Everything Built on Myth Eventually Fails

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Editor’s Comment:

The good news is that the myth of Jamie Dimon’s infallaibility is at least called into question. Perhaps better news is that, as pointed out by Simon Johnson’s article below, the mega banks are not only Too Big to Fail, they are Too Big to Manage, which leads to the question, of why it has taken this long for Congress and the Obama administration to conclude that these Banks are Too Big to Regulate. So the answer, now introduced by Senator Brown, is to make the banks smaller and  put caps on them as to what they can and cannot do with their risk management.

But the real question that will come to fore is whether lawmakers in Dimon’s pocket will start feeling a bit squeamish about doing whatever Dimon asks. He is now becoming a political and financial liability. The $2.3 billion loss (and still counting) that has been reported seems to be traced to the improper trading in credit default swaps, an old enemy of ours from the mortgage battle that continues to rage throughout the land.  The problem is that the JPM people came to believe in their own myth which is sometimes referred to as sucking on your own exhaust. They obviously felt that their “risk management” was impregnable because in the end Jamie would save the day.

This time, Jamie can’t turn to investors to dump the loss on, thus drying up liquidity all over the world. This time he can’t go to government for a bailout, and this time the traction to bring the mega banks under control is getting larger. The last vote received only 33 votes from the Senate floor, indicating that Dimon and the wall Street lobby had control of 2/3 of the senate. So let ius bask in the possibility that this is the the beginning of the end for the mega banks, whose balance sheets, business practices and public announcements have all been based upon lies and half truths.

This time the regulators are being forced by public opinion to actually peak under the hood and see what is going on there. And what they will find is that the assets booked on the balance sheet of Dimon’s monolith are largely fictitious. This time the regulators must look at what assets were presented to the Federal Reserve window in exchange for interest free loans. The narrative is shifting from the “free house” myth to the reality of free money. And that will lead to the question of who is the creditor in each of the transactions in which a mortgage loan is said to exist.

Those mortgage loans are thought to exist because of a number of incorrect presumptions. One of them is that the obligation remains unpaid and is secured. Neither is true. Some loans might still have a balance due but even they have had their balances reduced by the receipt of insurance proceeds and the payoff from credit default swaps and other credit enhancements, not to speak of the taxpayer bailout.

This money was diverted from investor lenders who were entitled to that money because their contracts and the representations inducing them to purchase bogus mortgage bonds, stated that the investment was investment grade (Triple A) and because they thought they were insured several times over. It is true that the insurance was several layers thick and it is equally true that the insurance payoff covered most if not all the balances of all the mortgages that were funded between 1996 and the present. The investor lenders should have received at least enough of that money to make them whole — i.e., all principal and interest as promissed.

Instead the Banks did the unthinkable and that is what is about to come to light. They kept the money for themselves and then claimed the loss of investors on the toxic loans and tranches that were created in pools of money and mortgages — pools that in fact never came into existence, leaving the investors with a loose partnership with other investors, no manager, and no accounting. Every creditor is entitled to payment in full — ONCE, not multiple times unless they have separate contracts (bets) with parties other than the borrower. In this case, with the money received by the investment banks diverted from the investors, the creditors thought they had a loss when in fact they had a claim against deep pocket mega banks to receive their share of the proceeds of insurance, CDS payoffs and taxpayer bailouts.

What the banks were banking on was the stupidity of government regulators and the stupidity of the American public. But it wasn’t stupidity. it was ignorance of the intentional flipping of mortgage lending onto its head, resulting in loan portfolios whose main characteristic was that they would fail. And fail they did because the investment banks “declared” through the Master servicer that they had failed regardless of whether people were making payments on their mortgage loans or not. But the only parties with an actual receivable wherein they were expecting to be paid in real money were the investor lenders.

Had the investor lenders received the money that was taken by their agents, they would have been required to reduce the balances due from borrowers. Any other position would negate their claim to status as a REMIC. But the banks and servicers take the position that there exists an entitlement to get paid in full on the loan AND to take the house because the payment didn’t come from the borrower.

