Banks Traded on Inside Information on Mortgages

Despite the pronouncements by Eric Holder, the chief law enforcement officer of the United States, and the obvious reticence of the Securities and Exchange Commission, the vast majority of securities attorneys believe that the banks were (a) trading on inside information and (b) committing securities fraud when they funded and then traded on mortgages that were too toxic to ever succeed.

The first, trading on inside information, is regularly prosecuted by the justice department and the SEC. It is why Martha Stewart went to jail in rather flimsy evidence. The catch, justice and the SEC say is that this only applies to securities and the 1998 act signed into law by Clinton makes mortgage bonds and hedges on mortgage bonds NOT securities. It also makes the insurance paid on the mortgage bonds NOT insurance. This is despite the fact that the instruments meet every definition of securities and both the insurance contracts and credit default swaps appear to meet every definition of insurance. But the law passed by Congress in 1998 says otherwise, so how can we prosecute?

The second, securities fraud meets the same obstacle they say because they can’t accuse anyone of committing fraud in the issuance or trading of securities when the law says there were no securities.

So goes the spin coming from Wall Street and as long as law enforcement in each state and the DOJ keeps listening to Wall Street and their lawyers, they will keep arriving at the same mistaken conclusion.

If Wall Street had in fact followed the plan of securitization set forth in their prospectuses and pooling and servicing agreements, assignment and assumption agreements and various other instruments that were created to build the infrastructure of securitization of debt — including but not limited to mortgages, credit cards, auto loans, student loans etc. — then Wall Street would be right and the justice department and the SEC might be stuck in the mud created by the 1998 law. But that isn’t what happened and therefore the premise behind the apparent immunity of Wall Street Banks and bankers is actually an illusion.

Starting with the issuance of the mortgage bonds, most of them were issued before any mortgage was originated or acquired by anyone. In fact, the list attached to the prospectus for the mortgage bonds said so — stating that the spreadsheet or list attached was by example only, that these mortgages do not exist but would be soon be replaced with real mortgages acquired pursuant to the enabling documents for the creation of the REMIC “trust.” But that is not what happened either.

In no way did the Banks follow the terms of the prospectus, PSA, assignment and assumption agreements or anything else. Instead what they really did was create the illusion of a securitization scheme that covered up the reality of a PONZI scheme, the hallmark of which is that it collapses when investors stop buying the bogus securities and more investors want their money out than those wishing to put money into the scheme. There was no reason for the entire system to collapse other than the fact that Wall Street planned and bet on the collapse, thus making money coming and going and draining the lifeblood of capital worldwide out of economies and marketplaces that depended upon the continued flow of capital.

The creation of the REMIC “trust” was a sham. It was never formalized, never funded and never acquired any mortgages. hence any “exempt” securities issued by it were not the kind intended by the Act signed into law in 1998. It was not a mortgage-backed security, or credit backed security, it was an illusion designed to defraud anyone who invested in them. The purpose of issuing the mortgage bonds was not to fund and acquire mortgages but rather to steal as much money out of the flow as possible while covering their tracks with some of the money ending up on the closing table for newly originated or previously originated bundles of mortgages that were to be acquired. That isn’t what happened either.

Wall Street bankers put the money from investors into their own private piggy bank and then funded and acquired mortgages with only part of the money while they made false “proprietary trades” in the “mortgage bonds” that made it look like they were trading geniuses making money hand over fist while the rest of the world saw their wealth decline by as much as 60%-70%. The funding for debt came not from the unfunded REMIC “trusts” but from the investment banker who was merely an intermediary depository institution which unlawfully was playing with investor money. The actual instruments upon which Wall Street relies to justify its actions is the prospectus, the PSA, and the Master Servicing agreement — each of which was used to sell the investors on letting go of their money in exchange for the promises and conditions contained in the exotic agreements containing numerous conflicting clauses.

Thus the conclusion is that since the mortgage bonds were issued by an unfunded and probably nonexistent entity, the investors had “bought” an interest in an incoherent series of agreements that together constituted a security or, in the alternative, that there was no security and the investors were simply duped into parting with their money which is fraud, pure and simple.

