ALERT: COMMUNITY BANKS AND CREDIT UNIONS AT GRAVE RISK HOLDING $1.5 TRILLION IN MBS

I’ve talked about this before. It is why we offer a Risk Analysis Report to Community Banks and Credit Unions. The report analyzes the potential risk of holding MBS instruments in lieu of Treasury Bonds. And it provides guidance to the bank on making new loans on property where there is a history of assignments, transfers and other indicia of claims of securitization.

The risks include but are not limited to

  1. MBS Instrument issued by New York common law trust that was never funded, and has no assets or expectation of same.
  2. MBS Instrument was issued by NY common law trust on a tranche that appeared safe but was tied by CDS to the most toxic tranche.
  3. Insurance paid to investment bank instead of investors
  4. Credit default swap proceeds paid to investment banks instead of investors
  5. Guarantees paid to investment banks after they have drained all value through excessive fees charged against the investor and the borrowers on loans.
  6. Tier 2 Yield Spread Premiums of as much as 50% of the investment amount.
  7. Intentional low underwriting standards to produce high nominal interest to justify the Tier 2 yield spread premium.
  8. Funding direct from investor funds while creating notes and mortgages that named other parties than the investors or the “trust.”
  9. Forcing foreclosure as the only option on people who could pay far more than the proceeds of foreclosure.
  10. Turning down modifications or settlements on the basis that the investor rejected it when in fact the investor knew nothing about it. This could result in actions against an investor that is charged with violations of federal law.
  11. Making loans on property with a history of “securitization” and realizing later that the intended mortgage lien was junior to other off record transactions in which previous satisfactions of mortgage or even foreclosure sales could be invalidated.

The problem, as these small financial institutions are just beginning to realize, is that the MBS instruments that were supposedly so safe, are not safe and may not be worth anything at all — especially if the trust that issued them was never funded by the investment bank who did the underwriting and sales of the MBS to relatively unsophisticated community banks and credit unions. In a word, these small institutions were sitting ducks and probably, knowing Wall Street the way I do, were lured into the most toxic of the “bonds.”

Unless these small banks get ahead of the curve they face intervention by the FDIC or other regulatory agencies because some part of their assets and required reserves might vanish. These small institutions, unlike the big ones that caused the problem, don’t have agreements with the Federal government to prop them up regardless of whether the bonds were real or worthless.

Most of the small banks and credit unions are carrying these assets at cost, which is to say 100 cents on the dollar when in fact it is doubtful they are worth even half that amount. The question is whether the bank or credit union is at risk and what they can do about it. There are several claims mechanisms that can employed for the bank that finds itself facing a write-off of catastrophic or damaging proportions.

The plain fact is that nearly everyone in government and law enforcement considers what happens to small banks to be “collateral damage,” unworthy of any effort to assist these institutions even though the government was complicit in the fraud that has resulted in jury verdicts, settlements, fines and sanctions totaling into the hundreds of billions of dollars.

This is a ticking time bomb for many institutions that put their money into higher yielding MBS instruments believing they were about as safe as US Treasury bonds. They were wrong but not because of any fault of anyone at the bank. They were lied to by experts who covered their lies with false promises of ratings, insurance, hedges and guarantees.

Those small institutions who have opted to take the bank public, may face even worse problems with the SEC and shareholders if they don’t report properly on the balance sheet as it is effected by the downgrade of MBS securities. The problem is that most auditing firms are not familiar with the actual facts behind these securities and are likely a this point to disclaim any responsibility for the accounting that produces the financial statements of the bank.

I have seen this play out before. The big investment banks are going to throw the small institutions under the bus and call it unavoidable damage that isn’t their problem. despite the hard-headed insistence on autonomy and devotion to customer service at each bank, considerable thought should be given to banding together into associations that are not controlled by regional banks are are part of the problem and will most likely block any solution. Traditional community bank associations and traditional credit unions might not be the best place to go if you are looking to a real solution.

Community Banks and Credit Unions MUST protect themselves and make claims as fast as possible to stay ahead of the curve. They must be proactive in getting a credible report that will stand up in court, if necessary, and make claims for the balance. Current suits by investors are producing large returns for the lawyers and poor returns to the investors. Our entire team stands ready to assist small institutions achieve parity and restitution.

FOR MORE INFORMATION OR TO SCHEDULE CONSULTATIONS BETWEEN NEIL GARFIELD AND THE BANK OFFICERS (WITH THE BANK’S LAWYER) ON THE LINE, EXECUTIVES FOR SMALL COMMUNITY BANKS AND CREDIT UNIONS SHOULD CALL OUR TALLAHASSEE NUMBER 850-765-1236 or OUR WEST COAST NUMBER AT 520-405-1688.

