Tonight! Steamrolling Using Judicial Notice 6PM EST

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One of the things that irritates most homeowners and lawyers for foreclosure defense is how “evidence” is admitted that “proves” a fact that doesn’t exist. One of the tools for doing that is Judicial Notice or as we call it, “JN.” JN is used for documents that are inherently credible — not some document created by one of the litigants and uploaded to a quasi government site without any validation by any government entity. They are inherently credible because they were prepared by or taken from the records of a credible source — a party with not relationship to the parties in litigation and no stake in the outcome.

If you read the statute in your state you will see plenty of reasons why most documents proffered as being subject to Judicial Notice (JN) should be rejected as evidence without proper foundation and specific foundation for each issue addressed in the document. Foundation means testimony and maybe other documents for which there is a witness to provide the foundation.

In truth when the lawyers for the fictional claimant does this they are opening up the door as well as virtually admitting that they can’t prove the false fact without JN. By aggressively preserving and invoking objections and using motions to strike and motions in limine, as well as effective cross-examination, the truth of the matter asserted by the document can be eliminated.

Institutional litigants are misusing the court system throughout the dozens of state and Federal jurisdictions to get into evidence matters which are and should be barred from evidence or at least subject to dispute, and about which these same litigants often have no or little independent evidentiary support. One such major vehicle for advancing this practice is the use of Requests for Judicial Notice (RJN).

Documents uploaded to SEC.gov, for example, are proffered as subject to judicial notice, even though the SEC website acts merely as a platform for publication, and not a proper registry, and neither monitors nor validates any documents placed on their site.

In California, StorMedia,, Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9, has long controlled among other Cal cases RJNs in California litigation.  This case holds that “When judicial notice is taken of a document…the truthfulness and proper interpretation of the document are disputable.”

Yet it is very common in California foreclosure litigation for courts to treat RJNs as if they do establish the truth of the matter asserted within the documents. This enables institutional defendants in Cal. borrower foreclosure litigation, to point as evidence to Plaintiff’s presenting recorded documents only to dispute their content, as if the documents so presented and disputed are not subject to dispute, because of the taking of judicial notice.

Wells Fargo CEO Forced Out Over Scam Customer Accounts

What is important to recognize is that the presumptions from the bench that the banks would not intentionally commit crimes or violations is wrong. It is important because all legal presumptions are predicated upon the supposition of trustworthiness of the party proffering evidence. This presumption is wrong. The banks have been fabricating accounts, “business records” and claims for years throwing the mortgage market and the economy into a deep recession from which we have still not recovered. We can;t recover until the fraud stops.

see http://www.nationalmortgagenews.com/news/compliance-regulation/wells-fargo-ceo-john-stumpf-steps-down-1088708-1.html

It was the CFPB who uncovered this fraud committed by Wells Fargo. AND by the way the CFPB was NOT ruled unconstitutional. The judge merely declared its structure to be unconstitutional because it was not subject to proper oversight. The same judge in the same opinion said that the agency would continue under oversight of the President.

The well-publicized case of Wells Fargo misconduct doesn’t prove anything as to any particular pending case. But it does point to the fact that Wells Fargo (like other TBTF banks) was and is perfectly willing to engage in false representations and creation of fabricated, forged and false documentation in order to increase the value of its stock. Apparently Wells Fargo decided that its stock price is more important than its brand. Other TBTF banks have done the same.

The creation of false accounts for retail bank customers is identical to the creation of false accounts from institutional investors who were led to believe that their money was being used to fund a new entity (an IPO) into which their their money would be placed for management. The entity was mostly a REMIC Trust that existed only on paper and never received the proceeds of sale of MBS instruments. The REMIC was supposed to acquire loans that had been properly originated and subject to the same underwriting standards as the banks would do if they were lending the money themselves. None of that happened.

The money from the MBS purchasers was instead diverted from the REMIC and used to secretly fund loans and to create the illusion of trading profits that were in actuality theft from those investors. The exorbitant fees arising out the “closing” of each mortgage loan was never disclosed. Had the MBS purchasers and homeowners known the truth, they would have known that the investment bank that created this illusion was diverting trillions of dollars away from the economy and which would be lost forever to both the MBS investors and the homeowners who were pawns in this scheme.

