“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007

Posted on April 21, 2011 by Neil Garfield

Internal emails indicate Deutsche Bank knew they were bankrolling toxic mortgages by Ameriquest and others

Internal emails indicate Deutsche Bank knew they were bankrolling toxic mortgages by Ameriquest and others

iWatch

In 2007, the report says, Deutsche Bank rushed to sell off mortgage-backed investments amid worries that the market for subprime loans was deteriorating.

“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007 about a deal stocked with securities created from raw material produced by Ameriquest and other subprime lenders.

Deutsche Bank Analyst: Overpay For Our Assets, Or You’ll Regret It

By Zachary Roth – February 12, 2009, 3:49PM

For a while now, it’s seemed like Wall Street’s message to government has been: We screwed up. But if you don’t rescue us on our terms, you’re all gonna be in trouble.

But you don’t usually see that expressed quite as clearly as it was in a research memo sent out yesterday by a senior Deutsche Bank analyst, and obtained by TPMmuckraker.

In the memo — one of Deutsche’s daily “Economic Notes” sent out to the firm’s clients, and to some members of the press — Joseph LaVorgna, the bank’s chief US economist, essentially, appears to warn that if the government doesn’t pay high prices for the toxic assets on the books of Deutsche and other big firms, there will be massive consequences for the US economy.

Writes LaVorgna:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the
economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives.

We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

One leading economist described the memo to TPMmuckraker as a “ransom note” to the US government. And David Kotok of Cumberland Advisors, who writes such research memos for his own clients, acknowledged that the memo, like all such communications, could be interpreted as an attempt to influence policy-makers.

Still, seeing the memo as a threat to the government to drive the softest of bargains wouldn’t be entirely fair. Kotok that cautioned that the effects of a single analyst’s memo are limited: “Joe LaVorgna doesn’t have enough clout to hold the US government hostage.”

LaVorgna himself was blunt: “I don’t write editorials,” he told TPMmuckraker.

At the very least, the memo can be seen as a frank statement of position from the chief economist of a major bank: if the government doesn’t cave and buy up all the banks’ toxic assets at inflated prices, the country will suffer.

Nice fix we’ve got ourselves into.


Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 15 Comments »

Borrower Bailout?: Goldman Sachs Conveyor Belt

Posted on April 27, 2010 by Neil Garfield
  • If you have a GSAMP securitized loan you might want to pay particular attention here. In fact, if you ever had a securitized loan of any kind you should be very interested.
  • Hudson Mezzanine: The use of the word “mezzanine” is like the use of the word “Trust.” There is no mezzanine and there is no trust in the legal sense. It is merely meant to convey the fact that a conduit was being used to front multiple transactions — any one of which could be later moved around because the reference to the conduit entity does not specifically incorporate the exhibits to the conduit.
  • The real legal issue here is who owns the profit from these deals? The profit is derived from insurance. The cost of insurance was funded from the securitized chain starting with the sale of securities to investors for money that was pooled.
  • That pool was used in part to fund mortgages and insurance bets that those mortgages would fail. 93% of the sub-prime mortgages rated Triple AAA got marked down to junk level even if they did not fail, and insurance paid off because of the markdown. That means money was paid based upon loans executed by borrowers, whether they were or are in default or not. In fact, if you follow the logic here, it is highly doubtful than any mortgage loan ever was actually in default if a payment was received from third party insurance, contract, bailout or guarantee. If the creditor received payment, where is the default?
  • If enough of the pool consisted of sub-prime mortgages, then the entire pool was marked down and insurance paid off. So whether you have a sub-prime mortgage or a conventional mortgage, whether you are up to date or in default, there is HIGH PROBABILITY that a payment has been made from insurance which should be allocated to your loan, whether foreclosed or not.
  • The rest of the proceeds of investments by investors went as fees and profits to middlemen. If you accept the notion that the entire securitization chain was a single transaction in which fraud was the principal ingredient on both ends (homeowners and ivnestors), then BOTH the homeowner borrowers and the investors have a claim to that money.
  • Homeowners have a claim for undisclosed compensation under the Truth in Lending Act and Investors have a claim under the Securities laws.  (That is where these investor lawsuits and settlements come from).
  • What nobody has done YET is file a claim for borrowers. The probable reason for this is that the securities transactions giving rise to these profits seem remote from the loan transaction. But if they arose BECAUSE of the execution of the loan documents by the borrower, then lending laws apply, along with REG Z from the Federal reserve. The payoff to borrowers is huge, potentially involving treble damages, interest, court costs and attorney fees.
  • Under common law fraud and just plain common sense, there is no legal basis for allowing the perpetrator of a fraud to keep the benefits arising out of the the fraud. So who gets the money?
April 26, 2010

