilty of forgery in the second degree when, with intent
    to defraud, deceive or injure another, he falsely makes, completes or
    alters a written instrument which is or purports to be, or which is
    calculated to become or to represent if completed:
    1. A deed, will, codicil, contract, assignment, commercial instrument,
    credit card, as that term is defined in subdivision seven of section
    155.00, or other instrument which does or may evidence, create,
    transfer, terminate or otherwise affect a legal right, interest,
    obligation or status; or
    2. A public record, or an instrument filed or required or authorized
    by law to be filed in or with a public office or public servant; or
    3. A written instrument officially issued or created by a public
    office, public servant or governmental instrumentality; or
    4. Part of an issue of tokens, public transportation transfers,
    certificates or other articles manufactured and designed for use as
    symbols of value usable in place of money for the purchase of property
    or services; or
    5. A prescription of a duly licensed physician or other person
    authorized to issue the same for any drug or any instrument or device
    used in the taking or administering of drugs for which a prescription is
    required by law.
    Forgery in the second degree is a class D felony.

    S 170.15 Forgery in the first degree.
    A person is guilty of forgery in the first degree when, with intent to
    defraud, deceive or injure another, he falsely makes, completes or
    alters a written instrument which is or purports to be, or which is
    calculated to become or to represent if completed:
    1. Part of an issue of money, stamps, securities or other valuable
    instruments issued by a government or governmental instrumentality; or
    2. Part of an issue of stock, bonds or other instruments representing
    interests in or claims against a corporate or other organization or its
    property.
    Forgery in the first degree is a class C felony.

    S 170.20 Criminal possession of a forged instrument in the third degree.
    A person is guilty of criminal possession of a forged instrument in
    the third degree when, with knowledge that it is forged and with intent
    to defraud, deceive or injure another, he utters or possesses a forged
    instrument.
    Criminal possession of a forged instrument in the third degree is a
    class A misdemeanor.

    S 170.25 Criminal possession of a forged instrument in the second
    degree.
    A person is guilty of criminal possession of a forged instrument in
    the second degree when, with knowledge that it is forged and with intent
    to defraud, deceive or injure another, he utters or possesses any forged
    instrument of a kind specified in section 170.10.
    Criminal possession of a forged instrument in the second degree is a
    class D felony.

    S 170.27 Criminal possession of a forged instrument in the second
    degree; presumption.
    A person who possesses two or more forged instruments, each of which
    purports to be a credit card or debit card, as those terms are defined
    in subdivisions seven and seven-a of section 155.00, is presumed to
    possess the same with knowledge that they are forged and with intent to
    defraud, deceive or injure another.

    S 170.30 Criminal possession of a forged instrument in the first degree.
    A person is guilty of criminal possession of a forged instrument in
    the first degree when, with knowledge that it is forged and with intent
    to defraud, deceive or injure another, he utters or possesses any forged
    instrument of a kind specified in section 170.15.
    Criminal possession of a forged instrument in the first degree is a
    class C felony.

  7. This stuff is very overwhelming but it is also fraud to raise mortgage payments based on fraudulent figures to foreclose faster and collect on the insurance

  8. a – better re-read the statute. It’s a crime to make misrepresentations to get anonymous’ autograph on docs, and that is what you say was done and about which I make no argument. I’ve said this before, but here goes again: you can’t just say Bob hit you, unfortunately. You have to rattle off the laws or rights this violated. So here is a law that was violated and its violation is a felony. (And it’s only one. There would be many, no doubt.) So, a felony was committed against anonymous and Lord knows who else. I suppose naming tort ( a civil wrong) would be useful, too. Lawyer’d have to help with the tort stuff. These things will not stay buried forever. If ‘outside’ people, like you, don’t find a way to expose it, eventually a mole, a disgruntled employee, or good citizen will.
    .
    Anyway, you have to put a name on your beef. (and as I said, the law I cited is just one)

  9. johngault

    The question is not the signature — the question is the fraud that procured the signature.

    Not sure you like it — but need to examine every single subprime refinance that was formerly a GSE loan.

  10. First question to ask — is how did “banks” get former GSE loans into their own hands — by subprime refinances????

    Unless examined …. there has been no investigation.

  11. From Thompson/Reuters
    Alison Frankel’s “On The Case”

    Bond insurers v. banks: MBS loss causation teed up for ruling
    10/10/2011
    Last week a rumor made the rounds of hedge funds that trade in Bank of America and MBIA shares: The bank had reputedly agreed to settle the bond insurer’s mortgage-backed securities fraud and put-back claims for $5 billion. The rumor turned out to be false, or at least premature, since no settlement is in the offing at the moment. But the size of the rumored deal gives you a sense of the magnitude of the litigation between the banks that packaged and sold mortgage-backed securities and the bond insurers that wrote policies protecting MBS investors. We are talking about billions of dollars-perhaps tens of billions-at stake in suits by MBIA, Syncora, Ambac, and Financial Guaranty against Countrywide, Credit Suisse, GMAC, Morgan Stanley, and other MBS defendants.

