Prosecutors Getting Tough? Small Banks ONLY!!


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Editor’s Comment and Analysis: Abacus Bank has only $272 million in deposits. In rank, it is near the very bottom of the ladder. And apparently justifiably, federal prosecutors have seen fit to prosecute the bank for fraud. The quandary here is why the prosecutors are putting their muscle behind just the low-hanging fruit and why they are settling with the mega banks for the same acts — without threat of prosecution. If we could offer $17 trillion in various forms of “relief” for the banks, they certainly could pony up $1 billion and investigate the truth behind the securitization claims. The only conclusion I can reach is that the administration, so far, doesn’t want proof of the truth.

One of the things that Yves gets right here is that when Fannie and Freddie get involved, it isn’t the end of the line and it certainly does not mean that the loan was not “securitized” using the same fake documents at origination and the same fake mortgage bonds, albeit guaranteed by Fannie and Freddie who serve as “Master Trustee” of the investment pools that presumably “bought the loans with actual money. Like their cousins in the non government guaranteed loans, the money largely comes from fat accounts where the investors’ money was commingled beyond recognition and the investment bank who created and sold the bogus mortgage bonds was the “buyer” on paper so that they could bet against the same loans and bonds they were selling to investors.

Yves still refers to the scheme as reckless as though a judgment was made without knowing the consequences of the banks’ actions. Nothing could be further from the truth. This wasn’t reckless.

It was intentional because that was where the big money came from. The scheme was to take as much as possible from money advanced by pension funds and keep it, while giving the illusion of a securitization scheme for funding mortgages and reducing risk.

The mega banks even bet on their success and the investors’ loss, the borrowers’ loss and the loss shouldered by taxpayers, increasing their leverage positions up  to 42 times (Bear Stearns). As we all know, the risk was magnified not reduced and the only experts that really knew were in the departments where collateralized debt obligations were packaged on paper, sold to investors and never transferred to any trust, REMIC of SPV.

With Abacus, the punch line is that their default rate was 1/10th that of the national average indicating that contrary to the practices of the mega banks, some underwriting was involved and some verification and oversight was employed.

What is avoided is that $13 trillion in loans were originated using the false securitization scheme in which the borrower was kept in the dark about who his lender was, and where upon inquiry the borrower was told that the identity of the lender was confidential and private, nearly all of which loans were classic cases of fraud in the execution, fraud in the inducement, breach of contract, slander of title, and recording false documents in the county records. The perpetrators of these schemes are settling for fractions of a penny on the dollar with full agreement that their conduct will not be reviewed.

So here is the question: If Abacus is guilty of fraud and caused minimal damage to the economy or the borrowers, isn’t the bar set higher for the mega banks. Why are they allowed to slip through without getting the same treatment as a bank whose deposits equal less than 1/10 of 1% of the size of the megabanks who caused mayhem here and around the world?

Quelle Surprise! Prosecutors Get Tough on Mortgage Fraud….At an Itty Bitty Bank

Bankers Scared S–tless by Iceland

Highly placed sources in high positions inform me that articles about Iceland are now starting to bother the arrogant banksters who started this mess. One such article is by Sarah Lyall in Sunday’s New York Times.

In a world drowning in fake debt, criminal behavior, and unnecessary Foreclosures, the one country standing out from the pack is Iceland with an economic growth rate of 2.8%, unemployment dropping like a stone, and new businesses opening quickly with loans underwritten by banks who were forced into debt forgiveness by the government.

Bankers in Iceland are being prosecuted, convicted, and sentenced for their crimes against the society that allowed them to be bankers. Not everything is perfect, but with business growing, employment growing, and a resilient determined population, Iceland is paying off it’s debts from the financial crisis and is able to easily borrow money in the open markets.

Government sources and economists say the reason could not be more obvious — forgiveness of debt, strengthening the already prodigious social safety net, and good data and information that turns out to be true and not filtered through the rose colored glasses that the bank PR machine is grinding out.

The application here and elsewhere is just plain obvious and notwithstanding proven — hold the banks and bankers accountable for their behavior, let them fail and even in Iceland where there were not a lot of banks (as opposed to the 7,000 banks and credit unions here that can easily pick up the pieces), the financial system not only survived, it prospered.

The difference between the banks in Iceland and the banks elsewhere (especially the U.S.) is that the banks, being creatures and inventions of the societies that created and allowed them to function, were managed and brought under control by government acting for the society and not for the banks.