Mortgage Deals Under Scrutiny as Goldman Faces Senators

By LOUISE STORY

WASHINGTON — The legal storm buffeting Goldman Sachs continued to rage Tuesday just ahead of what is expected to be a contentious Senate hearing at which bank executives plan to defend their actions during the housing crisis.

Senate investigators on Monday claimed that Goldman Sachs had devised not one but a series of complex deals to profit from the collapse of the home mortgage market. The claims suggested for the first time that the inquiries into Goldman were stretching beyond the sole mortgage deal singled out by the Securities and Exchange Commission. The S.E.C. has accused Goldman of defrauding investors in that single transaction, Abacus 2007-AC1, have thrust the bank into a legal whirlwind.

The stage for Tuesday’s hearing was set with a flurry of new documents from the panel, the Permanent Senate Subcommittee on Investigations. That was preceded by a press briefing in Washington, where the accusations against Goldman have transformed the politics of financial reform.

In the midst of this storm, Lloyd C. Blankfein, Goldman’s chairman and chief executive, plans to sound a conciliatory note on Tuesday.

In a statement prepared for the hearing and released on Monday, Mr. Blankfein said the news 10 days ago that the S.E.C. had filed a civil fraud suit against Goldman had shaken the bank’s employees.

“It was one of the worst days of my professional life, as I know it was for every person at our firm,” Mr. Blankfein said. “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”

Mr. Blankfein will also testify that Goldman did not have a substantial, consistent short position in the mortgage market.

But at the press briefing in Washington, Carl Levin, the Democrat of Michigan who heads the Senate committee, insisted that Goldman had bet against its clients repeatedly. He held up a binder the size of two breadboxes that he said contained copies of e-mail messages and other documents that showed Goldman had put its own interests first.

“The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients,” Mr. Levin said.

Mr. Levin’s investigative staff released a summary of those documents, which are to be released in full on Tuesday. The summary included information on Abacus as well as new details about other complex mortgage deals.

On a page titled “The Goldman Sachs Conveyor Belt,” the subcommittee described five other transactions beyond the Abacus investment.

One, called Hudson Mezzanine, was put together in the fall of 2006 expressly as a way to create more short positions for Goldman, the subcommittee claims. The $2 billion deal was one of the first for which Goldman sales staff began to face dubious clients, according to former Goldman employees.

“Here we are selling this, but we think the market is going the other way,” a former Goldman salesman told The New York Times in December.

Hudson, like Goldman’s 25 Abacus deals, was a synthetic collateralized debt obligation, which is a bundle of insurance contracts on mortgage bonds. Like other banks, Goldman turned to synthetic C.D.O.’s to allow it to complete deals faster than the sort of mortgage securities that required actual mortgage bonds. These deals also created a new avenue for Goldman and some of its hedge fund clients to make negative bets on housing.

Goldman also had an unusual and powerful role in the Hudson deal that the Senate committee did not highlight: According to Hudson marketing documents, which were reviewed on Monday by The Times, Goldman was also the liquidation agent in the deal, which is the party that took it apart when it hit trouble.

The Senate subcommittee also studied two deals from early 2007 called Anderson Mezzanine 2007-1 and Timberwolf I. In total, these two deals were worth $1.3 billion, and Goldman held about $380 million of the negative bets associated with the two deals.

The subcommittee pointed to these deals as examples of how Goldman put its own interests ahead of clients. Mr. Levin read from several Goldman documents on Monday to underscore the point, including one in October 2007 that said, “Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant.”