    Last week, Manhattan state supreme court judge Eileen Bransten, who has been the leading jurist in the bond insurer cases against MBS issuers, heard oral arguments on the issue that will determine the magnitude of the banks’ liability: Can bond insurers demand damages based on banks’ misrepresentations on the day deals were signed? Or can MBS issuers point to the housing bust, and not their deficient underwriting, as the reason so many loans have gone bad in the years after the MBS were sold? The case argued Wednesday before Judge Bransten concerned summary judgment motions in the MBIA and Syncora suits against Countrywide, but as the judge noted in her introductory remarks to the overflow crowd in her courtroom, “I understand that this [argument] has a major impact on lots of people.”

    For everyone who couldn’t squeeze into Judge Bransten’s courtroom, I’ve gotten hold of transcripts of the day-long hearing. I’m going to focus on the morning session on the loss causation issue, but here’s a link to the afternoon session on consolidating the issue of Bank of America’s successor liability for Countrywide MBS, which is specific to BofA.

    The loss causation question is central to two of the bond insurers’ categories of claims. The insurers assert they never would have agreed to cover Countrywide mortgage-backed securities offerings if Countrywide hadn’t misrepresented the quality of the underlying mortgages. They claim Countrywide fraudulently induced them to enter those contracts, so it must pay what they call “recissionary damages” in compensation. The insurers also assert that Countrywide must agree to buy back any underlying loans that breach the representations and warranties it made about them, regardless of whether the loans subsequently went into default or not. The monolines want Judge Bransten to keep things simple: If Countrywide lied in order to obtain insurance on MBS offerings, it’s liable to the insurers.

    As MBIA counsel Philippe Selendy of Quinn Emanuel Urquhart & Sullivan told Judge Bransten: “It is immaterial that there is no causal or other relationship between the actual loss which is sustained under the policy and the falsity of the representation.The insurer has to be able to elect what risks to insure, and its assessment of whether to issue the policy at all is based on Day One risk attributes,” he said. Debevoise & Plimpton partner Donald Hawthorne, who represents Syncora, followed Selendy. “In order to prove our entitlement to rescission for breach of contract, rescission forfraud, and in order to show our entitlement to put-backs,” he said, “all we have to show is that these provision were breached at the time of the transaction, and there is no need to provide any evidence of whether loans defaulted or what might have caused them to default.”

    Both Selendy and Hawthorne pointed Judge Bransten to an April 2011 ruling from Oklahoma City federal judge Robin Cauthron, who held in Wells Fargo Bank v. LaSalle Bank that Wells Fargo, as securitization trustee in a commercial mortgage-backed securities offering, only had to show that LaSalle had committed material and adverse breaches as of the closing date of the offering. “Evidence regarding the post-securitization market conditions is inadmissible,” she wrote.

    If Judge Bransten followed Judge Cauthron’s reasoning, a main line of defense for Countrywide and the other MBS issuers would be knocked out. Countrywide counsel Mark Holland and Paul Ware of Goodwin Procter, however, argued that Judge Bransten must consider the meltdown in the U.S. housing market. That’s been the banks’ defense in every MBS case, in which they assert that the real reason underlying mortgages soured isn’t because pieces of paper were missed from loan files or because underwriters didn’t check whether mortgaged houses were primary residences but because the recession hit, people lost their jobs, and housing prices fell. That was a risk, Holland argued, that the bond insurers assumed when they agreed to write MBS policies.

    “The insurance companies are trying to make Countrywide pay for risks that they assumed by asking you to exclude all evidence of the mortgage market meltdown,” he told Judge Bransten. “It is our position that before the monolines can recover any damages, they have to show that their losses were caused by something Countrywide did and not by a risk that they agreed to insure.” (The Goodwin lawyers also distinguished between the LaSalle ruling and their case because LaSalle didn’t involve New York law.)

    But Judge Bransten’s repeated questions for Holland showed that the bond insurers’ arguments made an impression. “My problem, Mr. Holland, is that can’t we agree that is this not a case concerning the decline of the housing market, but rather a case involving claims for fraud and breach of contract?” the judge said. “So, therefore, when does the issue-at what point does Countrywide say it should be [that] fraud and breach of contract should be shown?” The judge went on to ask virtually the same question twice again, with Holland never exactly answering. Instead, he continued to try to reframe the questions, arguing that Countrywide didn’t commit fraud, but suffered from the mortgage meltdown.

