Who Can Help Me with Mortgage Problems?

A number of people have been contacting me about the work of people other than my company that produces reports and analysis and expert witnesses and my law firm, Garfield, Gwaltney, Kelley and White based in Tallahassee.

My first rule is that I don’t attack or smear anyone who might provide some service that has any chance of helping someone with a consumer debt, mortgage problem, foreclosure etc. Everyone is invited to the party and with more than 5 million foreclosures behind us and another 5 million projected into the future, there is plenty of room for everyone to take a share of the market.

My second rule is that this should be a collaborative effort in which anyone with an idea should have a platform to put forth their ideas.

And my third rule is that I don’t recommend anyone unless I have seen their work, examined their credentials (education, licenses and experience) and discussed their approach with them. Their are many approaches that work for a while then stop working because the banks change their tactics in response. There are many legal theories that are correct but the Judges refuse to apply them. What is important is that you develop a strategy for NOW, with those tactics and strategies, defenses and causes of action that are getting traction with Judges.

CAVEAT: There are many people and companies that are offering bogus relief programs — some with a lot of cash to do advertising and marketing. Be careful and ask questions. If you must take their word for it because they have no historical presence in the bank scam arena be extra careful. What I mean is how have they been contributing to the assistance of distressed consumers and homeowners?

With that in mind, here are some general guidelines for who can help and who might be well intended but ineffectual in achieving a satisfactory result. People that might possibly be of assistance include the following:

  1. LAWYERS: Simply because in the final analysis these are legal problems that usually end up in court where rules of procedure and rules of evidence usually determine the outcome. Within this category are lawyers with foreclosure defense experience, bankruptcy lawyers, property lawyers, and civil litigation lawyers. Anyone without a lot of trial experience should only be used for advice.
  2. HUD COUNSELORS: often overlooked, these people have relationships with the banks that neither lawyers nor forensic examiners have and can often ferret out facts that might not be available even through the process of legal discovery. The good ones have a pretty good track record of settling or modifying loans. AND they usually have relationships with lawyers, real estate brokers, appraisers, investigators, mortgage brokers, hard money lenders. They are licensed and regulated the same as lawyers, brokers, appraisers, and investigators.
  3. FORENSIC ANALYSTS: Very few of the people who perform this work can claim any credentials as an expert witness whose credibility will be accepted by the court. But on the other hand they often have become very adept at ferreting out information of value to your lawyer or whoever is helping you.
  4. EXPERT WITNESSES: Almost anyone will be allowed to testify as an expert witness these days because the rules are so relaxed. But the Judge is not going to give their testimony any weight unless the expert can clearly explain the facts, opinions and conclusions in a compelling way. An expert witness who is not licensed in any relevant field, possessing no academic degrees relating to a relevant field, who has no experience in the relevant field (e.g. a current or former banker, investment banker, broker etc.) might be allowed to testify but nobody is listening. On the other hand, such a witness can testify as a FACT witness rather than an opinion witness as to the results of their forensic examination of the loan, assignments or current status of the alleged loan. There are very few expert witnesses who can testify as to all aspects of securitization but many who can testify as to parts of it. You might need more than one. Lastly, even an unqualified expert witness with little credibility might give you or your lawyer an idea that had escaped your attention so there is no harm in talking or consulting with someone, even if they appear on paper to have few attributes of an actual expert.
  5. BROKERS: REAL ESTATE AND MORTGAGE: Firstly, as licensed, educated, experienced individuals they command some attention. They might have their own agenda they are pushing but when asked the right questions they can be worth the fee if they are able to describe past and current practices and their opinion of certain transactions alleged by your opposition. Keep in mind that real estate and mortgage brokers have a stake in the marketplace — to keep things moving, buying and selling, borrowing and refinancing.
  6. APPRAISERS: Usually licensed and experienced with many years behind them, they can provide very helpful insights as to whether the property was really worth anywhere near the loan value and the current fair market value. They could be a key ingredient, where it applies, to showing that that the originator was not acting as a lender because custom and practice in the industry was to take a lower appraisal righter than a higher one and that custom and practice was to “go back to the well” several times where the market appeared volatile — all things that were absent in the “underwriting” practices of the time. It was the the appraisers in 2005 who warned of the coming catastrophe and many of them suffered by getting no business because they refused to sign off on an appraisal that was misleading.
  7. INVESTMENT BANKERS: Lots of them exist, very few are willing to testify. But they obviously know a lot of shocking details if they were involved in the bundling and sale of mortgages. But remember there are several moving parts in securitization and some investment bankers might know nothing of value to your case. Only a few people at the top truly know what happened to the money and what decisions were made as to fabrication of paperwork to cover up the misappropriation of funds, title and rights to enforce.
  8. MORTGAGE ORIGINATORS: Lots of them exist, few are willing to testify. But there are some. They can tell you that they were never at risk on the Loan” and how the money came from a source outside the circle of parties at the loan closing table. TILA and RESPA claims can be corroborated with their testimony as well as questions regarding title and thee right to enforce.
  9. WHISTLE-BLOWERS: Like “experts” anyone can claim to be one. But if the person has information that can be corroborated they can be an excellent guide through the maze of curtains and obstacles that currently prevent most borrowers from figuring out and proving what is really going on.
  10. LOAN MODIFICATION PROGRAMS: As greater regulation and enforcement is starting to get some traction, so has the possibility of modification or settlement. Keep in mind that with so many successful illegal foreclosures behind them, the banks are more likely to seek finality to the situation since we have passed the half way mark and the possibilities of liability for buy-backs and refunds are declining. Be careful about anyone who tells you that you should stop paying the payments — a strategic default is something you should thoroughly examine and research and get advice before doing it. That includes especially the banks who are doing that as a matter of policy. If you do enter into a modification program make sure that the end result is going to be a modification and not just another excuse to foreclose on you with more information about you than they had before. And make sure you clear up title as well as the debt. Without that you are raising the probability that you will be fighting title issues later in court.