Those seeking less government control are merely using it as a rallying cry to lure people into voting against themselves. We need fireman, policeman, teachers etc. And we need police on Wall Street in particular.

Regulation and Prosecution on Wall Street

In my opinion, the growing anger at Wall Street is giving Lloyd Blankfein and Jamie Dimon another chance at misdirection. They are using the current popular angst to steer the debate into whether derivatives and synthetic CDOs should be banned. In the end they will win that debate, and they should win it. What they should lose is their freedom in a judicial forum where they are prosecuted like Ken Lay and Bernie Ebbers, and where it is proven beyond a reasonable doubt that they committed criminal fraud and securities fraud.

The fact that we had a bad experience with derivatives is not a reason to ban them. The fact that they were abused and that people were cheated and that the entire financial system was undermined is another story.

There is nothing wrong with any transaction if the playing field is relatively level and if the imbalances are addressed by law and regulation. That is what the Truth in lending Act is all about and the Real Estate Settlement Procedures Act is meant to address.

When the big guys use their superior knowledge to trick consumers into deadly transactions, the big guys should pay the price. We have the SEC to take care of that on the other end protecting investors. Licensing laws and administrative sanctions against those licensed by state or federal agencies are well-equipped to step in and deal with these abuses. But they didn’t.

Complaints sent to the Federal Trade Commission, Office of Thrift Supervision and Office of the Controller of the Currency have gone unheeded even to this day. The only answer you get is similar to the answer we get from sending short or long Qualified Written requests or Debt Validation Letters — short shrift of legitimate complaints that by law are required to be investigated, verified (not just restated) and corrected.

The inconvenient truth is that our regulators were not employing the tools given to them. Everyone knew it. In part it was because of undue influence and in part it was because they were deferring to larger “smarter” institutions like the Federal Reserve. But the biggest reason the Federal and state agencies didn’t do their job is that we, as a society, bought into the non-regulation philosophy which has failed so spectacularly. We didn’t support appropriate funding, training and resources for these agencies. If we had done what we should have done — elect people who were committed to government protecting and serving the people — this mess would never have mushroomed to the point where Wall Street issued proprietary currency equal to 12 times times the amount of government currency — all in a span only 25 years.

The simple truth is that there was nothing inherently wrong about securitizing residential mortgages. In theory, spreading the risk out created much greater liquidity for small and large consumers of credit. What was wrong and remains wrong is that the use of these instruments was for an illegal purpose — to defraud investors and borrowers alike. And they did it in an illegal manner — by denying and withholding information essential to the decision-making on both sides of these transactions.

On one side you had a creditor who was willing to loan money for residential mortgages under terms and conditions that were “explained” in mind-numbing prospectuses and guaranteed by “insurance” that wasn’t really insurance and which was appraised by government licensed rating agencies who issued investment grade appraisals that were so wrong that it strains credibility to assume they didn’t know they were part of a larger criminal enterprise. This creditor lent money and received a bond, whose terms referenced other documents in the securitization chain that imposed conditions, co-obligors, and protections to the intermediaries that completely changed the loans that were signed by borrowers far, far away.

On the other side, you had borrowers, homeowners, who put their largest or only investment in the world at risk in a transaction that they could not understand because the information required to understand it was withheld. But even Alan Greenspan admitted he didn’t understand the transactions with the help of 100 PhD’s. These borrowers relied upon the sanctity of an underwriting process that no longer existed. Verification of property value, quality, affordability etc. were no longer in the mix.

These borrowers undertook an obligation to repay and signed a note that was evidence of the obligation but was payable to someone other than the party(ies) who loaned the money. That note was only a tiny part of the obligation to the creditor as evidenced by the mortgage backed bond they received.

The creditor was bilked out of a dollar and contrary to the expectations of the creditor, less than 2/3 of each dollar was actually used to fund mortgages. The creditor never actually received or even saw the note but ownership of the note was conveyed to the investor along with many other terms — terms that were entirely different from the note the borrower signed as to interest payments, principal, fees etc.

In between were the dozens of intermediaries who treated the documentation like a hot potato because nobody wanted to be stuck with it — knowing that misrepresentation and bad appraisals were the root of the instruments signed by creditors and debtors. These intermediaries kept possession of the note, kept the security instrument and kept the money and most of the insurance proceeds, received the federal bailout and now are proceeding to repackage the junk they already sold and through “resecuritization” are selling them again.