I would say that investors acquired certain passive rights to the instruments used, with the exception of the bogus mortgage bonds that were usually worthless pieces of paper or entries on a log. In my opinion the issuance of the prospectus was the issuance of a security. The issuance of the PSA was the issuance of a security, And the issuance of the other agreements in the illusory securitization chain may also have been the issuance of a security. If cows can be securities, then written instruments that were used to secure passive investments are certainly securities. The exemption for mortgage bonds doesn’t apply because neither the mortgage bond nor the REMIC “trust” were ever funded or used — except in furtherance of their fraud when they claimed losses due to mortgage defaults and obtained federal bailouts, insurance and proceeds of credit default swaps.

The loan closings, like the funding of the “investments” was similarly diverted away from the investor and toward the intermediaries so that they could trade on the appearance of ownership of the loans in the form of selling bundles of loans that were not even close to being properly described in the paperwork — although the paperwork often looked as though it was all proper.

The trading, hedging and insuring of investments that were not only destined by actually planned to fail was trading on inside information. The Banks knew very well that the triple A rating of the mortgage bonds was a sham because the mortgage bonds were worthless. What they were really trading in was the ownership of the loans which they knew were falsely represented on the note and mortgage. They thus converted the issuance of the promissory note signed by the borrower into a security under flase pretenses because the payee on the note and the secured party on the mortgage never completed the transaction, to wit: they never funded the loan and they made sure that the terms of repayment on the promissory note did not match up with the terms of repayment set forth in the prospectus, which was the real security.

Knowing from the start that they had the power (through the powers conferred on the Master Servicer) to pull the rug out from under the “investments” they traded with a vengeance hedging and selling as many times as they could based upon the same alleged loans that were in fact funded directly by and therefor owned by the investors directly (because the REMIC was ignored and so was the source of funding at the alleged loan closing).

Being the sole source of the real information on the legality, quality and quantity of these nonexistent investments in mortgage bonds, the Wall Street banks, their management, and their affiliates were committing both violation of the insider trading rule and the securities fraud rule ( as well as various other common law and statutory prohibitions and crimes relating to deceptive practices in the sale of securities). By definition and applying the facts rather than the spin, the Banks a have committed numerous crimes and the bankers should be held accountable. Let’s not forget that by this time in the S&L scandal more than 800 people were sent to jail despite various attempts to mitigate the severity of their trespass and trampling on the rights of investors and depositors.

Failure to prosecute, while the statute of limitations is running out, is taking the rule of law and turning it on its head. The Obama administration has an obligation to hold these people accountable not only because violations of law should be prosecuted but to provide some deterrence from a recurrence or even escalation of the illegal practices foisted upon institutions, taxpayers and consumers around the world. Ample evidence exists that the Banks, emboldened by the lack of prosecutions, have re-started their engines and are indeed in the process of doing it again.

Think about it, where would a company get the money to have a multimedia advertising campaign blanketing areas of the the Country when the return on investment, according to them is only 2.5%? Between marketing, advertising, processing, and administrative costs, pus a reserve for defaults, they are either running a going out of business strategy or there is something else at work.

And if the transactions were legitimate why do the numbers of foreclosures drop like stones in those states that require proof of payment, proof of loss, and proof of ownership? why have we not seen a single canceled check or wire transfer receipt that corroborates the spin from Wall Street? Where is the real money in this scheme?

James Surowiecki: Why Is Insider Trading on the Rise?
http://www.newyorker.com/talk/financial/2013/06/10/130610ta_talk_surowiecki

FROM OTHER MEDIA SOURCES —-

Foreclosure Victims Protesting Wall Street Impunity Outside DOJ Arrested, Tasered
http://www.truth-out.org/news/item/16527-victims-of-foreclosure-arrested-tasered-protesting-wall-street-impunity-outside-doj

Watch out. The mortgage securities market is at it again.
http://money.cnn.com/2013/05/23/news/economy/mortgage-backed-securities.pr.fortune/

Wall Street Lobbyists Literally Writing Bills In Congress
http://news.firedoglake.com/2013/05/27/wall-street-lobbyists-literally-writing-bills-in-congress/