    Countrywide’s argument did prompt one question from Judge Bransten for the bond insurance lawyers. (“There was one thing that I think Mr. Holland pointed out that interested me,” she said.) The insurers had argued that they can seek so-called recessionary damages under an old insurance law. Countrywide countered that the law was actually passed to protect policyholders from insurers attempting to cancel policies. The bond insurers were now “overreaching” in asking Judge Bransten “to use a statute designed to protect consumers from the sharp practice of insurance companies to somehow expand the right of insurance companies to seek damages,” Holland said.

    The judge asked MBIA counsel Selendy to respond. He said that the insurance law “simply clarified that rescissionary relief can be awarded provided there is this threshold showing, either a material increase in risk in the event that it is a breach of conditions precedent, warranties, and the insurance agreement, or a material misrepresentation but for which the insurer wouldn’t have written the policy on the same terms.”

    The judge didn’t give any clear indication of how she was leaning or even when she’ll rule. But if I were Countrywide, I’d be thinking hard about the power and appeal of Philippe Selendy’s words to Judge Bransten. “The housing crisis does not give Countrywide a defense to its Day One misconduct and its misconduct leading into these transactions. There would be no insurance policies and no losses but for that fraud,” he said. “When you think about it, what Countrywide is trying to do here, having first caused the housing crisis, together with other reckless loan originators and underwriters, they want to turn around and profit from it again. They want you to rule that the crisis is in effect a Get Out of Jail Free card that allows them to escape liability for their fraud and shift the costs to innocent parties. Well, luckily we’re in a country governed by the rule of law, and the law doesn’t work that way.”

    (Reporting by Alison Frankel)

    Comment: Looks like they found a judge with some common sense!

  12. Carie,

    That is the ongoing difficulty we all encounter: how to prove it? And until several attorneys in several different states have been successful in doing so, attempting it is still a very risky proposition in which the likelihood of a win for the homeowner remains remote as hell. That’s why I would guard anyone not completely detached from the outcome against trying it.

    So your question is extremely pertinent: where are those attorneys willing to risk their reputation to advance such arguments? More homeowners have become really detached from the outcome. In fact, many homeowners (including myself) have wasted so much time dealing with banks about “the damn house” that it has become a chain around our ankle, the one thing that is stopping us from picking up and moving on. And not enough of us have yet reached the point where it is simply a question of principle: fight for the fight itself, because it is the right thing to do, and let the chips fall where they may.

    I would bet that there are hundreds of attorneys out there thinking: “Great argument. I’ll try it on a judge when I see it successfully tried enough times for it to be worth it.” By then though, the cat will be so much out of the box that servicers will have stopped trying any case and settling at any cost will have become the norm.

    We’re all monitoring court rulings, verdicts, decisions, etc. So far, Alabama seems the only state to have broached the issue of collateral and securitization, although i seem to remember that NY also had a few cases arguing it. By the time your servicer files against you, you may be lucky enough to have a slew of precedents at your disposal. Right now, we aren’t there yet. That being said, I agree that educating people is of the utmost importance and for that, you can’t be faulted: you do spend the time and energy! We need to keep that under perspective nevertheless and perspective is what is missing right now…

    Give it a few months…

  13. OS
    This one is for anonymous:

    NRS 205.390 Obtaining signature by false pretense. A person who, with the intent to cheat or defraud another, designedly by color or aid of any false token or writing or other false pretense, representation or presentation obtains the signature of any person to a written instrument is guilty of a category D felony and shall be punished as provided in NRS 193.130. In addition to any other penalty, the court shall order the person to pay restitution.
    Search “my state obtaining signature by false pretenses statutes”

    This one’ s for everyone else (also):

    NRS 205.395 False representation concerning title. Every person who shall maliciously or fraudulently execute or file for record any instrument, or put forward any claim by which the right or title of another to any real property is, or purports to be, transferred, encumbered or clouded, shall be guilty of a gross misdemeanor.

    Search “My state false representation concerning title statutes”

  14. OS for victims of robo-signing:
    SPEAKING OF ROBO-SIGNORS

    NRS 42.007 Exemplary and punitive damages: Limitation on liability by
    employer for wrongful act of his employee; EXCEPTION

    1. Except as otherwise provided in subsection 2, in an action for
    the breach of an obligation in which exemplary or punitive damages
    are sought pursuant to subsection 1 of NRS 42.005 from an employer
    for the wrongful act of his employee, the employer is not liable for
    the exemplary or punitive damages UNLESS:

    (a) The employer had advance knowledge that theemployee was unfit
    for the purposes of the employment and employed him with a conscious
    disregard of the rights or safety of others;

    (b) The employer expressly authorized or ratified thewrongful act
    of the employee for which the damages are awarded; or

    (c) The employer is personally guilty of oppression,fraud or
    malice, express or implied.