This reduction in the balance owed from borrowers would in and of itself have resulted in the equivalent of “principal reduction” which in many cases was to zero and quite possibly resulting in a claim against the participants in the securitization chain for all of the ill-gotten gains. remember that the Truth In Lending Law states unequivocally that the undisclosed profits and compensation of ANYONE involved in the origination of the loan must be paid, with interest to the borrower. Crazy you say? Is it any crazier than the banks getting $15 million for a $300,000 loan. Somebody needs to win here and I see no reason why it should be the megabanks who created, incited, encouraged and covered up outright fraud on investor lenders and homeowner borrowers.

Making Banks Small Enough And Simple Enough To Fail

By Simon Johnson

Almost exactly two years ago, at the height of the Senate debate on financial reform, a serious attempt was made to impose a binding size constraint on our largest banks. That effort – sometimes referred to as the Brown-Kaufman amendment – received the support of 33 senators and failed on the floor of the Senate. (Here is some of my Economix coverage from the time.)

On Wednesday, Senator Sherrod Brown, Democrat of Ohio, introduced the Safe, Accountable, Fair and Efficient Banking Act, or SAFE, which would force the largest four banks in the country to shrink. (Details of this proposal, similar in name to the original Brown-Kaufman plan, are in this briefing memo for a Senate banking subcommittee hearing on Wednesday, available through Politico; see also these press release materials).

His proposal, while not likely to immediately become law, is garnering support from across the political spectrum – and more support than essentially the same ideas received two years ago.  This week’s debacle at JP Morgan only strengthens the case for this kind of legislative action in the near future.

The proposition is simple: Too-big-to-fail banks should be made smaller, and preferably small enough to fail without causing global panic. This idea had been gathering momentum since the fall of 2008 and, while the Brown-Kaufman amendment originated on the Democratic side, support was beginning to appear across the aisle. But big banks and the Treasury Department both opposed it, parliamentary maneuvers ensured there was little real debate. (For a compelling account of how the financial lobby works, both in general and in this instance, look for an upcoming book by Jeff Connaughton, former chief of staff to former Senator Ted Kaufman of Delaware.)

The issue has not gone away. And while the financial sector has pushed back with some success against various components of the Dodd-Frank reform legislation, the idea of breaking up very large banks has gained momentum.

In particular, informed sentiment has shifted against continuing to allow very large banks to operate in their current highly leveraged form, with a great deal of debt and very little equity.  There is increasing recognition of the massive and unfair costs that these structures impose on the rest of the economy.  The implicit subsidies provided to “too big to fail” companies allow them to boost compensation over the cycle by hundreds of millions of dollars.  But the costs imposed on the rest of us are in the trillions of dollars.  This is a monstrously unfair and inefficient system – and sensible public figures are increasingly pointing this out (including Jamie Dimon, however inadvertently).

American Banker, a leading trade publication, recently posted a slide show, “Who Wants to Break Up the Big Banks?” Its gallery included people from across the political spectrum, with a great deal of financial sector and public policy experience, along with quotations that appear to support either Senator Brown’s approach or a similar shift in philosophy with regard to big banks in the United States. (The slide show is available only to subscribers.)

According to American Banker, we now have in the “break up the banks” corner (in order of appearance in that feature): Richard Fisher, president of the Federal Reserve Bank of Dallas; Sheila Bair, former chairman of the Federal Deposit Insurance Corporation; Tom Hoenig, a board member of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas City; Jon Huntsman, former Republican presidential candidate and former governor of Utah; Senator Brown; Mervyn King, governor of the Bank of England; Senator Bernie Sanders of Vermont; and Camden Fine, president of the Independent Community Bankers of America. (I am also on the American Banker list).

Anat Admati of Stanford and her colleagues have led the push for much higher capital requirements – emphasizing the particular dangers around allowing our largest banks to operate in their current highly leveraged fashion. This position has also been gaining support in the policy and media mainstream, most recently in the form of a powerful Bloomberg View editorial.

(You can follow her work and related discussion on this Web site; on twitter she is @anatadmati.)

Senator Brown’s legislation reflects also the idea that banks should fund themselves more with equity and less with debt. Professor Admati and I submitted a letter of support, together with 11 colleagues whose expertise spans almost all dimensions of how the financial sector really operates.

We particularly stress the appeal of having a binding “leverage ratio” for the largest banks. This would require them to have at least 10 percent equity relative to their total assets, using a simple measure of assets not adjusted for any of the complicated “risk weights” that banks can game.

We also agree with the SAFE Banking Act that to limit the risk and potential cost to taxpayers, caps on the size of an individual bank’s liabilities relative to the economy can also serve a useful role (and the same kind of rule should apply to non-bank financial institutions).

