Barofsky Challenges Geithner Doctrine: Crushing the Bank Oligopoly

Posted on February 8, 2013 by Neil Garfield

See Financial Times for full article

Editor’s Comment: Barofsky’s characterization of the Geithner doctrine is accurate and appalling at the same time. The decision was made across the board that the stability and illusion of financial health on Wall Street was and is more important than anything else is what led to a prolonged recession and, from the reports being published it could be another 10-20 years before we work our way out of this mess.

President Obama made TRUTH a cornerstone of his campaign but the public wasn’t told the truth at any point. In fact the government was actively complicit in creating illusion and fraud. In doing so, they have created a precedent that will inevitably lead to bank behavior that will escalate the fraud and the damage on the world’s economies.

A creature of Wall Street, Geithner assumed that the money making machines on Wall Street were essential to stabilizing the financial system. He merely took over where Hank Paulson left off. At the point where the investment banks were converted to commercial banks, THAT was the time to strike with receivers, resolution of the megabanks that were holding trillions out of the U.S. economy and doing the same around the world.

The assumption by Paulson was that with a capital infusion the banks would lend more thus propping up the economy. It never happened. Instead people got notices in the mail freezing their home equity lines of credit and lowering their borrowing limits on all sorts of loans including credit cards. If the proof is in the pudding, then Geithner and Paulson were dead wrong.

The fraud extended from the closing tables where fictitious loans were documented and real loans were undocumented, to the diversion of investor money from the investment pools and to the investment banks. In short, the money was sucked out of the economy and the government, regulators and courts are either not doing doing anything about it, or making it easier for banks to get away with it, encouraging the moral hazard that occurs when greed fails to meet consequences.

The devastating effects on millions of homeowners and tens of millions of consumers, social services and taxpayers are not even on the table. Victims of fraud, pension funds, sovereign wealth funds, and individual retirement funds were stuck paying for Wall Street lies.

The same fraud — appraisal fraud, ratings fraud, and fraud in the inducement, fraud in the execution occurred with each of the borrowers, who never saw the benefit of the bargain they thought they had reached with what turned out to be a series of nominees (fictitious lenders). The Geithner doctrine stopped the government from intervening, stopped anything that smelled of restitution for the pension funds, dismissed the claims and losses of homeowners as though they didn’t matter and prevented an influx of wealth and capital that was badly needed by the economy.

The problem is that the central bankers have been scared into accepting a shadow banking system that is literally ten times the size of the real banking system. It’s a lie 10:1. The banks we call healthy are in fact subject to closure and receivership because the assets they are showing on their balance sheets are not worth nearly what they are reporting — and they never will be unless we all expand the money supply by ten times the current world monetary supplies.

But the existence of another curative solution is systematically disregarded on “moral”or “practical grounds.” Following the law, the banks should be forced into receivership if they don’t have the capital necessary to stay open, based upon the inflated values that started with appraisal fraud and ratings fraud, and now is sitting in bank balance sheets as accounting fraud.

By clawing back as much money as possible for investors in the bogus mortgage bonds, the amount owed to the investors would be reduced by payment instead of loss. And account receivables to each investor would be correspondingly reduced. And the accounts payable by the borrowers would be correspondingly reduced due directly to payment instead of forgiveness. It is simple arithmetic.

The banking oligopoly would be crushed and government could go back to being influenced by much smaller competing special interests. The pensioners would be assured that their pensions will keep coming, and homeowners could be restored to their homes or and possibly receive cash payments or credits for payment on the accounts receivable thus providing an enormous fiscal stimulus to an economy that is 70% based upon consumer spending.

If I understand this, along with Neil Barofsky and a gaggle of economists and financiers, why won’t the government even consider it?

Neil Barofsky: Geithner Doctrine Lives on in Libor Scandal

By Neil Barofsky, the former special inspector-general of the troubled asset relief programme and is currently a senior fellow at NYU School of Law. He is the author of ‘Bailout’, released in paperback this week.

Now that Tim Geithner has resigned as US Treasury secretary, it is time to survey the damage wrought from four years of his approach to the financial crisis. The “Geithner doctrine” made the preservation of the largest banks, no matter the consequences, a top priority of the US government. Aside from moral hazard, it has also meant the perversion of the US criminal justice system. The US faces a two-tiered system of justice that, if left unchecked by the incoming Treasury and regulatory teams, all but assures more excessive risk-taking, more crime and more crises. (e.s.)

The recent parade of banking scandals, such as the manipulation of Libor rates by Barclays, Royal Bank of Scotland and other major banks, can be traced back to the lax system of regulation before the financial crisis – and the weak response once disaster struck.