In my opinion there is nothing theoretically wrong with anything described above except for one thing — they lied. Fraud is fraud. If they had educated the creditors and debtors, if they had complied with local property and contract law, if they had been transparent disclosing everything much the same way as the prospectus in an IPO, then two things are true: (a) transactions that were completed would have been done because both sides knew the risks and were willing to take the loss and (b) transactions that were NOT completed (which would have been nearly all of them) would been rejected because the costs were too high, the risks were too high, and the consequences too dire.

But none of that happened because we allowed our regulators to be co-opted by the industries they were supposed to regulate. So tell your legislators and government agencies that you’ll allow them the resources to properly regulate and that you expect to hold them and the elected officials who put them there fully accountable.

Don’t throw the baby out with the bathwater. It isn’t derivatives that are wrong it is the people who used them and the way they were used that is wrong. Killing derivatives would lead to stagnation of what once was our greatest asset — the engine of liquidity for access to capital that has kept our economy growing.

Mortgage Meltdown Hurts Small Norwegian Towns: What’s Next?

And this is still the tip of the iceberg. It is happening all over the world. 

Public officials are hiding it in the hope that a bailout might save the investments. They can’t stop the disclosure. The party is over. This time the intended and known consequences are being dwarfed by unintended and unknown consequences. Too many people know or are getting to know what really happened. And too many people know how to ask the right questions. 

Besides avoiding U.S. source investment products, people will be throwing out the babies with the bath water. All derivative products will be suspect, which while a good thing, will slow down capital infusions even where the investment should be made. All U.S. investment products will have to be disguised, which is probably a good thing because it will require approval of private and government people in other countries, where the lock on fraudulent behavior is not so calmly accepted. Very bad news here though for U.S. equity markets. 

The Fed can only print money so long before the value of the dollar even in this country is seen as suspect or even zero. It has happened before right here, in this republic of ours also during wartime in the revolutionary war and the civil war. We are teetering here in inflation unknown to most AMerican citizens because it hasn’t happened in their lifetimes and the history they learned in school didn’t include this vital piece of information. Paper currency is based on faith. It is faith based money. And we have lost faith with the holders of our currency here and abroad. 

But the most disturbing outcome is backlash. All Americans might be considered targets for retribution. Unless our housing market DOES completely tank and stay in the doghouse, foreign investors and governments will see the fraud as being shared by everyone in the United States — a perception of vast conspiracy that will undermine faith in the stability and integrity of our government and our society. Reports of catastrophic consequences to homeowners and renters will be dismissed as PR to distract the world from seeing America as a whole and not a few bankers as the cause of this unspeakable economic horror. It is unlikely that the housing market will slump to that degree, and some of the reason will be foreign purchases of our real estate, cheap now because of a near worthless dollar. In the end, the perception of our culpability will be felt down to the citizen level.

And so, prosecution of the people in each country will lead to prosecution and indictments of people in other countries and eventually all lead back to the U.S. All roads will lead back to us. The legal mess created by a legal war against the U.S. will spill-over into all our foreign relations. And like the rock that starts falling down the hill, it gathers up and disturbs other rocks and debris that were better left undisturbed. The value of the dollar, supported in fact (as opposed to economic theory) by world view of the power of America will be replaced with suspicion and unwillingness to accept the dollar as the common denominator in commerce.

We don’t have time for this. Action must be taken now. Candidates must realize that this debacle is actually more important and significant in foreign relations and world peace than Iraq or even oil dependence. If we want to save ourselves we will demonstrate convincingly to the world that we are a nation of laws and principle. Our leaders and/or candidates must recognize the significance of this. We must make heads role, prosecutions happen, strengthen and enforce regulation on derivatives in particular, and put people, big people in jail. 

This was a natural outgrowth of the excesses that arose with Enron, WorldCom and many other companies that got caught up in “creative” accounting and plausible deniability. while we did raise our statute somewhat, everyone remembers that we let it happen, and that people all over the world, their families, their friends, their vendors, their governments and everyone else who depended upon them and upon whom they depended were either destroyed or hurt badly by the corporate corruption scandal. The culprit of course is greed and those incredibly high CEO salaries and the lack of culture or accountability for real results. Appearances do matter, but when they become everything, then at some point the mirror cracks, the lights go out and all that’s left is vapor.

And if you want to see all this predicted and described 35 years ago in a book, and 40 years ago in articles, find a copy Unaccountable Accounting: Games Accountants Play (Hardcover) Publisher: Harper Collins; [1st ed.] edition (January 1972) Language: English ISBN-10: 0060104716 by Abraham J. Briloff .

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