As the mortgage market collapsed, Goldman turned its back on clients who came knocking with older Goldman-issued bonds they had bought. One example was a series of mortgage bonds known as Gsamp.

“I said ‘no’ to clients who demanded that GS should ‘support the Gsamp’ program as clients tried to gain leverage over us,” a mortgage trader, Michael Swenson, wrote in his self-evaluation at the end of 2007. “Those were unpopular decisions but they saved the firm hundreds of millions of dollars.”

The Gsamp program was also involved in a dispute in the summer of 2007 that Goldman had with a client, Peleton Partners, a hedge fund founded by former Goldman workers that has since collapsed because of mortgage losses.

According to court documents reviewed by The Times on Monday, in June 2007, Goldman refused to accept a Gsamp bond from Peleton in a dispute over the securities that backed up a mortgage security called Broadwick. A Peleton partner was pointed in his response after Goldman refused the Gsamp bond.

“We do appreciate the unintended irony,” wrote Peter Howard, a partner at Peleton, in an e-mail message about the Gsamp bond.

Bank of America ended up suing Goldman over the Broadwick deal. The parties are awaiting a written ruling in that suit. Broadwick was one of a dozen or so so-called hybrid C.D.O.’s that Goldman created in 2006 and 2007. Such investments were made up of both mortgage bonds and insurance contracts on mortgage bonds.

While such hybrids have received little attention, one mortgage researcher, Gary Kopff of Everest Management, has pointed to a dozen other Goldman C.D.O.’s, including Broadwick, that were mixes of mortgage bonds and insurance policies. Those deals — with names like Fortius I and Altius I — may have been another method for Goldman to obtain negative bets on housing.

“It was like an insurance policy that Goldman stuck in the middle of the sandwich with all the other subprime bonds,” Mr. Kopff said. “And it was an insurance policy designed to protect them.”

An earlier version of this article misidentified Senator Levin’s home state.

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Discovery and Motion Practice: Watch Those Committee Hearings on Rating Agencies

Posted on April 23, 2010 by Neil Garfield
Editor’s Note: As these hearings progress, you will see more and more admissible evidence and more clues to what you should be asking for  in discovery. You are getting enhanced credibility from these government inquiries and the results are already coming out as you can see below.The article below is a shortened version of the New York Times Paper version. I strongly recommend that you get the paper today and read the entire article. Some of the emails quoted are extremely revealing, clear and to the point. They knew they were creating the CDO market and that it was going to explode. One of them even said he hoped they were rich and retired when the mortgage mess blew up.
Remember that a rating is just word used on Wall Street for an appraisal So Rating=Appraisal.
  • The practices used to corrupt the rating system for mortgage backed securities  were identical in style to the practices used to corrupt the appraisals of the homes.
  • The appraisals on the homes were the foundation for the viability of the loan product sold to the borrower.
  • In the case of securities the buyers were investors.
  • In the case of appraisals the buyers were homeowners or borrowers.
  • In BOTH cases the “buyer” reasonably relied on an “outside” or “objective” third party who whose opinion was corrupted by money from the seller of the financial product (a mortgage backed security or some sort of loan, respectively).
  • In the case of the loan product the ultimate responsibility for verification of the viability of the loan, including verification of the appraisal is laid squarely on the LENDER.
  • Whoever originated the loan was either passing itself off as the lender using other people’s money in a table funded loan or they were the agent for the lender who either disclosed or not disclosed (nearly always non-disclosed).
  • A pattern of table funded loans is presumptively predatory.
  • The appraisal fraud is a key element of the foundation of your case. If the appraisal had not been inflated, the contract price would have been reduced or there would have been no deal because the buyer didn’t have the money.
  • The inflation of the appraisals over a period of time over a widening geographical area made the reliance on the appraiser and the “lender” even more reasonable.
  • Don’t let them use that as proof that it was market forces at work. Use their argument of market forces against them to establish the pattern of illegal conduct.
April 22, 2010

Documents Show Internal Qualms at Rating Agencies

By SEWELL CHAN

WASHINGTON — In 2004, well before the risks embedded in Wall Street’s bets on subprime mortgages became widely known, employees at Standard & Poor’s, the credit rating agency, were feeling pressure to expand the business.