There are no doubt many other types of people who can or want to help. I can only mention the ones I know about. Be careful and don’t let desperation get the better of you.

FOOTNOTE: I am besieged by people trying to bait me into a “discussion” where I defend the strategies and tactics I use and describe on my blog. I won’t enter into such a discussion for the same reason that a judge would ignore what an “expert” says who has no credibility and no credentials. The only place where I will defend is in court for the benefit of clients. If someone doesn’t like my views because they think it discredits them or their services, then maybe they should do more research into what they are doing.

Berating the Raters and Appraisers

“of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.”

Editor’s Note: What homeowners and their lawyers, forensic analysts, and experts need to realize is that the ratings scam on Wall street was only one-half of the equation in a scheme to defraud homeowners. If you don’t understand how an appraisal of a home is the same thing as the rating of the security that was sold to fund the home, then you are missing the point and the opportunity to do something meaningful for borrowers.

TILA and Reg Z make it clear that the LENDER is responsible for verification of the appraisal. The LENDER is responsible for viability of the loan, NOT THE BORROWER. IT’S THE LAW! Instead the media and Wall Street PR and lobbyists are drumming a myth into our heads — that 20 million homeowners with securitized loans cooked up a scheme to get a free house. Where did they meet?

We have ample evidence that the entire scheme depended upon reasonable reliance upon those who were in fact not reliable and who were lying to us. If you bought a house for $600,000, the odds are:

  • the house was actually worth less than $400,000
  • the appraiser put the value at $620,000
  • the rating agency called it a triple AAA loan
  • you thought the house was worth what you were paying
  • the house is now worth $300,000
  • your mortgage is at least $500,000
  • Even if you can afford the payments, you will not be able to sell your home for more than the amount owed on it until at least 15-18 years have passed.
  • You will not be able to sell your home for what you paid for at least another 25-30 years, and that is only with the help of inflation
  • Counting inflation, you will never sell your home for what you paid for it or the amount you thought it was worth when you refinanced it

Besides obvious violations of federal and state lending statutes it is pure common law fraud. You are now faced with options that go from bad to worse, UNLESS you sue the people who caused this and your lawyer understands the basic economics of securitization. Your opposition knows all of this. That is why the cases, for the most part ,never get to trial. These cases are won or lost in demanding discovery, enforcing your demands, and relentless pursuit of the truth.

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April 26, 2010
Op-Ed Columnist

Berating the Raters

Let’s hear it for the Senate’s Permanent Subcommittee on Investigations. Its work on the financial crisis is increasingly looking like the 21st-century version of the Pecora hearings, which helped usher in New Deal-era financial regulation. In the past few days scandalous Wall Street e-mail messages released by the subcommittee have made headlines.

That’s the good news. The bad news is that most of the headlines were about the wrong e-mails. When Goldman Sachs employees bragged about the money they had made by shorting the housing market, it was ugly, but that didn’t amount to wrongdoing.

No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.

The rating agencies began as market researchers, selling assessments of corporate debt to people considering whether to buy that debt. Eventually, however, they morphed into something quite different: companies that were hired by the people selling debt to give that debt a seal of approval.

Those seals of approval came to play a central role in our whole financial system, especially for institutional investors like pension funds, which would buy your bonds if and only if they received that coveted AAA rating.

It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job. It’s all too obvious, in retrospect, how this could have corrupted the process.