Time to Put the Heat on the Fed and FDIC to Fix Lousy Governance at TBTF Banks
http://www.nakedcapitalism.com/2013/05/so-if-shareholders-wont-rein-in-jamie-dimon-time-to-put-the-heat-on-the-fed-and-fdic.html

West Sacramento homeowner uses new state law to stop foreclosure
http://www.sacbee.com/2013/05/23/5441875/west-sacramento-homeowner-uses.html

The Foreclosure Fraud Prevention Act: A.G. Schneiderman Commends Assembly for Passing Foreclosure Relief Bills
http://4closurefraud.org/2013/05/23/the-foreclosure-fraud-prevention-act-a-g-schneiderman-commends-assembly-for-passing-foreclosure-relief-bills/

Where did the California foreclosures go? Level of foreclosures sales dramatically down. Foreclosure legislation and bank processing. Subsidizing investor purchases via HAFA.
http://www.doctorhousingbubble.com/california-foreclosure-process-hafa-program-subsidize-investor-purchases/

Wasted wealth – The ongoing foreclosure crisis that never had to happen – The Hill’s Congress Blog
http://thehill.com/blogs/congress-blog/economy-a-budget/301415-wasted-wealth–the-ongoing-foreclosure-crisis-that-never-had-to-happen

Oregon Foreclosure Avoidance Program gets tuneup
http://www.oregonlive.com/opinion/index.ssf/2013/05/oregon_foreclosure_avoidance_p.html

Libor vs Mortgage Scandals: Amount of Money Appears to be the Only Difference

COME TO THE ANAHEIM 1/2 SEMINAR WEDNESDAY MORNING

It appears as though LIBOR is being thrown under the bus as a distraction from the much larger mortgage securitization scam. Both cases relied upon trust that was breached, money that was invented, figures that were fabricated, lying, cheating and inside trading to the detriment of the institutions that participated in one form or another. In both cases the ultimate victims on both sides of the transactions is the consumer.

Yet with LIBOR “suits are mounting,” (Wall Street Journal) investigations proliferating and a handy group of scapegoats far from the top of the scam may well be prosecuted.

The only difference seems to be that the size of the LIBOR scandal in terms of consequences to the institutions and consumers appears to be far less than the monumental scam foisted upon taxpayers all over the industrialized world, especially in the U.S.

To be certain the manipulation of the LIBOR rates was clearly an intentional act, but so was the insertion of the bankers naked nominees when residential loans were originated. In most cases, securitization was different in the commercial setting because it was more likely that more questions would be asked by higher priced, more sophisticated lawyers for the borrower.

The manipulation of LIBOR rates resulted in the wrong calculation of adjustable rate mortgages all over the world, making the notices of default, demand for payment and perhaps even the sales illegal. That is more in the nature of legal argument. The insertion of nominees controlled by the investment banks as payees, nominees, trustees, beneficiaries and mortgagees in lieu of the institutions that were actually providing the money and hiding the compensation that TILA requires to be disclosed, the steady practice of table funded loans which are deemed “predatory per se” under regulation Z, allowed intermediaries to pretend to be the lenders, the owners of the loans so they could trade with impunity. If they lost money, they threw the loss over the fence at the taxpayers and investment funds that bought bogus mortgage bonds. If they made money, they kept it.

The only difference is that the the amount of money involved in the non-existent securitization scheme that was so well “documented” was that it resulted in siphoning out the life blood of multiple nations and sending the world into a recession not seen in most of your lifetimes. AND the policy makers in Washington either were or are in bed with the perpetrators on this scheme, whereas the LIBOR scandal is being couched in terms where the traders were conspiring but the banks were unaware of their transgressions.

Let’s face it, if suddenly you have a trading department that is reporting profits geometrically and even exponentially higher than any other time in history, as CEO you would want to know why. Those trading profits did exactly that in both LIBOR and the mortgage securitization myth. One must ask why thousands of advertisements costing billions of dollars were on TV, radio, newspapers and magazines for loans at 5%. Put pencil to paper. If normal underwriting standards were used, and normal fees were applied to intermediaries who made the loan possible, there would be no room in the budget for such extravagance, much less the pornographic profits and bonuses reported on Wall Street. Why were armies of salesmen, including 10,000 convicted felons in Florida alone pushed into the market place as mortgage brokers or mortgage originators?

