BofA Cleanup Is Impossible Unless……

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

“The problem facing Bank of America is stunning, both on an economic and on a human scale. Among its 14 million mortgage customers, nearly 1 in 10 is past due. Another 190,000 have not been able to make a payment in at least two years, and one-third of the homes facing foreclosure are vacant, making them harder to maintain and sell. Dealing with customer service, many homeowners say, is frequently infuriating.”

Nor has the company signaled its path out, experts say. “If this is truly the biggest bank, they should be a leader, out in front,” says Mark Williams, executive-in-residence at Boston University and a former bank examiner for the Federal Reserve. “But they’re still in defense mode.”

EDITOR’S NOTE: They can write all they want about “good  intentions” and intractable problems, the fact remains that the assets on the books are an illusion, the business model is skewed by non-disclosure of a complete lack of planning on how to exit the mortgage mess, and the growing consensus of people in the court systems — Federal and State is that BofA has not emerged with a plan because it doesn’t have one.

THERE IS A PLAN THAT WILL WORK. But not one where BofA has it all their own way. There is an old expression that if you are being run out of town you might as well get in front of the crowd and make it look like a parade. If BofA wants to survive this and regain its some brightness to its image, it needs to adopt the obvious strategies that are necessary to bring down the increasingly deafening cries for heads to roll. If they take the lead, they can reload the investors, minimize losses, minimize the immediate risk and vastly improve the prospect of recovering the quality of their balance sheet. If they wait, then all will be lost. People on Wall Street are too devoted to believing that EVERYTHING IS AN ILLUSION. That is not and never has been true. Reality is affected by illusion — but in the end, if you promise someone 10 bucks, you have to give it to him or satisfy him in some other way — or you’re out of business.

Batting Cleanup at Bank of America


Charlotte, N.C.

BRIAN MOYNIHAN isn’t one to look back. And as the chief executive of Bank of America, he has plenty of reasons not to.

His company is staggering under the weight of his predecessors’ decisions, and each day seems to bring more bad news. More than 1.3 million of the bank’s customers are behind on their home loans, all 50 state attorneys general are investigating the industry’s foreclosure practices and Bank of America has become a leading symbol of the mortgage mess.

When the founder of WikiLeaks, Julian Assange, bragged late last month that his group was about to “take down” an American bank with a mother lode of damaging insider documents, the scuttlebutt on Wall Street quickly turned to Bank of America, sending its shares down more than 3 percent in a day.

But don’t bother feeling sorry for Mr. Moynihan. As far as he’s concerned, things are just fine.

“It’s been a great year and we’ve learned a lot,” he says during an interview in his office here, 58 floors above downtown Charlotte. “There’s not a better job in the world.”

However improbable that may sound, his damn-the-torpedoes stance has helped him stabilize a company that was in such desperate straits that it required two federal bailouts that totaled $45 billion. He’s even returned the bank to profitability — after a little help from that sizable taxpayer-supported cushion, of course.

But since he was named to the position a year ago this week, Mr. Moynihan’s strategy has failed to convince investors, analysts, and some customers that Bank of America is headed in the right direction. The bank’s shares have fallen 18 percent during his tenure.

“Many investors are trying to put their arms around Bank of America’s problems and have been left fluttering in the wind,” says Mike Mayo, a bank analyst with Crédit Agricole in New York. “The company hasn’t given investors much assurance or confidence. It’s like they’re in the twilight zone.”

As the chief executive of the largest bank in the country, Mr. Moynihan is under increasing pressure from Wall Street to raise his profile and rebuild his company’s battered image. “Given some of the problems the company has had, he’s got to show shareholders that he’s standing up for Bank of America,” said Moshe Orenbuch, an analyst with Credit Suisse.

Unfortunately, that doesn’t come easily to Mr. Moynihan. Unlike Jamie Dimon, who has become a media darling as the head of the nation’s second-largest bank, JPMorgan Chase, and has sidestepped some of the withering criticisms aimed at Bank of America, Mr. Moynihan isn’t fond of the spotlight.

“Jamie is visible, he’s a brand, and he gets much more of the benefit of the doubt than Brian,” says Christopher Whalen, managing director of Institutional Risk Analytics. “Brian still has to prove that he can ride the tiger at Bank of America.”

EVEN as his company was battered by one bad headline after another over the last 12 months, Mr. Moynihan rarely wavered from his script, sticking to his calls for better “execution” and a “customer focus.” The problem is that lengthy accounts of robo-signers, lost documents and other foreclosure imbroglios hardly sound like smart execution to furious customers.

“He’s got to get out there and become an equally large public figure as Jamie and articulate the bank’s position,” says D. Anthony Plath, an associate professor of finance at the University of North Carolina, Charlotte. “He’s a hard worker and he’s well liked inside the bank. But the way they are handling it now just won’t work.”

Within the company, Mr. Moynihan gets credit for prying open Bank of America’s rigid and top-down corporate culture and pressing the flesh with clients. Still, that side of Mr. Moynihan, a lawyer by training, doesn’t always come through in public settings. His detractors compare him to Charles O. Prince III, the general counsel at Citigroup who proved unable to adequately manage that sprawling juggernaut after he was promoted to chief executive in 2003.