MBS purchasers believed they had accounts with their share of MBS issued by Trusts that were funded with investor money and which then acquired loans. In fact, all that happened, was that false end of month statements were delivered to the MBS purchasers lulling them into a sense of false security. The “closing” documents on the “loans” gave the MBS purchasers no interest in the debt, note or mortgage or deed of trust. The investors were left naked in the wind. The payments they were receiving were coming from part of their own money plus the part of the payments of borrowers. The investment bank and its chain of conduits reaped huge fees for these fictional accounts.

Ditching the CEO is just more PR. He still walks away with a king’s ransom.

Trial Objections in Foreclosures

 

NOTE: This post is for attorneys only. Pro se litigants even if they are highly sophisticated are not likely to be able to apply the content of this article without knowledge and experience in trial law. Nothing in this article should be construed as an acceptable substitute for consultation with a licensed knowledgeable trial lawyer.

If you need help with objections, then you probably need our litigation support, so please call my office at 850-765-1236.

It is of course impossible for me to predict how the Plaintiff will attempt to present their case. The main rule is that objections are better raised prematurely than late. The earliest time the objection can be raised it should be raised. In these cases the primary objections are lack of foundation and hearsay.

As to lack of foundation, the real issue is whether the witness is really competent to testify. The rules, as you know, consist of four elements — oath, personal perception, independent recall, and the ability to communicate. The corporate representative should be nailed on lack of personal knowledge — if they had nothing to do with the closing, the funding of the loan, the execution of the documents, delivery of the note, delivery of the mortgage etc., or processing of payments or even the production of the reports or the program that presents the data from which the report populates the information the bank is attempting to present. Generally they fail on any personal knowledge.
The only thing that could enable them to be there is whether they can testify using hearsay, which is generally barred from evidence. If that is all they have, then the witness is not competent to testify. The objection should be made at the moment the attorney has elicited from the witness the necessary admissions to establish the lack of personal perception, personal knowledge.
On hearsay, their information is usually obtained from what they were told by others and what is on the computers of the forecloser like BofA which based on the transcript from cases run on at least 2 server systems and probably a third, if you include BAC/Countrywide. All of such testimony and any documents printed off the computers are hearsay and therefore are barred — unless the bank can establish that the information is credible because it satisfies the elements of an exception to hearsay. The only exception to hearsay that usually comes up is the business records exception. Any other testimony about what others told the witness is hearsay and is still barred.
The business records exception can only be satisfied if they satisfy the elements of the exception. First the point needs to be made that these records are from a party to litigation and are therefore subject to closer scrutiny because they would be motivated to change their documents to be self serving. If you have any documentation to show that they omitted payments received in their demand or that there are other financial anomalies already known it could be used to bolster your argument as an example of how they have manipulated the documents and created or fabricated “reports” strictly for trial and therefore are not regular business records created at the or close to the time of an event or payment.
The business records exception requires the records custodian, first and foremost. Since the bank never brings their records custodian to court, they are now two steps removed from credibility — the first being that they are not some uninterested third party and the second that they are not even bringing their records custodian to court to state under oath that the report being presented is simply a printout of regular business records kept by bank of America.
So the exception to business records under which they will attempt to get the testimony of their witness in will be that the witness has personal knowledge of the record keeping at Bank of America and this is where lawyers are winning their cases and barring the evidence from coming in. Because the witnesses are most often professional witnesses who actually know nothing about anything and frequently have reviewed the file minutes before they entered the courtroom.
The usual way the evidence gets in is by counsel for the homeowner failing to object. That is because failure to object allows the evidence in and once in it generally can’t be removed. It is considered credible simply because the opposing side didn’t object.
TRAPDOOR: Waking up at the end of a long stream of questions that are all objectionable for lack of foundation (showing that the witness has any personal knowledge related to the question) or because of hearsay, the objection will then be denied as late. So the objection must be raised with each question before the witness answers, and if the witness answers anyway, the response should be subject to a motion to strike.
THE USUAL SCENARIO: The lawyer will ask or the witness will say they are “familiar” with the practices for record keeping. That is insufficient. On voir dire, you could establish that the witness has no knowledge and nothing to recall and that their intention is to testify what the documents in front of him say. That is “hearsay on hearsay.” That establishes, if you object, that the witness is not competent to testify.
The bottom line is that the witness must be able to establish that they personally know that the records and everything on them are true. In order for the records to be admitted there must be a foundation where the witness says they actually know that the printouts being submitted are the same as what is on the BofA computers and what is on the BofA computers was put there in the regular course of business and not just in preparation for trial. And they must testify that these records are permanent and not subject to change. If they are subject to change by anyone with access they lack credibility because they may have been changed for the express purpose of proving a point in trial rather than a mere reflection of regular business transactions.
There is plenty of law nationwide on these subjects. Personal knowledge, “familiarity with the records,” and testifying about what the records say are all resolved in favor of the objector. The witness cannot read from or testify from memory of what the records say. The witness must know that the facts shown in those records are true. This they usually cannot do.