The intentional reporting of the wrong rates has an effect on all loans, past, present and future, but it requires yet more education of an already overloaded judiciary. So throwing a few traders under the bus and calling it a day is pretty much what is going to happen.

As it turns out though, the Banks have painted themselves into a corner on the securitization scam. What they securitized was paper, not money. The monetary transactions were left untouched by the documents, leaving the people who loaned the money through the scam vehicle known as a REMIC trust with no security for a bad loan.

Hence neither the documentation of an on-existent transaction between the parties named on the instrument, nor the manipulation of terms that were presented in one set to the investor-lenders and an entirely different set of terms presented to the borrower created valid contracts, much less perfected liens. But that didn’t matter to the intermediaries who were supposed to be acting as intermediaries — in the same way a check clears the bank — with no claim to the subject matter of the transaction.

They too manipulated rates by creating second tier yield spread premiums, and thus created spreads upon which they could withdraw money, pay for insurance, credit default swaps and other bets that the bad loans they wanted and received would fail, leaving the market in free-fall.

Predicting the market to to fall is like pushing a person off a cliff. You pretty much know that once the balance is lost the person is doomed. Doctoring up the applications with false income and false property appraisals did exactly that. It was a bet on a sure thing. Wall Street could rest comfortably in the knowledge that housing would ultimately fall to normal levels simply because there was nobody who could or would pay the premium they invested on the mortgage scam.

Now Wall Street is creating entities that will buy up “distressed”properties — a product of their own wrongdoing, using the money of the same people who owned the homes that were foreclosed — i.e., their pension and 401k retirement money. So they used your own money to fund a bad loan to you that they knew they could foreclose, and in between the time they originated the loan documents and the time of foreclosure they engaged in trading on your mortgage even though they had no part in funding or purchasing the loan.

My question to you is where is your outrage? When are you going to fight the bank control of Washington, the bank manipulation of judiciary by fabricating false, forged documentation that “looks right?” You can do it by voting against hose  most closely tied to the Wall Street community, by fighting with the party claiming to be your mortgage lender/servicer, or both. If you don’t you are handing the Country over to the banks and leaving it to your children and grandchildren to suffer the consequences.

Credit Default Swaps as Insider Trading Violation

“Yet on a wholesale basis, Goldman Sachs and others not only had the inside information, they had created it. That is why Goldman started trading against the the interests of its clients to whom it was selling mortgage backed securities that were designed to fail”

“Both the investor and the borrower would have understood that sometimes very little of the investors’ money was actually being used to fund mortgages, with the rest being sued to buy insurance, credit default swaps, pay fees, profits, kickbacks and commissions.”

As this article points out from NY Times Mark HulBert, the insiders always make money. That is the game when the people minding the store get to know everything about the inventory and push the old produce on you so you don’t realize that it will turn brown by the time you get home. Martha Stewart went to jail for a tiny arguable violation of using inside information.
Yet on a wholesale basis, Goldman Sachs and others not only had the inside information, they had created it. That is why Goldman started trading against the the interests of its clients to whom it was selling mortgage backed securities that were designed to fail.
Nobody is in  jail for that — at least not yet. Goldman made money selling the securities to investors, made money selling the loans into esoteric (impossible to audit) pools, made money underwriting securities, made money trading in credit default swaps — all of which required the signature of some hapless borrower who thought the people who had procured this loan were acting in accordance with law and good faith.
While nobody knew about credit default swaps when the Truth in Lending Act was passed, it was precisely this kind of behind the scenes shenanigans that TILA was designed to prevent. With transparency the borower would understand that fees, profits, insurance policies and credit default swaps were being created and purchased out of the proceeds of a transaction between the borrower and an investor who was advancing the money.
Both the investor and the borrower would have understood that sometimes very little of the investors’ money was actually being used to fund mortgages, with the rest being sued to buy insurance, credit default swaps, pay fees, profits, kickbacks and commissions. Both of them would have understood that the quality of their investment was secretly being undermined by the people selling them this wonderful opportunity.
Bottom Line: The loan was sold most of the time as a passive investment that would enable the homeowner to profit from increasing value of real property that was overleveraged (without the homeowner knowing that the appraisal was suspect believing that it had been confirmed through normal underwriting procedures). Forward this article to any securities attorney and see if he doesn’t agree that what was sold to homeowners was a security and that the rules regarding rescission, damages, disclosure etc. under securities laws, rules and regulations apply.
February 28, 2010
Strategies

More Often Than Not, the Insiders Get It Right

By MARK HULBERT

CORPORATE insiders are sending fairly positive signals about the market.

