Banks Still Out Cheating Their Customers and Everyone Else

Posted on February 17, 2014 by Neil Garfield

It is easy to think of the mortgage meltdown as a period of time in which the banks went wild. Unfortunately that period of time never ended. They are still doing it. The level of sophistication it takes to do the kinds of things that banks have been doing for the last 20 years is probably beyond the knowledge and experience of any of the regulators. In addition, it is beyond the knowledge and experience of most consumers, lawyers and judges; in fact as to non-regulators, bank behavior makes no sense. After having seen the results of what are euphemistically called subprime mortgages, Wells Fargo is plunging back in and obviously expecting to make a profit. Apparently the quasi governmental entities that issue guarantees on certain mortgages will allow these subprime mortgages. Wells Fargo says it now understands the parameters under which the guarantors (Fannie and Freddie) will approve those mortgages without a risk that Wells Fargo will be required to buy them back.

That is kind of a mouthful. We have thousands of transactions that are being conducted that directly affect the ownership and balance of various types of loans including mortgage loans. The picture presented in court is that the ownership and status of each loan is stable enough for representations to be made. But the truth is that the professional witnesses hired by the bank’s foreclosure actions only present a slice of the life of a loan. They neither know nor do they inquire about the rest of the information. For example, they come to court with a a report showing the borrower’s record of payments to the servicer but they do not show servicer’s record of payments to the creditor. By definition they are saying that they only know part of the financial record and that consists of a made for trial report on the borrower’s activities. It does not show what happened to the payments made by the borrower and does not show payments made by others —  like loss sharing with the FDIC, servicer advances, insurance, and other actual payments that were made.

These payments are not allocated to any specific loan account because that would reduce the amount claimed as due from the borrower to the creditor — as it should. And the intermediaries and conduits who are making claims against the borrower have no intention of paying the actual creditors (the investors) any more than they absolutely have to. So you have these intermediaries claiming to be real parties in interest or claiming to represent the real parties in interest when in fact they are representing themselves.

They cheat the investor by not disclosing payments received from insurance and FDIC loss sharing. They cheat the borrower by not disclosing those payments that reduce the count receivable and therefore the account payable. They cheat the borrower again when they fail to show “servicer advances” which are payments received by the alleged trust beneficiaries regardless of whether or not the borrower submits monthly payments.  (That is, there can’t be a default in payments to the “trust” because the pass through beneficiaries are getting paid. Thus if there is any liability of the borrower it would be to intermediaries who made those servicer payments by way of a new liability created with each such payment and which is NOT secured by any mortgage because the borrower never entered into any deal with the servicer or investment bank — the real source of servicer advances).

Then they cheat the investor again by forcing a case into a foreclosure sale when the borrower was perfectly prepared, willing and able to enter into a settlement agreement that would have paid the rest are far more than the proceeds of a foreclosure sale and final liquidation. Their object is to maximize the loss of the investor and maximize the loss of the borrower to the detriment of both and solely for the benefit of the intermediary or conduit that is pulling the strings and handling the money.  And they are still doing it.

The banks have become so brazen that they are manipulating currency markets in addition to the debt markets. While we haven’t seen any reports about activities in the equity markets, there is no reason to doubt that their illegal activities are not present in equity transactions. For the judicial system to assume that the Banks are telling the truth or presenting an accurate picture of the  transaction activity relating to a particular loan is just plain absurd now. The presumption in court should be what it used to be, at a minimum. Before the era of securitization, most judges scrutinized the documentation to make sure that everything was in order. Today most judges will say that everything is in order because they are pieces of paper in front of them, regardless of whether any of those pieces of paper represents an accurate rendition of the facts related to the loan in dispute. Most judges in most cases are rubber-stamping judgments for intermediaries and thus are vehicles for the intermediaries and conduits to continue cheating and stealing from investors and borrowers.

The latest example is the control exercised by the large banks over currency trading. Regulators are clueless.  The banks are no longer even concerned with the appearance of propriety. They are cheating the system, the society, the government and of course the people with impunity. They are continuing to pay or promote their stocks as healthy investment opportunities. Perhaps they are right. If they continue to be impervious to prosecution for violating every written and unwritten rule and law then their stock is bound to rise both in price and in price-to-earnings ratio. They now have enough money which they have diverted out of the economy of this country and other countries that they can create fictitious transactions showing proprietary trading profits for the next 20 years.

This is exactly what I predicted six years ago. They are feeding the money back into the system and laundering it through the appearance of proprietary trading. It is an old trick. But they have enough money now to make their earnings go up every year indefinitely. On the other hand, if the regulators and investigators actually study the activities of the banks and start to bring enforcement actions and prosecutions, maybe some of that money that was taken from our economy can be recovered, and the financial statements of those banks will be revealed and smoke and mirrors. Then maybe their stock won’t look so good. Right now everyone is betting that they will get away with it.