And it did. The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.

These skewed assessments, in turn, helped the financial system take on far more risk than it could safely handle. Paul McCulley of Pimco, the bond investor (who coined the term “shadow banks” for the unregulated institutions at the heart of the crisis), recently described it this way: “explosive growth of shadow banking was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out fake IDs.”

So what can be done to keep it from happening again?

The bill now before the Senate tries to do something about the rating agencies, but all in all it’s pretty weak on the subject. The only provision that might have teeth is one that would make it easier to sue rating agencies if they engaged in “knowing or reckless failure” to do the right thing. But that surely isn’t enough, given the money at stake — and the fact that Wall Street can afford to hire very, very good lawyers.

What we really need is a fundamental change in the raters’ incentives. We can’t go back to the days when rating agencies made their money by selling big books of statistics; information flows too freely in the Internet age, so nobody would buy the books. Yet something must be done to end the fundamentally corrupt nature of the the issuer-pays system.

An example of what might work is a proposal by Matthew Richardson and Lawrence White of New York University. They suggest a system in which firms issuing bonds continue paying rating agencies to assess those bonds — but in which the Securities and Exchange Commission, not the issuing firm, determines which rating agency gets the business.

I’m not wedded to that particular proposal. But doing nothing isn’t an option. It’s comforting to pretend that the financial crisis was caused by nothing more than honest errors. But it wasn’t; it was, in large part, the result of a corrupt system. And the rating agencies were a big part of that corruption.

Tourre: The CDO’s I Create Are “Pure Intellectual Masturbation”

“a ‘thing’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price.”

Editor’s Note: Think about it. The foundation of the supply of money that was pressure pumped into our economic housing system resulted in inflation of home appraisals.

  • It was so large that everyone thought the “market” was going up, when in fact it was going nowhere.

  • Everyone knew it except the homeowners who were tricked into relying upon “lenders” who had no stake in the transaction except to close it and collect their fee.

  • Under intense pressure from Wall Street consisting of the carrot of higher fees and the whip of unemployment if they didn’t comply, nearly everyone in the real industry on up to the securities industry was corrupted by this scheme.

  • And it was all based upon creating a scheme that was so complex, nobody could understand it or assess the value of what they were buying.
  • So front and center, the rating agencies and appraisers, both performing the same task, both violating the most basic standards of their “professions” gave credence to this intellectual exercise that far from pleasurable, brought the worst pain to the American soil since the Great Depression.
  • The supreme Irony is that they still have us under their spell. We have good people pointing the finger at other good people raising hell about how nobody should get a free house, while the fight itself is allowing just that — a free house to anyone who walks away with title or proceeds from a foreclosure sale of property “secured” by a securitized loan.
  • I have yet to see a single foreclosure sale where the party foreclosing had one dime at risk in the loan.

Fabulous Fab Tourre: The CDO’s I Create Are “Pure Intellectual Masturbation”

Gregory White | Apr. 25, 2010, 1:49 PM | 2,242 | comment 33

fabrice toureFabrice “Fabulous Fab” Tourre has bitten his tongue again, after it was revealed in an e-mail that he likened the debt instruments he created to, “pure intellectual masturbation,” according to the Times of London.

Other e-mails also revealed his distrust for the index many of his derivatives products were based on, the ABX, comparing it to “Frankenstein“, who famously turned on his inventor.

He also said that his creation was “a ‘thing’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price.”

While the SEC’s release of a full e-mail between Fabrice Tourre and his girlfriend did much to make the man look more sincere, these latest revelations will heap pressure on the Goldman Sachs market-maker as his Senate hearing looms.

Check out our top 20 winners and losers from the Goldman Sachs Case >

Blame the Lender not Yourselves or Each Other

WHEN WAS THE LAST TIME YOU HEARD ABOUT A BUNCH OF UNSOPHISTICATED, POORLY EDUCATED, SOMETIMES NON-ENGLISH SPEAKING PEOPLE SCATTERED OVER 50 STATES GETTING TOGETHER TO DEFRAUD THE POWERFUL FINANCIAL INDUSTRY ON WALL STREET?

  • We can all agree that there is enough blame to go around for everyone — from government and the financial industry, down to the mortgage brokers and borrowers.
  • But here is the essential question: do you want to sit around and arm-chair the game, or do you want to put a stop to it — because you can.
  • Do you want to wake up tomorrow morning and know that you helped some family stay in their home and that you are going to do it again today, or do you want to read more about declining home prices, no bottom, no credit available to expand the business you own or work for, no customers to buy your work product, your services or your products?

Many well-intended American patriots, believing in self-reliance as the core building block of American History have told me that they object to bailing out borrowers who got in over their heads using poor judgment or, even worse, intending to game the system. This is the current mantra of “conservatism” which if you think about it is certainly the bedrock of many American successes.

