SEC FUNDING CREATES CONFLICT OF INTEREST AND BAD NEWS FOR CONSUMERS

Posted on February 15, 2011 by Neil Garfield

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

WALL STREET: THE UNTOUCHABLES

Representative Stephen Lynch, Democrat of Massachusetts, warned: “You think regulation is costly? How about the $7 trillion we just lost from not regulating the derivatives markets.”

EDITOR’S NOTE: Our institutions are compromised with moral hazard every way you turn. The FDA, running mostly on money from fees paid by drug and medical supply companies (who then turn around and hire the same FDA people who approve so-called blockbuster drugs) supposedly reviews test results and approves labeling without doing any independent testing of their own. And people die. The federal and state agencies regulating banks, insurance companies, oil companies all run the same way — funded by fees paid by the companies they regulate and then the people who were the regulators end up employed by the companies they were regulating.

Somehow we seem to expect that this “system” will provide us with protection from thieves and those indifferent to whether we live or die, as long as they make a profit. This isn’t a system. It is a scam on the American public. Except that with the financial crisis it ended up affecting the world. With Congress regulating its own ethics, and with money being the principal religion in Washington, D.C. it is a huge challenge to even offer a conjecture of a favorable outcome.

In the mortgage mess, it was the rating agencies who were funded by fees paid by investment bankers who told the rating agency how to analyze the “low-risk” derivatives and give them AAA ratings — while at the same time the same investment firms had paid lobbyists to make sure they were not regulated at all when it came to derivatives and credit default swaps and other “custom” exotic financial products. It was the appraisers who were funded by fees generated by “lenders” (most of whom were merely acting as mortgage brokers) in order to generate fee revenue for merely pretending to underwrite loans. It is quite natural that the appraisals and ratings were so favorable to the scheme — the people who were doing the appraising and ratings were being paid to see things the way their “benefactors” wanted them to see it.

The two “protections” — ratings for investors and appraisals for homeowners — were reasonably relied upon to their combined detriment. What was promoted as an independent third party evaluation became an in-house marketing tool. So the investigations and the charges against individuals will skim the surface just enough for government to say they did something but not so much to make sure it never happens again. The larger problem is that each iteration of this cycle ends up in a worse debacle than the one before it.

So it should come as no small surprise that the SEC operates the same way. Funded by fees paid by companies who are regulated by the SEC, the SEC spawns future employees of the law firms and investment banking firms that are the subject or should be subjected to scrutiny and compliance with applicable laws, rules and regulations. Not content with virtually total control over the dominant currency of the world — collateralized debt obligations — and not content with being virtually unregulated, the banks are now seeking to choke off the last vestige of any hope that our financial system will ever regain stature. In a word, they seek to stop funding from Congress just to make sure there is nobody who legally touch them. In other words, the mega banks are willing to pay the fees to the U.S. Government (fees meant for SEC enforcement), provided the government doesn’t use that money to fund the SEC which is the only real agency with teeth.

Running on Empty

NY TIMES EDITORIAL 2/13/11

The new financial regulation law gave the Securities and Exchange Commission a big new job to police hedge funds, derivatives dealers and credit agencies — some of the main culprits in the financial meltdown. It authorized raising the commission’s budget to $2.25 billion, over five years. Now Congress is threatening to deny the S.E.C. the necessary financing to carry out its duties.

What makes this even more absurd is that the S.E.C. doesn’t cost taxpayers a dime. Its budget, like that of other financial regulators, is covered by fees assessed on Wall Street firms. While the other regulators decide their own financing needs, Congress sets the S.E.C.’s budget.

The agency’s budget was due to rise $200 million this year to $1.3 billion, but hasn’t because of the across-the-board freeze in discretionary spending. If House Republicans get their way and roll back spending to 2008 levels, the S.E.C. budget would fall to $906 million.

Mary Schapiro, the chairwoman of the S.E.C., warns that more budget cutting will hamstring its ability to carry out its usual duties of policing increasingly complex securities markets — let alone discharge its new responsibilities. A group of lawyers representing the financial companies regulated by the S.E.C. sent a letter to lawmakers urging them to increase the commission’s budget. Otherwise, they warn, the markets will lose investors’ trust. “The regulator of our capital markets is running almost on empty,” they wrote.

The S.E.C. needs better technology and more employees. S.E.C. officials have pointed out that it took the commission three months to understand what happened during last May’s “flash crash,” because it took that long for its computers to handle all the trading data. The number of investment advisers that the S.E.C. must police has grown by half over the past decade and trading volume has doubled. In the years running up to the financial crisis, the commission’s staff declined.