That’s not a fair comparison, says Laurence D. Fink, chief executive of BlackRock, a money-management giant that was partially owned by Bank of America until last month, when Mr. Moynihan sold off most of that stake in an effort to raise capital and focus on the company’s core banking business.

“There’s always skepticism hiring a lawyer as C.E.O.,” Mr. Fink says. “He’s facing enormous headwinds, but in the first year Brian has surprised a lot of those skeptics.”

Mr. Moynihan has, indeed, put out a series of fires — settling a Securities and Exchange Commission suit against the company, mending ties with regulators and hinting last week that a dividend increase is coming soon.

He has also eliminated much-maligned overdraft fees on debit cards, strengthened the bank’s balance sheet and sold off $16 billion worth of businesses that didn’t serve core customers. On Wall Street, the combined Bank of America and Merrill Lynch has emerged as a global powerhouse, helping the company earn $9.4 billion so far this year.

But if Mr. Moynihan can’t get a handle on the foreclosure furor and restore the company’s reputation as a fair-minded lender, his wins will continue to be drowned out, according to interviews with analysts, industry experts and former Bank of America executives.

The problem facing Bank of America is stunning, both on an economic and on a human scale. Among its 14 million mortgage customers, nearly 1 in 10 is past due. Another 190,000 have not been able to make a payment in at least two years, and one-third of the homes facing foreclosure are vacant, making them harder to maintain and sell. Dealing with customer service, many homeowners say, is frequently infuriating.

A report that the Moody’s Corporation issued on Thursday found that, when it comes to resolving delinquent subprime loans, Bank of America had taken longer than the other six major servicers examined.

“Bank of America has a lot more to clean up than any other servicer or lender,” says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “And customers find themselves facing a bureaucracy where it’s hard to get answers, hard to understand what they’re telling you and certainly hard to get solutions.”

Nor has the company signaled its path out, experts say. “If this is truly the biggest bank, they should be a leader, out in front,” says Mark Williams, executive-in-residence at Boston University and a former bank examiner for the Federal Reserve. “But they’re still in defense mode.”

Mr. Moynihan’s predecessors, Hugh McColl and Ken Lewis, were classic empire builders who, during banking’s boom years, transformed a sleepy North Carolina financial institution, NCNB, into the nation’s largest bank through a never-ending series of deals. But in the end, Bank of America had swallowed much more than it could digest, leaving it stuffed with an unwieldy collection of assets and dangerously exposed to any economic downturns.

Mr. Lewis’s final acquisition, Merrill Lynch, fulfilled his longstanding dream of becoming a banker to Wall Street and Main Street, and promised to prove to the elite banks in New York that a bunch of bankers from Charlotte could be every bit as successful as they were. Yet all he ended up showing, most analysts concur, was that he was every bit as poor at risk management as most of the Manhattan bankers.

The Merrill deal proved to be Mr. Lewis’s undoing, saddling Bank of America with tens of billions in losses even as the red ink began to flow from another of his errant purchases: the mortgage lending giant Countrywide Financial. By the time Mr. Lewis resigned in 2009, several outside executives had made it clear they didn’t want his job, and it fell to Mr. Moynihan to impose some kind of strategy on the sprawling empire.

Today, Bank of America’s customers range from millions of subprime borrowers barely hanging on to their homes to the swells who bank with U.S. Trust, where the minimum deposit required to open an account is $3 million. Its 300,000-strong work force includes the “thundering herd” of some 15,000 brokers from Merrill, and 55,000 mortgage workers who help service one in five American home loans.

“This is a behemoth,” Mr. Williams says. “But I have no idea where Bank of America is going.”

MR. MOYNIHAN appears to be scarcely aware that his anniversary is upon him. “We are working that day, right?” he points out. “I don’t have any special things planned. My mother asked me what day it was, and I couldn’t remember whether it was the 16th or 17th.” (It’s the 16th.)

Then again, it might just be an uncomfortable reminder of the selection process that led to his appointment in the fall of 2009, when the bank was rudderless for two and a half months after Mr. Lewis resigned and the board mulled over different candidates. Initially, directors looked at an outside choice, Robert P. Kelly, chief executive of Bank of New York Mellon, but that foundered after it became clear that it would be expensive to lure him away.

Ken Lewis had poked fun at Mr. Prince, says one former executive who requested anonymity because he was not authorized to speak publicly, and joked that he would never turn the company over to a lawyer. But Mr. Lewis, who declined to comment for this article, had not groomed a successor.

Mr. Moynihan’s internal rivals had troubles of their own. One of them, Greg Curl, then the chief risk officer, was a strategist behind the acquisitions of Merrill Lynch and Countrywide, both of which had turned into money pits.

Mr. Moynihan, on the other hand, didn’t carry much baggage. An Ohio native and former rugby player who graduated from Brown University and Notre Dame Law School, he initially made his mark in New England in the 1990s, quickly working his way up from associate general counsel at Fleet bank to run corporate strategy.

