BOA DEATH WATCH: Ironic Twist for Zombie Banks

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CITI and BOA Headed for Extinction

Editor’s Notes and Analysis:  

The bottom line here is that I have yet another prediction and I am just as certain of this as the ones Brad Keiser and I issued in September, 2008. Actually it is the same prediction all over again and for pretty much the same reason. I am not just boasting when I say that every single prediction, description and process I have been writing about has turned out to be dead on right despite the jeers it received when published. I actually have some people running through the books and the more than 3,000 Blog Articles to list those predictions, give you the cite, and describe the outcome.

In, 2007 when the DOW was around 14,000 I predicted that it would crash with a low in the 5,000 range, a rebound and then equilibrium in the 7,000 range. If you don’t want to wait for our article on our predictions and their accuracy, go look it up for yourself right here on this blog. And the reason was that the banks were playing a trick on the market and our society. They were merely the conduit for a financial transaction between investor lenders and the homeowner borrowers. They had forced appraisals into uncharted territory that we won’t see again for at least 30-40 years.

The trick was that they created a paperwork trail that they controlled absolutely, and financial trail of self-dealing that remains hidden to this day. Those deals are now dead branches hanging off of a dead tree. By originating the loans with “bankruptcy remote” vehicles the banks made it appear as though the transaction was set in stone (or rather on paper) and the appearance of the documents was like any other real estate transaction — so even seasoned professionals (at first) didn’t have a clue what was going on).

The paperwork was all about a story of a financial transaction that never happened. With very few exceptions none of the terms, conditions and recitals in the promissory note, mortgage (Deed of Trust), Settlement statement (HUD-1), Good Faith Estimate (GFE) or other disclosures  had any basis in fact. There was no financial transaction between the named parties. Consumers take out loans all the time with the assumption that the originator of the loan is the creditor in the transaction and that they are getting money or value from that originator.

Consumers also assume that the terms of repayment offered to the lender were the same as the terms offered to the borrower. And therefore the consumers assume that if the “Loan” is secured on personal property or real property, that the collector calling them  has every right to demand payment and enforce the repossession of the personal property or the foreclosure of the real property. But this wasn’t the case.

The investor lenders took it as an article of faith that banks with reputations dating back into the 1800’s wold want to keep that reputation intact. In fact the quasi public rating agencies made the same assumption. And everyone assumed that NOBODY would want to make a loan that was required to fail in order for the banks to make the ungodly amounts of money they made.

As we predicted over the last 3 years, the ratings of the big banks that led the way down the securitization rabbit hole, are headed toward junk status. As one article in the New York Times puts it, think about what would happen to your life if your credit rating went from 850 to 600 or lower. The debts of the major banks have now been reduced to near junk status and they are still headed down.

The reason these rating agencies have struck down the ratings is that they too were tricked at the front end when they gave investment grade ratings for pension funds to invest — without such ratings, the pension funds, City operating funds, sovereign wealth funds, were not allowed to make the purchase. So the game was on at the beginning to buy their way into the agencies with fishing trips and other inducements and threats, to get the rating necessary in order to receive money from public and private pension funds and trusts.

Now those rating companies have done what they should have done at the beginning. If they had done the due diligence, the entire scheme would have failed on the front end, and if the appraisers were more strictly regulated under threat of huge penalties and liabilities, the transactions would have failed on the back end.

As stated on these pages for months, these big banks are neither big nor banks. They claimed ownership of loans for the sole purpose of trading an ever widening tree of what were once legitimate hedge products wherein an investor protects themselves as to risk of loss by paying a premium that will reduce the return they’re getting but virtually eliminates the possibility of risk.

With loans, it was a simple proposition. Armed with a Triple A rating from the ratings companies, investment bankers sold loans, bundles and bonds forward when there was nothing to sell. Armed with fraudulent appraisals, documents, and disclosures, originators would offer fictitious loan products that bore no relationship to the loans offered to the lenders.

Now the rating companies have examined the books, records and process of these loans and arrived at the same conclusion we reached in 2008. None of these loans were owned by the banks, none of the obligation was subject to any documentation in favor of the actual lenders, and the “assets” on the books are pure fairy tails because they never owned the loans or the bonds. And because of a rule that allows banks to report markdowns for assets held in the United Stated states, but allows them to ignore the write-downs for “foreign” investments, they are able to lie about the assets nd ignore the incredibly huge liabilities facing these banks.

BOA is  dead man walking masquerading as what was once a bank. It cannot recover. Neither can Citi, and there is a big question mark over JP Morgan Chase. Two Banks are about to fall like the twin towers — BOA and Citi. Besides a total loss for the shareholders and most of the creditors, it will release millions of homes from the threat of foreclosure and allow for recovery of millions of homes that were illegally foreclosed. The rating agencies have realized that the foreclosures were merely a device to mask the loss and throw it onto investor lenders. But the rating agencies understand fully now that the pension fund would be violating law and contract by taking loans already declared in default. So for the lawyers out there — there was an offer, no acceptance (nor any possibility of acceptance), and no consideration for the transaction the banks want to use to pitch the loss onto the investor.

That loss cannot be thrown onto the investors because the deal the investors bought was not executed. They didn’t get a good loan within 90 days. Now when a Judge enters a foreclosure order or judgment, the Judge doesn’t realize that he has opened a can of worms. because the main interest (the loss of real creditors) was just litigated without notice or the ability to appear. And the implication of each such order and judgment is that the loan actually made it into a pool, when there were no pools, there are no pools, and the money the dealers took from the government (a) should have been paid to the investors (b) should have been paid only to the extent of their loss — not a multiple payment when the loan or “pool” failed and (c) and those payments (over leveraged in every case) exceeded the amount of the loan to the borrower or the obligation to the investor.

By entering that order, the Judge is saying to investors that THEY are deadbeats unworthy of due process. By entering that order, the Judge has ruled that contrary to the provisions of the pooling and servicing agreement, prospectus and the Internal revenue Code, he is making a factual and permanent finding that the investor must NOW accept and did accept a defaulted loan that would have been rated below junk.

There is an old expression that applies here. “You can’t pick up one end of the stick without picking up the other.” You can’t screw the homeowner borrowers also without screwing the investors — pension funds etc.. The rating agencies have come to what is a startling conclusion for them — the assets are not real and the liabilities are grossly understated. The rating for these “banks” is about to be cut to junk status or below. Citi and BOA are headed for extinction sometime in the next 6 months (last time we said 6 months it was 6 weeks, when we predicted the fall of the banks, and the order in which they would fall).

So that is the prediction — no matter who is elected to the White House or Congress or legislatures or state law enforcement the banks and the regulators stepped on a rake in 1998 and it is now coming up to bash their head into tiny pieces that more than 7,000 performing and conforming banks are ready and willing to clean up. BOA and Citi are done.

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