How Do I Use an Expert Declaration?

With judges under pressure to clear their calendar, the strategy of the banks in delaying prosecution of foreclosure cases is coming to an end. And the opportunity for the borrower, as well as a good reason for action, has just begun. An aggressive approach is more likely to yield good results than any strategy predicated upon delay. And judges are prone to blame the delay on the homeowner who wants to stay in his home rent-free for as long as possible.

So having an aggressive plan to prosecute the case with solid answers and affirmative defenses is key to getting the judges curiosity — why is the homeowner trying so hard to move the case along and the bank stonewalling and delaying the action alleging they need relief? Some lawyers, like Jeff Barnes, don’t know how to litigate with kid gloves on. When they take a case it is to draw blood and Barnes has established himself as not only an aggressive attorney but one who often wins a satisfactory result for his clients.

My expert declaration covers the gamut from property issues through UCC and contract issues. Securitization is something I understand very well — how it is intended to be used, how the law got passed exempting it from being characterized as securities or insurance products and how it was sold to Congress and Clinton as an innovative way to spread and reduce risk of loss, thus raising an investment with a medium degree of risk of loss to very low and therefore suitable for stable managed funds who are required to put their money into extremely low risk triple A rated investments.

All that said, for all I know and can say, neither my declaration nor testimony is ever dispositive in the final ruling of the case, with a few exceptions. On the other hand out of hundreds of times my declarations or testimony has been used in court, the number of times the banks have proffered an alternate “expert” to say I was wrong, mistaken or had used defective analysis to reach my conclusions is ZERO. And the banks took my deposition in a class action suit in which I was admitted as an expert witness in Federal Court — the deposition lasted six full working days 9:00am to 5:00pm. About the only negative thing they had to say after hours and hours of testimony was that my opinion was “grandiose” to which I answered that it was not nearly as grandiose as the fraud their clients were perpetrating upon our society.

So the most common question is how can I use your expert declaration? And the first answer I  always give is (a) my declaration, whether notarized or not, is never and should never be a substitute for actual facts applicable to the actual case which requires actual witnesses who have actual knowledge (usually from the opposition in discovery) and (b) you should have a plan for your case that does not call for a knock-out punch in the first hearing. If you think that is going to happen you are deluding yourself.

The most common attack on my affidavit is a motion to strike or a memorandum that alleges that I am not a credible expert. But the rules on admission of expert testimony are so lax that almost anyone can be admitted as an expert but he Judge is not required to presume the expert knows what he is talking about or has anything of value to offer. Thus a proper foundation of facts, timelines, paper trails and money trails needs to be laid out in front of the judge in a manner and form that makes it easy to understand. The declaration is only one step of a multistage process. When the opposition attacks the declaration, they are trying to distract the court from the real issues.