What’s wrong with applying these very good principles to the mortgage meltdown is that it attempts to force the facts into ideological beliefs which cannot accommodate our current reality. Put another way, people are seeing what they choose to believe regardless of the freely available facts.

It is easy to say that anyone in their right mind would read documents before they sign them. But when presented with an intimidating stack of papers at closing, virtually nobody reads those documents (even the lawyer who was hired to do the closing for the Buyer or the Seller). I know. I’ve been there. That is why the governmental authorities on the Federal and State Level required a consistent form of good faith estimate before closing and a standardized settlement form for the handling of the money (Truth in Lending Act and Respa, Hoepa etc.)

Under these laws, buyers/borrowers are required to be alerted by the lender and the mortgage broker and the real estate broker and the title agent and anyone else who knows the truth, that the terms of this loan are not what they appear on the face page of the documents where the signature and initials of the buyer/borrower appear. And none of these third party “fiduciaries/trustees” had any problem when they were really who they said they were. But when the “lender” became a conduit or a mortgage broker, when the mortgage broker became a loan officer for a particular bank, when the real estate broker became a salesperson for the mortgage broker, and when the appraiser became the agent of the “lender” to satisfy the real (but undisclosed) people who actually funded the “loan” — THAT is when the argument started.

And that is why everyone is suing everyone else. Not because of some nefarious plot by farmers who never heard of a “derivative” living in Montana, but because of people who work on Wall Street and who exerted unrelenting pressure to drop traditional loan underwriting standards in order to come up with more paper to sell (under equally false pretenses) to investors, some of whom were city governments in Europe who now must cut back on services their residents have relied upon for decades.

And the person who calls out those tax and spend liberals for wanting to bailout the borrowers in trouble is one of the many people who has not read his own documents from his own closing. He or she does not know how those documents could be used against them in ways that were never discussed or disclosed prior to or at closing. He or she doesn’t know that deep within the fine print of the note, the mortgage or both are provisions that allow the lender to increase your monthly payment, impose extra fees, force-place insurance (even what you already have it), increase the interest rates, increase the principal, and leave the payment of insurance and taxes to you instead of escrowing that money through an escrow payment to the mortgage servicer.

That person who calls out for “NO BAILOUTS” is probably sitting with a mortgage on record, the rights to which have been parsed up and transferred out to multiple third parties. But he doesn’t know that because he hasn’t checked. He or she is now paying a mortgage service provider that in 65% of the cases doesn’t have any right to collect money from the borrower because the revenue from the note payments was also parsed out and transferred to multiple parties, then parsed and packaged again and transferred again to multiple parties, and then re-packaged with cross guarantees with the mortgage or note of other people the borrower never met, and then pledged to some investor to protect and guarantee that investor a rate of return that exceeds the payments received from the borrower.

That person doesn’t realize that even he or she “played by the rules” the way everyone should, he or she has been paying their mortgage payments to a nominee who has no right to the payments, and that the people who at least think they are entitled to those payments are not receiving them now.

Mr. and Mrs. conservative have now placed themselves in a position where multiple third parties can sue him or her for payments that he or she already made — and they are screaming against the people who have set out to protect them from that problem. It is the people you are yelling at, who are clearing up a title problem that will prevent you from ever selling your house. These same people are, without ever knowing you, are protecting you from having to deal with more than one person or entity claiming you owe the full balance of your mortgage to both of them.

And sorry folks, this isn’t technical legal beagle stuff designed to get stupid consumers out of deals they should never have gotten into. This is real. And people just like you are losing their homes, their hopes, their families, and their savings through this intricate PONZI scheme invented by Wall Street “creative financiers.”

If you are a true conservative it is perfectly clear that you seek to conserve something — probably American values, American lifestyle and American ideals. But this Ponzi scheme conserved nothing and destroyed everything in its path. It didn’t just target the poor and disenfranchised that you feel should work harder to climb the American ladder of success.

It gave the “gotcha” to EVERY borrower (without exception) who took on a mortgage from 2001 to 2008. It doesn’t matter if you took a fixed rate 15 year mortgage or a variable rate, adjustable, negative amortization 30 year mortgage of the 2/28 or 3/27 variety et al. It now has resulted in the largest decline in the sale price, saleability and home equity in American history. Do you really think that such a disparate group, dispersed over the millions of square miles constituting the greatest country on earth, could have pulled this off?

The entire world financial market functions solely on trust and confidence. Do you really think that Wall Street and main Street Bankers did not understand the risk of the financial products that they, not the borrowers, created?