Take the response of the New York Federal Reserve to Barclays’ admission in 2008 that it was submitting false Libor rates and was not alone in doing so. Mr Geithner’s response was to in effect bury the tip. He sent a memo to the Bank of England suggesting some changes to the rate-setting process and then convened a meeting of regulators where he reportedly described only the risk but not the actual manipulation of the rate. He then put the government imprimatur on the rate via bailout programmes. His inaction helped permit a global crime to continue for another year.

When it was UBS’s turn to settle its Libor charges, even though a significant amount of the illegal activity took place at the parent company level, only a Japanese subsidiary was required to take a plea. Eric Holder, US attorney-general, demonstrated his embrace of the Geithner doctrine (a phrase coined by blogger Yves Smith) in explaining the UBS decision. He said that a more aggressive stance against the parent company could have a negative “impact on the stability of the financial markets around the world”.

This week we saw the latest instalment of the saga. In fining RBS £390m, the DoJ only indicted one of the bank’s Asian subsidiaries, avoiding the more damaging result that would have stemmed from charging the parent company.

Instead of seeking deterrence and justice, the US government increasingly appears to have fully absorbed the Geithner doctrine into its charging decisions by seeking a result that has a minimal impact on the target bank but will generate the best-looking press release. Some banks today are still too big to fail – and they are still too big to jail.

The lack of robust enforcement is of course not limited to the Libor scandal. It was seen in the recent settlement talks with HSBC, when Treasury officials reportedly pressed the DoJ to consider the broad economic consequences that would follow an indictment. After hearing these arguments the DoJ chose not to criminally charge HSBC.

And, of course, it is seen in the stunning dearth of criminal prosecutions arising out of the crisis. This was all but preordained given who the government turned to when the crisis struck: the same captured regulators who had blindly advanced bankers’ self-serving calls for a “light touch” before the crisis and who unsurprisingly embraced the Geithner doctrine afterwards. Having done so, of course, there would be no criminal prosecutions while the banks still teetered on the brink of collapse. The risk of causing them to fail, and thereby undoing all of the bailout efforts, was too high.

But that these arguments continue to resonate with officials in 2013 shows that the Geithner doctrine, perhaps justified by the conditions in 2008-09, has planted deep roots in our system of government.

This forbearance will have potentially devastating long-term effects, as each settlement on favourable terms reinforces the perception that, for a select group of executives and institutions, crime pays. It is only rational. They know that they will get to keep all of the ill-gotten profits if they go undetected, and on the small chance that they’re caught, most probably only the shareholders will pay – and only a relatively minor fine at that. The lack of meaningful consequences for those committing these frauds encourages future fraudulent conduct. Ultimately, the financial crisis was a game of incentives gone wild, and the lack of accountability in the aftermath of the crisis has only reinforced those bad incentives.

Breaking those incentives requires ditching the Geithner doctrine, which has led to the banks becoming even larger and more systemically significant than they were before the crisis. As a result, the DoJ’s fear of destabilising the global economy through aggressive prosecutions may indeed be well-founded. But that must not be the end of the story.

To reclaim our system of justice, the global threat posed by the failure of any of our largest financial institutions must be neutralised once and for all. They must be reduced in size, their safety nets must be dramatically constricted and their capital requirements enhanced far beyond the current standards. Then, and only then, can the same set of rules apply to all.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , | 97 Comments »

Chorus of Whistles as the Blowers Get Ignored or Shutdown

Posted on January 17, 2013 by Neil Garfield

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Editors Comment and Analysis: Chorus of whistles around the country and indeed around the world is going over the administration’s handling of the wrongful foreclosure claims and the outright bullying, intimidation and lying that lies at both the root of the false securitization scheme for residential mortgages and the false foreclosure review process supposedly designed to correct the problem. The plain truth, as pointed out in the article below and the Huffington Post, is that the reviews were never intended to work.

Take a step back for perspective. The news is being carefully managed by Wall Street just as Congress is being carefully manipulated by Wall Street. But for the inquiring mind, the data is right there in front of everyone and is being ignored at the peril of the future of the real estate industry which depends upon certainty that the title intended in the transaction is actually conveyed without undisclosed or “unknown” liabilities. The title companies are greasing the rails with their
“Guarantee of Title” but that doesn’t fix the corrupted title records.

