BOA Seeks to Seal Damaging Testimony from Urban Lending

Posted on July 4, 2013 by Neil Garfield

HAPPY INDEPENDENCE DAY!

WHY ARE THE BANKS FIGHTING TO GET AS LITTLE AS POSSIBLE FROM EACH “FAILED” LOAN?

A drama is playing out in the state of Massachusetts. Bank of America is pretending to be the lender or the authorized servicer or both. But it outsourced the task of dealing with borrowers seeking modification. The company that was used is Urban Lending Solutions (ULS).  A deposition was taken from a knowledgeable source from within ULS.  The attorney  taking the deposition was merely looking for evidence of a script prepared by Bank of America that ULS employees were to follow. Not only was the script uncovered but considerable other evidence suggested institutional policies at Bank of America that were in direct conflict with the requirements of law, and in direct violation of the settlements with the Department of Justice and the banking regulators.

The transcript of the deposition was sealed at the request of Bank of America, which the borrower did not interpose any objection. Now there are a lot of people who want to see that deposition and who want to take the deposition of the same witness and other witnesses at ULS who might reveal the real intent of Bank of America. The question which is sought to be answered is why the mega banks are fighting so hard to take less money in a foreclosure sale then they would get in a modification or even a short sale. The policy is obvious. Borrowers are lured into a hole that gets deeper and deeper so that foreclosure seems inevitable and indefensible. Even after a successful trial modification the banks are turning down the permanent modification, as though they had the power to do so.

Now a number of attorneys are preparing motions to the trial court in Massachusetts to unseal the transcript of the ULS employee. Bank of America is opposing these efforts on the grounds of “confidentiality” which from my perspective makes absolutely no sense. Why would Bank of America share confidential information or trade secrets with a vendor whose only purpose was to interfere with the modification process? My opinion is that the only information that Bank of America wishes to keep secret is that the instructions they gave to ULS clearly show that Bank of America was not interested in anything other than achieving a foreclosure sale in as many cases as possible.

In nearly all cases the modification of the loan more than doubles the prospect of proceeds from the loan and in some cases approaches 100%. Thus the full-court press from the megabanks to go to foreclosure is a mystery that will be solved. My sources from inside the industry together with my own analysis indicates that the reason is very simple. The banks took in money from investors, insurers, counterparties in credit default swaps, the Federal Reserve, the Department of the Treasury and other parties based on the representation of the banks that (A) the banks owned the mortgage bonds and therefore on the loans and (B) there was a loss resulting from widespread defaults on mortgages. Under the terms of the various contracts within the false chain of securitization and the Master servicer had sole discretion as to whether or not the value of the mortgage bonds and the asset pools had declined and had sole discretion as to the amount of the loss caused by the defaults. Both representations were false — the Banks did not own the bonds or the loans and the loss was not even close to what was represented to insurers and other third parties.

As a general rule of thumb, the banks computed value of the collateral at around 25% and therefore received payment to compensate the banks for a 75% loss. They received the payment several times over and then sold the mortgage bonds to the Federal Reserve for 100% of the face value of the bonds. It can be fairly estimated that they received no less than 250% of the principal amount due on each of the loans contained within the asset pool that had issued each mortgage bond. While they had to create the appearance of objectivity by showing a number of the loans as performing, they intentionally overestimated the number of loans that were in default or were in the process of going into default.

Let us not forget that while nobody was looking the Federal Reserve has been “purchasing” the worthless mortgage bonds at the rate of $85 billion per month for a long time and doesn’t appear to have any intention of stopping that flow of money to banks that have already received more than 100% of the principal due on the notes. And lest you be confused, the money the banks received should have gone to the investors and should never have been kept by the banks. The purchases by the Federal Reserve at 100% of face value despite a market value of zero is merely a way for the Federal Reserve to keep the mega banks floating on an illusion.

Since the banks received 250% of the principal amount due on the loan, an actual recovery from the borrower of 100% (for example) on the loan would leave the banks with a liability to all of the third parties that paid the banks. The refund liability would obviously be 150% of the principal amount due on the loan and the banks would be required to turn over the hundred percent recovery from the borrower to the investors adding to their liability. THIS IS WHY I SAY CALL THEIR BLUFF AND OFFER THEM ALL THE MONEY DEMANDED ON CONDITION THAT THEY PROVE OWNERSHIP AND PROVE THE LOSS IS ACTUALLY THE LOSS OF THE BANK AND NOT OF THE INVESTORS.