Under the proposed law, no bank-holding company could have more than $1.3 trillion in total liabilities (i.e., that would be the maximum size). This would affect our largest banks, which are $2 trillion or more in total size, but in no way undermine their global competitiveness. This is a moderate and entirely reasonable proposal.

No one is suggesting that making JPMorgan Chase, Bank of America, Citigroup and Wells Fargo smaller would be sufficient to ensure financial stability.

But this idea continues to gain traction, as a measure complementary to further strengthening and simplifying capital requirements and generally in support of other efforts to make it easier to handle the failure of financial institutions.

Watch for the SAFE Banking Act to gain further support over time.

26 Responses

  1. Dear Carle,
    Without pension fund money there would have been no loans. The fact that the pension fund money was funneled through a falsified process in which they were issued “bonds” (often without even the benefit of a printed certificate) takes nothing away from the fact that they were the only source of funds for these mortgages. When Sam gives Joe $300,000 contemporaneously with the purchase of a new home it is presumed that Sam expected to be repaid. In the absence of very powerful evidence that the money was intended to be a gift. The pension funds gave money to the borrowers. None of the intervening conduit entities put a penny of their own money into the flow.

    The fact that the pension funds are called investors takes nothing away from the fact that they are clearly lenders. What I know about securitization has filled two published books. What you know appears to come from spin masters who have either convinced or hired you to write such a post.

  2. The last week I’ve been increasingly interested in this JPMorgan mess. The basic rule of investing is that, in the market, there are winners and losers. The object of the ‘game’ is to be on the winning side. Expanding on that premise, for every winner, there’s a loser. And, in this case, for every loser, there’s a winner. So, what I’ve been wondering of late is just who it is that came out on the winning side of this loss? Someone made a bunch of money.

  3. @Pie,

    Isn’t 7-2-2012 the day all those banks have to pay quarterly dividends? Tell me if I’m way off.

  4. @ Enraged July 02, 2012 is the day those roosters come home to roost. Did you like James Dimon out there claiming the isolated incident con. Unfortunately, for Chase investors – at this pace of announcements and dollar amount, they will have to have another 19 London Whales. Maybe they will throw some geographical variety into the mix.

  5. @pie,

    The stench of doodoo is unmistakable.

    Which reminds me an old joke I heard once: do you know why those French people chose the rooster as their emblem? It’s the only animal thast keeps singing with both feet in it… 🙂

    We’re talking about Greece but I think France will make or break the Euro. I was listening to a speech from Hollande. He said out loud what everybody is thinking and won’t dare say: we have an enemy. Not Iran, not China, not Germany. The enemy is not a person nor a nation. The enemy is the financial world… So I guess war is on…

  6. @enraged – is doodoo similar to cocky-doody?

  7. Count the days to July 02, 2012. The plan is is motion and it will change the globe permanently.

    Check the linkg below


    It’s a coming!

  8. @Linda,

    Bingo! When investors and homeowners decide to unite and tear at those TBTF, we’ll be able to breath.

  9. Yeah, creditors are entitled to return on investment, but borrowers are entitled to legal paperwork, too. Banks foreclosed on both ends.

  10. The Too Big To Fail banks have grown so fat on OUR money ,, with their gov’t insured heads I win , tails you lose gambling that they cannot blend in anywhere anymore ,, all the little fish are teaming up to nudge them into repeated losses where they have to unwind their bets (I will not call what they do investing)… JPM is just the warning shot …

  11. Hman.

    Look at AZ statutes. In Florida a title agency has to hold records for 7 yrs. they also have to notify the state review agency when they go out of business. The title agency did neither which I pointed out to the useless review agency.

    Also statutes in FL make the TItle insurance company responsible for theft of their afiliated title agencies. Problem is although I got some traction the servicers and big title insurance companies are not going to do anything unless they are sued.

    And, yes, if my hunch is right it is $1200 per refinance for 6 yrs times milliones of homes in Florida and it is tons of money stolen. Similar to MERS fees. Stewart got caught in California for similar issue but got the AG accepted a $2 million fine for a $50 million lawsuit (sound familiar?).

    I do believe there is value in uncovering these things bec I still hope that it will lead me/us/everybody to reveal something bigger.