BLK | Thu, Nov 14

BlackRock with ETF push to smaller banks • The roughly 7K regional and community banks in the U.S. have securities portfolios totaling $1.5T, the majority of which is in MBS, putting them at a particularly high interest rate risk, and on the screens of regulators who would like to see banks diversify their holdings. • “This is going to be a multiple-year trend and dialogue,” says BlackRock’s (BLK) Jared Murphy who is overseeing the iSharesBonds ETFs campaign. • The funds come with an expense ratio of 0.1% and the holdings are designed to limit interest rate risk. BlackRock scored its first big sale in Q3 when a west coast regional invested $100M in one of the funds. • At issue are years of bank habits – when they want to reduce mortgage exposure, they typically turn to Treasurys. For more credit exposure, they habitually turn to municipal bonds. “Community bankers feel like they’re going to be the last in the food chain to know if there are any problems with a corporate issuer,” says a community bank consultant.

Full Story: http://seekingalpha.com/currents/post/1412712?source=ipadportfolioapp

Banks Should Be Boring and Reliable — That’s All

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COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary CLICK HERE TO GET COMBO TITLE AND SECURITIZATION REPORT

an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Bring Back Boring Banks

By AMAR BHIDÉ

Medford, Mass.

CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and the European Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks. It was a missed opportunity to fix a regulatory effort that goes back nearly 150 years.

Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.

In 1863, Congress created a uniform, government-issued currency to end panicky redemptions of the notes issued by banks. But it didn’t stop bank runs because people began to use bank accounts, instead of paper currency, to store funds and make payments. Now, during panics, depositors would scramble to turn their account balances into government-issued currency (instead of converting bank notes into gold).

The establishment of the Fed in 1913 as a lender of last resort that would temporarily replace the cash withdrawn by fleeing depositors was an important advance toward banking stability. But although the Fed could ameliorate the consequences of panics, it couldn’t prevent them. The system wasn’t stabilized until the 1930s, when the government separated commercial banking from investment banking, tightened bank regulation and created deposit insurance. This system of rules virtually eliminated bank runs and bank failures for decades, but much of it was junked in a deregulatory process that culminated in 1999 with the repeal of the 1933 Glass-Steagall Act.

The Federal Deposit Insurance Corporation now covers balances up to a $250,000 limit, but this does nothing to reassure large depositors, whose withdrawals could cause the system to collapse.

In fact, an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits. Since the 2008 financial crisis, governments and central bankers have been seriously overstretched. The next time a panic starts, markets may just not believe that the Treasury and Fed have the resources to stop it.

Deposit insurance was also a long shot in 1933 — President Franklin D. Roosevelt, the Treasury secretary, the comptroller of the currency and the American Bankers Association opposed it. Somehow advocates rallied public opinion. The public mood is no less in favor of radical reform today. What’s missing is bold, thoughtful leadership.

Amar Bhidé, a professor at Tufts’s Fletcher School of Law and Diplomacy, is the author of “A Call for Judgment: Sensible Finance for a Dynamic Economy.”

 

SIMON JOHNSON: OCC SELLS OUT TO BANKS: CONSUMERS DON’T COUNT

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CONSUMERS DON’T COUNT

EDITOR’S COMMENT: Fascism is a system in which the government is essentially run by business. The premise of fascism is that successful commerce (as measured by the government that is controlled by business) leads to a successful society. Italy tried it and we know what happened there. Like anywhere else,  including the United States, without the government being the referee in the marketplace, it is only BIG BUSINESS that succeeds — leaving small business, entrepreneurs, innovation, and consumers to eat dirt.

When regulators know their next job, and their future prospects will come from the banks they are regulating they essentially submit themselves to the control of their future employers. That is what has happened in banking. That is what has happened with our government. And that is why the elephant in the living room is being ignored.

The current PLAYBOOK of the banks, duly followed by most regulators and virtually all members of congress and virtually all legislatures around the country (except Hawaii?), is looking for a way out of the mortgage mess by having regulators intervene in what is essentially state law and what has clearly been gross negligence at best, and malfeasance or criminal activity on the part of the banks at worst. The victims are clearly identified — investors who bought the falsely valued mortgage bonds that were nothing like what was described and homeowners who bought the falsely valued loan products based upon falsely valued real estate in deals that were nothing like what was described.

In short, the Banks wish to use their unbridled control over government and in particular the regulators, to redefine banking, risk law and morality so that they can escape the criminal prosecution that followed the savings and loan scandal of the 1908’s where over 800 bankers went to jail. (yes that’s right, as a class, they have a prior criminal record, so this time their punishment should be worse).