And who do you think cares most about the fact that your neighborhood, through action or fault of your own, is declining with  vandalism, renters, deferred maintenance homes and tumbling home equity? Certainly not the professional “conservers” or who call themselves conservatives. After all, it was they who created the financial “products” that resulted in this mess.

We can all agree that there is enough blame to go around for everyone — from government and the financial industry, down to the mortgage brokers and borrowers. But here is the essential question: do you want to sit around and arm-chair the game, or do you want to put a stop to it — because you can. Do you want to wake up tomorrow morning and know that you helped some family stay in their home and that you are going to do it again today, or do you want to read more about declining home prices, no bottom, no credit available to expand the business you own or work for, no customers to buy your services or products?

If you really want to conserve basic American values of hard work, honesty, savings, and good citizenry, then you should be at the head of the line demanding accounting and correction for the institutionalized lying of investment bankers, “banks” that hold themselves out as lenders but take no risk, mortgage brokers who hold themselves out as the expert upon whom the borrower can rely but get paid bonuses for getting the borrower to sign papers that include prepayment penalties, and government regulators who pretend to reign in excessive predatory practices, while they receive personal and private “donations” to look the other way.

If you really want to conserve the economic values, your nest egg, that you have worked all these years to build and protect it against the continued decline of the value of the American currency, and the hyper-inflation of basic commidty prices upon which you depend, then you will join the growing grass roots movements of concerned citizens of all ideologies including borrowers and professionals who seek to stop the freight train of foreclosures, the creation of 10-12 month inventory supplies of homes, and tell the world, we are as good as we say we are — that we make mistakes but we correct them because we stand for truth, justice, and honesty and that the American way is still an ideal worth looking to when modeling a new society or correcting an old one.

Mortgage Banking Meltdown AND Foreclosure Defense: Who Are the Victims?

When was the last time you heard of a crowd of debt-ridden consumers cornering the finance market and playing with the economy at their leisure?

THE WALL STREET GENIUSES HAD CREATED THIS MONSTER AND THE ONE ENTITY THAT WAS SUPPOSED TO HAVE THE VANTAGE POINT OF SEEING THE BIG PICTURE AND THE NEED TO REIN IN SOME PRACTICES WHILE ENCOURAGING OTHERS WAS GOVERNMENT. INSTEAD CONGRESS PASSED THE REMIC STATUTE, REGULATORS TURNED A BLIND EYE AND GREENSPAN AT THE FEDERAL RESERVE GAVE HIS STAMP OF APPROVAL ON THE WORST GROUP OF FINANCIAL PRACTICES TO HIT THE MARKET IN OVER ONE HUNDRED YEARS. 

In the smug circles of regulators and big finance, a myth is being propogated that the mortgage mess, the credit crisis and the bank failures together with 100 year old investment firms is all or mostly the fault of either speculators who got what they deserved or greedy home buyers who should have known better. Actually that is not true. Everyone is victim here and only a handful of people are really responsible.

Most of the loans were refi’s, so the argument that retail home buyers had eyes bigger than their pocket books, is simply not supported by the numbers. But as I have said in past blogs on public policy — the longer we wait to address the fundamentals of this situation the worse it is going to get. Everyday, a little more news shows that the numbers are growing. 

Very few of the loans were to speculators, but of these so-called “speculators” were 95% the victim of boiler room identify theft operations that gave the victim the idea he/she was a real estate investor when in fact, they had just sold their identities.

THE REAL FRAUD HERE IS INFLATION OF VALUE ABOUT WHICH NEITHER THE BUYER OF REAL ESTATE NOR THE BUYER OF ASSET BACKED SECURITIES HAD ANY KNOWLEDGE OR EXPERIENCE. THE METHOD WAS THE SAME ON BOTH ENDS — A GROUP OF SHARKS ON THE HOME BUYER SIDE PROVIDING “APPRAISALS” AND OFFICIAL LOOKING DOCUMENTS LEAVING THE BUYER WITH AN INVESTMENT THAT WAS NOT WORTH 75% WHAT HE/SHE PAID.

AND ON THE OTHER SIDE A GROUP OF SHARKS ON THE INVESTMENT SIDE, ) MONEY MANAGERS LOOKING OVER THE MONEY OF PEOPLE ON PENSIONS OR INVESTED IN MUTUAL FUNDS, OR CITY GOVERNMENTS AND CORPORATIONS PRUDENTLY EARNING INTEREST ON CASH THEY DID NOT YET NEED), PROVIDING “APPRAISALS’ (RATINGS) AND OFFICIAL LOOKING DOCUMENTS LEAVING THE BUYER AND ALL THE MILLIONS PEOPLE AFFECTED BY THE BUYER’S INVESTMENT DECISION WITH AN INVESTMENT THAT WAS NOT WORTH, IN SOME CASES, EVEN 1% OF WHAT HE/SHE PAID.