Ms. Schapiro planned to hire 800 employees this year to beef up enforcement and meet the agency’s new duties. Those plans are on hold. The commission has also started cutting back on investigations and is considering canceling technology upgrades, including new data management systems and a new digital forensics lab.

The S.E.C.’s recent record was tarnished by its failure to uncover Bernard Madoff’s gargantuan Ponzi scheme, and it was caught off guard by the collapse of Bear Stearns and Lehman Brothers. The Bush administration’s lax approach to regulation should bear much of the blame. But a lack of qualified investigators was also a big problem. If the commission is to do its job right, it needs the resources to do it.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , | 6 Comments »

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 »

Maples Finance Shows as SIV for Deutsch Bank

Posted on March 15, 2010 by Neil Garfield

Tony,
I got an interesting email to my blog BUT when I replied POOF they disappeared! I have been researching this for a bit now.

I need information on the following tip:

“Deutsche Bank National Trust passed the certificate to the administator of the main trust Maples Finance Limited, You want to check out Indymac c1-1 Corp they are incorporated in Cayman Islands.”

This is where most of the Corporations are formed.

Maples Finance, which provides clients with a multi-jurisdictional legal and specialized management service from offices in Jersey, the British Virgin Islands and Dublin as well as the Cayman Islands. Maples Finance also provides management and administration services for Cayman Islands’ investment funds and Cayman Islands’ structured finance vehicles.

Maples Finance provides directives to structured finance vehicles which undertake a wide range of transactions including, loans and loan programmes, collateralized debt obligations (CDOs), cashflow CDOs, securitizations and structured investment vehicles.

All of which have been issued to and are held by Maples Finance Limited, a licensed trust company incorporated in the Cayman Islands (in such capacity, the ” Trustee Share“), under the terms of a declaration of trust in favor of charitable purposes. The Issuer will not have any material assets other than the Collateral Securities and certain other eligible assets. The Collateral Securities and such other eligible assets will be pledged to the Trustee as security for the Issuer’s obligations under the Notes and the Indenture.

This is where we need to find the info.

DinSFLA

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, HERS, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , , , , , | Leave a comment »

SEC JUST NOW SEEKING KEY INFORMATION ON MELTDOWN

Posted on December 18, 2009 by Neil Garfield

THANK YOU ALLAN AGAIN!!!

Editor’s Note: Allan is right about his frustration with a government that is so slow on the draw. Yet if history teaches us anything it is that government, especially our govenment, tends tomove very slowly except for “emergency” situations, when most of the actions are flawed.

It would be a good idea to contact the SEC, ask for their form and give them as much information a you can. Remember, every homeowner involved with a securitized mortgage was a “CDO Player.” Hearing from you will balance the scales a little. The SEC will soon take notice that homeowners were sold  security the same way that pension funds were sold securities at the other end of the securitization chain. THAT is where the scheme unravels. And smart securities class action lawyers will finally see that there is more money in this unravelling than anything they have ever worked on in their lives.  

Business
SEC JUST NOW SEEKING KEY INFORMATION ON MELTDOWN

by Jake Bernstein and Jesse Eisinger, ProPublica
– December 16, 2009 3:30 pm EST

This story is part of an ongoing investigation with NPR’s Planet Money [1].

Former SEC chairman Christopher Cox, right. (Chip Somodevilla/Getty Images)
Former SEC chairman Christopher Cox, right. (Chip Somodevilla/Getty Images)

Almost three years since banks started taking losses that led to the worst financial crisis since the Great Depression, the Securities and Exchange Commission is still asking basic questions about what happened.

Were you there?

If you were involved in the CDO business during the end days of the boom, please contact us.

 

(917) 512-0258 cdos@propublica.org [2]

The SEC is conducting an information-gathering sweep of the key players in the market for collateralized debt obligations, the bundles of mortgage securities whose sudden collapse in price was at the center of the meltdown of the global banking system.

In a letter dated Oct. 22, the SEC sent what amounts to a questionnaire to a number of collateral managers, the middlemen between the investment banks that created the complex financial products and the investors who bought them.

Collateralized debt obligations are made up of dozens if not hundreds of securities, which in turn are backed by underlying loans, such as mortgages. Investment banks underwrite the structures and recruit their investors. Collateral managers, brought in by the investment banks but paid by fees from the assets, select the securities and manage the structures on behalf of the investors. CDO managers have a fiduciary duty to manage the investments fairly for investors.

Since 2005, $1.3 trillion worth of CDOs have been issued, with a record $521 billion in 2006, according to the securities industry lobbying group SIFMA. The collapse in value of mortgage CDOs triggered the 2008 financial collapse.