  12. Thanks Everyone,

    Enraged, I suspect the same response from my title insurance company as my loan was done over 5 years ago. I expect they will claim the documents have been purged. I’ll keep you posted. I’m going to contact the AZ Dept of Financial institutions prior to my visit to see what the record retention policy is for title companies. I can’t seem to find anything on this?

    Chas-I don’t really think it’s small potatoes. If you can obtain funding instructions from the original “lender” showing Party A paid off your loan but party B is listed on your DOT as lender you would have a case. If you were mislead from the start & can prove that the lender on the DOT is incorrect it would be defective. This is my opinion but it would seem like you would have a good starting point to base a case around.

  13. Chas404,

    One small potato, plus one small potato, plus one small potato… pretty soon, worldwide hunger has been eradicated. Everywhere we look, there’s doodoo. I’m in doodoo up to my eyebrows!

    If each one of us sat down, reviewed page by page our file, wrote a complete timeline with the list of all the regulations breached every step of the way and bombarded with it (along with our supporting documents) the local and national TV stations, our reps, Congress, the White House, Obama personally and Romney personally as well as Ron Paul, our AG, Schneiderman, Beau Biden and anyone with any kind of authority, perceived or otherwise, I am convinced that it would start sticking. Let’s not forget that Lynn what’s-her-name got traction with CBS 60 minutes when she did it.

    Why not us? What did she have that we don’t? At this juncture, we all have so much documentation of the frauds from A to Z that no one, and I mean no one, can keep ignoring it in all impunity. It is an election year, for Pete’s sake! Let’s put it to good use!!!

  14. Hman,

    I discovered that the lender’s title policy listed on the HUD via Stewart Title (owned 22% by Wells Fargo my servicer) was never funded.

    They all told me to pound sand. Interestingly, I have several emails from Stewart employee saying they do NOT have a policy.

    After pushing this for 6 months with the FL state reviewers that review insurance companies they finally got Stewart to now all of the sudden say they ‘endorsed’ the old policy and upped the amount for my refinance.

    The state revieweers now say well chas you see you were crying for nothing. They FINALLY sent me copies of the ‘new’ magically appearning policy which has a disclaimer saying “this policy not in effect until signed by agent”. Well it is not signed.

    I think it was manufactured. Why else would Stewart say they dont have the policy and/or it is not of business then when pressed by the reviewers after 6 to 12 months they say “see we had one all along Chas you complained for nothing!”

    My theory is that Wells instructed Stewart not to issue policies for refis and just pocket the entire $1200 fee. My point all along is that they stole the fee. If you do not fund the policy it is insurance fraud.

    The state reviewers seem happy they did their ‘job’.

    I have a lawyer and he did use this as a defense but it is small potatoes compared to the other stuff.

    STAY ON THEM. Call the state insurance review dept. Good luck.

  15. Awesome, Neil! Keep on him!


    How Long Will it Take?
    This is the number of days since the Arizona Attorney General Tom Horne told Neil that he would get back to Neil on why the AZ AG is not prosecuting the banks and servicers for corruption and racketeering by submitting false credit bids from non-creditors at foreclosure auctions.
    Days will be updated daily until we get a response

  16. @Hman,

    From the moment you paid for certain documents, my understanding is that you are entitled to them. Check your state’s laws. And because none of the underwriting was done at the request of an attorney (and could therefore fall under “attorney’s work product”. That was a mistake on their part: they never expected the whole damn thing to blow), they can’t hide behind it.

    Go ahead and put up a stink. Good luck.

  17. @Hman,

    Did I ever tell you that my title insurer and my original lenders were… one and the same? Different “Inc”, mind you, but the owners and officers are the same people. When I requested my entire file from the lender, he sent me everything he had. I did the research, realized the doozy I had on my hands and, within three months, filed my lawsuit against the current servicer.

    My attorney contacted the lender with the same exact request. His answer: “We do not keep documents beyong five years. This file has been discarded.” I thought it was very odd: knowing that I was snooping, I would have expected them to hold on to the docs, just in case… right?

    Well, I sent the same request to the title company, including the underwriting file, appraisals, inspections, etc. and guess what? They “do not keep files beyond five years. The documents you have requested have been discarded.”

    Very, very cute. Lender, aka title insurer, has skeletons he wasn’t to eager to let loose… Well, we have those letters. Something tells me that they will be useful in due time.