New forex lawsuit parses data to make case

Yesterday, 03:13 PM ET · JPM

  • There have been a number of suits against the global banks over claims of forex manipulation, but this latest by the City of Philadelphia Board of Pensions and Retirement is the first to include research highlighting unusual movements in major currencies.
  • Using data compiled by Fideres, the plaintiffs analyzed daily trading right around the 4 PM fix of currency prices … curiously, anomalous price movements became rarer and less pronounced after the initial reports of rigging surfaced last summer.
  • Morgan Stanley has spent some time looking at euro/dollar spikes at 4 PM and also concluded they were unrelated to economic events. Instead of collusion though, Morgan pins the blame on computerized trading programs.
  • The seven banks sued by Philadelphia which is seeking damages as high as $10B: Barclays (BCS), Citigroup (C), Deutsche Bank (DB), HSBC, JPMorgan (JPM), RBS, and UBS.

Read more at Seeking Alpha:
http://seekingalpha.com/currents/post/1565171?source=ipadportfolioapp_email

Filed under: CORRUPTION, evidence, expert witness, Fannie MAe, foreclosure, foreclosure defenses, foreclosure mill, GARFIELD KELLEY AND WHITE, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Motions, Neil Garfield Show, Pleading, securities fraud, Servicer, TRUST BENEFICIARIES, trustee | Tagged: , , , , , , , , , , , | 13 Comments »

UBS Admits Criminal Wrongdoing, Pays $1 Billion Fine

Posted on December 14, 2012 by Neil Garfield

CHECK OUT OUR DECEMBER SPECIAL!

What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Note: This happened because European regulators and law enforcement made it happen. Why are we not doing the same thing here? See my earlier post today.

Criminal wrongdoing is all over the  board spilling onto the floor in the mortgage meltdown. The banks are rigging the auctions just like they rigged the Libor rates, which should be interesting because now we don’t know what the rate should have been. That interbank rate is the base for all interest rate calculations on all loans. And where the LIBOR shows an increase mortgage payments go up.

So most everyone with an ARM or even conventional mortgage, should send a QWR asking for how the rate was calculated at origination and how it is calculated now, plus how they intend to calculate the rates and payments in the future.

Foreclosure auctions based upon demands for money due were based in part on adjustments caused by the bid rigging in LIBOR. Thus the amount demanded was probably wrong, even if the loan was valid (something I doubt). That would mean the Notice of Default and the sale would have taken place with the wrong figures being used.

PRACTICE HINT: In filing for wrongful foreclosure, make an allegation that the banks already admit criminal wrongdoing in setting LIBOR, the foundation for computation of all interest rates. Thus the homeowner additionally DENIES the amount due and demands DISCOVERY of the calculations that were made and by whom those calculations were made when the loan was approved and/or when the monthly statement went out and/or when the monthly payment was supposedly adjusted to reflect LIBOR or changes based based upon LIBOR.

If the attorney represents the state or county, then they should make hay out of this, stating that besides corrupting the title registries across the state, the defendants conspired to wreck the economy of the state by false calculations in which the banks themselves were the source of the LIBOR manipulations.

UBS Admits Criminal Wrongdoing in Bid Rigging

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , | 151 Comments »

Unravelling UBS Derivative Bond Trading and Hedges Provide Details on Securitization Scam

Posted on September 15, 2012 by Neil Garfield

“”Mr. Adoboli had ceased to act as a professional investment banker and had begun to approach his work as a naked gambler,” Ms. Wass said.”

Editor’s Comment: Just so there is no mistake about it, my opinion is that securitization never occurred and that all the paperwork was a cover-up for a complex PONZI scheme that ended like all all PONZI schemes —- when the money from new investments dries up, the scheme is over. I hold these truths to be self-evident and easily proven without speculation.

The failure of government to prosecute comes from two sources (a) conflicts of interests because of the revolving door for people who work at banks and then at regulators or vica versa and (b) because honest policy makers, unsophisticated in the ways of Wall Street truly believe that the collapse of bank of America, Chase, Citi, Wells et al would lead to a run on the banks and an end to our financial system and social network.

Bill Maher said it all last night when he “quipped” that our faith and belief in the almighty dollar exceeds any evidence of faith, belief or morality tied to a relationship with God. As long as that is true, prison populations will rise, drug lords to rise to greater wealth and power, and military-industrial complex (a warning from President Dwight Eisenhower) will control much of our spending and foreign policy. Today we add the threat of banks gone wild and the details of their sordid deals provide a road map for just how the supposed “securitization” of residential mortgages became real in the minds of millions and how it worked like a charm to cover up a common theft that rose so high that the consequences are still being felt as the theft continues right under the noses of regulators, law enforcement and law makers.