While the main action is in court where the banks are losing ground every day just by looking at the truth, the facts, the evidence and the results of their mean-spirited creation of the illusion of securitization, citizens (consumers, past and present) must be ever vigilant and raise hell when they are doing something that is plainly bad for the country and bad for our children and grandchildren. Let your representatives and the regulators know in writing that you don’t approve of the job they are doing regulating the banks or in the handling of the foreclosure crisis which now looks like it will persist for decades.

The goal is NOT to preserve the health of the banks at all costs. The goal, as clearly set forth in our constitution and in case law going back centuries, is to protect and serve the members of the society that have agreed to a form of governing themselves. If that goal changes, then government is spurious. Government becomes our jailers instead of our protectors and if they won’t protect us against financial terrorism and we let them, what is to prevent them from deciding that it is “best for the country” (meaning themselves) to cease protecting us from anything else, including military threat.

May 19, 2011, 5:00 am

When Regulators Side With the Industries They Regulate

By SIMON JOHNSON
Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The Office of the Comptroller of the Currency is one the most important bank regulators in the United States — an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates what in the United States, see this primer).

Over the last decade, the Office of the Comptroller of the Currency repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection. (James Kwak and I covered this in “13 Bankers,” and those details have not been disputed by the agency or anyone taking its side.)

After suffering some serious and well-deserved loss of prestige during the financial crisis of 2007-9, the comptroller’s office survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before. In its view and that of its senior staff — including key people who remain from before the crisis — the “safety and soundness” of banks requires, above all, not a lot of protection for consumers.

This is a mistaken, anachronistic and dangerous belief.

Probably the most egregious mistake made by the Office of the Comptroller of the Currency during the subprime boom was to push back against state officials who wanted to curtail malpractice in housing loans, including predatory lending.

The comptroller’s office ultimately lost that case before the Supreme Court, but its delaying action meant that an important potential brake on abuse and excess was not available — which contributed to the worst business practices that took hold in 2006 and 2007 (see this nice summary or Eliot Spitzer’s account).

Naturally, post-debacle the Office of the Comptroller of the Currency talks an ostensibly better game but, as Joe Nocera put it, “it sure looks as though the country’s top bank regulator is back to its old tricks.” In discussions regarding a potential settlement on mortgage foreclosures — and how they have been handled — the comptroller’s office has supported an outcome that is more favorable to the banks (see the Nocera column for more details).

Now it is again insisting that federal regulation pre-empts the ability of states to regulate in a way that would protect consumers.

In a letter on May 12 to Senator Thomas Carper, Democrat of Delaware, the agency asserted that its pre-emption regulations are consistent with the Dodd-Frank Act (see this interpretation by Sidley Austin, a law firm, which I draw on). There is a lot of legalese in the letter but the basic issue is simple — are states allowed to protect their consumers vis-à-vis national banks, or do they have to rely on the Office of the Comptroller of the Currency, despite its weak track record?

The comptroller’s office is clear — the states are pre-empted, meaning that national comptroller regulations will always overrule them on the issues that matter. (As a technical matter, the issue comes down to what is known as visitation: whether state-level authorities can gain access to bank documents if the bank or the comptroller’s office has not already determined that there is a problem.)

The American Bankers Association was, not surprisingly, delighted: “The O.C.C.’s action helps clarify the rules of the road for national banks and how they serve their customers.”

Richard K. Davis
, chief executive of U.S. Bancorp and then chairman of the Financial Services Roundtable, a powerful lobbying group, emphasized the importance of the pre-emption issue to national banks in March 2010, during the Dodd-Frank financial reform debate in the Senate: “If we had one thing to fight for, it would be to protect pre-emption.”

It is hard to know which would seem more incredible to a second grader: that we left in place the same agency that was responsible for a significant part of past misbehavior, or that this agency seems determined to continue with the same philosophy and policies.

The problem is not that the Office of the Comptroller of the Currency sees its primary duty as the “safety and soundness” of the financial system. Rather, the danger to the public arises because it has consistently taken the view that the best way to protect banks — and keep them out of financial trouble — is to allow them to be harsh with consumers.

This is worse than short-sighted — it completely ignores all externalities, such as how business practices and ethics evolve, and it pays no attention to even the most basic macroeconomic dynamics, such as the fact that we have a credit cycle during which we should expect lenders to “race to the bottom” in terms of standards.

The Office of the Comptroller of the Currency should have been abolished by Dodd-Frank. Unfortunately, it is too late for Congress to revisit this issue. President Obama should at the very least nominate a new head of the Office of the Comptroller of the Currency — the job has been open since August of last year — and a serious reformer could make a great deal of difference.

Under its current leadership and with its current approach, the Office of the Comptroller of the Currency is putting our financial system into harm’s way. The lessons of 2007-9 have been completely lost on it. As Talleyrand said of the Bourbons, “They have learned nothing and forgotten nothing.”

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