We know that every study done shows collectively that

  1. Strangers to the transaction dominate the foreclosure activity — i.e.,  entities that are not injured or even involved with eh funding of the original loan or the payment of the price of the loan on assignment, endorsement or transfer of the alleged loan.
  2. In virtually ALL cases of securitization, regardless of whether the securitization started at the origination of the loan, or later, the use of nominees rather than actual parties was the rule, and the documents misrepresent both the parties and terms of repayment.
  3. The Banks are slowly prolonging the process to be able to assert the statute of limitations on criminal or civil prosecution but that wouldn’t protect them if law enforcement would dig deeper and find that there was nothing but fraud at the origination and all the way up the “Securitization” chain — all of which transactions were unsupported by consideration.
  4. We know the Banks know that they are exposed to awesome liability equaling the whole of the mortgage market from 1996 to the present. If that were not true they would be announcing settlements every day where some bank is paying hundreds of millions or billions or tens of billions of dollars “without admitting liability.”
  5. We know that in ALL foreclosures where a loan was claimed to be securitized or even where it was hidden tactically (like Chase does), the “credit bid” at auction was not submitted by an injured party. Thus the party who submitted the credit bid was not a creditor and everyone of those foreclosures — millions of them — can be and should be overturned.
  6. We know that at origination the money came from a controlled entity not of the originator but of the aggregator. The originator was not permitted to touch the money nor did the originator ever have any risk of loss. Hence the originator was a nominee with no more rights or powers than MERS. The borrower was left with the fact that he was dealing with unknown parties whose “underwriting process” was designed to get the deal done and allow the originator to proceed.
  7. We know that without the approval from the aggregator, the originator would not have announced approval of the loan. At no time did the Borrower know that they were actually dealing with Countrywide or other aggregators and that the money was coming through an entity (credit warehouse) set up by Countrywide for the origination of loans, with the caveat being that the money for funding would NOT go through the hands of the originator.
  8. We know that the mortgage liens were not perfected.
  9. We know that the note describes a transaction that never occurred — wherein the originator loaned money to the borrower. (No consideration) and that the originator never had any risk of loss.
  10. We know that the actual transaction was from an aggregate fund in which investments from multiple investors in what the investors thought were discreet accounts for each REMIC trust but where the Trust was ignored just as the requirements of state law or ignored by using nominees without disclosure of the principal on the note, mortgage or deed of trust.
  11. We know the losses on the bogus mortgage bonds were taken by the injured parties — the investors (pension funds) who put up the money.
  12. We know that the investment bank, aggregator and Master Servicer were in control of all transactions and that the subservicers were nominees for the Master Servicer whose name is kept out of litigation.
  13. We know the despite the loss hitting the investors because it was after all their money that funded this PONZI scheme, it was the banks who were allowed to take the insurance, proceeds of credit default swaps and federal bailouts leaving the investors twisting in the wind.
  14. We know that the investment bank, Master Servicer and aggregators were in privity, owed duties and were agents of the investors when they received the insurance and bailout money.
  15. We know that the banks kept the money from insurance and bailouts instead of paying the investors and reducing the balance due to the investors.

We know all these things, and much more, with whistle-blowers stepping up every day. The day of reckoning is coming and the announcement of BofA about another hidden earnings hit is only 2-3% of the actual number as shown on their own statements and probably more like 1/10 % of their real liability.

The term “Zombie” is being used to describe many features of our financial landscape. Truth be told it ought to be used to describe our entire financial system. If the actual corrections were made in accordance with existing law and existing equitable doctrines applied in hundreds of millions of other individual cases, we would be working on plans to wind down the mega banks, wind down household debt, falsified by the banks, and wind down the efforts to derail appropriate lawsuits by real injured parties.

The more you understand about what REALLY happened, the more you will see the opportunity for relief. I can report to you that I am receiving daily reports of multiple cases in which the borrower is winning motions. Even a year ago that was unthinkable.

The Judges are starting to catch on and some lawyers are realizing that this is just like any other case — their client is subject to enforcement of an alleged debt or foreclosure action and their answer is to deny the allegations, the documents and make them prove up their status as injured party on a perfected mortgage lien securing the promises on a valid note for a debt created by actual payment of the named party to the borrower.

The assumption by Judges and lawyers that there wouldn’t be a foreclosure if the facts didn’t support it is going down fast. Judges are realizing that title is being corrupted by bad presentations made by pro se litigants and many lawyers in which they admit the essential elements of the foreclosure and then try to get relief. Deny and Discover covers that. Deny anything you can deny as long as you have no reason to believe it to be true beyond a reasonable doubt. Let them, force them to prove their case. They can’t. If you press discovery you will be able to show that to be true.  File counter motions for summary judgment with your own affidavits and attack the affidavits of the other side in support of their motions.

More Whistleblower Leaks on Foreclosure Settlement Show Both Suppression of Evidence and Gross Incompetence

No wonder the Fed and the OCC snubbed a request by Darryl Issa and Elijah Cummings to review the foreclosure fraud settlement before it was finalized early last week. What had leaked out while the Potemkin borrower reviews were underway showed them to be a sham, as we detailed at length in an earlier post. But even so, what actually took place was even worse than hardened cynics had imagined.