    If the employer is a corporation, the employer is not liable for
    exemplary or punitive damages unless the elements of paragraph (a),
    (b) or (c) are met by an officer,director or managing agent of the
    corporation who was expressly authorized to direct or ratify the
    employees conduct on behalf of the corporation.

    These are Nevada statutes, but most if not all states will have ones just like them.

  15. Carie – the legal community needs to work imo on the right to discovery when the evidence needed to support our cases is singularly in the possession of our adversaries.

  16. Very astute observation and we thank John McDermott for picking it up and reporting.

    When the tale is told, we will learn that the huge expansion in USA money-supply was a function of USA private debt. While we can do a Michelle Bachman on the quality of Federal Borrowing (c.f. Solyndra): the collateral backing US Federal Debt and even some State/Municipal Debt can be quite good. Any American can go out and inspect the nearest US Highway and make a judgement about the quality of collateral. Or go count the number of Bradley armored vehicles at the nearest National Guard. There is all kinds of Federal Property to police up those pesky 99% at occupywallstreet: and plenty of highways to get the military there. Posse comitatus!

    What about private debt: I’d argue that all private is backed by bad collateral. The lower the interest rate (e.g. mortgages): the worse the collateral. Some high interest rate loans (e.g. student loans) are perhaps the most secure.

    But if we extend the Gorton and Ordoñez argument to the money-supply – we can see that if you wipe out the collateral then you’ve simultaneously wiped out a like amount of money supply. When the guy walks into your store flush with cash from his latest house refinancing – we ought to make him initial the dollar bill with the caveat that this particular dollar bill may be backed by contaminated collateral. How’s that for skin-in-the-game.

    How about an article on Gresham’s Law?

  17. William P Foley CEO of Fidelity National Title and all their entites
    have orchestrated and produced the documents that have stolen more properties here in the United States then anyone else.

    Lets start going after them with Forfeiture laws to get back their fraudulent illegal gains.

  18. “…L. Randall Wray, Professor of Economics and Research Director for the Center for Full Employment and Price Stability, University of Missouri-Kansas City posted an article on the Huffington Post (http://www.huffingtonpost.com) that I somehow missed. The MERS design was woven in fraud. Professor Wray points out the two main issues with MERS. The first is that most foreclosures are illegal because those doing the foreclosing do not have legal standing. Second the practices that create the foreclosure problems also mean that the mortgage backed securities are actually unsecured debt. Professor Wray says that this means the banks must take them back, so they are toast. He also states that it all comes back to MERS business model: it destroyed the chain of title…”

    “…the homeowner was told “this is a loan”, but then given a complex securities transaction that was a materially non-disclosed. The proof that this entire meltdown was a scheme and artifice to defraud is the very existence of MERS itself. The creation of MERS shows not just Mens Rea (a guilty mind; guilty knowledge or intention to commit a prohibited act), but scienter (an evil mind)….”

    QUESTION: How to prove in court that the mortgage-backed securities are NOT mortgage-backed—and no mortgage exists—only unsecured debt—and servicer is liable for damages—???

    Where are the lawyers, Neil???

  19. Buy a big (or small) safe, take money out of the bank, keep it in your safe, and cut up all credit cards. Visit your local Occupy group on the street tonight. Call the press and tell them the truth.

  20. L.Randall Wray—almost a year old, now—but a good read if you haven’t already…although a couple points we now know are wrong:

    http://www.huffingtonpost.com/l-randall-wray/post_1440_b_797563.html

    (a particularly pathetic excerpt):

    “…Things began to change in the 1970s, and especially in the 1980s as growth slowed, as median real wages stopped rising, and as financial institutions were unleashed to expand activities into new areas. At first households coped with stagnant incomes by putting more family members to work (especially women), but gradually they began to rely on debt. Banks created new kinds of credit and gradually expanded their views as to who is creditworthy. I can still remember one conference I attended at which someone from the financial sector proudly announced that the banks had discovered an untapped market for credit cards — the “mentally retarded”. The argument was that this group would be just as safe as college students, since parents would bail them out in order to avoid having their kids’ credit ratings suffer. This was not a joke — it was a business model.”

  21. The Cancer is growing worldwide :

    http://www.spiegel.de/video/video-1155470.html

  22. Hear hear Mr. Garfield! DO IT NOW! Resistance is victory! Better to die on your feet than live on your knees, etc.

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