Rating Agencies Finally Drawing Fire They Richly Deserve — But Will They be Prosecuted?

“The Justice Department claims that the faulty projections were not simply naïveté, but rather a deliberate effort to produce inflated, fraudulent ratings. “The complaint asserts that S.& P. staff chose not to update computer programs because the changes would have led to harsher ratings, and a potential loss of business,” (e.s.)

“I was there. It is not possible that companies like S&P, Fitch and other rating agencies didn’t know how to do securities analysis — they invented it. The S&P Book was widely used as a shorthand method of evaluating a stock or bond for decades before I arrived on Wall Street. They were known and trusted for their data and their crunching of data. It isn’t possible that they wouldn’t know that the ratings were artificially inflated. They were only concerned with collecting fees and covering their behinds with “plausible deniability.”What they gave up was the their reputation for truth and clarity. Now they can’t be trusted.

And the same goes triple for the investment banks who brought those bogus mortgage bonds to market. Wall Street is a small place. Everyone but the customers and borrowers knew what was going on and everyone knew a huge bust was coming. If they knew and the regulators knew, why did they allow it play out when the warning signs were already clear in the early 2000’s.” Neil F Garfield, http://www.livinglies.me


What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure or to challenge whoever is taking your money every month, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, Tennessee, Georgia, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Analysis: When you see movies like Too Big to Fail and read any of the hundreds of books published on the great recession, you must be left with a sense of outrage  and/or disappointment that our government and our major banks tacitly approved of the illegal activities undertaken by all the participants in what turned out to be a PONZI scheme covered over by a fraudulent scheme they called “Securitization.”

Despite some people raising the concern that the homeowners were hit hardest by the criminal enterprise, any concern for them vanished in the face of an invalid assumption by Hank Paulson and Ben Bernanke that the economy would fail and society would fall apart if they didn’t bail out the banks. If anything, the behavior of the banks was the equivalent of NOT bailing them out because they never honored their part of the bargain — increasing the flow of capital into the economy through loans and investments. While that understanding should have been reduced to writing, it was obvious that the banks would lend out money with extra capital infused into their balance sheet. Except they didn’t.

And the world didn’t end, but there was chaos all over the world because the banks were and continue sitting on a bounty that has not been subject to any audit or accounting.

As I expected, the rating agencies are now being sued not for negligence but for intentionally skewing the ratings knowing that stable managed funds were restricted from investing in anything but the safest securities (meaning the highest rating from a qualified rating agency). It is the same story as the appraisers of real property who were pressured into inflating and then re-inflating the prices of property whose value was left far behind. Both the rating agencies and the appraisers who participated in this illicit scheme caved in to threats from Wall Street that they would never see any business again if they didn’t “play ball.”

The very structure and the actual movement of money and documents would tip off an amateur securities analyst. Starting with the premise of securitization and an understanding of how it works (easily obtained from numerous sources) any analysis would have revealed that something was wrong. Securities analysis is not just sitting at a desk crunching numbers. It is investigation.

Any investigation at random picking apart the loan deals, the diversion of title from the REMIC trusts, the diversion of money from the investors to a mega-account in which the investors’ money was indiscriminately commingled, thus avoiding the REMICs entirely, would lead to the inevitable conclusion that even the highest rated tranches and the highest rated bonds, were a complete sham. Indeed internal memos at S&P shows that it was well understood by all — they even made up a song about it.

The analysis by the people at S&P omitted key steps so they wouldn’t be accused of knowing what was going on. It is the same as the underwriting of the loans themselves where the underwriting process was reduced to a computer platform in which the aggregator approved the loan — not he originator — and the investment banker wired the funds for the loan on behalf of the Investors, but the documents showed that it was the originator, who was not allowed to touch any of the money funded for loans, whose name was placed on the note and mortgage. Why?

Any good analyst would have and several did ask why this was done. They got back a double-speak answer that would have resulted in an unrated or low-rated mortgage bond, with a footnote that the REMICs may never have been funded and that therefore without other sources of capital they could not possibly have purchased the loans. Which means of course that the REMICs named in foreclosures over the past 5-6 years.