But if the case goes through a foreclosure sale, the banks can take a comfortable position that the number of defaults and the depth of the loss was as great as they represented when they took payment from insurers and other third parties. The liability of 250% is completely eliminated. Thus while it might appear to be in the bank’s interest to take a 60% recovery from the borrower instead of a 25% recovery from a foreclosure sale, the liability that would be created each time alone was modified or settled would dwarf the apparent savings to the pretender lender or actual creditor.

The net result is that on a $100,000 loan, the investor takes an extra $35,000 loss over and above what would normally apply in a workout and the bank avoids $250,000 in liabilities to third parties who paid based upon false representations of losses.

The mere fact that they went to great lengths to seal the transcript indicates how vulnerable they feel.

PRACTICE MEMO TO FORECLOSURE DEFENSE LAWYERS

As a condition precedent I would suggest that in all cases where we feel the deposition transcript would be helpful I think it would create more credibility if you issued a subpoena duces tecum directed at Urban to produce the witness whose deposition was sealed in the existing case and to bring those records that were requested or demanded at that deposition. One of the questions that needs to be answered is whether the witness witness is still working for Urban, whether the witness has “disappeared”, and whether his testimony has changed — thus we would need the other deposition to test credibility and perhaps get exhibits that BANA either didn’t object to, which means they waived confidentiality. If they do not move to quash the subpoena then they might also be arguably waiving the confidentiality objection.
If they do object, you have two bites of the apple — if they move to quash they must state the grounds other than than it will damage their chances in litigation. The trial court would then hear the objections and of course each if the cases that could benefit from unsealing the deposition results in a hearing, then several judges would hear the same objection. The likelihood is that the objection would attempt to bootstrap the order sealing the deposition as reason enough to quash the subpoena. That in turn puts pressure on the Massachusetts judge to release the transcript.
The more Motions filed the better. So I would suggest that we reach out through media to get as many people as possible with separate motions saying that sealing the deposition is causing a disruption in due process. Since Urban reached out on behalf of BANA — an allegation that should be made in opposition test the motion to quash the subpoena in each case — exactly what confidential information needs to be protected? Has the Massachusetts court heard a motion in liming preventing the use of the deposition at trial? If not, then the objection is waived since the Plaintiff will clearly use the deposition at trial, if there is one.
The other issue is that BOA can’t simply allege confidentiality rather than strategy in litigation. They must state with particularity what could be possibly confidential. There is no attorney-client privilege, there is no attorney work product privilege.  At first Bank of America disclaimed any knowledge or relationship with ULS.  When it became obvious that the relationship existed and that ULS was using Bank of America letterhead to communicate with borrowers they finally admitted that the relationship existed and then went one step further by alleging confidentiality and trade secrets so that the contract and instructions between Bank of America and ULS would never see the light of day., For a company that BOA disclaimed any knowledge but who used BOA stationery they were clearly an agent of BANA. What exactly could Urban have other than information about modification and foreclosure? I would also notice or subpoena BANA to produce the person who signed the contract with Urban and to bring the contract with him or her. Who received instructions from BOA? Where are those instructions? Were they produced at the sealed deposition.
 If the Massachusetts court does not unseal the transcript, doesn’t this give BOA an opportunity for a do-over where they fabricate documents that are different from those produced in the sealed deposition?
What were the instructions to Urban? What was the goal of the relationship between BOA and URban? Where are the scripts now that we’re produced in the sealed deposition?
Were the instructions to Urban the same as the instructions to all vendors assisting in the foreclosure process? Why did BOA even need Urban if it had proof of payment, proof of loss,  proof of ownership of the loan? We want to know what scripts were used by Urban and whether the same scripts were distributed to other vendors whose behavior could be plausibly denied. Discovery is a process by which the party seeking it must only show that it might lead to the discovery of admissible evidence. THE POINT MUST BE MADE THAT THE DEFENSE FOR WHICH WE ARE LOOKING FOR SUPPORT AND CORROBORATION IS THAT THE DELIBERATE POLICY AND PRACTICE OF BOA WAS TO MOVE PEOPLE INTO DEFAULT BY TELLING THEM TO STOP MAKING PAYMENTS. WE WANT TO SHOW THAT THEIR GOAL WAS FORECLOSURE NOT MODIFICATION CONTRARY TO THE REQUIREMENTS UNDER HAMP AND HARP AND THAT RATHER THAN PROCESS MODIFICATION OR SETTLEMENTS THE POLICY WAS TO DERAIL AS MANY AS POSSIBLE TO GET THE FORECLOSURE EVEN IF IT MEANT THAT THE INVESTORS WOULD GET LESS MONEY? Why?
The instruction was to use the promise or carrot of modification to trick the homeowner into (a) acknowledging BOA as the right party (b) stop making payments causing an apparent default and causing an escrow shortage (c) thus assuring the foreclosure sale despite the fact that BOA never acquired and (d) thus assuring that claims against them from investors (see dozens of law suits against BOA) and from insurers and counter parties on credit default swaps and payments from co-obligors based on the “default” that BOA fabricated — payments that involved more than the loan itself in multiples of the supposed loan balance.