The best and most fruitful uses of an expert declaration are to use them when battling for information through the discovery. That is where cases are often won and lost, where cases end up being settled to the satisfaction of the borrower or lost, pending appeal. The expert declaration tells the court what the expert looked at and raises issues and opinions including the information that is absent which will resolve the issue of whether the forecloser actually has a cause of action upon which relief could be granted (an inquiry applicable to both judicial and non-judicial states).
Expert declarations have been used with success in hearings on discovery because it explains why you need to take the deposition of a specific witness or compel production of certain documents or compel answers to interrogatories. Once that order is entered agreeing that you are entitled to  the information it is often the case that the mater is settled within hours or days.
To a lesser degree expert declarations have been successful in non-judicial states where the homeowner seeks a temporary restraining order. And a fair amount of traction has been seen where it is used to show the court hat there are material issues of fact in dispute to defeat a motion for summary judgment, sometimes effective if there is a cross-motion for summary judgment for the homeowner where there is an effective attack on the affidavit filed in support of the forecloser’s motion for summary judgment.
The least traction for the expert declaration is where homeowners attempt to use it as a substitute for evidence — which means no live witnesses testifying to facts that lay the foundation for introduction of documents into evidence. And there are mixed results on motions to lift stay — but even where effective temporarily the debtor is usually required to file an adversary action.
After you file the declaration along with some pleading that states the purpose of the filing, you will most likely be met with a barrage of attacks on the use of the affidavit. They are trying to bait you into an argument about me and whether anything I said was true. Of course they do not submit an affidavit from an expert who comes to contrary conclusions; but even if the declaration is perfect, it is no substitute for real evidence. It is the reason why you need to get a court order requiring the forecloser to answer discovery and how they should answer it. It is support for why you believe your discovery will lead to admissible evidence or cut short the litigation. The declaration explains why you want to pursue the money trail to see of negotiation of the note and mortgage ever took place. The assignment says yes but if the payment isn’t there, no transaction exists. The UCC and contract law are in complete agreement — offer, acceptance and payment are required to enforce a contract. And on the offer side, you can either start with the investor or the borrower.
In live testimony it is my job to show the court what really happened not by piling presumption on opinions but by pointing to the facts you revealed in discovery and then explaining what transactions actually occurred. The only actual transaction — the only time money exchanged hands was when investors advanced money to be used for the acquisition or origination of loans.
But the intermediaries usurped the money and kept part of it instead of funding mortgages. And the intermediaries diverted title to the loan documents from the investors and claimed ownership so they could create the illusion of an insurable interest and the illusion of a risk of loss justifying the credit default swap contracts.
It was also used by the banks to sell worthless mortgage bonds to the Federal Reserve. We know now that the “trustee” of the REMIC trust never received any of the investment dollars advanced by the investors. The reason we know that the mortgage bonds are worthless is that there is no record of the existence of a trust account for the REMIC pool. Hence, the trust had no money to buy or originate the loan.

But it is nonetheless true that the investors advanced money and the borrowers got some of it. The amount received by or on behalf of the borrower is a legitimate debt owed by the borrowers to the investors as lenders. If you say otherwise, your entire argument will be viewed with justifiable skepticism. But the investors cannot be grouped by REMIC common law trusts under New York law because they too, like the assignments and allonges and endorsements, lack any money or other transfer of consideration in exchange  for the loan.

So we have consideration without a REMIC trust, without an enforceable contract which means that the debt existed but there were no agreed terms — the note and bond terms are very different, contrary to the requirements of TILA and Reg Z. Thus the investors may have received bonds issued by the REMIC trust, but their money never went into the trust contrary to the terms of the prospectus. So the investors are owed the money as a group by the borrowers as a group. That means the only way to refer to the investors as a group (contrary to their belief because they think their money went into the REMIC trust) is a partnership arising by operation of law. That is a common law general partnership. But because equitable liens a NOT allowed by law, they have n way to use the mortgage lien or the note. But they do have a claim, even if it is unsecured.