Some of the best analysts on Wall Street saw at a glance that this was a PONZI scheme and a fraudulent play on the word “Securitization.” Simply tracing the parties to their real function would and still will reveal that all of them were acting in nominee capacities and not as true agents of the investors or participants in the securitization scheme.

And the nominees include but are not limited to the REMIC itself, the Trustee for the REMIC, the subservicer, the Master Servicer, the Depositor, the aggregator, the originator, and the law firms, foreclosure mills and companies like LPS and DOCX who sprung up with published price sheets on fabrication of documents and forgeries of of those documents to convince a court that the foreclosure was real and valid. The whole thing was a sham.

If I saw it at a glance after being out of Wall STreet for many years, you can bet that the new financial and securities analysts at the rating agencies also saw it. Instead they buried their true analysis behind a mountain of fabricated data that in itself was a nominee for the real data and then crunched the numbers in the way that the Wall Street firms dictated.

The fact that there were algorithms that took the world’s fastest computers a full weekend to process without the ability to audit the results should have and did in fact alert many people that the bogus mortgage bonds were unratable because there was no way to confirm their assumptions or their outcome.

The government is very close, now that it is moving in on the ratings companies. They are close to revealing that this was not excessive risk taking it was excessive taking — theft — and that the rating companies should lose their status as rating companies, the officers and analysts who signed off should be prosecuted, and the receiver appointed over the assets should claw back the excessive fees paid to the ratings companies from officers of the ratings companies and, following the yellow brick road, the CEO’s of the investment banks.

We have found out, thanks to the greed and deception practiced by the banks on officers at the highest level of your government what will happen if the credit markets free up without the TARP money being used to free up those markets. It isn’t pretty but it isn’t apocalypse either. The proof is in. The mega banks should be taken down piece by piece and their function should be spread out over a wide swath of more than 7,000 community banks, credit unions and savings and loan associations — all of whom have access to the utilities at SWIFT, VISA, MasterCard, check 21, and other forms of interbank electronic funds transfer.

If the administration really wants a correction and really wants to increase confidence in the marketplaces around the world and the financial system supporting those markets, then it MUST take the harshest action possible against the people and companies who engineered this world-wide crisis. Eventually the truth will all be out for everyone to see. Which side of history do we mean to be aligned — the bank oligopoly or a capitalist, free, democratic society.


DOCUMENTS IN S.&P. CASE SHOW ALARM Documents included in the Justice Department’s lawsuit against Standard & Poor’s provide a glimpse at the company’s inner working in the run-up to the financial crisis. “Tensions appeared to be escalating inside the firm’s headquarters in Lower Manhattan as it publicly professed that its ratings were valid, even as the home loans bundled into mortgage-backed securities, or M.B.S., were failing at accelerating rates,” Mary Williams Walsh and Ron Nixon write in DealBook. “Together, the documents show a portrait of some executives pushing to water down the firm’s rating models in the hope of preserving market share and profits, while others expressed deep concerns about the poor performance of the securities and what they saw as a lowering of standards.”

Some of the documents also showed some of the snark among the rank-and-file over the impending crisis. One analyst in March 2007 borrowed from the Talking Heads, creating new lyrics to “Burning Down the House,” according to the complaint: “Subprime is boi-ling o-ver. Bringing down the house.” In a confidential memo reproduced in the complaint, one executive said: “This market is a wildly spinning top which is going to end badly.”

At the heart of the civil case are the computer models S.&P. used to rate complex mortgage securities. The Justice Department claims that the faulty projections were not simply naïveté, but rather a deliberate effort to produce inflated, fraudulent ratings. “The complaint asserts that S.& P. staff chose not to update computer programs because the changes would have led to harsher ratings, and a potential loss of business,” Peter Eavis writes. But S.&P., which says the lawsuit is without merit, disagrees with the government’s characterization of the models. Catherine J. Mathis, an S.& P. spokeswoman, said the Justice Department had not “shown actual adjustment to the models or other changes that were not analytically justified.”

Indeed, the government faces an uphill battle in making its case that S.&P. intentionally inflated ratings. “The government will have to prove that ratings were in fact faulty, and published intentionally so as to deceive investors in the securities. In response, S.& P. could simply argue that the company was just as blinded by the financial crisis as anyone else, and that questionable e-mails are simply the work of lower-level employees who were not involved in the decision-making,” Peter J. Henning and Steven M. Davidoff write. “Even if the Justice Department can prove the agency acted to deceive investors, it still has to deal with something lawyers call reliance. In other words, did investors rely on these ratings to make their decisions?”

R.B.S APPROACHES SETTLEMENT OVER RATE-RIGGING The Royal Bank of Scotland said on Wednesday that it was in advanced discussions with authorities on both side of the Atlantic over settling accusations that it manipulated Libor. “Although the settlements remain to be agreed, R.B.S. expects they will include the payment of significant penalties as well as certain other sanctions,” the bank said.

A settlement, which could be announced as soon as Wednesday, is expected to include a penalty of about 400 million pounds, or $626 million, according to several news reports. “As part of the anticipated deal, R.B.S.’s Japanese unit is expected to plead guilty to a crime in the U.S., although the Justice Department isn’t expected to charge any individuals, according to one of the people briefed on the talks,” The Wall Street Journal writes. John Hourican, the head of R.B.S.’s investment bank, is also expected to resign, the reports said.

S&P Analyst Joked of ‘Bringing Down the House’ Ahead of Collapse

Case Details Internal Tension at S.&P. Amid Subprime Problems

Justice Sues S&P, But What Purpose are Ratings Agencies Serving Anyway?

S&P charged with fraud in mortgage ratings

Another Ruse: Realtors Gleeful over Equator Short Sale Platform

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Editor’s Comment:

Banks have adopted a technology platform to process short sale applications. It is called Equator, presumably to imply that it equates one thing with another, and produces a result that either gives a pass or fail to the application. In theory it is a good thing for those people who want to save their homes, save their credit (up to a point) and move on. In practice it essentially licenses the real estate broker to take control over the negotiations and police the transactions so that the new “network” rules are not violated. This reminds me of VISA and MasterCard who control the payment processing business with the illusion of being a quasi governmental agency. Nothing could be further from the truth, but bankers react to net work threats as though the IRS was after them.

Equator is meant as another layer of illusion to the title problem that realtors and title companies are trying to cover up. The short sale is getting be the most popular form of real estate sale because it is a form of principal reduction where there is some face-saving by the banks and the borrowers. The problem is that while short sales are a legitimate form of workout,  they leave the elephant in the living room undisturbed — short sales approved by banks and servicers who have neither the authority nor the interest in the loan to even be involved except as an agent of Equator but NOT as an agent of the lenders,  if they even exist anymore.

So using the shortsale they get the signature of the borrower as seller which gives them a layer of protection if they are the bank or servicer approving the short-sale. But it fails to cure the title defect, especially in millions of transactions in which Nominees (like MERS and dummy originators) are in the chain of title. 

The true owner of the obligation is a group of investor lenders who appear to have only one thing in common— they all gave money to an investment bank or an affiliate of an investment bank, where it was divided up and put into various accounts, some of which were used to fund mortgages and others were used to pay fees and profits to the investment bank on the closing of the “deal” with the investor lenders. As far as the county recorder is concerned, those deposits and splits are nonexistent. 

The investor lenders were then told that their money was pooled in a “Trust” when no such entity ever existed or was registered to do business and no attempt was made to fund the trust. An unfunded trust is not a trust. This, the investor lenders were told was a REMIC entity.  While a REMIC could have been established it never happened  in the the real world because the only communications between participants in the securitization chain consisted of a spreadsheet describing “closed loans.” Such communications did not include transfer, assignment or even transmittal or delivery of the closing papers with the borrower. Thus as far as the county recorder’s office is concerned, they still knew nothing. Now in the shortsales, they want a stranger the transaction to take the money and run — with no requirement that they establish themselves as creditors and no credible documentation that they are the owner of the loan.

This is another end run around the requirements of basic law in property transactions. They are doing it because our government officials are letting them do it, thus implicitly ratifying the right to foreclose and submit a credit bid without any requirement of proof or even offer of proof.

It gets worse. So we have BOA agreeing to accept dollars in satisfaction of a loan that they have no record of owning. The shortsale seller might still be liable to someone if the banks and servicers continue to have their way with creating false chains of ownership. But the real tragedy is that the shortsale seller is probably getting the shaft on a false premise — I.e, that the mortgage or deed of trust had any validity to begin with. 

The shortsale Buyer is most probably buying a lawsuit along with the house. At some point, the huge gaps in the chain of title are going to cause lawyers in increasing numbers to object to title and demand that it be fixed or that the client be adequately covered by insurance arising from securitizatioin claims. Thus when the shortsale Buyer becomes a seller, that is when the problems will first start to surface.

Realtors understand this analysis whereas buyers from Canada and other places do not understand it. But realtors see shortsales as the salvation to their diminished incomes. Thus most realtors are incentivized to misrepresent the risk factors and the title issues in favor of controlling the buyer and the seller into accepting pre-established criteria published by the members of Equator. It is securitization all over again, it is MERS all over again, it is a further corruption of our title system and it is avoiding the main issue — making the victims of this fraud whole even if it takes every penny the banks have. Realtors who ignore this can expect that they and their insurance carriers will be part of the gang of targeted deep pockets when lawyers smell the blood on the floor and go after the perpetrators.

Latest Changes to The Bank of America Short Sale Process

by Melissa Zavala

When processing short sales, it’s important to know about how each of the lending institutions handles loss mitigation and paperwork processing. If you have done a few short sales in Equator with different lenders, you may see what while your same Equator account is used for all your short sales at all the lending institutions, each of the servicers uses the platforms in a different manner.

Using the Equator system

When processing short sales, it’s important to know about how each of the lending institutions handles loss mitigation and paperwork processing. Many folks already know that Equator is the online platform used by 5 major lenders (Bank of America, Wells Fargo, Nationstar, GMAC, and Service One). If you have done a few short sales in Equator with different lenders, you may see what while your same Equator account is used for all your short sales at all the lending institutions, each of the servicers uses the platforms in a different manner.

And, my hat goes off to Bank of America for really raising the bar when it comes to short sale processing online. And, believe me, after processing short sales with Bank of America in 2007, this change is much appreciated.

New Bank of America Short Sale Process

Effective April 13, 2012, Bank of America made a few major changes that may make our short sale processing times more efficient.  The goal of these changes is to make short sale processing through Equator (the Internet-based platform) at Bank of America so efficient that short sale approval can be received in less than one month.

First off, Bank of America now requires their new third party authorization for all short sales being processed through the Equator system. Additionally, the folks at Bank of America will be working to improve task flow for short sales in Equator by making some minor changes to the process.

According to the Bank of America website,

Now you are required to upload five documents (which you can obtain at http://www.bankofamerica.com/realestateagent) for short sales initiated with an offer:

  • Purchase Contract including Buyer’s Acknowledgment and Disclosure
  • HUD-1
  • IRS Form 4506-T
  • Bank of America Short Sale Addendum
  • Bank of America Third-Party Authorization Form

And, now, you will have only 5 days to submit a backup offer if your buyer has flown the coop.

The last change is a curious one, especially for short sale listing agents, since it often takes awhile to find a new buyer after you learn that the current buyer has changed his or her mind.

Short sale listings agents should be familiar with these changes in order to assure that they are providing their client with the most efficient short sale experience possible.

Robert Creamer: Big Banks Plan Sneak Attack on Wall Street Reform Law Within Days

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary SEE LIVINGLIES LITIGATION SUPPORT AT LUMINAQ.COM


Editor’s Analysis: Once upon a time, the Banks were content to make an ordinary profit doing ordinary banking things. Now they see us as prey rather than customers to be protected under their risk-averse general policy. Their current policy to to take your money and make it their money. Their current policy is to take your home and make it their home. Their current policy is to take your pension and make it their capital.

The article below picks up on one oef the many ways they are attempting to accomplish their aims without regard to their customers, and frankly without regard to their own shareholders. Management seeks only one thing — more money for themselves and the power and prestige that comes along with it.

Along the way, with government complicity, they have created huge computer networks that are essentially utilities for the banks to transfer funds. Despite numerous efforts by the Department of Justice, they managed to control the rules by making themselves appear quasi-governmental. Small banks and credit unions are scared of Visa, MasterCard etc. They have rules. None of the bank members know what the rules are because they are never actually delivered to any of the banks.

So the name of the game is make the rules, use the infrastructure to control competition, and make it impossible for any competing bank to take market share away from the megabanks because the megabanks get “special treatment.” The megabanks that once started with such innocuous names as Southeast Switch, Inc. in Maitland, Florda, (later called “HONOR”) realized that they could keep the community bankers and credit unions in check while at the same time forcing the smaller banking institutions to PAY FOR the same infrastructure that limits their profitability and their ability to compete with the megabanks.

It’s really the perfect scam. 7000 smaller institutions not only pay the costs of the network system but create a profit for those who prey on unsophisticated customers and smaller banks and credit unions. The supreme irony of this is that a transaction whose actually cost is less than a 1/4 of a cent including communications expense, is now being charged to customers at the rate of $3-$6 and now will be raised to over $10 because of the front end fees and back end fees the mega banks want to charge.

Customers are misled into believing that only by going to BOA can they have the convenience of a bank that is everywhere, when in fact, the network operations that controls ALL transactions is accessible to even the smallest bank. ATM access is possible for the customers of even the smallest bank, without paying any fee in most instances, even if they go to a BOA, Chase or Citi ATM. It is all a lie. Elizabeth Warren wants the public to have access to this information and the banks want Warren’s mouth to be paralyzed. They are not having much luck there so they are resorting to their usual way of doing things — sneaky legislative attacks and sneaky control over state and federal agencies that are there to protect the consumer but instead do as they are instructed by the unknown names and faces at megabanks.

Robert Creamer

Political organizer, strategist and author

Posted: March 24, 2011 08:39 AM
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Big Banks Plan Sneak Attack on Wall Street Reform Law Within Days

Read More: Bank Lobbyists , Debit Card Interchange Fees , Debit Card Swipe Fees , Dick Durbin , Duopoly , Mastercard , Middle Class , Non Competitive Prices , Visa , Wall Street Banks , Wall Street Bonuses , Wall Street Reform Law , War On The Middle Class , Business News

The big Wall Street banks are planning a sneak attack on an essential element of the Wall Street reform law that was passed by Congress last year. They plan to make their move as early as next week.

The target of their attack is the provision limiting the “interchange” fee that the big banks charge retailers and their consumers every time a debit card is used. Right now, so-called “swipe fees” are set by Visa and MasterCard — who control 80% of all credit card transactions. In other words, they are not subject to competitive market pressure of any sort. They are fixed by the Visa-MasterCard duopoly.

According to the Federal Reserve, $16.2 billion of debit interchange fees were paid in 2009.

It is estimated that the financial reform law will save consumers $10 billion of that total. How could that be? Because it should come as no surprise to anyone who has even a passing acquaintance with Economics 101, that fees set by a duopoly have no relationship whatsoever to the costs of the transaction.

They are in fact just one more mechanism that Wall Street has used to siphon an increasing percentage of our Gross Domestic Product out of the pockets of the middle class and into the increasingly-bloated financial sector.

The central problem of our economy — and society — is that virtually every dime of the considerable economic growth of the last twenty years has gone to the top two percent of the population. Wall Street salaries and bonuses have exploded, while middle class incomes have stagnated.

From 1948 to 1980, profits generated by the financial sector represented from 5% to 15% of all U.S. business profits. Then they began to creep up — and finally explode — to an unbelievable 40% right before the Great Recession. They dropped briefly, and by the end of 2009, they were back to 36% .

Let’s remember that the financial sector does not make anything. Its goal is to take a little piece of every transaction as money flows through its hands — what novelist Tom Wolff calls the “golden crumbs.”

In the last twenty years, the exploding financial sector has sucked the lifeblood out of the American middle class. It has vacuumed money out of the pockets of people who actually work for living producing goods and services. It has siphoned off virtually every dime of economic growth so that real middle class incomes have actually fallen at the same time the economy has grown. That wasn’t just disastrous for the middle class — it was catastrophic for our entire economy. It meant that there weren’t enough consumer dollars available to buy new goods and services — a problem that was temporarily solved by the credit bubble until it ultimately collapsed and cost eight million Americans their jobs.

To put it simply, the financial sector — and especially the big Wall Street banks — are a huge cancer growing on our economy.

To have an economy that will allow long-term, widely shared, growth — we have to shrink the financial sector and put money back into the hands of companies that produce actual goods and services, and consumers who buy them.

The Wall Street reform law made a big step in the direction of reining in the big Wall Street banks. And a key element of that law was the provision that prevents the duopoly power of those big banks — exercised through Visa and MasterCard — from fixing the price of the fees merchants pay every time you use your debit card.

The new law requires that these fees must be reasonable and proportionate to the cost of running a debit transaction over that network’s wires. But it turns out their actual cost of providing this service is very low. If prices for “swipe fees” were set by the competitive market, they would dramatically fall because of competitive pressure. But since the prices are set through a duopoly they allow gigantic profits for the banks.

Right now Visa and MasterCard — at their sole discretion — set different fee rates for different types of debit transactions. For example, they charge higher fee rates for small businesses than for large ones. Most debit interchange fee rates are set as a percentage of the transaction amount plus a flat fee (e.g., 0.95% + $0.20). The Fed found that the average interchange fee for all debit transactions in 2009 was 44 cents per transaction, or 1.14% of the transaction amount.

The Fed put out a draft rulemaking in December 2010 that suggested options for reform. Both of the options suggested limiting interchange fee rates for the biggest 1% of banks to 12 cents per transaction (down from the average 44 cents per transaction today). This comes close to the 0.2% debit interchange rate that Visa and MasterCard recently agreed to use in the European Union. A reduction of this amount would save U.S. consumers around $10 billion per year.

Now, this proposed rate is obviously not below their costs, since that’s what they agreed to charge in Europe.

But the big banks are desperate to hang onto the gusher of profit that comes out of American pockets.

They have used their enormous lobbying muscle to convince some otherwise decent Senators, that this is really nothing more than a battle between the banks and retail merchants. Baloney. Non-competitive “swipe fees” are just one more way they reach into the pool of money generated by the real economy and set it aside so it can end up as part of some Wall Street banker’s multi-million dollar bonus check. And you can be certain that most retailers don’t eat the costs of “swipe fees.” They pass the vast majority of these costs on to consumers in the form of higher prices.

Nonetheless, next week the big banks hope to get the Senate to pass an amendment “delaying” implementation of this law. This delay would save the banks — and cost consumers — about $10 billion a year, simple as that. The provision’s original sponsor, Senator Dick Durbin (D-IL), promises to lay down on the tracks to prevent them from being successful. But there is still a grave danger that the bankers will succeed.

That’s because the big banks hope to conduct this attack without a great deal of public notice. They have conducted a vigorous PR campaign inside the beltway, but out in the rest of the country, no one has heard word one about this issue.

And this is just the beginning. If they are successful with “swipe fees,” they will be emboldened to try to gut other sections of this critical law.