ProPublica and NPR have confirmed that the SEC letter was sent to several managers, although the distribution list was likely industrywide. At the height of the boom in 2006, only 28 managers controlled about half of all CDOs, according to Standard and Poor’s.

Banks began disclosing the first big losses on CDOs in early 2007. The infamous Bear Stearns hedge funds ran into problems [3] beginning that summer. By that August, the credit markets began seizing up. Merrill Lynch and Citigroup were among the hardest hit by losses on bad investments in mortgage-based securities and CDOs.

The SEC’s letter focuses on information regarding “trading, allocation and valuations and advisers’ disclosure,” though it also asks for other details on how the managers ran their businesses. The letter requests information on CDOs issued since Jan. 1, 2006.

The letter asks collateral managers for information about what investments they made on their own behalf and how they valued these investments. Securities experts say the letter indicates that the agency is still gathering basic information about the CDO market, despite its centrality to the banking crisis.

“One wonders why this letter, especially given the general nature of it, is just now being sent. And why wasn’t it sent several years ago, as the CDO market was exploding?” says Lynn Turner, who was the SEC’s chief accountant in the late 1990s. “It makes it look like the SEC is several years behind the markets.”

Even Wall Street executives and securities lawyers who were involved in the CDO business at its height have privately expressed surprise that the SEC was only now contacting them for such rudimentary information.

The SEC declined to comment on the letter. As a policy, a spokesman said, the agency doesn’t comment on its regulatory actions. The SEC has jurisdiction over CDO managers,and enforces rules against securities manipulation, among other violations. The letter does not use the words “inquiry” or “investigation.”

Interviews with market participants and former regulators point to several areas that the SEC might be investigating. Some managers had their own in-house investment funds and may have taken positions that were in conflict with those of the investors in the structures that they managed. In some cases, their hedge funds may have bet against the very slices of the securities they were managing on behalf of the investors in the structure.

Underwriting investment banks often had influence over the investment choices some CDO managers made, giving rise to another possible conflict of interest. The agency may be looking at whether that influence was proper or not.

“The possibility for conflicts and self-dealing is huge,” says Turner, the former SEC chief accountant.

To date, the agency has little to show for its probes into the causes of the crisis that engulfed global financial markets just over a year ago. In June 2007, Christopher Cox, then the SEC chairman, testified before Congress that the agency had “about 12 investigations” [4] under way concerning CDOs and collateralized loan obligations and similar products. A little more than a year later, Cox told Congress that the number of investigations into the financial industry, including the subprime mortgage origination business, had ballooned to over 50 separate inquiries. [5]

There could be multiple reasons why investigations are proceeding slowly. Such cases are complex and require enormous resources and expertise. Regulators also face the hurdle of proving intent to defraud.

Under Cox’s stewardship, the SEC fell into disarray [6], and it was harshly criticized by Congress and its own inspector general, particularly for its failure to catch [7] the Ponzi scheme of Bernie Madoff. The turnover of the new administration, which ushered in new leadership at the much-criticized agency, has also likely slowed efforts. In recent months, under new Chairman Mary Schapiro, the SEC has made insider-trading inquiries a high priority.

So far, there have been few indictments or civil complaints. In a sign of how long these cases can take, the mortgage company New Century Financial Corporation disclosed in March 2007 that it was the subject of an SEC investigation [8] into possible insider stock sales and accounting irregularities. It wasn’t until last week — Dec. 7 — that the SEC filed a formal complaint against former executives of the company. The government’s highest-profile prosecution involving the financial collapse – the case against two managers of the Bear Stearns hedge fund for alleged securities and wire fraud – failed to gain a conviction when a jury decided [9] that the men were simply bad businessmen rather than criminals.

Were you involved in the CDO business in the latter stages of the boom? We want to talk to you. E-mail us at CDOS@propublica.org [10] or call us at               (917) 512-0258         (917) 512-0258.

Write to Jesse Eisinger at Jesse.Eisinger@propublica.org [11].

Write to Jake Bernstein at Jake.Bernstein@propublica.org [12].

Want to know more? Follow ProPublica on Facebook [13] and Twitter [14], and get ProPublica headlines delivered by e-mail every day [15].

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

FINALLY somebody’s paying George Santayana heed. “Those who cannot learn from history are doomed to repeat it.” My bet’s on repeating it, given how our political system works like a pendulum. How many bubbles did we experience in the last 10 years? What happens to regulation and resolve when there is a political changeover?

ALLAN
B e M o v e d @ A O L . c o m

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage | Tagged: , , , , , , , , , , , , | 6 Comments »

%d bloggers like this: