FASB on Sham Transactions

Posted on October 12, 2016 by Neil Garfield
See AU Section 332 Auditing Derivative Instruments, hedging Activities and Investment in Securities.
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Every written instrument is by definition the memorialization of an event. Absent the event in the real world, the instrument is worthless at best and at worst fraudulent. This is derived from the my knowledge of generally accepted accounting principles (GAAP) as enunciated by the Financial Accounting Standards Board (FASB) supported by the American Institute of Certified Public Accountants (AICPA).
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In any audit of bookkeeping and/or accounting records written instruments are the starting point for inquiry as to whether the documents represents a true and fair representation of an actual transaction. While the auditor may be aware of certain legal presumptions concerning the validity of a facially valid instrument, the auditor is tasked with testing all transactions including those that appear to possess the attributes of facial validity.
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Specifically the audit process for alleged transactions relating to derivative securities (mortgage backed bonds, for example) goes further than standard auditing confirmation under the rules recognized as nationwide and binding. In large part because of the admissions or quasi admissions in settlements with government regulators, attorneys general and investors, it has become obvious that transactions that are related to activity in the derivative marketplace are subject to special scrutiny. Auditors are required to test the following, among other things:
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  1. Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.
  2. Completeness. All transactions and events that should have been recorded have been recorded.
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In the definition of the confirmation process required by auditors, it is clearly stated that a plan of confirmation is to be used. Facially valid documents are not excluded from the confirmation process. And as seen above, transactions relating to alleged securitization are subject to specific testing. The courts are out of their element in assessing the risk of fraudulent representation because the Courts’ inquiry generally starts and ends with the written instrument.
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The Auditor wants to know if the transaction memorialized in that instrument actually took place and wants to see evidence to that effect — i.e., the money trail as represented by cash flow, balance sheet and income statements as well as the general ledger (and supporting documents, bank statements and receipts) of the entity that claims to have been a party to a transaction and now claims an asset as a result.
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These sections are the beginning point for discovery and the foundation for objections when “business records” are proffered at trial as exceptions to the hearsay rule.
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The big question is whether the transactions that are represented in court as loans or assignments or endorsement are actually reflected on the general ledger, bookkeeping records and accounting records of the party who was supposedly involved in any of those transactions is proffering false testimony or fabricated documents into evidence.
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The answer is simple: based upon reliable sources the facts are that the big banks have produced a convoluted set records of loosely connected entities. One fact is clear: the acquisition of loans is generally not found in their records nor supported by any entry reflecting a financial transaction. The little originators and banks are generally buried after having gone out of business, but the ones that are left will show that most originated “loans” did not result in the flow of cash from the originator to the alleged borrower.
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My recommendation is that foreclosure defense attorneys employ the use of CPA’s who have specific auditing experience and knowledge. The testimony of these experts might be invaluable to the discovery process and lead the opposing side to soften their approach.

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The Banker That Used Bailout to Buy a Condo

Posted on August 28, 2013 by Neil Garfield

Just a short note on this. Think about it. Why would he have taken the money and used it for a condo when he had to cover bank losses on mortgage loans that were in default?

Answer: the bank had no losses, so there was nothing to account for.

This money wasn’t income. It couldn’t be booked as capital contribution, but his use of it to buy a condo didn’t harm the bank one bit. Their balance sheet is unchanged.

My guess is that if he asked an attorney familiar with accounting for banks, he would have suggested that the bank use the money to buy something that can be capitalized on the balance sheet.

Otherwise the financial statements look cooked by the receipt of “bailout” money when there were no losses to bailout. There were no losses to bailout because his bank never assumed the risk of loss on the subject securitized loans.

His bank never advanced any funds for the loans. His bank never used its credit to fund the loans. His bank was most probably an originator who was paid for services rendered. What services? The service of acting as though they were the lender when they were not. My guess is that unless they get him on some technicality his prosecution and sentence, if any, will be light.

Banker Used Bailout Money To Buy Luxury Condo
http://breakingnewsusa.com/2013/08/banker-bailout-money-buy-luxury-condo/

Filed under: CDO, CORRUPTION, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , | 13 Comments »

New Accounting Rules for Banks Could Break Them

Posted on November 5, 2012 by Neil Garfield
The IASB and FASB have been working on accounting rules for the “losses” at the banks. Someone is either in for a surprise or somehow the banks will escape the rules. One thing is certain, that the accounting firms that provide the auditing services and certification of the statements of the mega banks are in bind. If they tell the truth, the bank may fail and the firm itself could be sued because it didn’t spot the problems before and report on them. If they lie, which everyone on Wall Street and maybe even in government wants them to do, they are not living up to the standards of their profession. As the truth is unraveled in courts where more and more borrowers are winning cases, both the bank and accounting firms are going to be caught red-faced.
I still want to know how these banks ended up booking unsold mortgage bonds as assets on their balance sheet. Do they expect us to believe that the investment bank actually advanced money for these bonds? The story being peddled on Wall Street and printed by mainstream media is wrong. When will we stop accepting the word of Wall Street leaders who got us into this mess? Remember these are the same bankers who lied to investors, lied to rating agencies, lied to insurers, lied to the their regulators, lied to the federal government and lied to borrowers. It seems to strain all bounds of reason to actually think that that they are suddenly telling the truth now.
Either investors bought mortgage backed certificates (bogus or not) or they did not. If they did, that money was used to fund mortgage closings downstream and it was used as the personal piggy bank of each investment firm. It follows inevitably to say that the banks were not funding the loans and hence had no risks of default. Yet they claimed the losses anyway.
They used investor money that was supposed to go to funding mortgages to gamble on the quality of the mortgage bonds hoping and making sure they could pull the rug out from under the same people they had sold the certificates. And they made sure that even the best tranche was saddled with making good on the worst tranche so that even those loans would be declared in default for purposes of collecting the insurance that should have gone to the investors, the credit default swap proceeds that should have gone to investors and the taxpayer and Federal reserve bailouts that should have gone to investors.
The creditors, i.e., the actual lenders in the loan transactions, were denied disclosure and payment of money received by their agents on Wall Street who “helped” them buy these bogus mortgage backed certificates. The banks claimed the losses that the investors eventually bore, when they knew they were getting the insurance and bailout money. They should have given the money to  investors and refunded the money that was based upon pure lies. The mortgage assets they carry on their balance sheets are also lies in large measure. You simply cannot convince me or any reasonable person that in the waning days of the mortgage meltdown, when everyone knew this scheme was crashing, that these very smart investment bankers starting buying the mortgage bonds themselves.
In this sense, the investment bankers and the investors must be considered as one entity or at least principal and agent. The money was received, it should have been booked as loss mitigation for the investors and that would have reduced the receivable on the books of the investors. Several investor groups have sued the banks saying as much. And those cases are being settled which means we know that the receivables of the lender-investors has been reduced or eliminated.
Once the receivable is reduced — for any reason relating to payment received in money — the payable must be correspondingly reduced, which means the homeowner doesn’t owe as much as he thinks nor as much as the parties claiming foreclosure. Remember, homeowners didn’t crate this false securitization scheme that covered up a simple PONZI scheme. It was the bankers who did this, seeking windfall. That part of the windfall will now start falling in the homeowners’ direction is simply turnabout is fair play.

This was all passed off as bad judgment — description that is insulting. This was intentional. Wall Street is all about making the money off of other people’s money. And that is exactly what they did. And now they are screwing the investors, screwing the taxpayers, screwing the borrowers and taking the homes too. This goes beyond unfair; it is theft.

New loan loss rules expected early next year
http://www.accountancyage.com/aa/news/2222362/new-loan-loss-rules-expected-early-next-year

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , | 35 Comments »

Leslie Seidman: Lighting Up a Dark Room at the FASB

Posted on December 27, 2010 by Neil Garfield

Leslie F. Seidman
Chairman, FASB

EDITOR’S COMMENT:

You probably don’t know the name Seidman, much less  Leslie Seidman. But back in the 1960’s when the accounting rules were first being changed (causing Briloff to write the book Unaccountable Accounting), the Seidman accounting firm was one of the few who understood the significance and moral hazard of what was being laid at the foundation of required disclosure and certification of financial statements. Neither Seidman nor Briloff got the attention they deserved because they were bearing messages that nobody wanted to hear. The usual excuses of apparent “transparency” and facilitating free flow of capital and commerce were used to justify giving management the right to basically tell you what you wanted to hear if you were holding the stock or bond, or to induce you to buy if you were a prospective investor.

The eventual changes were monumental in scope, misleading in nature and essentially legitimized fraud on the securities exchanges, which had a catalytic effect on the fringe shadow markets where regulation was already spotty at best.

Now through a fluke of circumstance, Leslie Seidman has become chairman of the Financial Accounting Standards Board, and stands in a position similar to Elizabeth Warren, to change the way business is reported on Wall Street — a fact making many people nervous all over the world of finance. The FASB makes the rules on generally accepted accounting practices (GAAP). She has no incentive that we know of to do anything but the job to which she was appointed, without favoritism to Wall Street, business or anyone else. And she stands a good chance of re-appointment when her term runs out after the previous chairman suddenly stepped down.

This time there is a light at the end of the tunnel and it’s name is Seidman — a long-standing reputable name in the field of accounting. Let’s hope she is able to push through the reforms required to bring us back to days when we could actually know the condition of companies, cities, states and the federal government. Maybe we could even bring to light “selling forward” and price earnings ratios on “forward earnings”. The possibilities are endless. You may not know the name Leslie Seidman, but if the U.S. regains respect in the world of finance, it will be because of people like Seidman, Shapiro at the SEC, and Warren at the Consumer Protection Agency.

PRESS RELEASE:

Leslie F. Seidman was named Chairman of the Financial Accounting Standards Board (FASB) by the Financial Accounting Foundation, effective December 23, 2010. She was originally appointed to the FASB in July 2003 and reappointed to a second term in July 2006.

As Chairman of the FASB, Ms. Seidman is responsible for managing the organization’s day-to-day activities and leading the Board’s efforts to develop high-quality financial reporting standards that result in decision-useful information for investors and other users of financial statements.

From 1994–1999, Ms. Seidman was a member of the FASB staff. She initially joined the organization as an Industry Fellow, after which she served as a Project Manager and as the Assistant Director of Research and Technical Activities. As Assistant Director, she supervised staff members dealing with implementation and practice issues, including the FASB’s Emerging Issues Task Force, and had liaison responsibilities for the Securities and Exchange Commission and the regulators of financial institutions.

In between her two tenures at the FASB, Ms. Seidman founded and managed a financial reporting consulting firm, serving corporations, accounting firms and other organizations. Prior to her Fellowship at the FASB, Ms. Seidman was a vice president in the accounting policies department of J.P. Morgan & Co. Inc., where she was responsible for establishing accounting policies for new financial products, particularly securities and derivatives, and analyzing and implementing new accounting standards. Ms. Seidman started her career at Arthur Young & Co. (now Ernst & Young, LLP), as a member of the audit staff, serving clients in the retail, publishing and venture capital industries.

A member of the AICPA, the American Women’s Society of CPAs, and the Institute of Management Accountants, Ms. Seidman earned an M.S. degree in accounting from New York University and a B.A. degree in English from Colgate University.

lfseidman@fasb.org

 

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , | 2 Comments »

TRUE SALE and ASSIGNMENTS: The Nature of REMIC

Posted on January 25, 2010 by Neil Garfield

From “Anonymous”

Editor’s Post: It’s always a pleasure to read something where someone actually knows what they are talking about. The following post was picked up from the comments. The key points that are relevant to the Qualified Written Request and Discovery are

1. In the shuffling of paperwork, where was a “true sale” of the pool , a portion of the pool or any of the alleged loan obligations?

2. This material doesn’t come from someone’s head. It comes from established rules from the Financial Accounting Standards Board, statutes and administrative rules.

3. If the “loan” doesn’t show up on the balance sheet of the entity making a claim it is an admission that they are not a creditor. This takes some digging. Individual loans are a rarely shown on any balance sheet. They are shown on the worksheets or the equivalent of the bookkeeping department and the accountant who prepared the financial statements. Deposing the accountant for the company in question might get you the information you need and make the other side pretty nervous that you are zeroing in on their game. Deposing the Treasurer or CFO might get you even more. In many cases these entities NEVER booked any loans. They ONLY showed fees on their income statement which means that they admit they only provided a service (to whom?) in passing the “loan” through as a conduit.

4. Timing of the “assignments.” Besides the obvious fabrications that have been discussed in these pages, if you actually demand and get the enabling documents you will find, most of the time, that the requirements have NOT been met for acceptance of the assignment. The author points out that there is usually a 90-day rule, after which the the assignment is by definition not accepted. But there are other requirements as well, especially the one that says that the assignment must be recorded or in recordable form, which generally speaking it is not.

5. The sale, according to the paperwork, is to the underwriter, not the “Trust” (SPV). So you have a right to challenge the assertion that the “Trustee” is a Trustee, that the “Trust” is a trust and that there is anything in the trust. But I would add that the PRACTICE here was the selling forward of the mortgage backed security which means they were selling something they didn’t have. So the LEGAL title to the paper MIGHT not inure to the benefit of the holder of the mortgage backed bond; but it is equally true that they already “promised” the investor that they WOULD own the “loans”, and the investor is the only one who advanced money (and thus the only one meeting the definition of creditor). Hence there MUST be an equitable right by MBS holders to make a claim — the question being against whom — the homeowner, the investment banker or someone else? Your point in Court should NOT be to try to cover this abstractly with the Judge but only to have an expert witness that would make the assertion backing up your allegations. Your strategy is simply to say that according to the information you have there is a question of fact before the court as to what entity, if any, has this loan on their balance sheet? That is a question for discovery. And once that entity has been identified then you would want to discover the claims of third parties who could or would make a claim on that “asset.”

6. The author’s statement that the investor does not show the loan on its balance sheet is therefore both right and wrong. The investor bought a bond that is payable by an entity that issued the bond. That entity is not the homeowner and therefore it could be argued that the homeowner, who was not party to that transaction, does not have any obligation to the investor and that therefore the entry on the balance sheet of the pension fund investor would not account for the “loan.” BUT, the bond contains a conveyance of a percentage interest in a pool (which as we have seen might not exist), which purportedly includes “loans” of which the Homeowner’s deal was one. Thus effectively the ONLY party who could make an accounting entry for the loan in compliance with generally accepted accounting practices, is the investor. It comes down to the most basic of double entry bookkeeping practice. A debit from cash and a credit to receivables.

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The “true sale” concept was the focus of FASB 166 and 167. Once the market crisis hit, intervention to support the SPVs rendered any “true sale” negated because there can be no intervention under a true sale.

Also, Mike H. is right regarding REMICs and ninety-day rule. A REMIC is a static fund and no mortgages can be added after 90 days (very limited exception). Many assignments are long after the 90 days and some are not even effectuated to the cutoff date (or 90 day rule) of the REMIC. Even if effectuated, and due to the dissolution of REMIC (violation of “true sale” by intervention), assignments are not valid. The problem is that if the loan is in default, it is no longer a pass-through security held by any trust. It has been removed.

As a result, assignments presented by foreclosure attorneys in court is probably not the LAST assignment. As discussed, collection rights are sold after the swap is paid.

Although courts view assignment and sale as the same thing for collection rights. It is not the same thing. In the process of securitization the mortgage loans are SOLD to security underwriters (we never see this sale in the chain), and the cash flows passed-through are assigned. The security underwriter still has the loan on their books (even if concealed by off-balance sheet conduit). Once in default, the loan is charged-off, and is no longer an asset, and the assignment of cash flows is also extinguished..

Again, the Federal Reserve, in Interim Opinion for TILA Amendment, has emphasized that the creditor is the one who must account for the loan on their balance sheet. It is not investors that have beneficial interests in REMICS, Pass-throughs, or any other security. Question is – who now is accounting for collection rights on it’s balance sheet. Who was accounting for rights at time of foreclosure initiation. How much did they pay for those rights??

There seems to be much confusion regarding the word “investor.” For beneficial interest in securities one may be called an “investor”. But this investor does not account for mortgage loan on its books. In terms of mortgage loan ownership, “investor” may also be used instead of “creditor.” But this investor accounts for mortgage loan (or collection rights) on its books – that is the investor you want to know.

Any last assignment recorded is likely NOT the actual last assignment executed. Foreclosure attorneys ignore this because they reason that the default derivatives attach the current owner/investor to the original trust. This is false – as derivatives are not certificates and not securities – and not part of the trust. The default loan is gone from the trust – gone from banks books – and in the hands of some “investor” who saw profit potential in the collection rights to the default loan. This what the government not only concealed, but also promoted to help the banks “clear” their off/on balance sheets of “toxic assets.”

Finally, Neil is right about sentiment in courts. Going in and asking for a “free house” will harm you. Sentiment in country in not on our side due to media propaganda. I have a long time friend in a prestigious private equity firm. Sentiment is that if anyone gets a principal reduction it is unfair because everyone should then get a principal reduction. People not affected by foreclosure fraud just do not get it. It is always all about “me” – even if they have not been harmed. I do not know how we are going to change this thinking – but if we do not – we will continue to get no help from government and lose in courts. Need a big case, with a judge that grants and enforces full discovery, in order to change the sentiment.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , , , , , , | 14 Comments »

Foreclosure Defense: Pay Attention to the Ankle Biting For Really Good Inside Information

Posted on June 17, 2008 by Neil Garfield


LITIGATORS AND LITIGANTS WHO ARE FIGHTING FORECLOSURE AND USING OFFENSIVE STRATEGIES TO RECOVER REFUNDS, REBATES AND DAMAGES FROM THE COLLECTION OF COMPANIES THAT RAN UPLINE AND DOWNLINE FROM THE LENDER SHOUDL TRACK THESE LAWSUITS AND EVERY FIILNG — THERE IS A LOT OF GOLD IN THOSE PLEADINGS AND A LOT OF WORK YOU WON’T BE REQUIRED TO DO ESPECIALLY WHEN YOU FIND A LAWSUIT AGAINST SOME OF THE SAME PARTIES YOU HAVE IN YOUR CASE. 

THE FRAUDULENT ACTS COMMITTED IN VIOLATION OF MULTIPLE STATUTES AT THE SECURITIES END OF THIS SINGLE TRANSACTION IS A MIRROR IMAGE OF THE FRAUDULENT ACTS AT THE REAL ESTATE END OF THE TRANSACTION. THE SIGNATURE IS THE SAME. INFLATED APPRAISALS AND RATINGS WERE AT THE ROOT OF COVERING UP INTENTIONAL DISREGARD AND DEGREDATION OF UNDERWRITING STANDARDS.

IN ALL CASES UP AND DOWN THE LINE, UNDER FASB ACCOUNTING STANDARDS, THE LOAN WAS NOT ON THE BALANCE SHEET OF ANY ENTITY, WHICH IS WHY WE SAY THAT THE SECURITY WAS SEPARATED FROM THE SECURITY INSTRUMENT AND THE OBLIGATION TO PAY WAS SEPARATED FROM THE NOTE. 

IN ALL CASES WHERE WE HAVE BEEN PRIVY TO THE DETAILS, WE HAVE FOUND NO ENTITY THAT CAN PROVE IT IS OR WAS THE ACTUAL LENDER IN THE REAL ESTATE TRANSACTION AND WE HAVE FOUND NO ENTITY THAT CAN PRODUCE THE ORIGINAL NOTE OR EVEN THE ASSIGNMENTS THAT TOOK PLACE SHORTLY AFTER THE REAL ESTATE TRANSACTION. THIS IS WHY WE SAY THAT THE REAL ESTATE TRANSACTION WAS IN ACTUALITY A SECURITIES TRANSACTION WHERE THE BORROWER WAS PROMISED HIGH RETURNS ON HIS PASSIVE INVESTMENT IN A HYPER-INFLATED APPRAISAL (RATING) OF REAL ESTATE.

Now that things are falling apart, the banks are suing each other, the investors are suing the investment banks, everyone is suing everyone. A lot of what has been reported here and theorized in this site is now supported by the allegations of dozens of lawsuits and changes being made in regulations, accounting standards, and licensing of professionals in securities, real estate and related areas to the Mortgage Meltdown. 

The Buffalo case reported below clearly shows the inside scoop on how the fraud occurred, how clear it is, and how the financial shake-up is not ending but rather just starting a new chapter. The fraud alleged is precisely what has been reported and predicted by this site for months. Deutsch Bank is at the center of this one, but don’t be fooled. They all did it, some more than others. 

New reports from the Financial Accounting Standards Board indicate a long overdue correction in reporting standards for off balance sheet transactions. Until now, incredibly, financial firms were allowed to conduct business “off balance sheet”, reporting the income but NOT the liability.

Firms like Lehman are now going to be required to take all those transactions back onto their balance sheet. This will reveal the 25+ ratio typically used by all investment banking firms for leverage which every investor knows is stupidly suicidal. Their plan was to report the income on the way up and get bailed out by government if everything went to hell.

We also have information on a case that proves our point beyond a reasonable doubt: Wells Fargo was selling (assigning) various aspects of its residential real estate loans as soon as the application was filled out. Which means that at NO time were they ever using their own money. The case involved property in Michigan and will shortly be filed there.

M&T sues German bank

Deutsche Bank AGaccused of impropriety

By Jonathan D. Epstein NEWS BUSINESS REPORTER
Updated: 06/17/08 7:10 AM

M&T Bank Corp. sued German banking giant Deutsche Bank AG Monday evening, accusing the global investment banking powerhouse of knowingly selling M&T unsafe mortgage investments. M&T is seeking to recover $182 million in losses and punitive damages.

The legal action represents an attempt by Buffalo-based M&T to recoup most of the damage it suffered on a trio of mortgage-backed securities in the fourth quarter of last year. That’s when mortgage delinquencies and foreclosures were soaring nationwide, causing vast losses not only for lenders but also for the holders of investments.

The fraud lawsuit, filed Monday in State Supreme Court in Erie County, concerns two investment securities M&T purchased from Deutsche Bank in February 2007. At the time, M&T had hoped to earn higher returns than it could on U. S. Treasury bills and high-grade commercial debt issued by a company like General Electric Co.

Known as “collateralized debt obligations,” the complex layered securities were ultimately backed by “subprime mortgages,” which are loans to borrowers with bad credit. But the investments were highly rated by two of the nation’s major debt-ratings agencies, Standard & Poor’s and Moody’s Corp., giving the bank some comfort.

In its lawsuit, M&T claims Deutsche Bank deceived M&T by claiming the two securities it sold were “safe, secure, and nearly risk-free” — even safer than corporate debt and nearly as safe as Treasury bills.

In fact, the suit says, Deutsche Bank knew that its underwriting standards and due diligence had deteriorated, and bank officials were already experiencing problems with subprime loans and collateral “under their control” in 2006 and early 2007.

Also, M&T claims the ratings from Moody’s and S&P were also “fraudulent and false” because Deutsche Bank allegedly withheld information from the ratings firms, including about fraud with some of the loans and the refusal by the loan originators to stand behind them.

In the end, M&T cut the value of all three investments from $132 million to just $4.4 million less than a year after buying them.

“If M&T had been aware of the true facts . . . M&T would not have purchased the notes,” the bank said in the 51-page suit.

The bank is seeking to recover the original cost of the two Deutsche Bank securities, about $82 million, plus interest and $100 million in damages. The lawsuit does not cover the third security investment, originally valued at $50 million and sold to M&T by another party.

“We think that we have an incredibly strong case on the facts,” said Robert Lane, partner and head of the litigation department for Buffalo law firm Hodgson Russ LLP, which is handling the bank’s case.

The action by M&T represents the latest effort by an investor that purchased mortgage- backed securities and related bonds to go after the lender or brokerage that sold the investments in the first place.

Several such investor lawsuits have been filed by unions, pension funds, hospitals and municipalities such as Springfield, Mass., alleging they were sold inappropriate investments.

All of those suits are still in the early stages of litigation, with no sign of immediate resolution. But Lane said M&T was confident because its case is based on “very basic, accepted legal theories of fraud and negligent misrepresentation.”

The lawsuit also shines a light into the inner workings of “securitizations,” in which a multitude of loans are packaged by an investment bank into a legal trust, whose cash flow from the loans is then broken into pieces and sold to investors. Ratings agencies bestow their blessings in the form of evaluations such as “AAA,” which Wall Street then touts to sell the securities.

The two securities M&T purchased were “collateralized debt obligations,” which are pieces of debt that in turn are backed by other debt, such as mortgage-backed securities. Cash flow from one is used to repay the debt from the next higher level. And investors can buy into different levels of risk, accepting a bigger chance of default for higher returns. Many CDOs also have used derivatives known as “credit default swaps” to supplement loans.

M&T historically stuck to conservative investments, but opted to buy CDOs for the first time in February 2007. Relying on Deutsche Bank’s marketing, it chose two bonds from the Gemstone VII trust, which Deutsche Bank put together, sold, and administered, with Texas-based HBK Investments LP as collateral manager, the lawsuit said.

The first security, for $42 million, was rated AAA by S&P, while the second, for $40 million, was AA. The Gemstone marketing materials touted HBK’s experience and record, and the historically stable performance of similar investments, while a Deutsche Bank salesman repeatedly reassured M&T.

But within months after the purchase, the loans deteriorated, defaults soared, the bonds behind the CDOs were downgraded, and Gemstone itself was up for downgrade. M&T also learned for the first time that HBK had had claims against one of its biggest lenders, and was fighting with five over loans in default since 2006.

By October, half the bonds in Gemstone were downgraded, and one-fourth were in default. Gemstone itself was next.

Ultimately, M&T cut the Gemstone bonds to just under $2 million. They’re now $1 million.

jepstein@buffnews.com


Filed under: CDO, currency, Eviction, foreclosure, GTC | Honor, Mortgage | Tagged: , , , , , , , , , | 1 Comment »

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