We are going to be reporting on this story in detail, since we are conducting an in-depth investigation. But this initial report by Huffington Post gives a window on a good deal of the dubious practices that took place during the foreclosure reviews. I strongly suggest you read the piece in full; there is a lot of nasty stuff on view.

There are some issues that are highlighted in the piece, others that are implication that get somewhat lost in the considerable detail. The first, as stressed by Sheila Bair and other observers, is that the reviews were never designed to succeed. This is something we and others pointed out; this was all an exercise in show. The OCC had entered into these consent orders in the first place with the aim of derailing the 50 state attorney general settlement negotiations. This was all intended to be diversionary, but to make it look like it had some teeth, borrowers who were foreclosed on in 2009 and 2010 who thought they were harmed were allowed to request a review. If harm was found, they could get as much as $15,000 plus their home back if they had suffered a wrongful foreclosure, or if they home had already been sold, $125,000 plus any equity in the home. Needless to say, the forms were written at the second grade college level, making them hard to answer. A whistleblower for Wells Fargo reported that of 10,000 letters, harm was found in none because the responses were interpreted in such a way as to deny harm (for instance, if the borrower did not provide dates of certain incidents, those details were omitted from the assessment).

But the results were even worse than that, hard as it is to believe. For instance, even though the OCC stipulated that the banks hire supposedly independent reviewers, they were firmly in control of the process. From the article, describing the process at Bank of America, where a regulatory advisory firm Promontory was supposed to be in charge:

Bank of America contractors were reviewing Bank of America loans at a Bank of America facility under the management of full-time Bank of America employees. They were reporting those results to Promontory, the outside independent consultant, whose employees started their reviews based on what Bank of America contractors had concluded.

As the auditor, Promontory had authority to overrule any conclusion drawn by a Bank of America contractor. Promontory has defended its work as independent from influence by Bank of America. But the Bank of America contractors said it was clear to them that what they noted during their reviews was integral to the process. They continued to do substantive, evaluative review work until a few months ago, they said, when they were told that their job going forward was simply to dig up documents for Promontory.

Of course, Promontory protests that it was in charge. It is hard to take that seriously when no one from Promontory was on premises. And the proof is that the Bank of America staff suppressed the provision of information:

Another contract employee recounted the time he noted in a file that he couldn’t find vital documents, such as notice supposedly sent to a homeowner that a foreclosure was pending. “Change your answer,” he said he was told on several occasions by his manager.

Second is that the OCC was changing the goalposts as the reviews were underway. But was that due to OCC waffling or pushback by the consultants acting in the interest of the banks to derail the process by making the results inconsistent over time? If you do the first month of reviews under one set of rules and then get significant changes in month two, that implies you have to revise or redo the work in month one. That serves the consultants just fine, their bills explode. And the banks get to bitch that the reviews are costing too much, which gives them (and the OCC) a pretext for shutting them down, which is prefect, since they were all intended to be a PR rather than a substantive exercise from the outset.

Consider this section:

From the the consultants’ point of view, it was the government regulators who had some explaining to do. First there was the constant change in guidance, throughout at least the first eight months of the process, as to what they wanted the auditors to do and how they wanted them to do it, they said. The back-and-forth was so constant, one of the consultants involved with the process said that specific guidelines for determining if a mortgage borrower had been harmed by certain kinds of foreclosure fraud still weren’t in place as late as November 2012.

Huh? Tell me how hard it is to determine harm. If a borrower was charged fees not permitted by statue or the loan documents, there was harm. If the fees were in excess of costs (not permitted) there was harm. If the fees were applied in the wrong order, there was harm. If a borrower was put into a mod, made the payments as required in the mod agreement, but they weren’t applied properly and they were foreclosed on despite following bank instructions, there was harm. Honestly, there are relatively few cases where there is ambiguity unless you are actively trying to throw a wrench in the process, and it is not hard to surmise that is exactly what was happening. That is not to say there might not have been ambiguity on the OCC side, but it is not hard to surmise that this was contractor/bank looking to create outs, not any real underlying problem of understanding harm v. not harm.

It looks that some of the costly process changes were also due to the consultants being caught out as being in cahoots with their clients rather than operating independently:

The role of the Bank of America contract employees did not change to simply doing support work for Promontory until near the end of last year. That happened after ProPublica reported that Promontory’s employees were checking over Bank of America’s work, rather than conducting a fully independent review.

Finally, the article mentions (but does not dwell on) the fact that there was considerable evidence of borrower harm:

The reviewer said she found some kind of bogus fee in every file she looked at, ranging from a few dollars to a few thousand dollars. Another who looked for errors that violated state statutes estimated that 30 to 40 percent of loan files contained mistakes.