CONTROL OVER THE ENTIRE SCHEME WAS EXERCISED FROM THE BOARD ROOMS OF WALL STREET WHERE FINANCIAL INCENTIVES AND COERCION (DO IT OUR WAY OR YOU CAN’T BE PART OF THE “TEAM”) WHO UNDERSTOOD PERFECTLY WELL THAT THE HOMES WERE OVER-APPRAISED, THAT THE BORROWER’S ABILITY TO PAY WAS NEAR ZERO IN MANY CASES, AND THAT UNDERWRITING STANDARDS LIKE INCOME VERIFICATION, AND SERVICING STANDARDS LIKE PAYMENT OF TAXES AND INSURANCE, WERE COMPLETELY ELIMINATED.

THEY DIDN’T CARE BECAUSE THEY HAD “PARSED” THE RISK OUT TO A MULTITUDE OF UNRELATED PEOPLE WHO WERE VERY UNLIKELY TO GET TOGETHER AND ALL SUE AT ONCE. AND WITHOUT ALL OF THEM, THERE WOULD, IN LEGAL PARLANCE, BE AN ABSNECE OF NECESSARY AND INDISPENSAABLE PARTIES, THUS CREATING A BARRIER TO ACCESS TO THE COURTS FOR EVEN WELL-FUNDED PLAINTIFFS, LET ALONE BORROWERS FOR HOME MORTGAGES THAT HAD BEEN TAPPED OUT AND MAXED OUT ON CREDIT.  

In the shadows of the real world of finance, away from the public eye are numerous securities exchanges, currency exchanges, and entities acting like banks and agents of banks that are completely unregulated, off the radar, and serve as the loci of virtually all the manipulation that screws consumers and insures dominance and power to a select few.  

Look up ICE for example and you will find that it is something more than cold water that cools your drinks. It is the place where oil prices are manipulated by as much as 50% — that’s right double — where currency and money supply is generated at the price of downgrading the money in our pockets, and where schemes are hatched that take on the illusion of legal, ethical business while they bend, break, change laws to provide immunity for past acts or legitimacy for future acts that ANYONE would know are wrong in that those acts are against the interests of our society. 

When was the last time you heard of a crowd of debt-ridden consumers cornering the finance market and playing with the economy at their leisure?

Or is it more likely that the couple in Maryland was duped by high pressure, slick sales tactics into purging their entire life savings of $400,000 (including $150,000 from the medical trust fund for the ill son) and getting a mortgage that they could not possibly afford, but which was explained to them in a way that made it seem plausible.

Or maybe it is more likely that a retired community college administrator who bought and paid for his house in San Diego in 1972, added improvements, maintained it immaculately, and was making out just fine in retirement, was fooled into multimillion dollar refi’s to purchase rental property $1500 miles away, which he lost and is now faced with loss of a home with equity enough to secure what would have been his retirement?

Maybe it is more likely that Wall Street found a new toy in complex finance instruments that even the creators didn’t totally understand, increased money liquidity by a factor of 1,000 and was awash in money that needed to be placed somewhere or else they would be charged with fraud for taking investments when they had nothing. So maybe these Wall Street people had too much “inventory” (money) and put maximum pressure and illegal incentives to people downline — “lenders”, appraisers, mortgage brokers, real estate brokers, and title agents to get deals closed no matter what they had to do or say. 

Sure there were some people who were gaming the system. Not on the scale that the Wall Street tycoons were gaming the system, but nonetheless some people were “playing.”

THE WALL STREET GENIUSES HAD CREATED THIS MONSTER AND THE ONE ENTITY THAT WAS SUPPOSED TO HAVE THE VANTAGE POINT OF SEEING THE BIG PICTURE AND THE NEED TO REIN IN SOME PRACTICES WHILE ENCOURAGING OTHERS WAS GOVERNMENT. INSTEAD CONGRESS PASSED THE REMIC STATUTE, REGULATORS TURNED A BLIND EYE AND GREENSPAN AT THE FEDERAL RESERVE GAVE HIS STAMP OF APPROVAL ON THE WORST GROUP OF FINANCIAL PRACTICES TO HIT THE MARKET IN OVER ONE HUNDRED YEARS. 

Look up amnesty in the search box and you’ll see we predicted all this and we proposed a solution. Nobody is interested because the bankers are covering their behinds, the Wall Street people are trying to stay out of jail, and the appraisers are hiding under rocks along withe rating agencies who were paid off to give inappropriate ratings to asset-backed securities.