One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralized debt obligations, the investments that later emerged at the heart of the financial crisis.

“We are meeting with your group this week to discuss adjusting criteria for rating C.D.O.s of real estate assets this week because of the ongoing threat of losing deals,” the e-mail said. “Lose the C.D.O. and lose the base business — a self reinforcing loop.”

In June 2005, an S.& P. employee warned that tampering “with criteria to ‘get the deal’ is putting the entire S.& P. franchise at risk — it’s a bad idea.” A Senate panel will release 550 pages of exhibits on Friday — including these and other internal messages — at a hearing scrutinizing the role S.& P. and the ratings agency Moody’s Investors Service played in the 2008 financial crisis. The panel, the Permanent Subcommittee on Investigations, released excerpts of the messages Thursday.

“I don’t think either of these companies have served their shareholders or the nation well,” said Senator Carl Levin, Democrat of Michigan, the subcommittee’s chairman.

In response to the Senate findings, Moody’s said it had “rigorous and transparent methodologies, policies and processes,” and S.& P. said it had “learned some important lessons from the recent crisis” and taken steps “to increase the transparency, governance, and quality of our ratings.”

The investigation, which began in November 2008, found that S.& P. and Moody’s used inaccurate rating models in 2004-7 that failed to predict how high-risk residential mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006.

The companies failed to assign adequate staff to examine new and exotic investments, and neglected to take mortgage fraud, lax underwriting and “unsustainable home price appreciation” into account in their models, the inquiry found.

By 2007, when the companies, under pressure, admitted their failures and downgraded the ratings to reflect the true risks, it was too late.

Large-scale downgrades over the summer and fall of that year “shocked the financial markets, helped cause the collapse of the subprime secondary market, triggered sales of assets that had lost investment-grade status and damaged holdings of financial firms worldwide,” according to a memo summarizing the panel’s findings.

While many of the rating agencies’ failures have been documented, the Senate investigation provides perhaps the most thorough and vivid accounting of the failures to date.

A sweeping financial overhaul being debated in the Senate would subject the credit rating agencies to comprehensive regulation and examination by the Securities and Exchange Commission for the first time. The legislation also contains provisions that would open the agencies to private lawsuits charging securities fraud, giving investors a chance to hold the companies accountable.

Mr. Levin said he supported those measures, but said the Senate bill, and a companion measure the House adopted in December, did not go far enough.

“What they don’t do, and I think they should do, is find a way where we can avoid this inherent conflict of interest where the rating companies are paid by the people they are rating,” he said. “We’ve got to either find a way — or direct the regulatory bodies to find a way — to end that inherent conflict of interest.”

Although the agencies were supposed to offer objective and independent analysis of the securities they rated, the documents by Mr. Levin’s panel showed the pressures the companies faced from their clients, the same banks that were assembling and selling the investments.

“I am getting serious pushback from Goldman on a deal that they want to go to market with today,” a Moody’s employee wrote in an internal e-mail message in April 2006.

In an August 2006 message, an S.& P. employee likened the unit rating residential mortgage-backed securities to hostages who have internalized the ideology of their kidnappers.

“They’ve become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation,” the employee wrote.

Lawrence J. White, an economist at the Stern School of Business at New York University, said he feared that the government’s own reliance on the rating agencies had “endowed them with some special aura.”

The House bill calls for removing references to the rating agencies in federal law, and both bills would require a study of how existing laws and regulations refer to the companies.

The addition of new regulations might inadvertently serve to empower the agencies, Mr. White said. “Making the incumbent guys even more important can’t be good, and yet that’s the track that we’re on right now,” he said.

David A. Skeel, a law professor at the University of Pennsylvania, said the Senate bill “basically just tinkers with the internal governance of the credit rating agencies themselves.”

Ending the inherent conflicts of interest is “more ambitious, but if you’re ever going to talk about it, then this is the time,” Mr. Skeel said.

Binyamin Appelbaum contributed reporting.

Filed under: bubble, CDO, CORRUPTION, Eviction, expert witness, Fannie MAe, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, STATUTES, trustee, workshop | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments »

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