One reviewer who provided a comment that we elevated into a post was far more specific:

…in one case I reviewed the borrower paid approximately 25K to reinstate his mortgage. Then he began to make his mortgage payments as agreed. Each time he made a payment the payment was sent back stating he had to be current for the bank to accept a payment. He made three payments and each time the response was the same. Each time he wrote and called stating he had sent in the $25K to reinstate the loan and had the canceled check to prove it. After several months the bank realized that they had put the 25K in the wrong account. At that time that notified him that they were crediting his account, but because of the delay in receiving the reinstatement funds into the proper account he owed them more interest on the monies, late fees for the payments that had been returned and not credited and he was again in default for failing to continue making his payment. The bank foreclosed when he refused to pay additional interest and late fees for the banks error. I was told that I shouldn’t show that as harm because he did quit making his payments. I refused to do that.

There was another instance when there was no evidence that the bank had properly published the notice of sale in the newspaper as required by law. The argument the bank made when it was listed as harm to the borrower was “here is the foreclosure sale deed, obviously we followed proper procedure, and you should change your answer as to harm.”

Often there is no evidence of a borrower being sent a proper notice of intent to accelerate the mortgage. When these issues are noted in a file we are told to ignore them and transfer those files to a “special team” set up to handle that kind of situation. You choose whatever meaning you like for that scenario.

To add insult to injury, the settlement fiasco was shut down abruptly without the OCC and the Fed coming with a method for compensating borrowers. So the records have been left in chaos. That pretty much guarantees that any payments will be token amounts spread across large number of borrowers, which insures that borrowers that suffered serious damage, such as the case cited above, where the bank effectively extorted an extra $25,000 from a borrower before foreclosing on him, will get a token payment, at most $8,000 but more likely around $2,000. Oh, and you can be sure that the banks will want a release from private claims as a condition of accepting payment. $2,000 for a release of liability is a screaming deal, and it was almost certainly the main objective of this exercise from the outset. Nicely played indeed.

Read more at http://www.nakedcapitalism.com/2013/01/more-whistleblower-leaks-on-foreclosure-settlement-show-both-suppression-of-evidence-and-gross-incompetence.html#m7aM5FACevivJMRf.99

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , | 255 Comments »

Yves Smith Nails Obama on Failed Housing Policies

Posted on August 21, 2012 by Neil Garfield

Editor’s Note: Yves wrote the piece I was going to write this morning. See link below. The salient points to me are mentioned below with comments. The principal point I would make is that Obama has been listening to people who are listening to Wall Street. The Wall Street spin is that this is just another housing bust. It isn’t. It is massive Ponzi scheme that was well-planned and executed with precision, sucking the life out of our economy. Normally Ponzi schemes (see Drier or Madoff) don’t get big enough to have that effect.

The bottom line is that the banks took money from investors under false pretenses and diverted the proceeds into their own pockets.

In order to cover that up they created false documents with false lenders and false secured parties, false creditors and false beneficiaries. They borrowed money from the lenders, then borrowed the identity of the lenders to declare it was the banks who were losing money from mortgage “defaults”, to receive proceeds of payouts from subservicers, payouts from insurance, payouts from credit default swaps and payouts from federal bailouts.

The plain fact is that under normal black letter law, the notes and mortgages were faked at origination based upon the false premise that the actual lender was named or protected. That was a lie. The loans are not secured and the investors have a mess on their hands figuring out who has what claim to what loan so they are suing the investment banks instead of going after the homeowners and striking deals that would undermine the hundreds of trillions of dollars in bets out there that is masquerading as shadow banking.

Instead the investors and the homeowners — the only true parties in interest — got screwed and the administration has yet to correct that basic injustice.