  18. I don’t think there are laws. To compel documents you need a subpoena or documents production request and both of those require a lawsuit in most cases (unless you’re a government agency). That said, you can usually get more flies with honey than vinegar (if you’re trying to get flies).

  19. Has anyone attempted or been able to get documents from their title company? I requested documents and have had no response. I called yesterday and was told I had to request them from their “corporate headquarters”. I am going to go in person tomorrow.

    What are the most important documents to request? Funding instructions? Copies of checks paying off previous liens? Want to make sure I request the most important documents.

    Does anybody know if there is any law I can reference if they are unwilling to produce the documents? I have a feeling they will be less than pleased to see me and would like to know my rights. I haven’t been able to find any law that stipulates that they are required to produce the documents. Is anybody aware of any laws?

  20. The evidence is being hidden…so what can we do?

  21. I am looking for a less poetic address to a very pragmatic problem for all of us who want to see justice done. The AG claims were settled before the evidence came to light at least publicly. While I would love to simply commit this to another conspiracy, my intuition is the AG’s didn’t settle to cover things up. They settled to get some financial help for their own acts and the homeowners, like me, who were barraging them with complaints. Not that it was the right thing to do. The AG Schneiderman is still pursuing a case filed in Feb. which focuses more on the losses sustained by investors. It is a much more promising case than the robosigning case, though, again, I do not doubt all the fraud committed by banks with robosigning. I have hopes for this case, which may be dashed soon enough. I keep looking for a sign. I agree with many of the things you say and empathize with all you feel. But, the kind of evidence needed to put people in jail for what amounts to high crimes and, yes, treason, has not been presented. Bring me a subpoena response document dump and a large supply of potato chips!

  22. @Jordana,

    “Or will it be one of the lone wolf fighters of this battle? The documents of a fraud this huge must exist and the whistleblower to uncover it as well.”

    Documentation of the banks fraud does exist. It hasn’t been completely investigated but that complaint upon which the infamous ” AG settlement” was conceived spells it out quite loud and clear. Anyone with half a brain knows that, as much as fraud was (and still is) the basis for all the foreclosures, it is also the basis for all those trillions, quadillions, gazillions thrown at our face from morning to night.

    Basically, resources that existed 200 years ago in a space as limited as earth haven’t grown. it’s still the same amount of resources, simply transformed in finished products. So, the value it had 200 years, whether brut or finished, still is the same. Just because you use water (plentiful on this earth), pollute it beyond measure and end up throwing all kinds of (manufactured-from-earth-resources) crap into it to “purifiy” it doesn’t change the value it originally had. If there’s enough for all the inhabitants to drink, irrigate and take showers, it has little “value”, although it is priceless for us to survive on. Whatever you invested into it to fix what you caused doesn’t grant it more “value”. The value will increase only once you start running out (which shouldn’t happen. Even with ice caps melting, we have the technology to recuperate some of that water now in the rising oceans, desalt it, “purify” it and carry it where it is needed.)

    On this earth, nothing is created, nothing is destroyed, everything is transformed. First principle in chemistry. So, the “value” compared to humanity’s basic needs doesn’t increase or lower, so long as the “transformations” keep serving survival needs.

    All that finance crap is a bad mirage. in the meantime, more and more people suffer and go hungry. That is despicable. Not a species I am proud of belonging to…

  23. This fraud has been analyzed to death. It will never be righted because there is no champion for homeowners and the rule of law is now the biggest myth of all

    Welcome to serfdom 1012

  24. So what have the banksters overlooked? Do we have proof of the fraud in our hands and don’t know it? Is there a simple way to go after our rights?

  25. “Everything Built on Myth Eventually Fails”

    Yes, Neil…including your spin—ie. “investor lenders”…

    No such thing as “investor lenders”…nice myth…that will “eventually fail” because it’s NOT the truth. The security investors are NEVER the lender, NEVER the creditor…you know that.

  26. Yes Neil, I don’t doubt any of it. But, as with all good theories, it needs proof. How it it going to be proved? Will it be the action of Schneiderman and Co? Or will it be one of the lone wolf fighters of this battle? The documents of a fraud this huge must exist and the whistleblower to uncover it as well. Otherwise, it’s just another good, well reasoned conspiracy. I would sit in a windowless room for months reviewing documents for no pay if it would help uncover the truth. And that’s the truth!

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