Editor’s Note: State Treasurers and Finance Directors are realizing that their own jobs are on the line when the voters go to the polls. While avoiding the third rail of wrongful and illegal foreclosures, the trading in illegal and fraudulent instruments, states can no longer avoid the reaction from those who marshal the the state’s financial resources. LIBOR has been manipulated for what appears to be at least 15 years and perhaps longer. It was easy to do considering the “trust” that Banks talk about all the time and which enable them to get the upper hand in foreclosure litigation where they are getting the benefit of the doubt.
The fall out from this is that you finally have experienced personnel sifting through data that makes other state officials go to sleep. They are discovering losses caused by the manipulation of LIBOR, the most prominent benchmark index for lending rates in the world. The deeper they dig, the closer they will get to another inconvenient truth. Whether they broadcast the results or not, they will be moving perilously close to the stonewall that currently protects the freedom of bankers in creating the largest Ponzi scheme in human history, which, by the way, is still going on.
Securitization as it has been described to both investors, regulators and legislatures was (like LIBOR) a big fat lie. The result could well upset thousands of government liens as well as having deprived the governments of revenue to which they were entitled. Just as in the LIBOR scandal all the outward appearances of propriety were visible, the dark ugly truth is simply that bankers were stealing the money from pension funds, putting into their own pockets, and using a little to fund mortgages. When they did the fund the mortgages, they completely ignored the securitization “structure” that had been described in the prospectus and pooling and servicing agreement.
These descriptions were used to get fund managers for pension funds to buy bogus, worthless mortgage bonds and together the bonds and descriptions were used to get ratings of the securities, insurance and trading profits from the bonds, the loans, credit default swaps and other exotic vehicles.
There is no need to unravel securitization because it never happened. The investor money was controlled by the investment banks, not by “trustees” of common law trusts whose assets were loans. The banks played the role of commercial banks in funding the loans and directed that the lender be a party other than the lending source — so people started making stuff up and tracking it in the make-believe world of MERS title transfer system. The reason Wall Street needed the note and mortgage to avoid making the real source of lending was because they were stealing the money, trading with the money for their own accounts, instead of for the pension funds.
Like any embezzler starting a Ponzi scheme, Wall Street “borrowed” the money from the investors in “mortgage bonds.” There were no mortgage bonds, there were no pools, there were no loan receivable accounts, and thus no valid note that was evidence of the obligation that was owed to the pension funds (unknown to the borrower). With no valid note, the security relied upon by the pension funds also never existed. A perfected lien could not be established without the payee on the note funding the loan. It never happened.
When all is said and done, the pension funds have claims against the bankers, AND they are the only creditors who can and should expect payment from the borrowers — but without a note or mortgage or deed of trust. And the pension funds’ agents who received money from trading, insurance, credit default swaps and other sources present a new problem to the pension fund investors in mortgage-backed securities. The receipt of those funds by their agents although never turned over to the creditors, is due the creditor. Thus the bond principal is reduced.
With the bond principal reduced, the creditor’s account receivable is correspondingly reduced because the pension fund is only entitled to be repaid once. Hence my prior statements that the entire loan receivable account, if it even exists, must be examined starting with the origination of the loan through the present. The reductions at the creditor level in the TOTAL account receivable inure to the benefit of the borrowers whose principal has been paid by co-obligors that the borrower never knew existed and may well have never wanted to partner with. But those payments were paid and received.
Allowing those same intermediary banks to foreclose “borrowing” the name of some non-existent trust with a non existent bank account is where the windfall, the free house rears is head — not as has been presupposed to the borrower homeowner who still owes the money to someone.
If that balance is forgiven the homeowner has received a benefit — a taxable benefit that could be recouped in the existing income tax structure with installment payments with an even stronger lien than the mortgage lien that never was perfected. State and Federal Treasuries would be replenished, the middle class on the road to recovery, and consumer confidence was break through the roof with at least some of their wealth restored. This is not a free ride for homeowner borrowers. The free ride is for the bankers who pay nothing in off-shore tax havens on the proceeds of loans they neither funded nor purchased except with money stolen from pension fund managers.
The devil is in the details. The current Libor investigation can reveal not only illegal trading that resulted in losses to state treasuries but also losses to both the state treasuries and the homeowners whose loans were set, even at fixed rate, based upon Libor. This “game” is far from over.
The only way the bankers can avoid jail is the time-honored way of continuing the Ponzi scheme until you can’t. That is what is happening and that is exactly what is close to being revealed. And those revelations might end up replacing at least some substantial return of the wealth stolen from pension funds, homeowners, state treasuries and other agencies for fees, fines, interest and penalties. When we get to the point where the realization becomes generally accepted that the documents were all lies, fabricated out of thin air and the recorded, then we start getting into concrete areas where criminal laws apply.
Banks Face Suits as States Weigh Libor Losses
The scandal over global interest rates has state officials like Janet Cowell of North Carolina working intensely behind the scenes to build a case for suing the nation’s largest banks.