  1.  The proposals for the housing fix were predicated upon the fraud and other illegals activities of the parties in a mythological “securitization” scheme. They were not “unpopular” as Klein observes in the news. They were rejected because wall Street obviously rejected any plan that would take away their ill-gotten gains.
  2. Combat servicing operations using five times the staff of ordinary servicers are doing the work just fine. It was the lack of oversight and regulation that allowed the obfuscation of the truth by the servicers created for the sole purpose of covering up the fraud. These servicers never report the status of the loan receivable to anyone and they probably don’t have access to the loan receivable accounts. In fact, it is quite probable that no loan receivable account actually exists on the books of any creditor who loaned money through the vehicle of bogus mortgage bonds.
  3. Servicers were set up to foreclose, not service and not to assist in modification or settlement. Wall Street needed the foreclosure to be able to say to the investor, OK now the loan and the loss is yours, since we have drained all value out of it. Sorry.
  4. The administration had a ready tool available: enforcing the REMIC statute. They chose not to do this despite the obvious facts in the public domain that the banks were routinely ignoring both the law and the documents inducing investors to invest in non-existent bonds based upon non-existent loans.
  5. The CFPC had not trouble issuing a regulation that defined all parties as subject to regulation. Why did it take the formation of a new agency to do that? Treasury officials from the administration who argued that they had no authority over servicers were wrong and if they had done any due diligence, it would have been obvious that the banks were blowing smoke up their behinds.
  6. There are hundreds of billions of dollars, perhaps trillions of dollars in lost tax revenue that the ITS is not pursuing because the the policy of coddling the scam artists who manufactured this crisis. The deficit exists in large part because the administration has not pursued all available revenue, the bulk of which would have made a huge difference in the dynamics of the American economy and the election.
  7. Refusing the help the  victims by characterizing some of them as undeserving borrowers is like saying that a bank robber should be granted leniency because the bank he robbed was run poorly.
  8. The real issue is the solvency of the large banks which most economists and even bankers agree are in fact too big to manage, far too big to regulate. The administration is taking the view that even if the assets on the balance sheets of the big banks are fake, we can’t let them fail because they would bring the entire system down. That is Wall Street spin. Iceland and other places around the world have proven that is simply not true. The other 7,000 banks in this country would easily be able to pick up the pieces.

Yves Smith on Obama Failed Housing Policies

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , | 10 Comments »

Pension and Union Funds Were Upside Down the Moment They Bought MBS

Posted on February 5, 2012 by Neil Garfield

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Editor’s comment: Smith’s statement about the passivity of investors is well taken. Up until recently, they were content to let the Banks and servicers fight it out and they assumed they would get their fair share of the money that was due to them. Remember that these are NOT just “institutional investors” like banks — they are pension funds, unions, cities, counties and states that invested in what was thought to be investment grade securities Triple A rated and insured.

So it isn’t surprising that the investors are now going on the attack. It is obvious that the banks and servicers are having a field day feeding off the carcass of what was purported to be good collateral — the homes of the borrowers. The starting insult though was the money the banks took out of the funds advanced by investors before they started funding mortgages. In some cases the percentage is a staggering 40%. So for each million dollars that your pension fund put in, the banks immediately removed $400,000 and booked it as trading profits. Now with only $600,000 left, the pool was supposed to make enough money to pay the interest expected by investors plus the principal.

Those figures don’t work and Wall Street knew it. So all they needed was to place bets that the pool would fail and that is what they did under the guise of merely covering the “minor” risk of loss with yet another hedge. But the proceeds of insurance and credit default swaps were received by the banks who did not report those proceeds to investors, much less pay them. The whole thing was carried in a classic PONZI scheme where the money from the investor was paid to the investor without investing or funding any other income-producing asset.

So now Goldman Sachs has a genuine class action (approved by Federal Judge) on its hands, the major banks and MERS have a major lawsuit (Schneiderman) that will completely upend the mortgage transactions and foreclosures that have taken place, as well as eliminating the secured portion of the loans. The Banks are right where I predicted they would be when I projected the path of this long road. The banks and servicers are intermediaries and conduits with no interest in the loans other than some vague contractual rights that were long ago breached by the banks.

The interests of the investors and the interests of the homeowners have thus become strangely but inevitably aligned. Neither one would have entered into the deals if they knew the truth and both were defrauded by inflated appraisals, inflated securities ratings, misrepresentations about the loans, misrepresentations about the loan underwriting process, and neither want to be part of any large-scale foreclosure process. The investors want as much of their money back as possible and then the right to get the rest from the banks, who stole their money. The borrowers want to stay in their homes so much so that they are willing to accept mortgage balances in excess of the fair market value of the home.

Both the investors and the homeowners are underwater — some for the same reasons and some for different reasons. But the full accounting of all money in and all money out will restore far more of the original capital that was siphoned out of the nation’s economy than the current foreclosure process — even if the foreclosures were valid and enforceable which they clearly are not because they are based upon documentation that was intentionally fabricated, forged, misrepresented and a direct breach of the duties of the originators to perform due diligence.

The choice is the same one I stated 5 years ago — which will be more important — the power and wealth of these overs-zed banks or the rights guaranteed by the U.S. Constitution. We can’t have both. In order to give the banks what they want, with amnesty, further bailouts etc., we must surrender our sovereignty and consent to being subject to the rule of Banks without any governing charter. In order to ratify the millions of foreclosures that have already taken place and allow the millions more to proceed, we must abandon all notions of due process, equity and fairness.

by Yves Smith

Investors (and Others) Realizing Their Ox is About to be Gored in Mortgage Settlement

Investors have been remarkably passive as banks and servicers have taken advantage of them. We’ve heard numerous reports of servicer fee abuses that amount to stealing from investors (remember, if you overcharge a stressed borrower and that borrower loses his home, the money in the end comes out of pension funds and 401 (k)s when the excessive fees are deducted from the proceeds of the sale of the home). Investors can even see suspicious patterns in investor reports. We’ve also pointed out that they are guaranteed even more pain, since $175 billion of losses that have already recorded on loans in MBS pools have not yet been allocated to the related bonds.

