FASB on Sham Transactions

See AU Section 332 Auditing Derivative Instruments, hedging Activities and Investment in Securities.
Every written instrument is by definition the memorialization of an event. Absent the event in the real world, the instrument is worthless at best and at worst fraudulent. This is derived from the my knowledge of generally accepted accounting principles (GAAP) as enunciated by the Financial Accounting Standards Board (FASB) supported by the American Institute of Certified Public Accountants (AICPA).
In any audit of bookkeeping and/or accounting records written instruments are the starting point for inquiry as to whether the documents represents a true and fair representation of an actual transaction. While the auditor may be aware of certain legal presumptions concerning the validity of a facially valid instrument, the auditor is tasked with testing all transactions including those that appear to possess the attributes of facial validity.
Specifically the audit process for alleged transactions relating to derivative securities (mortgage backed bonds, for example) goes further than standard auditing confirmation under the rules recognized as nationwide and binding. In large part because of the admissions or quasi admissions in settlements with government regulators, attorneys general and investors, it has become obvious that transactions that are related to activity in the derivative marketplace are subject to special scrutiny. Auditors are required to test the following, among other things:
  1. Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.
  2. Completeness. All transactions and events that should have been recorded have been recorded.
In the definition of the confirmation process required by auditors, it is clearly stated that a plan of confirmation is to be used. Facially valid documents are not excluded from the confirmation process. And as seen above, transactions relating to alleged securitization are subject to specific testing. The courts are out of their element in assessing the risk of fraudulent representation because the Courts’ inquiry generally starts and ends with the written instrument.
The Auditor wants to know if the transaction memorialized in that instrument actually took place and wants to see evidence to that effect — i.e., the money trail as represented by cash flow, balance sheet and income statements as well as the general ledger (and supporting documents, bank statements and receipts) of the entity that claims to have been a party to a transaction and now claims an asset as a result.
These sections are the beginning point for discovery and the foundation for objections when “business records” are proffered at trial as exceptions to the hearsay rule.
The big question is whether the transactions that are represented in court as loans or assignments or endorsement are actually reflected on the general ledger, bookkeeping records and accounting records of the party who was supposedly involved in any of those transactions is proffering false testimony or fabricated documents into evidence.
The answer is simple: based upon reliable sources the facts are that the big banks have produced a convoluted set records of loosely connected entities. One fact is clear: the acquisition of loans is generally not found in their records nor supported by any entry reflecting a financial transaction. The little originators and banks are generally buried after having gone out of business, but the ones that are left will show that most originated “loans” did not result in the flow of cash from the originator to the alleged borrower.
My recommendation is that foreclosure defense attorneys employ the use of CPA’s who have specific auditing experience and knowledge. The testimony of these experts might be invaluable to the discovery process and lead the opposing side to soften their approach.

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Editor’s Comment:

I attended Darrell Blomberg’s Foreclosure Strategists’ meeting last night where Arizona Attorney General Tom Horne defended the relatively small size of the foreclosure settlement compared with the tobacco settlement. To be fair, it should be noted that the multi-state settlement relates only to issues brought by the attorneys general. True they did very little investigation but the settlement sets the guidelines for settling with individual homeowners without waiving anything except that the AG won’t bring the lawsuits to court. Anyone else can and will. It wasn’t a real settlement. But the effect was what the Banks wanted. They want you to think the game is over and move on. The game is far from over, it isn’t a game and I won’t stop until I get those homes back that were ripped from the arms of homeowners who never knew what hit them.

So this is the first full business day after AG Horne promised me he would get back to me on the question of whether the AG would bring criminal actions for racketeering and corruption against the banks and servicers for conducting sham auctions in which “credit bids” were used instead of cash to allow the banks to acquire title. These credit bids came from non-creditors and were used as the basis for issuing deeds on foreclosure, each of which carry a presumption of authenticity.  But the deeds based on credit bids from non-creditors represent outright theft and a ratification of a corrupt title system that was doing just fine before the banks started claiming the loans were securitized.

Those credit bids and the deeds issued upon foreclosure were sham transactions — just as the transactions originated with borrowers were based upon the lies and false pretenses of the acting lenders who were paid for their acting services. By pretending that the loan came from these thinly capitalised sham companies (all closed with no forwarding address), the banks and servicers started the lie that the loan was sold up the tree of securitization. Each transaction we are told was a sale of the loan, but none of them actually involved any money exchanging hands. So much for, “value received.”

The purpose of these loans was to create a process that would cover up the theft of the investor money that the investment bank received in exchange for “mortgage bonds” based upon non-existent transactions and the title equivalent of wild deeds.

So the answer to the question is that borrowers did not make bad decisions. They were tricked into these loans. Had there been full disclosure as required by TILA, the borrowers would never have closed on the papers presented to them. Had there been full disclosure to the investors, they never would have parted with a nickel. No money, no lender, no borrower no transactions. And practically barring lawyers from being hired by borrowers was the first clue that these deals were upside down and bogus. No, they didn’t make bad decisions. There was an asymmetry of information that the banks used to leverage against the borrowers who knew nothing and who understood nothing.  

“Just sign everywhere we marked for your signature” was the closing agent’s way of saying, “You are now totally screwed.” If you ask the wrong question you get the wrong answer. “Moral hazard” in this context is not a term anyone knowledgeable uses in connection with the borrowers. It is a term used to express the context in which unscrupulous Bankers acted without conscience and with reckless disregard to the public, violating every applicable law, rule and regulation in the process.

Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis

Public Policy Discussion Paper No. 12-2

by Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen

This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

To ready the entire paper please go to this link: www.bostonfed.org/economic/ppdp/2012/ppdp1202.htm

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