This is an important battle. Let’s win it. There is strength in numbers. We might find the scripts were prepared by someone who used scripts from other banks and that the banks were in agreement that despite the obligations under HAMP and HARP and despite their ,rinses in the AG and OCC settlement, their goal is to foreclose at all costs because if the general pattern of conduct is to settle these loans and make them “performing” loans again it is highly probable that for each dollar of principal that gets taken of the table there is a liability or claim for $10. This would establish that the requirements of HAMP and HARP has resulted in negotiating with the fox while the fox is in the henhouse getting fat.

Filed under: CDO, CORRUPTION, currency, Eviction, foreclosure, GARFIELD GWALTNEY KELLEY AND WHITE, GTC | Honor, Investor, Mortgage | Tagged: , , , , , , , , , , , , , | 690 Comments »

More Bailouts Coming

Posted on November 15, 2012 by Neil Garfield

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Editor’s Comment: Ignoring the obvious, Federal Agencies and the Courts are compounding the problems caused by the sham securitization scheme that covered up the largest PONZI scheme in history. And the taxpayers are paying for it. Investors are losing money and homeowners are losing money and their homes as the plain fact of defects in the origination documents are ignored, except when it comes to agencies and institutions suing each other, all alleging the same thing — the documents are unenforceable.

This isn’t just a paperwork problem, which is why I keep saying that while the UCC arguments have merit they are not dispositive of the real issues. The paperwork is bad because banks intentionally created a scheme that they never would have accepted from borrowers — using layers and ladders of corporate veils to hide the real parties in interest.

They diverted the investor money into their own piggy banks and they diverted the origination documents from the investors because they had plans for that paperwork — plans that required them to be able to “prove” they owned the loan and therefore could trade the loans, sell them, hedge them, insure them and even take Federal bailouts because of “defaults” on loans the mega banks never made nor purchased.

Now the FHA is going to need extra money to make good on guarantees on toxic documents that are not necessarily bad loans but were insured at the mortgage bond level. The banks are getting paid over and over again as they laugh all the way to their accounts in the Cayman Islands.

But it doesn’t end there. The investors were mostly managed funds for retirement including vested pension funds that in some cases have reduced the assets held by the fund so drastically that they have already declared themselves “underfunded” which is another way of saying they are insolvent. Some are insured and some are not. But either way, if pensioners and retirees are going to get the income they counted on in retirement the funds are going to need money. And there is no place to get it except from the Federal government.

The accounting for the loans excludes any information from the Master Servicer (the only party with ALL the information about the loan and the money and the documents) and specifically the third party payoffs received by the banks who at all times were, whether they like it or not, acting as agents of the investors. The money the banks made belongs to the investors — the managed retirement funds; but they are not getting it except if they sue for fraudulent representations made at the time of the sale of the bogus “mortgage-backed” bonds.

If the investors did get their share of the money that was paid by insurance, credit default swaps, other hedges and federal bailout, they would not have lost nearly as much as they did in the value of their assets and they probably would not be “underfunded.”

But this creates the politically unacceptable consequence of lowering the amount due on each obligation owed to the investor — a benefit that would inure to the benefit of homeowners who are one of the obligees on those debts.

Somehow we have arrived at the conclusion that it is better to reward the perpetrator of the crime rather than give restitution to the victims. Somehow we have arrived at the conclusion that the windfalls should continue going the way of the banks instead of the investors and borrowers.

Just looking at all the actions filed by agencies and institutions there is a clear consensus that the loans were bad from the start. They named the wrong (strawman) payee, they named the wrong mortgagee/beneficiary (strawman) and they never disclosed or referred to the real obligation to the investors as set forth in the mortgage bond which was the ONLY reason the investors advanced the money.