But the fees to manage bond funds are pretty thin, and fixed income investors are generally a risk averse lot, and are not well set up to litigate. But the biggest obstacle to them Doing Something is that they don’t want to rile the banks. They think they need them for information and transaction execution.

So it shouldn’t be surprising that investors have sat on the sidelines during the mortgage settlement and “fix the housing market” debates, even as becomes clearer and clearer that the solution envisaged is to take from investors to make the banks whole. Remember, the major banks have very large second lien portfolios that should be written down. The banks claim the second loans, almost entirely home equity lines of credit, are current, but that is often an accounting fiction. The banks are often engaging in negative amortization (as in taking any trivial amount and deeming it to be acceptable and adding any shortfall to what should be a proper minimum payment to principal) and allowing customers to borrow in order to make their payments. MBS investors have told me that realistic marks on Bank of America’s second lien portfolio would exceed the market value of its equity, and would also take a big cut out of the equity bases of Citi, JP Morgan, and Wells.

So the plan, which was messaged in an interview with William Dudley in the Financial Times in early January and is embodied in the mortgage settlement plan, is to write down first liens and leave seconds largely intact (there have been some indications that seconds might get a modest ding in the case of a principal mod on the first, but that is backwards. The second should be WIPED OUT before anything modification is made to the first mortgage). Any principal mods on the first lien that leaves the second in place amounts to a transfer from retirement plans to banks. Pensions are being raided to avoid exposing the insolvency of the big banks.

We are, rather late in the game, getting some plaintive bleats from investors as they are being led to slaughter. Reader Deontos sent us a statement from the Association of Mortgage Investors:

The state Attorneys General, federal agencies, and certain mortgage servicers have worked for approximately one year on developing a solution to address our national foreclosure crisis. The time now may be nearing for a settlement of claims of alleged wrongdoing by servicers. AMI and mortgage investors have neither been involved in the negotiations nor are aware of the ultimate settlement terms. In anticipation of a possible settlement, however, AMI cautions these negotiators not to rush into a settlement, but rather work to get a properly constructed settlement that helps distressed homeowners with the right solutions. “Investors in mortgage trusts, such as unions and pensions, do not service these loans and certainly did not create these woes for borrowers. The use of mortgage trust money (from pensions funds, unions and charities) to settle the investigation is tantamount to a bank bail-out. We expect that principal modifications of private mortgages made to satisfy any kind of settlement will involve only mortgages held by the settling parties and that the criteria for all additional principal modifications be firmly established,” explained Chris Katopis, AMI’s Executive Director.

AMI would only support such a resulting settlement, if any, if appropriately designed to address such alleged wrongdoing while not implicating innocent parties. AMI is on-record as supporting long-term, effective, sustainable solutions to the housing foreclosure crisis. It is generally supportive of a settlement if it ensures that responsible borrowers are treated fairly throughout the foreclosure process; while at the same time providing clarity as to investor rights and servicer responsibilities. The settlement should be designed in a way that ensures that investors, who were not involved in the alleged activities and, who likewise were not a participant in any negotiations, do not bear the cost of the settlement. Specifically, mortgage servicers should not receive credit for modifying mortgages held by third parties, which are often pension plans, 401K plans, endowments and “Main Street” mutual funds. To do otherwise, will damage the RMBS markets further and limit the ability of average Americans to obtain credit for homes for generations to come.

Erm, the fact that you weren’t given a seat at the table means the power that be thought you were dispensable.

More amusingly, a Bloomberg report reveals what most insiders know full well, that industry associations that supposedly represent the buy side and the sell side, like the American Securitization Forum and the Securities Industry and Financial Markets Association, really take care only of the sell side, meaning Wall Street. SIFMA’s Asset Management Group, which represents investors, wanted to issue a statement objecting to the use of investor funds to settle bank misdeeds, but it was squelched by management:

Wall Street’s biggest lobbying group is split over a proposed settlement of state and federal foreclosure probes, after a committee of money managers signaled it opposes terms letting banks push some costs onto bondholders.

The Securities Industry and Financial Markets Association’s Asset Management Group planned to release a statement last week urging government negotiators to protect innocent investors, amid reports that banks will get credit for lowering the balances of mortgages packaged into bonds, three people familiar with the matter said. Sifma’s leadership said no. The panel’s members oversee $20 trillion and include BlackRock (BLK) Inc. and Pacific Investment Management Co.