The big banks do well under cover of darkness. When they are exposed to the bright light of public attention — as they were during the battle over financial reform — consumers had the high political ground. The Wall Street reform bill got tougher as it moved through the legislative process because Members of Congress were afraid to side with Wall Street against ordinary Americans.

Now, the big banks hope to conduct their attack on the Financial Reform Law while the voters are focused on a new war in Libya, a nuclear disaster in Japan, the battle over collective bargaining and March Madness.

Big bank lobbyists are like cockroaches.When you turn on the light they scatter, but they take over if they’re allowed to operate in the dark.

When you’ve finished reading this article, pick up the phone, call your Senator and turn on the light. Tell them to keep Wall Street from gutting this key provision of the Wall Street Reform Law.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.

Lies About Big Banks vs Small Banks

The break-up of the big banks combined with strengthening the community banks and credit union would create something much closer to a free market of 7,000 institutions than 4 institutions controlling the world’s currency.

Since the 1960’s the banking industry has been dominated by two main tiers of banking — the founding members of “associations” who sit on the board of electronic networks and then the peons who are all the rest of the banks. The number of founders is probably less than a dozen. The rest number around 7,000.

To give credit where credit is due, the leaders of this pack (when their numbers were higher before consolidation) came up with a pretty smart plan: create an electronic network that would enable their depositors to have access to their bank accounts all over the world — and force the vast majority of smaller banks to use that network and thus pay for the cost of the infrastructure.

The result was that community banks and credit unions were subjected to “rules” that did not allow them to conveniently access the network whereas the big fellows were able to advertise that you could get free access to your account with your ATM card anywhere.

Attempts by community banks and credit unions to use smaller ATM machines and push back on the big bank competitors resulted in draconian rules that put hundreds of firms out of business and severely restricted access to bank accounts unless you were a customer of a big bank. This in turn allowed the big banks to raise fees to absurd levels.

The cost of a an electronic transaction is less than 1 cent including settlement. Visa, MasterCard and others have instituted charges on the front end (surcharges) and back end (on your end of month statement where you might not notice) of somewhere around $6.00 per transaction if you use an ATM that is not branded with the big bank name.

This combined with two other developments — the allowance of interstate banking and the repeal of the Glass Steagel act giving investment bankers (risk takers) access to depository accounts at commercial banks (risk averse), resulted in complete domination of the marketplace by just a few banks.

The story goes that we need extra large banks because there are international companies that need extra large financing. Small banks can’t do that, they say and so big banks are a necessary evil.

It’s a lie. ATM Charges should be less than $2.00 at most including front and back end. Bank charges have skyrocketed despite the claim of scale economies in the large banks. And electronic transactions are only more convenient for large banks because they won’t let the networks give the same privileges to the small banks. It’s a classic case of antitrust waiting to happen.

But that was just the beginning. By changing the face of lending from the banker actually knowing its customer to never knowing its customer, the decision-making process on loans became increasingly remote. So they came up with an addictive form of gambling called FICO which is a convoluted score-system that requires you to be in debt in order to get a high enough score to borrow money when you need it.

Enter securitization. The risk-taking investment bankers quickly figured out a scheme wherein if they created underwriting standards that would produce non-performing loans, they could make a fortune and bleed the world dry of virtually all real money. They got the money from investors, other banks, governments and even individual investors by lying to them. But because the process of lending had become so decentralized they had the cover of plausible deniability and started creating “innovative products” under the ideological belief that the “free market” (which is anything but free) would regulate itself.

Here is the real story: Most small business and personal loans would be of far higher quality and produce far more impact on local, state and national economies if they were originated by local banks who met, knew, visited and verified the facts and the people. There is no rational business case for a lender in Chicago to be selling its services to a borrower in San Diego.

Virtually any loan, regardless of how large could be handled by expanding the functionality, which already exists, of the technology networks that transfer and settle electronic transactions.