When stocks began to fall in mid-January, insiders cut back on sales of their companies’ shares and increased their purchases, according to David Coleman, editor of the Vickers Weekly Insider Report.

That adds up to at least a “neutral” stance, he wrote to clients, and implies that the recent decline won’t turn into a full-blown bear market.

But, as a market indicator, how reliable are the sell-and-buy decisions of insiders like corporate officers, directors and big shareholders?

While these insiders have a long history of correctly anticipating the market’s direction, they haven’t done all that well in the last few years. As a group, insiders failed to recognize the top of the bull market in October 2007, and didn’t anticipate the depth of the decline that followed.

After these missteps, have insiders’ trades outlived their usefulness as a basis for market timing?

Probably not, says H. Nejat Seyhun, a finance professor at the Stephen M. Ross School of Business at the University of Michigan, who has studied the behavior of corporate insiders for many years. In an interview, Professor Seyhun said that insiders were not infallible, and that their recent failures were hardly their first misreading of the market’s direction.

But since 1975, the earliest year he has studied, insiders have been correct far more often than they’ve been wrong, and this is still likely to be the case, he said.

And there is no evidence, he added, that insiders have lost their ability to tell when their own companies’ stocks are undervalued. In the late 1970s and early ’80s, for example, he found that the average stock bought by an insider outperformed the overall market by three percentage points in the 50 days after the purchase.

For the most recent 10-year period in his sample, through 2008, the comparable 50-day advantage for the insiders was 3.3 percentage points. That’s striking because it includes the bulk of the 2007-9 bear market.

Given the variability of the year-by-year results, Professor Seyhun cautions that it’s not clear whether insider purchases are more profitable today than they were 30 years ago. But, he argues, his results show that insiders by no means are losing their touch.

Though the professor’s analysis extends only through 2008, data collected by the Vickers Weekly Insider Report show that even though the insiders missed the bear market, they can nevertheless take credit for anticipating the market rebound that began a year ago. Leading up to the market’s low in March 2009, for example, insiders as a group behaved more bullishly than they had in more than a decade.

Consider an indicator that Vickers calculates each week, representing the ratio of the number of shares that insiders sold over the previous eight weeks to the number they bought. That ratio dropped to as low as 0.45 to 1 in the weeks just before the bear market ended. That was the ratio’s lowest level since December 1990, at the beginning of the great ’90s bull market.

The more recent low, of course, was followed by a 10-month rally in which the Standard & Poor’s 500-stock index gained some 70 percent.

By November, in contrast, this sell-to-buy ratio had risen as high as 5.21 to 1, according to Vickers, more than double its long-term average of around 2.5 to 1. That signaled to Mr. Coleman that the market was vulnerable to a decline — and, indeed, the market did start to fall in mid-January. At its lowest point, the S.& P. 500 was down nearly 9 percent from the mid-January high.

But in recent weeks, insiders have been cutting back on sales and increasing their purchases. As a result, the sell-to-buy ratio has fallen back to 3.52 to 1, according to Vickers.

Though that is still higher than the long-term average, the trend suggests to Mr. Coleman that the recent downturn is likely to be “only a near-term correction.” He said that his firm was “increasingly optimistic about the future performance of the overall markets.”

Had the sell-to-buy ratio increased in the wake of the market’s pullback, Professor Seyhun added, we would have had reason for worry. It would have meant that insiders had no confidence that their shares would be recovering anytime soon, he said.

“Fortunately, and at least for now,” he said, “insiders are not exhibiting such eagerness” to sell.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.

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