This is why I am pushing DENY AND DISCOVER  as the principal strategy to pursue coupled with discovery aimed not at the document trail but at the money trail where the would-be forecloser must show that the origination documents accurately recited the the true facts of the transaction and where the assignments were transferred for “value received.” When you ask for proof of payment, wire transfer instructions, wire transfer receipts, they are completely absent in assignments and in the origination they clearly show that the loan was never funded by the party “disclosed” as the lender at closing. They never show the terms of repayment as set forth in the bond. And therefore they leave the borrower and all other people or entities with a stake in the property after that transaction in a state of limbo because there is no clear path to clear title.

Too many cases are being lost in all forums because pro se litigants and lawyers and Judges are too willing to take the word of the party in the room that they MUST be the creditor — why else would they be there? It is because in most cases they are getting a free house when they were playing with investor money and they have created the losses to the investors, the homeowners and the taxpayers.

The government should claw back the money paid to the banks and claw back the profits they made using investor money to gamble with. The accounts should be settled with the investors and then allocated to the debts of each borrower to see what balance, if any, is left. The losses will largely vanish just be applying existing law and long-standing standards of accounting and bookkeeping. The resulting balance, if  any can easily be paid off by borrowers who will again have some equity in their homes because of the vast amount of over-payments received by the banks which they paid out in bonuses to their employees for their participation and silence in the PONZI scheme. As soon as the investors stopped buying the the bogus mortgage bonds the scheme collapsed — the hallmark of every illicit scheme based not on on real business but rather the appearance of of doing business.

F.H.A. Audit Said to Show Low Reserves

By

The Federal Housing Administration’s annual report is expected to show a sharp deterioration in the agency’s financial condition, including a shortfall in reserves, the result of escalating losses on the $1.1 trillion in mortgages that it insures, according to people with knowledge of the entity’s operations.

The F.H.A., the Department of Housing and Urban Development unit that insures home mortgages, reports on its capital reserves at the end of each fiscal year and makes projections for its financial position in the coming year. If the report, due later this week, showed that the F.H.A.’s capital reserves had fallen deep into negative territory, it would be a stark reversal from projections last year that it would show a positive economic value of $9.4 billion in 2012.

Capital reserves are kept to cover future losses. Outsiders have questioned whether the agency would some day need an infusion from Treasury if its reserves are insufficient.

Alex Wohl, a spokesman for the F.H.A., said, “We’re not going to comment on it until the actuarial report comes out on Friday.”

This year, the F.H.A. has tried to improve its financial position by raising the premiums that it levies on loans and increasing its volume significantly. But those efforts may have been negated by rising loan losses, even on mortgages that it insured long after the credit crisis took hold.

More than one in six F.H.A. loans are delinquent 30 days or more, according to Edward Pinto, a resident fellow at the American Enterprise Institute who specializes in housing. Delinquencies increased by 166,000 from June 30, 2011, to September 2012, he said, a 12 percent increase. Loans insured by the F.H.A. often allow very small down payments of 3.5 percent of the purchase price.

“There’s a fundamental problem with the F.H.A.,” Mr. Pinto said. “Its loans are too risky and that has to be addressed. It’s not the legacy book that’s creating all the problems. It’s beyond that.”

Brian Chappelle, a former F.H.A. official who is now at Potomac Partners, a mortgage consulting firm, said that he had not seen the audit report but that he had been told some of the shortfall resulted from less optimistic projections for home prices than were in last year’s audit.

“In and of itself, it doesn’t mean that they’re going to need a draw from the Treasury,” he said.

At the same time, “there is no question that F.H.A. was going to suffer,” he added. “The amazing thing is that F.H.A. stayed solvent for as long as it did.”

The F.H.A. is subject to a statutory capital requirement of 2 percent of loans, or about $22 billion on its $1.1 trillion portfolio. An economic value of negative $5 billion to $10 billion would leave the F.H.A. $27 billion to $32 billion short of this statutory requirement, Mr. Pinto said. This would be the fourth consecutive year that F.H.A. has failed to meet the requirement, he added.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , | 4 Comments »

Libor vs Mortgage Scandals: Amount of Money Appears to be the Only Difference

Posted on August 28, 2012 by Neil Garfield

COME TO THE ANAHEIM 1/2 SEMINAR WEDNESDAY MORNING

It appears as though LIBOR is being thrown under the bus as a distraction from the much larger mortgage securitization scam. Both cases relied upon trust that was breached, money that was invented, figures that were fabricated, lying, cheating and inside trading to the detriment of the institutions that participated in one form or another. In both cases the ultimate victims on both sides of the transactions is the consumer.