And the amount owed to the investors is different than the amount of principal on the defective notes and mortgages. That is because the investment bank took more money than it used for funding mortgages and pocketed the difference. So the transaction with the borrower gives rise to a liability to the investor lenders but the borrowers are only one of several co-obligors by contract and through tort theory. And the money received by the intermediary bank that claimed the bond and loans as their own using investor money should be credited to the receivable account of the investor. The argument here is that the investment banks cannot pretend to be agents of the investors for purpose for taking money from the investors and then claim not to be the agent for the purpose of receiving money from co-obligors including the homeowner.

It is only by untangling this mess that the request for modification from the investors can be directed to the right parties but that requires the investors’ identities to be revealed. There can be no meaningful modification, mediation or litigation without getting this straight.
Let’s start with the borrower. The borrower executes a note and mortgage. If the borrower denies ever getting a loan from the payee or mortgagee or beneficiary, then the issue is in dispute as to whether the borrower’s initial transaction was anything more than offer for someone to accept.
TILA says the lender must be disclosed, as well as common sense. If the payee was merely a nominee performing fee for service, then there is no payee and no mortgagee or beneficiary — and under property law there is nobody known to borrower who can execute a satisfaction of mortgage on the day of closing.
So we have the issuance of a note that might qualify as a security that is NOT exempted from registration and security regulations and/or the note and mortgage constitute an offer. The fact that there was no lender disclosed and no disclosed source of funds (a table funded loan labeled predatory per se by Reg Z and TILA) means that the terms of the note and the terms of the security instrument have not been accepted — and at this pointing our example there is only one party who can accept it — the party who loaned actual money to the borrower — I.e., the sourceof the  funds.
Now as it turns out that the source if funds was a group of investors who were not offered the note nor offered the terms expressed on the note and instead they agreed to the terms of the prospectus/indenture. But those terms were immediately breached just as the law was immediately broken when the borrower was tricked into executing a security issuance or an offer.
The investors thought their money was going into a REMIC trust just like the borrower trout that the originator was indeed his lender. Neither the investors nor the borrowers were told that there were dozens of intermediaries who were making money off of the issuance of the bond and the issuance of the note, neither of which bound the investor lender nor the borrower to anything. But nobody except the investment banks acting supposedly as intermediaries knew that the banks were claiming town both the bonds and the loans — at least long enough to trade on them.
Since the borrower did not agree to the terms of the bond and the investor didn’t agree to the terms of the note, they have no offer, they have no acceptance but they do have consideration. I have appeared in several class actions in Phoenix and Reno and dozens of cases in bankruptcy court, civil state and Federal cases.
Where the lawyer used my declaration as a means to an end — discovery, they got good results. Where they tried to suit in lieu of admissible evidence it is not so valuable. A few hundred motions for summary judgment have been turned down based upon my affidavit, but in other cases, the Judge accepted me as an expert but said that my opinion evidence was not supported by supporting affidavits from people with personal knowledge — I.e., competent witnesses to lay a competent foundation. Thus expert declarations are a valuable tool if they are backed up by real facts and issues — a task for the lawyer or pro se litigant, not the expert unless you are going to pay tens of thousands of dollars using the expert’s valuable time to perform clerical work.

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

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.

Funny Thing About Trust and Credibility

Editor’s Note: business seems more concrete and logical than say, religion. But the truth is that all of finance and the economy is based upon three things: (1) trust, (2) credibility and (3) belief.

Example: If you believed that the U.S. Dollar was going to be worthless (as has happened in our history) would you believe it is worth anything? Obviously not. would you take it for payment? Obviously not. Then why are we expecting any long-term solution to come out of our current policy of pretending that the banks did ANYTHING right? The world is waiting for an answer.

U.S> domestic and foreign policy is restricted by the resentment arising from the act of financial terrorism that was perpetrated by a select few on wall Street. Our financial sector continues to drag down the sparkling image of the the U.S. as the world’s engine of growth and democracy.

The second part is worse than the first. With median incomes continuing to decline the price of housing will also continue to decline. Wealth will continue to vanish — even amongst those who owns and rents property to others. If they can’t get a monthly rental equal to their payments, strategic defaults like Stuyvesant will become common place putting even more housing in disrepair.