At Fleet, Mr. Moynihan was a leading member of the so-called Nifty 50, a group of young executives who had been identified as up and comers, recalls Bill Mutterperl, who served as Fleet’s general counsel and was Mr. Moynihan’s first boss. “He’s indefatigable in terms of being a hard worker, putting in incredible hours, focusing and never losing attention,” Mr. Mutterperl says.

He also played a central role in Fleet’s own expansion. “On many deals he knew how to find the bodies that were buried and really do the due diligence,” Mr. Mutterperl says. “He is a real fixer.”

Mr. Moynihan was one of the few Fleet executives to survive when Bank of America acquired it in 2004, becoming president of the combined company’s global wealth and investment management business. He stabilized that unit, in which mutual fund managers had run afoul of regulators over trading practices, and then switched over to run Bank of America’s global corporate and investment bank in 2007.

Mr. Moynihan remained based in Boston, however, raising his three children in the suburbs and making it a point to be there for soccer games and birthday parties. His distance from Charlotte would actually turn out to be crucial when the top job opened up.

Amid the tumult caused by the merger with Merrill, Mr. Moynihan managed to hang on, cycling through four top jobs in 2008 and 2009, stepping in as other executives quit or were fired. He served for less than two months as general counsel, moving on to run corporate and investment banking and wealth management in January 2009, only to shift to running the consumer bank in August 2009. By December, he was chief executive.

“The good news was that he’d seen a lot of the businesses,” says Mr. Mayo, the analyst at Crédit Agricole. “The downside is that he wasn’t in any position for that long, making it much harder to evaluate his track record.”

Charles O. Holliday Jr., Bank of America’s chairman, admits that “nobody likes to move an executive after four months. But this guy was a proven quantity who could hit the ground running and produce results quickly.”

Others say Mr. Moynihan gets the job done without complaining or spending too much time analyzing the unforgiving messes he has frequently had to clean up.

“It’s really interesting how we got here, but it’s completely unimportant to where we go next,” Mr. Moynihan says. “You got to sit there and say, ‘Do I want to be part of the team? Yes.’ Then go do your job.”

IF Mr. Moynihan didn’t have time to settle into the myriad jobs he had before becoming chief executive, it also meant he avoided blame for the losses piling up at Merrill and for the controversial decision to hand out billions in bonuses to Merrill’s employees shortly before the deal closed in the beginning of 2009.

Unlike Countrywide, Merrill is now paying off for the company. In the first nine months of the year, Bank of America’s investment bank, wealth management and capital markets units earned $6.7 billion, or well over half the company’s overall profits. In businesses like leveraged finance, equity underwriting and investment banking, the combination of two middle-tier players has created a powerhouse.

“It took a long while for people to agree with us,” Mr. Moynihan says about Merrill. “You’re seeing the power of the franchise come through. It was a terrific transaction.”

David Darnell, the head of commercial banking, says his unit has received 10,000 leads from the former Merrill. “This is working,” he says. “Merrill is a game-changer in my business.”

But what about Countrywide?

“A decision was made; I wasn’t running the company,” Mr. Moynihan says, although he was obviously a top bank official at the time. “Our company bought it and we’ll stand up; we’ll clean it up.”

Countrywide has already cost Bank of America more than $5 billion in write-offs. But Mr. Moynihan might be the last man standing when it comes to defending the merits of the deal.

“When we get through the work on the management side, people will come to the same conclusion that this is a great thing for customers and a great thing for the bank,” he says. “Right now, we’re still absorbing the body blows.”

There’s no sign that those body blows will stop anytime soon. Nearly all of Bank of America’s subprime mortgage portfolio was inherited from Countrywide, whose risky lending typified the giddy years before the housing bubble burst.

Countrywide also saddled Bank of America with many more homeowners in default than its system could possibly handle. The overload contributed heavily to the consumer abuses and dubious legal practices that led it to halt foreclosures across the country in October, after the news media, courts and regulators began questioning the bank’s operations.

Mr. Moynihan remains reluctant to yield much ground on Bank of America’s foreclosure practices, however.

“At the end of the day, we could have done better. I’ll take constructive criticism,” he says, especially on delays as the caseload exploded. Still, with the number of workers focusing on defaults set to hit 30,000 by early next year — triple what the bank had two years ago — he says he’s “satisfied that we are doing everything we can and that we’ve caught up and are working through the backlog.”

“This is a very, very difficult process,” he adds. “People want to pay us their debt, but they’re sick, they’ve lost their job, they’ve lost their income. It’s a very tough scenario to have a good outcome for anybody.”

In-house mortgage modifications, the process in which the terms of a loan are eased so homeowners have a chance to catch up, have been a source of contention between the banking industry and its critics.

Mr. Moynihan points out that the scale of Bank of America’s modification efforts far exceeds those of his competitors — 725,000 modifications since January 2008 — and is expanding fast. He says the rate of monthly modifications jumped to 22,400 in November from 12,700 in September.

“I feel proud of what we’ve done,” he says. “You never want to have a customer feel something wasn’t done right.”

But with more than 1.3 million of its customers still behind on their mortgage payments, even tens of thousand of modifications a month still represents a small portion of the loans.

Other numbers also tell a less rosy story. For homeowners who failed to get a permanent modification under the federal government’s Home Affordable Modification Program, only 14 percent managed to get an alternative in-house modification at Bank of America, compared with 31 percent at JPMorgan Chase, 27 percent at Citibank and 40 percent at Wells Fargo.

And of the 425,000 homeowners serviced by Bank of America estimated to be eligible for the program at the end of September, only 0.7 percent began trial modifications in October, according to federal data. That compares with 2.4 percent at JPMorgan Chase, 1 percent at Citibank and 1.6 percent at Wells Fargo.

“Bank of America has just had a culture of being more reluctant to make concessions as part of the modification process,” said Alan White, associate professor of law at Valparaiso University in Indiana. “It’s improving slowly, but they continue to lag their peers.”

Bank of America says that the government’s modification program is a limited benchmark for measuring its progress, and its overall record on modifications is hampered by Countrywide’s subprime-heavy portfolio.

While the bank may be making progress, the overall picture Mr. Moynihan paints still doesn’t reflect reality, says Rachel Bloch, a foreclosure prevention advocate at Empowering and Strengthening Ohio’s People, a Cleveland community organization that helps borrowers with troubled mortgages stay in their homes.

“I’ve been working with Bank of America for three years now, and it’s been a really hard process,” she says. “I have homeowners waiting for a year just to get an update, let alone a resolution.” Over and over again, she said, the paperwork sent in by borrowers is lost, causing further delays, while fees and penalties accumulate.

It’s a problem cited by other consumer advocates and homeowners like Dorothy Robinson of San Jose, Calif. Ms. Robinson, 66, has been trying to get a modification from Bank of America on her $476,000 mortgage for the last two years, ever since her husband lost his job.

But dealing with customer service has been incredibly frustrating, she says, with one bank representative telling her she’d been denied, another saying the modification had been approved, and both of them repeatedly asking for documents she’d already sent in. And when Ms. Robinson withdrew money from her retirement account to try to get caught up, it took months for Bank of America to even record the payment, she says.

“I have to get this resolved. I need a roof over my head,” says Ms. Robinson. “I don’t know what’s happening.”

Bank of America says Ms. Robinson has been conditionally approved for a modification under the government program, including a principal reduction. More information is still needed from Ms. Robinson to confirm final eligibility for the modification, the bank says, while denying that there is any systematic problem causing documents to be lost.

BAD as the foreclosure mess has been for Bank of America’s reputation, Wall Street analysts say a bigger financial threat is looming: what if Bank of America and other giants are forced to buy back a portion of the hundreds of billions in mortgages gone bad?

A growing number of investors are arguing that because the mortgages may have been originated fraudulently, or sliced into mortgage-backed securities without adequate due diligence, the banks are obligated to buy them back under the original terms of the securities — a process known as a putback.

Legal barriers to putbacks are high, but the sheer amount of mortgages originated, securitized and sold to all investors by Bank of America and Countrywide is staggering — $2.1 trillion from 2004 to 2008.

So even if only a small portion are put back, some analysts argue, the losses for banks could run into the tens of billions. This is one issue on which Mr. Moynihan and Charles H. Noski, the chief financial officer, have made a more forceful case that the risk is “manageable,” promising “hand-to-hand combat” in the courts on a loan-by-loan basis if putbacks start cascading in.

But analysts like Mr. Mayo cite fear of putbacks as one reason Bank of America’s stock has lagged behind its main rivals. “People are worried about a $35 billion hit,” Mr. Mayo says. “That may be wrong, but they haven’t convinced people otherwise.”

Mr. Moynihan is unbowed. “We signed up for the task, and we’ll clean it up,” he says. “We’re working our tails off.”

Bank of America to Pay $108 Million in Countrywide Case


FTC v Countrywide Home Loans Incand BAC Home Loans ServicingConsent Judgment Order 20100607

Editor’s Comment: This “tip of the iceberg”  is important for a number of reasons. You should be alerted to the fact that this was an industry-wide practice. The fees tacked on illegally during delinquency or foreclosure make the notice of default, notice of sale, foreclosure all predicated upon fatally defective information. It also shows one of the many ways the investors in MBS are being routinely ripped off, penny by penny, so that there “investment” is reduced to zero.
There also were many “feeder” loan originators that were really fronts for Countrywide. I think Quicken Loans for example was one of them. Quicken is very difficult to trace down on securitization information although we have some info on it. In this context, what is important, is that Quicken, like other feeder originators was following the template and methods of procedure given to them by CW.Of course Countrywide was a feeder to many securities underwriters including Merrill Lynch which is also now Bank of America.

Sometimes they got a little creative on their own. Quicken for example adds an appraisal fee to a SECOND APPRAISAL COMPANY which just happens to be owned by them. Besides the probability of a TILA violation, this specifically makes the named lender at closing responsible for the bad appraisal. It’s not a matter for legal argument. It is factual. So if you bought a house for $650,000, the appraisal which you relied upon was $670,000 and the house was really worth under $500,000 they could be liable for not only fraudulent appraisal but also for the “benefit of the bargain” in contract.

Among the excessive fees that were charged were the points and interest rates charged for “no-doc” loans. The premise is that they had a greater risk for a no-doc loan but that they were still using underwriting procedures that conformed to industry standards. In fact, the loans were being automatically set up for approval in accordance with the requirements of the underwriter of Mortgage Backed Securities which had already been sold to investors. So there was no underwriting process and they would have approved the same loan with a full doc loan (the contents of which would have been ignored). Thus thee extra points and higher interest rate paid were exorbitant because you were being charged for something that didn’t exist, to wit: underwriting.
June 7, 2010

Bank of America to Pay $108 Million in Countrywide Case


WASHINGTON (AP) — Bank of America will pay $108 million to settle federal charges that Countrywide Financial Corporation, which it acquired nearly two years ago, collected outsized fees from about 200,000 borrowers facing foreclosure.

The Federal Trade Commission announced the settlement Monday and said the money would be used to reimburse borrowers.

Bank of America purchased Countrywide in July 2008. FTC officials emphasized the actions in the case took place before the acquisition.

The bank said it agreed to the settlement “to avoid the expense and distraction associated with litigating the case,” which also resolves litigation by bankruptcy trustees. “The settlement allows us to put all of these matters behind us,” the company said.

Countrywide hit the borrowers who were behind on their mortgages with fees of several thousand dollars at times, the agency said. The fees were for services like property inspections and landscaping.

Countrywide created subsidiaries to hire vendors, which marked up the price for such services, the agency said. The company “earned substantial profits by funneling default-related services through subsidiaries that it created solely to generate revenue,” the agency said in a news release.

The agency also alleged that Countrywide made false claims to borrowers in bankruptcy about the amount owed or the size of their loans and failed to tell those borrowers about fees or other charges.

AND the indictments start

“This will go on for a long time and a lot of people will be indicted,”

“The government continues to show that it simply doesn’t understand how this market operated,”
Editor’s Note: If you read this carefully, you get a flavor of how the derivative scam adventure involved everyone except its victims. Mind you, there is nothing wrong and probably everything right about derivatives. The problem is not the instrument, it is how it was used and who used it. Banks shouldn’t be allowed to underwrite, sell, trade and take investment positions contrary to the interests of the clients who buy those securities.  No trading in derivatives should be subject to the description “opaque debt investment. All trading needs to be transparent when it comes to underwriters. And complex derivatives should not be used as a cover for fraud.

Conspiracy of Banks Rigging States Came With Crash (Update1)

By Martin Z. Braun and William Selway

May 18 (Bloomberg) — A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market.

The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds. On one end of the line was Steven Goldberg, a trader with Financial Security Assurance Holdings Ltd. On the other was Zevi Wolmark, of advisory firm CDR Financial Products Inc. Goldberg arranged to pay a kickback to CDR to land the deal, according to government records filed in connection with a U.S. Justice Department indictment of CDR and Wolmark.

West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks.

They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money.

California to Pennsylvania

The workings of the conspiracy — which stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and non- profits — can be pieced together from the Justice Department’s indictment of CDR, civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials.

“The whole investment process was rigged across the board,” said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. “It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded.”

Anderson said he referred scores of cases to the Justice Department when he was with the IRS. He estimates that bid rigging cost taxpayers billions of dollars. Anderson said prosecutors are lining up conspirators to plead guilty and name names.

“This will go on for a long time and a lot of people will be indicted,” he said in a telephone interview.

Bidding Encouraged

The U.S. Treasury Department encourages public bidding for GIC contracts to ensure that localities are paid proper market rates. Banks that conspired in the bid rigging for GICs paid kickbacks to CDR ranging from $4,500 to $475,000 per deal in at least 10 different transactions, government court-filed documents say.

A GIC is similar to a certificate of deposit, but its rates aren’t advertised publicly. Instead, towns rely on advisory firms such as CDR to solicit competing offers.

In the bid-rigging deals, CDR gave false information to municipalities and fed information to bankers allowing them to win with lower interest rates than they were otherwise willing to pay, the indictment says. Banks took their illegal gains from the additional returns and paid CDR kickbacks, according to the indictment.

Not Guilty Plea

Wolmark, 54, who was indicted by a federal grand jury in Manhattan on antitrust, conspiracy and wire fraud charges, to which he pleaded not guilty, declined to comment when reached by telephone at CDR’s office. Goldberg, who hasn’t been charged, declined to comment, says his attorney, John Siffert.

Court records in the broadest-ever criminal investigation of public finance shed new light on how Wall Street’s biggest banks were cheating cities and towns during the same decade in which they were setting the stage for a global economic collapse.

As the banks were steering the world’s financial system to the brink of catastrophe by loading more than $1 trillion of subprime mortgage loans into opaque debt investments, they were also duping public officials across the U.S.

Many of the same bankers and advisers who sold public officials interest-rate swap deals that backfired for taxpayers are now subjects of the criminal antitrust investigation involving GICs.

The swaps are derivatives designed to keep monthly interest payments low as lending rates change. Municipal- derivative units of the largest U.S. banks also sold the contracts, public records across the nation show.

Key Witness

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives.

A key witness in the government’s case is a former banker whom the government hasn’t named, according to a civil lawsuit filed by Baltimore, Maryland, and six other municipal borrowers against Bank of America, JPMorgan and nine other banks. The banker is providing evidence against his peers.