Yet with LIBOR “suits are mounting,” (Wall Street Journal) investigations proliferating and a handy group of scapegoats far from the top of the scam may well be prosecuted.

The only difference seems to be that the size of the LIBOR scandal in terms of consequences to the institutions and consumers appears to be far less than the monumental scam foisted upon taxpayers all over the industrialized world, especially in the U.S.

To be certain the manipulation of the LIBOR rates was clearly an intentional act, but so was the insertion of the bankers naked nominees when residential loans were originated. In most cases, securitization was different in the commercial setting because it was more likely that more questions would be asked by higher priced, more sophisticated lawyers for the borrower.

The manipulation of LIBOR rates resulted in the wrong calculation of adjustable rate mortgages all over the world, making the notices of default, demand for payment and perhaps even the sales illegal. That is more in the nature of legal argument. The insertion of nominees controlled by the investment banks as payees, nominees, trustees, beneficiaries and mortgagees in lieu of the institutions that were actually providing the money and hiding the compensation that TILA requires to be disclosed, the steady practice of table funded loans which are deemed “predatory per se” under regulation Z, allowed intermediaries to pretend to be the lenders, the owners of the loans so they could trade with impunity. If they lost money, they threw the loss over the fence at the taxpayers and investment funds that bought bogus mortgage bonds. If they made money, they kept it.

The only difference is that the the amount of money involved in the non-existent securitization scheme that was so well “documented” was that it resulted in siphoning out the life blood of multiple nations and sending the world into a recession not seen in most of your lifetimes. AND the policy makers in Washington either were or are in bed with the perpetrators on this scheme, whereas the LIBOR scandal is being couched in terms where the traders were conspiring but the banks were unaware of their transgressions.

Let’s face it, if suddenly you have a trading department that is reporting profits geometrically and even exponentially higher than any other time in history, as CEO you would want to know why. Those trading profits did exactly that in both LIBOR and the mortgage securitization myth. One must ask why thousands of advertisements costing billions of dollars were on TV, radio, newspapers and magazines for loans at 5%. Put pencil to paper. If normal underwriting standards were used, and normal fees were applied to intermediaries who made the loan possible, there would be no room in the budget for such extravagance, much less the pornographic profits and bonuses reported on Wall Street. Why were armies of salesmen, including 10,000 convicted felons in Florida alone pushed into the market place as mortgage brokers or mortgage originators?

The intentional reporting of the wrong rates has an effect on all loans, past, present and future, but it requires yet more education of an already overloaded judiciary. So throwing a few traders under the bus and calling it a day is pretty much what is going to happen.

As it turns out though, the Banks have painted themselves into a corner on the securitization scam. What they securitized was paper, not money. The monetary transactions were left untouched by the documents, leaving the people who loaned the money through the scam vehicle known as a REMIC trust with no security for a bad loan.

Hence neither the documentation of an on-existent transaction between the parties named on the instrument, nor the manipulation of terms that were presented in one set to the investor-lenders and an entirely different set of terms presented to the borrower created valid contracts, much less perfected liens. But that didn’t matter to the intermediaries who were supposed to be acting as intermediaries — in the same way a check clears the bank — with no claim to the subject matter of the transaction.

They too manipulated rates by creating second tier yield spread premiums, and thus created spreads upon which they could withdraw money, pay for insurance, credit default swaps and other bets that the bad loans they wanted and received would fail, leaving the market in free-fall.

Predicting the market to to fall is like pushing a person off a cliff. You pretty much know that once the balance is lost the person is doomed. Doctoring up the applications with false income and false property appraisals did exactly that. It was a bet on a sure thing. Wall Street could rest comfortably in the knowledge that housing would ultimately fall to normal levels simply because there was nobody who could or would pay the premium they invested on the mortgage scam.

Now Wall Street is creating entities that will buy up “distressed”properties — a product of their own wrongdoing, using the money of the same people who owned the homes that were foreclosed — i.e., their pension and 401k retirement money. So they used your own money to fund a bad loan to you that they knew they could foreclose, and in between the time they originated the loan documents and the time of foreclosure they engaged in trading on your mortgage even though they had no part in funding or purchasing the loan.

My question to you is where is your outrage? When are you going to fight the bank control of Washington, the bank manipulation of judiciary by fabricating false, forged documentation that “looks right?” You can do it by voting against hose  most closely tied to the Wall Street community, by fighting with the party claiming to be your mortgage lender/servicer, or both. If you don’t you are handing the Country over to the banks and leaving it to your children and grandchildren to suffer the consequences.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , | 29 Comments »

Everything Built on Myth Eventually Fails

Posted on May 15, 2012 by Neil Garfield

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Editor’s Comment:

The good news is that the myth of Jamie Dimon’s infallaibility is at least called into question. Perhaps better news is that, as pointed out by Simon Johnson’s article below, the mega banks are not only Too Big to Fail, they are Too Big to Manage, which leads to the question, of why it has taken this long for Congress and the Obama administration to conclude that these Banks are Too Big to Regulate. So the answer, now introduced by Senator Brown, is to make the banks smaller and  put caps on them as to what they can and cannot do with their risk management.

But the real question that will come to fore is whether lawmakers in Dimon’s pocket will start feeling a bit squeamish about doing whatever Dimon asks. He is now becoming a political and financial liability. The $2.3 billion loss (and still counting) that has been reported seems to be traced to the improper trading in credit default swaps, an old enemy of ours from the mortgage battle that continues to rage throughout the land.  The problem is that the JPM people came to believe in their own myth which is sometimes referred to as sucking on your own exhaust. They obviously felt that their “risk management” was impregnable because in the end Jamie would save the day.

This time, Jamie can’t turn to investors to dump the loss on, thus drying up liquidity all over the world. This time he can’t go to government for a bailout, and this time the traction to bring the mega banks under control is getting larger. The last vote received only 33 votes from the Senate floor, indicating that Dimon and the wall Street lobby had control of 2/3 of the senate. So let ius bask in the possibility that this is the the beginning of the end for the mega banks, whose balance sheets, business practices and public announcements have all been based upon lies and half truths.

This time the regulators are being forced by public opinion to actually peak under the hood and see what is going on there. And what they will find is that the assets booked on the balance sheet of Dimon’s monolith are largely fictitious. This time the regulators must look at what assets were presented to the Federal Reserve window in exchange for interest free loans. The narrative is shifting from the “free house” myth to the reality of free money. And that will lead to the question of who is the creditor in each of the transactions in which a mortgage loan is said to exist.

Those mortgage loans are thought to exist because of a number of incorrect presumptions. One of them is that the obligation remains unpaid and is secured. Neither is true. Some loans might still have a balance due but even they have had their balances reduced by the receipt of insurance proceeds and the payoff from credit default swaps and other credit enhancements, not to speak of the taxpayer bailout.

This money was diverted from investor lenders who were entitled to that money because their contracts and the representations inducing them to purchase bogus mortgage bonds, stated that the investment was investment grade (Triple A) and because they thought they were insured several times over. It is true that the insurance was several layers thick and it is equally true that the insurance payoff covered most if not all the balances of all the mortgages that were funded between 1996 and the present. The investor lenders should have received at least enough of that money to make them whole — i.e., all principal and interest as promissed.

Instead the Banks did the unthinkable and that is what is about to come to light. They kept the money for themselves and then claimed the loss of investors on the toxic loans and tranches that were created in pools of money and mortgages — pools that in fact never came into existence, leaving the investors with a loose partnership with other investors, no manager, and no accounting. Every creditor is entitled to payment in full — ONCE, not multiple times unless they have separate contracts (bets) with parties other than the borrower. In this case, with the money received by the investment banks diverted from the investors, the creditors thought they had a loss when in fact they had a claim against deep pocket mega banks to receive their share of the proceeds of insurance, CDS payoffs and taxpayer bailouts.

What the banks were banking on was the stupidity of government regulators and the stupidity of the American public. But it wasn’t stupidity. it was ignorance of the intentional flipping of mortgage lending onto its head, resulting in loan portfolios whose main characteristic was that they would fail. And fail they did because the investment banks “declared” through the Master servicer that they had failed regardless of whether people were making payments on their mortgage loans or not. But the only parties with an actual receivable wherein they were expecting to be paid in real money were the investor lenders.

Had the investor lenders received the money that was taken by their agents, they would have been required to reduce the balances due from borrowers. Any other position would negate their claim to status as a REMIC. But the banks and servicers take the position that there exists an entitlement to get paid in full on the loan AND to take the house because the payment didn’t come from the borrower.

This reduction in the balance owed from borrowers would in and of itself have resulted in the equivalent of “principal reduction” which in many cases was to zero and quite possibly resulting in a claim against the participants in the securitization chain for all of the ill-gotten gains. remember that the Truth In Lending Law states unequivocally that the undisclosed profits and compensation of ANYONE involved in the origination of the loan must be paid, with interest to the borrower. Crazy you say? Is it any crazier than the banks getting $15 million for a $300,000 loan. Somebody needs to win here and I see no reason why it should be the megabanks who created, incited, encouraged and covered up outright fraud on investor lenders and homeowner borrowers.

Making Banks Small Enough And Simple Enough To Fail

By Simon Johnson

Almost exactly two years ago, at the height of the Senate debate on financial reform, a serious attempt was made to impose a binding size constraint on our largest banks. That effort – sometimes referred to as the Brown-Kaufman amendment – received the support of 33 senators and failed on the floor of the Senate. (Here is some of my Economix coverage from the time.)

On Wednesday, Senator Sherrod Brown, Democrat of Ohio, introduced the Safe, Accountable, Fair and Efficient Banking Act, or SAFE, which would force the largest four banks in the country to shrink. (Details of this proposal, similar in name to the original Brown-Kaufman plan, are in this briefing memo for a Senate banking subcommittee hearing on Wednesday, available through Politico; see also these press release materials).

His proposal, while not likely to immediately become law, is garnering support from across the political spectrum – and more support than essentially the same ideas received two years ago.  This week’s debacle at JP Morgan only strengthens the case for this kind of legislative action in the near future.

The proposition is simple: Too-big-to-fail banks should be made smaller, and preferably small enough to fail without causing global panic. This idea had been gathering momentum since the fall of 2008 and, while the Brown-Kaufman amendment originated on the Democratic side, support was beginning to appear across the aisle. But big banks and the Treasury Department both opposed it, parliamentary maneuvers ensured there was little real debate. (For a compelling account of how the financial lobby works, both in general and in this instance, look for an upcoming book by Jeff Connaughton, former chief of staff to former Senator Ted Kaufman of Delaware.)

The issue has not gone away. And while the financial sector has pushed back with some success against various components of the Dodd-Frank reform legislation, the idea of breaking up very large banks has gained momentum.

In particular, informed sentiment has shifted against continuing to allow very large banks to operate in their current highly leveraged form, with a great deal of debt and very little equity.  There is increasing recognition of the massive and unfair costs that these structures impose on the rest of the economy.  The implicit subsidies provided to “too big to fail” companies allow them to boost compensation over the cycle by hundreds of millions of dollars.  But the costs imposed on the rest of us are in the trillions of dollars.  This is a monstrously unfair and inefficient system – and sensible public figures are increasingly pointing this out (including Jamie Dimon, however inadvertently).

American Banker, a leading trade publication, recently posted a slide show, “Who Wants to Break Up the Big Banks?” Its gallery included people from across the political spectrum, with a great deal of financial sector and public policy experience, along with quotations that appear to support either Senator Brown’s approach or a similar shift in philosophy with regard to big banks in the United States. (The slide show is available only to subscribers.)

According to American Banker, we now have in the “break up the banks” corner (in order of appearance in that feature): Richard Fisher, president of the Federal Reserve Bank of Dallas; Sheila Bair, former chairman of the Federal Deposit Insurance Corporation; Tom Hoenig, a board member of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas City; Jon Huntsman, former Republican presidential candidate and former governor of Utah; Senator Brown; Mervyn King, governor of the Bank of England; Senator Bernie Sanders of Vermont; and Camden Fine, president of the Independent Community Bankers of America. (I am also on the American Banker list).

Anat Admati of Stanford and her colleagues have led the push for much higher capital requirements – emphasizing the particular dangers around allowing our largest banks to operate in their current highly leveraged fashion. This position has also been gaining support in the policy and media mainstream, most recently in the form of a powerful Bloomberg View editorial.

(You can follow her work and related discussion on this Web site; on twitter she is @anatadmati.)

Senator Brown’s legislation reflects also the idea that banks should fund themselves more with equity and less with debt. Professor Admati and I submitted a letter of support, together with 11 colleagues whose expertise spans almost all dimensions of how the financial sector really operates.

We particularly stress the appeal of having a binding “leverage ratio” for the largest banks. This would require them to have at least 10 percent equity relative to their total assets, using a simple measure of assets not adjusted for any of the complicated “risk weights” that banks can game.

We also agree with the SAFE Banking Act that to limit the risk and potential cost to taxpayers, caps on the size of an individual bank’s liabilities relative to the economy can also serve a useful role (and the same kind of rule should apply to non-bank financial institutions).

Under the proposed law, no bank-holding company could have more than $1.3 trillion in total liabilities (i.e., that would be the maximum size). This would affect our largest banks, which are $2 trillion or more in total size, but in no way undermine their global competitiveness. This is a moderate and entirely reasonable proposal.