Ms. Cowell, the state’s elected treasurer, and several of her staff members have spent the summer combing through the state’s investments trying to determine how much the state may have lost because of suspected manipulation of the London interbank offered rate, or Libor, which is used as a benchmark for trillions of dollars of financial contracts around the world.
“We think this could be as big as the mortgage crisis settlement, that this could be a really high impact situation and that we should be aggressive on this,” Ms. Cowell said, referring to the $25 billion settlement that the nation’s biggest banks entered with state attorneys general.
The activity provides a glimpse at how widely the Libor scandal has spread through the financial world, and how much damage may still be in store for the banks accused of manipulating Libor. Her work also suggests just how difficult it is, and how long it may take, to get to the bottom of the losses.
The attorneys general in Maryland, Massachusetts, New York and Connecticut have all been examining how much their states may have lost as a result of a lowered Libor. A spokeswoman for Connecticut’s attorney general, George C. Jepsen, said that the state’s work with New York’s attorney general, Eric T. Schneiderman, “has broadened significantly over the last few weeks and we are now coordinating with a much larger group of attorneys general.”
Even before the British bank Barclays admitted in June that its employees had tried to manipulate Libor, there were a number of lawsuits filed by cities and municipal agencies seeking damages from large banks for manipulating Libor. But while those cases were filed by private sector lawyers, the public officials are looking at bringing more wide-ranging lawsuits on behalf of the states. The Justice Department has coordinated with the states and is leading its own investigation.
The government officials are hoping that their cases will be bolstered by new settlements between regulators and individual banks that are suspected of participating in the manipulation. Most of the more than one dozen banks involved in setting Libor have said in official filings that they are in discussions with regulators about their involvement in the Libor process.
Libor is supposed to represent how much banks are paying for short-term loans from other banks. It is determined by the British Bankers Association after a daily poll of the world’s largest banks. It then serves as a benchmark for rates paid by consumers and businesses on everything from mortgages to derivatives to student loans.
Barclays said in its settlement that it and other banks pushed Libor down artificially during the financial crisis to appear more healthy. Barclays also admitted that its traders tried to manipulate Libor at other points in order to sweeten particular financial deals. Barclays paid $450 million to settle the charges.
The financial products used by states and local governments are especially vulnerable to an artificially lowered rate.
Ms. Cowell, a 44-year-old Democrat and former business consultant who is running for another four-year term, was aware of the potential implications of the Libor case for North Carolina almost as soon as the Barclays settlement was announced on June 27. The next Monday, at her weekly staff meeting, she asked her office’s lawyers and investment officers to begin looking into it.
The inquiry has focused primarily on two areas of the state’s finances.
One was the state’s public pension plans, which in North Carolina are overseen by the treasurer. A state money manager began identifying bonds held by the state pension fund and money market fund investments that derived their value from Libor.
In July, lawyers from the treasurer’s office took part in a conference call on the topic with pension funds in other states. Ms. Cowell and members of her staff have found a few investments held by the $76 billion pension fund that were tied to Libor, but they have now determined that the losses were most likely “pretty small.”
The other, more significant area where Ms. Cowell began looking for losses was in a kind of financial contract that many states use, known as an interest rate swap. States use swaps when they want to issue a bond at a floating interest rate but protect themselves from future swings in rates. In a standard swap, a state makes a regular payment to its bank and gets a payment back that is determined by the level of Libor. If Libor was lower, the payments will be, too.
North Carolina had two major swaps at the time the benchmark was suspected of being rigged. Together, the two swaps were tied to $1.3 billion of bonds that were issued in 2002 and 2005. The banks on the other side of these contracts included Bank of America, of Charlotte, N.C., and JPMorgan Chase & Company based in New York, both of which are involved in setting Libor.
The challenge facing North Carolina and other states is that there is no agreement yet on how much the banks actually manipulated Libor, and for how long. The lawsuits that have already been filed have estimated that the banks held Libor down by at least 30 basis points, or 0.30 percent, for three years. By one method of calculation, that could have meant losses for North Carolina of around $10 million on their swaps.
Ms. Cowell said she assumed that as more banks settled with regulators, those numbers would become clearer. In the meantime, the treasurer’s office is working out formulas for losses that they can plug numbers into if and when new settlements are made public. At that point, Ms. Cowell also plans to share her work with other municipal agencies in North Carolina that held about 40 swaps during the period in question.
“This is an unprecedented level of analysis, and an unprecedented wide spectrum of financial impact,” Ms. Cowell said.
The inquiry could provide a political bump for Ms. Cowell, who is seeking another term as anti-Wall Street sentiment is running high. A graduate of the Wharton School of Business, she served on the Raleigh, N.C., City Council and then the state Senate before taking office in 2008. She cites among her accomplishments the state’s maintaining its status as one of eight with a AAA rating from the major credit rating agencies.
North Carolina’s attorney general will make the final determination on whether the state will join existing lawsuits, proceed with its own case or take no action at all. The attorney general’s office did not respond to requests for comment.
But the office has been involved in many of the discussions with the treasurer’s staff, people involved in the meetings said.
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Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: account receivable, bailouts, credit default swaps, insurance, Libor, loan receivable, pension funds, securitization, state treasurer | 2 Comments »