The witness, who was employed by Bank of America Corp. starting in 1999, has laid out the inner workings of the scheme in confidential meetings with investigators, according to the civil lawsuit.

Bank of America, based in Charlotte, North Carolina, has also been providing prosecutors with evidence since at least 2007. The bank voluntarily reported its own illegal activity and agreed to cooperate with the Justice Department’s antitrust division, according to a press release from the company.

Amnesty Agreement

In exchange, the government promised in an amnesty agreement not to prosecute the bank. Bank of America spokeswoman Shirley Norton in San Francisco said in an e-mail the firm is continuing to cooperate.

The banker who has been cooperating with the Justice Department said he overheard his colleagues change Bank of America’s bids after coaching from brokers or other banks bidding on the same deal, according to information that the firm provided to plaintiffs in the civil case filed by seven municipalities.

At least five former bankers with New York-based JPMorgan, the second-biggest U.S. bank by assets, conspired with CDR to rig bidding on investment deals sold to local governments, according to the Justice Department list now under seal.

At least three other former JPMorgan bankers are targets of the investigation, according to filings with the Financial Industry Regulatory Authority. Six bankers with Bank of America, the biggest U.S. lender, are also named in the sealed Justice Department list as participants.

16 Companies

Eighteen employees at 16 other companies, including units of General Electric Co., UBS AG and FSA, then a unit of Brussels lender Dexia SA, are also cited as co-conspirators by the Justice Department, according to the list under seal. None have been charged in the case.

Citigroup spokesman Alex Samuelson, Dexia spokesman Thierry Martiny, GE spokesman Ned Reynolds, JPMorgan spokesman Brian Marchiony, UBS spokesman Doug Morris, and Ferris Morrison, a spokeswoman for Wells Fargo & Co., which acquired Wachovia in 2008, declined to comment.

Former CDR employees Douglas Goldberg, Daniel Naeh and Matthew Rothman, pleaded guilty in federal court in Manhattan in February and March to wire fraud and conspiracy to rig bids.

In October, CDR was charged with criminal conspiracy and fraud, along with Chief Executive Officer David Rubin, 48, vice president Evan Zarefsky and Wolmark. They pleaded not guilty. Rubin, who was also charged with making fraudulent bank transactions, faces as much as $3 million in fines and more than 30 years in jail if convicted.

No Law Broken

Rubin declined to comment in a telephone call.

“Mr. Rubin doesn’t think that CDR broke the law in any of these transactions,” said Laura Hoguet, his attorney in New York.

Daniel Zelenko, a lawyer for Zarefsky in New York, said he was confident his client will prevail at trial.

“The government continues to show that it simply doesn’t understand how this market operated,” Zelenko said in an e- mail.

During more than three years of investigation, federal prosecutors amassed nearly 700,000 tape recordings and 125 million pages of documents and e-mails regarding public finance deals.

$400 Billion

Municipalities and states raise $400 billion a year by selling bonds. They invest much of those proceeds in GICs, sold by banks or insurance companies. Those accounts hold taxpayer money and earn interest before public agencies spend it.

Banks and advising firms illegally siphoned money from taxpayers by paying artificially low interest rates in the GICs, the CDR indictment says. The money was intended to build schools, hospitals, roads and sewers and refinance higher-cost debt.

The bid-rigging schemes were orchestrated by CDR and other advisory firms, according to the indictment and the civil suits. Advisers are unregulated private firms hired by local governments to consult on public finance deals — and are almost always paid by the banks that arrange the transactions or manage the GICs.

Wilshire Boulevard

CDR, which was located on Wilshire Boulevard in Beverly Hills, California, during the transactions under investigation, has provided advice on more than $158 billion in public transactions since it was founded in 1986, according to its website.

CDR helped arrange deals in which financial firms took millions of dollars in profits from GICs, Bloomberg News reported in October 2006. Almost all of the deals were shams: As much as $7 billion in bond-issue proceeds were invested in GICs but never spent for the intended purpose of providing services to taxpayers.

CDR signed off on interest-rate swaps to municipalities, as banks took hidden fees sometimes 10 times as much as they charged on fixed-rate bond deals, according to data compiled by Bloomberg. For the public, the swaps were fraught with risks.

In the past decade, banks have peddled swaps the world over, from Jefferson County, Alabama — which was forced to the brink of bankruptcy — to the hill towns of the Umbria region of Italy. Many of these swaps soured when the credit crisis began in 2007.

Getting Out

Dozens of municipalities have paid banks billions to get out of swap contracts. The agency that oversees the San Francisco-Oakland Bay Bridge said it spent $105 million to escape its deal in July 2009.

“They were gouging the municipalities,” said retired IRS investigator Anderson, 59. “Beside the excessive fees, some of the swap deals just didn’t work. It was just awful. The same people were involved in the GIC end of the market.”

Bid rigging not only cheated cities and towns, it also illegally denied the IRS required taxes from GIC income, Anderson said. The evidence is clear in telephone recordings made on GIC desks, he said. “We could hear people talking about how everyone knew who was going to win the bid. You could tell it was just everyday business.”

The Securities and Exchange Commission is conducting a probe of bid rigging from its Philadelphia office that’s parallel to the Justice Department investigation.

More Probes

State attorneys general in California, Connecticut and Florida are also investigating. Bank of America, JPMorgan, Fairfield, Connecticut-based GE, and Zurich-based UBS have disclosed in regulatory filings that they may be sued by the SEC.

The Federal Bureau of Investigation has raided at least two of CDR’s competitors, Pottstown, Pennsylvania-based Investment Management Advisory Group Inc., known as Image, and Eden Prairie, Minnesota-based Sound Capital Management. Neither has been charged.

Robert Jones, a managing director of Image, declined to comment, after answering a call to the firm’s office. Johan Rosenberg of Sound Capital didn’t return calls seeking comment.

Tape recordings cited in a letter by Justice Department prosecutor Rebecca Meiklejohn show how those deals worked. In two GIC bids for the Utah Housing Corp., CDR’s Zarefsky advised an unidentified trader that his firm could lower its offer by “a dime,” or 10 basis points (a basis point is 0.01 percentage point).

‘A Couple Bucks’

The West Valley City-based housing agency accepted contracts with GE’s FGIC Capital Market Services division for 5.15 percent and 3.41 percent in 2001, public records show. Zarefsky didn’t return calls seeking comment.

“I can actually probably save you a couple bucks here,” Zarefsky told the trader, according to the letter citing the tape recording.

The Utah agency, which finances mortgages for low-income residents, didn’t know that financial firms were cheating it out of money that could have been used to help home buyers, said Grant Whitaker, who runs the agency. “It sounds like somebody got a better deal than we did,” he said in a telephone interview.

Such deals could produce large illegal profits by banks, said Bartley Hildreth, public finance professor at the Andrew Young School of Policy Studies at Georgia State University in Atlanta.

A New Wrinkle

“Just a basis point on many of these deals is tens to hundreds of thousands of dollars,” he said.

This isn’t the first time Wall Street has faced accusations of reaping excessive fees on investment deals with public officials. Goldman Sachs Group Inc., Lehman Brothers, which filed for bankruptcy in 2008, Merrill Lynch & Co. and other securities firms agreed by 2000 to pay more than $170 million to settle SEC charges that they had sold overpriced Treasury bonds to municipalities.

The so-called yield burning drove down the returns that local governments earned and trimmed required payments to the IRS. The firms neither admitted nor denied wrongdoing.

Even as the banks were settling with regulators, they devised another way to burn yield, this time by skimming money from GICs, according to the indictment, which said the conspiracy went from 1998 to at least 2006.

In the lawsuit against Bank of America and JPMorgan filed in New York in June 2009, the city of Baltimore, two Mississippi universities and four other municipal borrowers say that bankers from those two companies colluded in bidding for GIC contracts in Pennsylvania.

Holiday Party

At a holiday party sponsored by advising firm Image at Sparks Steak House in Manhattan early in the past decade, the Pennsylvania deals were discussed by the Bank of America trader who is cooperating with prosecutors and Sam Gruer of JPMorgan, the civil antitrust lawsuit says.

The Bank of America trader told Gruer that he was happy that the two banks weren’t “kicking each other’s teeth out” on bidding for certificates of deposits for bond proceeds, the suit says. That information was provided by Bank of America to the plaintiffs.

Gruer, who was informed by prosecutors in 2007 that he was a target of the investigation, declined to comment.

Coaching a Bidder

The trader who is now a federal witness joined Bank of America after being recommended by Image, according to information that the bank turned over to the Baltimore-led plaintiffs. He was assigned by Phil Murphy, who headed the municipal trading desk, to be Bank of America’s point person for investment contracts bid by Image, the lawsuit says.

Image coached Bank of America in winning an investment contract in Pennsylvania, according to an internal e-mail exchange in May 2001 between Bank of America trader Dean Pinard and Image’s Peter Loughhead that was obtained by Bloomberg News. The e-mail was provided to Bloomberg by a person who got it from Bank of America and asked to remain unidentified.

Loughead, who ran bids for Image, advised Pinard on how much to offer for managing the cash fund for a $10 million bond issued by the sewer authority of Springfield Township, York County, 100 miles (161 kilometers) west of Philadelphia.

‘Don’t Fall on Any Swords’

Pinard said in the e-mail to Loughead that Bank of America was willing to pay the town as much as $40,000 upfront to win the deal. Loughead wrote that the bank didn’t need to pay that much.

“Don’t fall on any swords,” Loughead wrote to Pinard the day before bids were submitted. He suggested that the bank could win the contract with a bid of slightly more than $30,000. The next day, Bank of America offered $31,000. It won the bidding, authority records show.

Loughead didn’t return calls seeking comment. Pinard didn’t respond to telephone requests for an interview and no one responded to a knock on the door at his Charlotte home.

Image ensured that Bank of America would dominate GIC deals in Pennsylvania by soliciting sham bids from other banks to make the process look legitimate, according to testimony from the trader cooperating with the Justice Department.

Bank of America would return the favor to Image by submitting so-called courtesy bids at the adviser’s request, allowing JPMorgan to win some of the deals, according to information that Bank of America gave plaintiffs’ attorneys.