No one is suggesting that making JPMorgan Chase, Bank of America, Citigroup and Wells Fargo smaller would be sufficient to ensure financial stability.

But this idea continues to gain traction, as a measure complementary to further strengthening and simplifying capital requirements and generally in support of other efforts to make it easier to handle the failure of financial institutions.

Watch for the SAFE Banking Act to gain further support over time.

Filed under: foreclosure | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 26 Comments »

Taking Aim at Bonuses based on $23.7 Trillion in Taxpayer Gifts

Posted on January 15, 2010 by Neil Garfield

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If they earned it, what business is it of ours or the government? On the other hand, if they stole it, why are they not in jail?

If there is money for bonuses it is because of illusory (fake) profits from an illegal scheme that I would call fraudulent. If that is profit then so are the proceeds of purse snatching. So the bonuses, the “profits” and the “capital of the perpetrators belongs to the taxpayers, the homeowners and the investors — the only real victims in this mess.

The REAL tally of taxpayer aid is coming out from members of the media and oversight committees and it isn’t $700 billion the way they have said, and it isn’t $7 trillion the way some pundits have calculated it. It is $23.7 trillion, which is roughly TWICE the U.S. gross domestic product. That’s right folks, so far, as the tally is rising, Wall Street sucked out of our economy the amount we measure as all goods and services traded in the entire United States for two years.

Just think about it. If it were really about $600 billion in defaults or even $2 trillion in defaults, why would the entire economy have taken a nose dive? Why would the world have have been paralyzed? We’ve taken hits before and it didn’t bring us to the brink of ruin. This one did, because the percentage was more than 3% or even 15% of GDP, it was around 200%, so far and it is growing.

It isn’t the bailout or the stimulus that is putting us behind the 8-ball. It’s the money siphoned off by Wall Street who have successfully disseminated two myths through the lazy media: (1) the banks had losses caused by excessive risk taking and (2) government bailout is TARP. The truth is they never had any losses from mortgage defaults or defaults on SWAPS  (how could they with $23.7 trillion covering them?) and TARP is barely 2% of the taxpayer aid through entities created, preserved or promoted with the blessing of the U.S. Treasury and the Federal Reserve.

It shouldn’t surprise me, but it always does — somehow the people with the most money get closest to the microphone and the lazy press lets them take over the narrative. My personal choice is that if they committed fraud knowing of the huge catastrophic consequences and if that fraud and associated acts constitute a crime, then they belong in jail.

If you are serious about getting the past corrected as much as it is possible to do so, and serious about sending referees back onto the playing field so this really doesn’t happen again then start writing to your congressmen, legislators, governors, the White House and DON’T STOP. Make it a weekly ritual.

Those people in the tea parties might seem extreme and some of them might be racist, but their underlying theme is getting traction simply because the people are way out in front of their government this time and the political consequences will be very painful for those who think their jobs are secure. Their theme is that government has been stolen from the people and they are right. The only people to take it back are citizens who vote and people who are willing to serve in public office.

This should not be taken as an endorsement of the tea party — just their message. Wall Street stole our gross domestic product for two years and we want it back. If we get it back or any significant portion of it, state budget deficits will disappear or at least become manageable. Foreclosures will stop or be reduced to a  lower rate than before this mess started. Wealth will be returned at least in part to the middle class so the the economy can function without government stimulus and without that ridiculous cycle of debt.

We have to get over the myth that the banks took the losses from mortgage defaults. They didn’t. They always had the securities sold before committing the funds and used investor money to fund the mortgages. That is why it is incorrect to say that they took excessive risks. They took no risk at all. They schemed like the movie “The Producers”: to open a show that was sure to fail and bet on that. Where is the risk. None to Wall Street.

Of course that’s just my opinion. Maybe the ideologues are right. Maybe we should focus on personal responsibility, selectively enforce it against the middle  and lower class, and let the country go to hell.

So about those bonuses. In the law we have a doctrine called a constructive trust where a thief or other person who is not authorized takes title to property or money that is clearly the property or money of another. Under the doctrine of a constructive trust the current holder of the property, despite his pleas to the contrary is actually holding the property “constructively” for the real owner(s).

If there is money for bonuses it is because of illusory (fake) profits from an illegal scheme that I would call fraudulent. So the bonuses, the “profits” and the “capital of the perpetrators belongs to the taxpayers, the homeowners and the investors — the only real victims in this mess.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , | 11 Comments »

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