Which means that a big huge borrower or a banker with a scheme like the mortgage meltdown scheme would be subjected to 7,000 banks reviewing the risk and probably getting outside knowledgeable consultants to evaluate the scheme. Syndication of loans is as old as lending. Take the big banks out of the equation and ask yourself, would the mortgage meltdown scheme have ever left the station if it was subjected to that kind of scrutiny?

The ONLY reason it worked is the LIVING LIE that bigger was better. The Department of Justice Antitrust division can fix this quickly simply by enforcing existing law. The break-up of the big banks combined with strengthening the community banks and credit union would create something much closer to a free market of 7,000 institutions than 4 institutions controlling the world’s currency.

For consumers this would mean lower bank fees. Most people pay over $200 per year in various bank fees without realizing it. It’s large undisclosed or simply added into your statement. Some people pay as high as thousands of dollars for “overdrafts” created by first imposing a fee that drains the account to zero and THEN presenting the checks for payment and paying them for a “modest” fee of $39.00.

Nothing is going to change though, unless people get riled up, throw the bums out and start over again. As long as Dimon and others effectively write the laws and make the rules the consumer is screwed, the taxpayer is left in a hole for generations, and investors will never trust the U.S. markets again.

Mortgage Meltdown: Regulation or Re-creation?

It is startling to see how little anyone knows about the mess we are in. First they don’t understand how bad this is going to get. Second they don’t understand how it happened because they don’t understand the financial system. And third, they have no clue how to prevent this from happening again. They don’t even realize that it has happened before several times right here in this country. 

The Country, the States and even the Counties and cities are more or less organized around the concept of bicameral legislatures, with checks and balances from the executive and judicial branches of government.

In all of those governmental entities there is not one person who has the knowledge or the authority or the accountability for the Mortgage Meltdown. It is impossible to imagine any smart regulation coming out of our current approach, so the inevitable conclusion is that the Mortgage Meltdown, the dot com meltdown, etc., will all happen again. The players will change but the game is the same.

So the first thing is to throw out all the proposals for future regulations or simply accept the fact that they won”t perform the basic purpose of government: to preserve society and protect the citizens from harm. 

Let’s get specific about the mortgage meltdown: it happenned because the private sector was able to create the equivalent of money using investor cash under false pretenses. It also happened because the participants were able to do it without perceiving any risks or negative consequences to themselves.

While you might say that the mortgage meltdown has had plenty of negative consequences to the financail institutions and intermediaries who participated in this fraud, the fact is that very few of the decision-makers have suffered any negative outcome. They walked away with bonuses and golden parachutes. People who worked for them suffered loss of jobs and themselves are in difficult financial straits, but not the real decision-makers (the movers and shakers).

If you want this scenario to stop (yes it is still happening) then three things must be true:

1. Full disclosure to government must be filed with a governmental agency on any program that involves a loan. Visa and MasterCard require every card issuance program to be individually approved. If they understand this simple concept, certainly government can learn something from the private sector. No lender should be able to act as a pure conduit for a loan without losing their status as a financial institution. If that is what they want to do, they are a broker not a lender. Every lender should have risk or they should not get paid a dime and the borrower should be told that the lender has no interest in the loan other than getting the borrower’s signature so that the lender can make a profit. If the fair market value of the house is stated incorrectly then all parties who had knowledge, despite plausible deniability, should be accountable for the difference.

2. The risk of imperfect disclosure and failure to perform in accordance with the fiduciary duties of a lender should be substantial and obvious and should be felt by the decision-makers. The same holds true for the seller of securitized products to investors. The simple test is this: if the borrower or investor knew what the lender or securities seller knew, would they have done the deal? If not, the full loss should fall on the companies and individuals who created these flawed programs.

3. Securitization of loans is not a good thing unless the investor fully understands the security he or she is buying. Allowing plausible deniability through reliance on rating agencies and insurers will always leave the investors holding an empty bag. The sellers, the rating agencies and the insurers should be required to file in the public record everything they know about the security and what they did to assure themselves that the facts were true. Later, if the deal falls apart, investors have defendants who are in clear violation of their duties and government has a clear case for prosecution.

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