Sifma elected not to issue the statement “because the settlement surrounds potential legal issues involving the commercial interests of many of our members,” said Cheryl Crispen, a spokeswoman for the group in New York. “Sifma generally does not intervene in such matters and remains focused on matters of policy and advocacy.”

What bullshit. This is a “all animals are equal, but some are more equal than others” statement.

Needless to say, as the propagandizing gets louder, a few lonely voices are decrying the settlement. For instance, Daily Kos had a refreshing piece, “Stop the Delusional Celebration: Victims of Foreclosure Fraud Have Little to Celebrate.” Dave Dayen gets to an aspect of the settlement that I have not had time to cover, namely, that the enforcement is a joke. A story by Loren Berlin and D.M. Levine at Huffington Post remind us “Robo-Signing Settlement Might Not Provide Homeowners With Needed Help.” The short form of their story: the deal looks to be targeting mods to not that deeply underwater borrowers. Addressing a related Administration PR effort, Alan White at Credit Slips, in The Permanent Foreclosure Crisis and Obama’s Refinancing Obsession says, in no uncertain terms, that refis won’t solve the mortgage mess.

There is a possible saving grace here. I am told by a principal that if this settlement goes through, the odds are 100% that it will be challenged on Constitutional grounds, as a violation. Taking from the first lienholders to save the second lienholders to keep otherwise insolvent banks from going under amounts to a transfer from private parties to the government, as in it saves the FDIC from needing an emergency injection from Congress, as it did in the savings and loan crisis. So as much as I’d rather see this deal scuttled, it would terribly amusing to see Obama tidy’s efforts to generate pretend to help homeowners while really helping the banks sidetracked by litigation. The courts have stymied bank efforts to get away with their heist, and they may prove to be their bane yet again.

Topics: Banana republic, Banking industry, Credit markets, Investment management, Legal, Politics, Real estate, Regulations and regulators, The destruction of the middle class

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YVES SMITH: BANKS LIED ABOUT BAILOUT AND MADE PROFIT!

Posted on November 29, 2011 by Neil Garfield

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Quelle Surprise! Banks Lied About Bailout Funds and Got $13 Billion in Profit from Them

Bloomberg News is continuing with the tankless task of pushing forward with FOIA requests relative to the Fed’s lending programs, and once it eventually gets its troves of documents, having to slog through them to see what they reveal.

Bloomberg has a long article up on its site about its latest findings. And the bottom line is everybody close to the process lied like crazy. For instance:

Banks lied during the crisis. The big banks said they were in really good shape even as they were sucking tons of credit from the Fed. The ones that arguably were healthier, like JP Morgan, tried the “they threw me in the br’er patch, I really didn’t want all that money,” in fact stayed in the program well beyond the acute phase of the crisis because it liked getting all that cheap funding.

Now this sort of misrepresentation is a securities law violation, but since the regulators presumably winked and nodded and it would be hard to prove damages, no bank executive will be held to account.

Bloomberg also performs the useful task of trying to ascertain how much benefit the banks derived from the cheap funding. They come up with $13 billion, or roughly 23% of profit (they assume typical margins, when it would take a good deal of internal data to make more refined estimates). This is actually a very narrow definition of profit impact. The Fed stepping into the markets to shore up the banks by design stabilized and boosted asset prices, which surely had a significant profit impact.

Regulators lied to Congress. The article does a good job of marshaling details:

Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”….

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.

“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.

“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”…

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible…

Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Regulators continue to lie. I get really offended by the bogus accounting, such as the “banks paid back the TARP” or “the Fed lost no money on its lending facilities,” which this story annoyingly has to repeat out of adherence to journalistic convention. This is all three card Monte. So what if the banks paid back loans when the central bank has goosed asset prices vis super low interest rates? That’s a massive tax on savers. And we have the hidden subsidy of underpriced bank rescue insurance. Ed Kane estimates that’s worth $300 billion a year for US banks; Andrew Haldane of the Bank of England has pencilled the annual cost as exceeding the market cap of big banks (and that was in 2010, when their stock prices were higher than now).

The Fed is most assuredly going to have losses. It hoovered up a ton of Treasuries and MBS to shore up asset prices at time when interest rates were already low. The central bank intends to sell them when interest rates rise, to soak up liquidity. Buying when interest rates are low and selling when rates are high guarantees losses. As an old Wall Street saying goes, it’s easy to manipulate markets, but hard to make money from it.

The story contains other juicy tidbits, like bank lobbying on behalf of big banks to help them get bigger, and how Geithner told Congressmen they were too stupid to be able to shrink banks, and they should leave those questions to the Basel Committee (which has no interest in making big banks smaller). Go read it here.

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