Switching Jobs

Bank of America has cooperated with the municipalities that were suing the bank as part of its 2007 amnesty agreement with the Justice Department.

Traders such as FSA’s Goldberg often had worked for several banks and insurance companies that had a role in GIC contracts, according to employment records with Finra, the self-regulator of U.S. securities firms. CDR employees went on to work in the derivative departments of Deutsche Bank AG and UBS, the records show.

Before joining Bank of America, Pinard, 40, worked at Wheat, First Securities Inc. in Philadelphia with two bankers who would later join Image, according to broker registration records.

“Few people understand this part of public finance,” Georgia State’s Hildreth said. “It is a very small band of brothers who know the market. So, of course, they are going to reap the benefits.”

34 States

For nearly a decade, CDR founder Rubin, Wolmark, and Zarefsky helped fix prices on investment deals that cheated taxpayers in at least 34 states, according to their indictments and records filed in the case.

FSA’s Goldberg, who received a bachelor’s degree in accounting from St. John’s University in Queens, New York, worked with CDR employees on GIC deals, according to the indictment and public records. Goldberg worked from 1999 to 2001 at GE, which gets 35 percent of its revenue from financial services.

Goldberg was referred to only as “Marketer A” in the CDR indictment. “Marketer A” was then later identified as FSA’s Steven Goldberg in the Justice Department list of co- conspirators.

At GE, Goldberg worked with Dominick Carollo, a senior investment officer for FGIC, and Peter Grimm, who worked there from 2000 until at least 2006, according to court documents and public records. GE sold FGIC in 2003 to a group led by mortgage insurer PMI Group Inc.

Funneling Kickbacks

Goldberg and Grimm worked with CDR to increase their gains on GIC deals, according to the CDR indictment and conspirator list. Carollo left GE in 2003, joining the derivatives unit of Royal Bank of Canada. Grimm and Carollo didn’t respond to telephone calls and e-mails seeking comment.

Goldberg continued to participate in the conspiracy after he left for FSA in 2001 and used swap deals with Toronto-based Royal Bank of Canada and UBS to funnel kickbacks to CDR, according to the indictments and the Justice Department list of conspirators. Royal spokesman Kevin Foster said the company is cooperating the government.

FSA, Royal Bank of Canada and UBS all worked on public finance deals in West Virginia that prosecutors say involved bid rigging.

At least three times, Goldberg conspired with CDR to pick up deals with West Virginia agencies, according to a guilty plea by former CDR employee Rothman and other records filed in federal court in Manhattan. Among them was a $147 million investment contract with the West Virginia School Building Authority.

‘Raw Greed’

That state’s schools need every penny they can get, said Mark Manchin, executive director of the school authority. With 17 percent of West Virginians below the poverty line in 2008, the state was 45th among the 50 U.S. states, according to a 2009 Census Bureau report. Manchin said some students study in dilapidated, century-old buildings.

“It’s just raw greed at the expense of the most vulnerable,” he said in a telephone interview. “With deteriorating facilities all over the state, that money is what we use to build schools.”

Bank of America’s municipal derivatives division, which was formed in 1998, worked on the 14th floor of the Hearst Tower in Charlotte. The space was so tight that the banker who’s cooperating with the Justice Department said he could hear others in the office change their bids when they got word from financial advisers, according to information Bank of America gave Baltimore.

Bank of America’s Murphy told the banker helping prosecutors that Image would use sham auctions to steer deals to Bank of America if the employee told Image that he “wanted to win” and “would work with” Image, according to the civil suit filed by Baltimore. Murphy declined to comment.

Verbal Cues

They would use verbal cues to communicate. The banker would ask whether the bid was a “good fit” to get information on competing bids from Image. Sometimes Image’s Martin Stallone said Bank of America’s bids were “aggressive,” or too high, and had to be reworked.

At other times, Stallone would ask the banker to bid a specific number, according to the civil suit.

Stallone didn’t respond to messages left for him at work or to a list of questions faxed and e-mailed to Image.

Like Financial Security Assurance, Bank of America also paid kickbacks to brokers for their help in getting deals, according to the Baltimore lawsuit, which based its allegations on information provided by Bank of America.

On June 28, 2002, Douglas Campbell, a former municipal derivatives salesman at Bank of America, wrote in an e-mail to his boss, then managing director Murphy, that he had paid $182,393 to banks and brokers not tied to any particular deals.

‘Better Relationship’

Three payments totaling $57,393 went to CDR, which played no role in any transaction connected to that amount. A copy of the e-mail was contained in a North Carolina lawsuit filed by Murphy against Bank of America in 2003.

“The CDR fees have been part of the ongoing attempt to develop a better relationship with our major brokers,” Campbell wrote.

The bid rigging in GIC contracts has reduced public funding for schools and housing across the U.S.

“If this was going on in a small state like West Virginia, it must have been huge elsewhere,” the state’s Assistant Attorney General Doug Davis said.

To contact the reporters on this story: William Selway in San Francisco at; Martin Z. Braun in New York at

Last Updated: May 18, 2010 08:55 EDT

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