We maintain here now as we did before that this crisis is far greater that the numbers released thus far. Derivative securities are approaching $600 trillion which is more than 10 times all the money in the world. Instead of arresting people and suing people and arguing political ideology, we should be fixing the problem. And that starts with using all the resources and channels we have including the people who started this mess. I favor amnesty for EVERYONE in the process conditioned on their cooperation on putting the market right-side up.

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Brokers threatened by run on shadow bank system

Regulators eye $10 trillion market that boomed outside traditional banking

By Alistair Barr, MarketWatch
Last update: 6:29 p.m. EDT June 19, 2008
SAN FRANCISCO (MarketWatch) — A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
Big brokerage firms like Goldman Sachs (GS Lehman Brothers (LEH ) Merrill Lynch (MER , which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn’t have reliable access to short-term borrowing during times of stress.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
“The shadow banking system model as practiced in recent years has been discredited,” Ramin Toloui, executive vice president at bond investment giant Pimco, said.
Toloui expects greater regulation of big brokerage firms which may face stricter capital requirements and requirements to hold more liquid, or easily sellable, assets.
‘Clarion call’
“The bright new financial system — for all its talented participants, for all its rich rewards — has failed the test of the market place,” Paul Volcker, former chairman of the Federal Reserve, said during a speech in April. “It all adds up to a clarion call for an effective response.”
Two months later, Timothy Geithner, president of the Federal Reserve Bank of New York, and others have begun to answer that call.
“The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system,” he warned in a speech last week. That “made the crisis more difficult to manage.”
On Thursday, Treasury Secretary and former Goldman Chief Executive Henry Paulson said the Fed should be given the authority to collect information from large complex financial institutions and intervene if necessary to stabilize future crises. Regulators should also have a clear way of taking over and closing a failed brokerage firm, he added. See full story.
Banking bedrock
The bedrock of traditional banking is borrowing money over the short term from customers who deposit savings in accounts and then lending it back out as mortgages and other higher-yielding loans over longer periods.
The owners of banks are required by regulators to invest some of their own money and reinvest some of the profit to keep an extra level of money in reserve in case the business suffers losses on some of its loans. That ensures that there’s still enough money to repay all depositors after such losses.
In recent decades, lots of new businesses and investment vehicles have evolved that do the same thing, but outside the purview of traditional banking regulation.
Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again. And rather than offering home loans, these entities buy mortgage-backed securities and other more complex securities.
A $10 trillion shadow
By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed’s Geithner.
Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said.
Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007.
Hedge funds held another $1.8 trillion, bringing the total value of asset in the “non-bank” financial system to $10.5 trillion, he added.
That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said.
“These things act like banks, but they’re not.”
— James Hamilton,
Economics professor
While acting like banks, these shadow banking entities weren’t subject to the same supervision, so they didn’t hold as much capital to cushion against potential losses. When subprime mortgage losses started last year, their sources of short-term financing dried up.
“These things act like banks, but they’re not,” James Hamilton, professor of economics at the University of California, San Diego, said. “The fundamental inadequacy of their own capital caused these problems.”
Big brokers targeted
Geithner said the most fundamental reform that’s needed is to regulate big brokerage firms and global banks under a unified system with stronger supervision and “appropriate” requirements for capital and liquidity.
Financial institutions should be persuaded to keep strong capital cushions and more liquid assets during periods of calm in the market, he explained, noting that’s the best way to limit the damage during a crisis.
At a minimum, major investment banks and brokerage firms should adhere to similar rules on capital, liquidity and risk management as commercial banks, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on Wednesday.
“It makes sense to extend some form of greater prudential regulation to investment banks,” she said.
Separation dwindled
After the stock market crash of 1929, the U.S. Congress passed laws that separated commercial banks from investment banks.
The Fed, the Office of the Comptroller of the Currency and state regulators oversaw commercial banks, which took in customer deposits and lent that money out. The Securities and Exchange Commission regulated brokerage firms, which underwrote offerings of stocks and corporate bonds.
This separation dwindled during the 1980s and 1990s as commercial banks tried to push into investment banking — following their large corporate clients which were selling more bonds, rather than borrowing directly from banks.
By 1999, the Gramm-Leach-Bliley Act rolled back Depression-era restrictions, allowing banks, brokerage firms and insurers to merge into financial holding companies that would be regulated by the Fed.
Commercial banks like Citigroup Inc. (C, Bank of America (BACand J.P. Morgan Chase (JPMsigned up and developed large investment banking businesses.