The simple truth is that we continue to pretend. It is a fairy tale that we have enough money to buy our way out of this and a continuing lie for us to continue to allow companies, banks, lenders, pretender lenders and others report earnings and assets they don’t have. The “equity” is gone.

The value of the mortgage backed securities is, in my opinion, zero unless some fair system of distributing the wealth is worked out after clawing back all those illegal profits. double undisclosed yield spread premiums and collections on insurance where the beneficiary was not the one who had lost any money. Fair market valuation is the only answer across the board.

Only when we transparently report that some very big companies are actually broke and only when we return the bottom half of the country to some sort of normalcy will we have a foundation for recovery.

Will We Ever Again Trust Wall Street?

by Jason Zweig
Monday, February 8, 2010

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For many investors, the market’s turbulence hasn’t just destroyed wealth. It has shattered their faith in the financial system itself. Consider Philip Eberlin, 56 years old, who runs a woodwork-restoration business in Chicago Heights, Ill. Trading hot stocks a decade ago, Mr. Eberlin got burned on picks like Krispy Kreme and Tyco. In 2007 he got back into stocks, only to take another hit.

Having been burned twice in 10 years,” says Mr. Eberlin, he now has about 80% of his family’s assets   protected from the market” in certificates of deposit and fixed annuities. “I don’t have trust in Wall Street to help the small investor in any way, shape or form.” Mr. Eberlin isn’t alone. Late last year, Decision Research of Eugene, Ore., asked Americans how much they trusted bankers and other Wall Street leaders “to reduce the risk of the financial challenges the country is facing now.” On a scale of 1 to 5, with 1 meaning no trust at all, the rating averaged a paltry 1.7.

With such a loss of faith, how will companies be able to obtain the capital they need to expand? The foundations of the financial markets ultimately rest upon the confidence of mom-and-pop investors across the country.  But every investor has a fundamental need to believe that the world is just—that good people are ultimately rewarded, that bad people are eventually punished and that the system isn’t rigged to favor an undeserving few. This belief in a just world is partly delusional; most of us realize that nice guys often finish last. But this delusion makes short-term setbacks endurable. “A belief that the world is fair and predictable is necessary in order for people to delay gratification and to make investments that will pay off in the long run,” says James Olson, a psychologist at the University of Western Ontario.

So when bad things happen, “people often prefer to blame themselves rather than believe they live in a chaotic and unjust world,” says Dale Miller, a psychology professor at Stanford University.After tech stocks crashed in 2000-2001, for instance, many investors kicked themselves for taking foolish risks. This time around, however, many investors who followed the best advice were punished the worst. Someone who held a total-stock-market index fund lost more than 58% from October 2007 through March 2009 and remains 31% behind even after last year’s recovery.

These people can’t blame themselves; they did as they had been told. Meanwhile, they watched Wall Street firms parcel out billions in bonuses. I believe the old truths remain valid: Buying and holding a diversified stock portfolio still makes sense. Paradoxically, as fewer people cling to their faith in traditional stock investing, the future rewards from it are likely to grow greater. But that can take time. In 1952, two full decades after the Great Crash hit bottom, only 19% of wealthy Americans regarded stocks as the wisest investment choice, according to a Federal Reserve survey. Most investors thus sat out the great bull market of the 1950s, when stocks gained 19.4% annually.

How can faith be restored?  Wall Street firms need to be forthright in admitting their shortcomings. The more they protest their innocence, the more they make the typical investor feel that the financial world is unjust. The Pecora hearings, held in the U.S. Senate in the 1930s, served partly as a form of public expiation, in which Wall Street’s leaders apologized for their firms’ conduct. The Financial Crisis Inquiry Commission, formed by Congress in 2009 and now holding its own hearings, may help investors feel that Wall Street can own up to its mistakes. Finally, financial advisers need to be much less dogmatic and confident in their predictions. By admitting the extent of their own ignorance today, they would help prevent investors from feeling railroaded tomorrow.

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