However, big brokerage firms like Goldman, Morgan Stanley and Lehman didn’t become financial holding companies and stayed out of commercial banking partly to avoid increased regulation by the Fed.
Run on a shadow bank
The Fed’s bailout of Bear Stearns in March will probably change all that, experts said this week.
Bear, a leading underwriter of mortgage securities, almost collapsed after customers and counterparties deserted the firm.
It was like a run on a bank. But Bear wasn’t a bank. It financed a lot of its activity by borrowing short term in repo and commercial paper markets and couldn’t borrow from the Fed if things got really bad.
Bear’s low capital levels left it with highly leveraged exposures to risky mortgage-related securities, which triggered initial doubts among customers and trading partners.
The Fed quickly helped J.P. Morgan Chase, one of the largest commercial banks, acquire Bear. To prevent further damage to the financial system, the Fed also started lending directly to brokerage firms for the first time since the Depression.
“They stepped in because Bear was facing a traditional bank run — customers were pulling short-term assets and the firm couldn’t sell its long-term assets quickly enough,” Hamilton said. “Rules should apply here: You should have enough of your own capital available to pay back customers to avoid a run like that.”
Bear necessity
A more worrying question from the Bear Stearns debacle is why customers and investors were willing to lend money to the firm in the absence of an adequate capital cushion, Hamilton said.
“The creditors thought that Bear was too big to fail and that the government would step in to prevent creditors losing their money,” he explained. “They were right because that’s exactly what happened.”
“This is a system in which institutions like Bear Stearns are taking far too much risk and a lot of that risk is being borne by the government, not these firms or the market,” he added.
The Fed has lent between $8 billion and more than $30 billion each week directly to brokerage firms since it set up its new program in March. Most experts say this source of emergency funding is unlikely to disappear, even though it’s scheduled to end in September.
“It’s almost impossible to go back,” FDIC’s Bair said on Wednesday.
With taxpayer money permanently on the line to save big brokers, these firms should now be more strictly regulated to keep future bailouts to a minimum, Bair and others said.
“By definition, if they’re going to give the investment banks access to the window, I for one do believe they have the right for oversight,” Richard Fuld, chief executive of Lehman, told analysts during a conference call this week. “What that means, though, particularly as far as capital levels or asset requirements, it’s way too early to tell.”
Super Fed
Next year, Congress likely will pass legislation forcing big brokerage firms to be regulated fully by the Fed as financial holding companies, Brad Hintz, a securities analyst at Bernstein Research and former chief financial officer of Lehman, said.
Legislators will probably also call for tighter limits on the leverage and trading risk taken on by large brokers, while demanding more conservative funding and liquidity policies, he added.
Restrictions on these firms’ forays into venture capital, private equity, real estate, commodities and potentially hedge funds may also follow too, Hintz warned.
This may undermine the source of much of the surging profit generated by big brokerage firms in recent years.
A newly empowered “super Fed” will likely encourage these firms to arrange longer-term, more secure sources of borrowing and even promote the development of deposit bases, just like commercial and retail banks, the analyst explained.
This will make borrowing more expensive for brokerage firms, undermining the profitability of businesses that require a lot of capital, such as fixed income, institutional equities, commodities and prime brokerage, Hintz said.
Such regulatory changes will cut big brokers’ return on equity — a closely watched measure of profitability — to roughly 15.5% from 19%, Hintz estimated in a note to investors this week.
Lehman and Goldman will be most affected by this — seeing return on equity drop by about four percentage points over the business cycle — because they have larger trading books and greater exposure to revenue from sales and trading. Goldman also has a major merchant banking business that may also be constrained, Hintz added.
Morgan Stanley and Merrill Lynch (MER

will see declines of 3.2 percentage points and 2.2 percentage points in their return on equity, the analyst forecast.

If you can’t beat them…
Facing lower returns and more stringent bank-like regulation, some big brokerage firms may decide they’re better off as part of a large commercial bank, some experts said.
“If you’re being regulated like a bank and your leverage ratio looks something like a bank’s, can you really earn the returns you were making as a broker dealer? Probably not,” Margaret Cannella, global head of credit research at J.P. Morgan, said.
Regulatory changes will be unpopular with some brokerage CEOs and could result in a shakeup of the industry and more consolidation, she added.
Hintz said the business models of some brokerage firms may evolve into something similar to Bankers Trust and the old J.P. Morgan.
In the mid 1990s, Bankers Trust and J.P. Morgan relied more on deposits and less on the repo market to finance their assets. They also operated with leverage ratios of roughly 20 times capital. That’s lower than today’s brokerage firms, which were levered roughly 30 times during the peak of the credit bubble last year, according to Hintz.
However, both firms soon ended up in the arms of more regulated commercial banks. Bankers Trust was acquired by Deutsche Bank (DBin 1998. Chase Manhattan Bank bought J.P. Morgan in 2000. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.
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