Behold the case of “Kweku M. Adoboli, a former UBS trader in London who faces four counts of fraud and false accounting in connection with a $2.3 billion loss at the Swiss bank.” Here in his own words and those who are prosecuting him, is the methods he used, the results he “achieved” and the plausible deniability that works so well on Wall Street to avoid criminal prosecution of the highest executives while they throw their soldiers under the bus.

This is a case that few people will notice unless they see articles like this one and it starts them thinking about how we got to this point where the entire housing market, consumer market and financial market is cornered by the decisions of common thieves who achieved power in ways no better than Scarface.

The man they are throwing under the bus (as opposed to leveraging him to get to higher and higher kingpins the way they do with drug lords) “doctored documents, invented profits and fabricated clients to cover up his rogue activities. Sasha Wass, the lead prosecutor, told a jury that Mr. Adoboli was motivated by greed and ego as he looked to increase his salary and status at the bank.”

One background comment here. Back when I was on Wall Street, the self-governing mechanism that worked most of the time was the fact that the firms were only allowed to be partnerships with no limitation on personal liability. When we allowed them to go public it was like opening the lion cage, because they could take whatever risks they wanted with the money of shareholders, clients or investors and pocket huge bonuses vastly exceeding the size of their prior partnership. Instead of partners at risk, we have management unhinged. It worked out for the people who rose to the top and many middle management folks who had never seen such salaries and bonuses in the history of Wall Street — all while median national income was flat, the economy was growing increasingly dependent on debt to create the appearance of commerce that would be counted in GDP measurements, and living expenses imposed on the middle class skyrocketed.

Fabrication of trades, documents and false accounting are and always have been a staple method of business. Wall Street institutionalized fraud as a custom and practice of the industry long before the mortgage meltdown, even preceding the dawn of the 20th century. What is different here is that for the last 30-40 years Wall Street has been dipping directly into the pockets of consumers and breaking laws that are already on the books, rules and regulations that have been in place since the Great depression that was also caused by Wall Street speculation, and generally treating consumers as trading pawns or garbage that could be viewed as collateral damage while Wall Street performed its function — to make money.

But Wall Street was not allowed into existence to MAKE money, it was allowed into existence to create liquidity which is another way of creating money not for themselves, which would be counterfeiting, but for others who are innovating, expanding and growing. With no effective referee on the playing field, the players went wild making up rules and even pretending they had played when they were out to lunch with the referees.

Wall Street began creating money for itself in 1983 with the full blessing of the Federal Reserve and the U.S. government. Instead of using it as an engine for national growth, they used to to create growth of salaries and bonuses for the people who worked there, thus siphoning out of the economy what should have been piped in — liquidity, money, investment and loans into a strong economy.

Follow the bread crumbs and you will arrive at the front door of every mega bank and discover that securitization was completely falsified, covered up and sold in a way that even today has an aura of legitimacy. It is taken as true (an assumption that is totally wrong) that Wall Street firms sliced and diced the loans and sold them to investors through investment pools variously referred to as pools, REMICs, Special Purpose Vehicles, Trusts and other names.

Not one of these “pools” ever had a bank account, an asset or a penny. They were all fictitious entities with whom Wall Street made fictitious trades, as a cover-up for taking much of the money from pension funds and making ti the money of the Wall Street firms through trading profits (selling bad loans — funded from investor money from outside the securitization chain —- to the investors at a profit), thus creating the endless stories about trading profits and losses that never were real. It was simple theft: out of the money advanced by investors, Wall Street put much of it in their own very deep pockets.

They covered it up with fictitious or bad loans whose funding required much less money than the funding on a real loan using standard underwriting procedures based upon the premise of repayment. Here the premise was nonpayment and Wall Street made sure that was what happened — even if the loans were current.

“Mr. Adoboli took pains to evade internal controls. According to prosecutors, the former UBS trader, who focused on a plain-vanilla version of derivatives trading, falsified trades valued from $5 million to $20 million. Mr. Adoboli even created separate accounts, which he called his umbrella, to hide the profits and losses of his unauthorized activities. In 2009, the so-called umbrella held $30 million, according to the prosecution.”

In the real world of business people whoa re CEO of a large organization or said to have known or should have known” about bad or illegal practices. In the world of finance such statements are never made, and instead of sitting in prison, people like Jamie Dimon sits on the board of the New York Federal Reserve board.

If you liked the crash of 2007-2009 you are going to love what happens next. The ONLY hope we have is your use of voting power and putting practical understandable policies into place by electing those who are not bought off by the banks.

September 14, 2012, 3:59 pm <!– — Updated: 6:59 pm –>

Ex-UBS Trader Is Accused of Gambling in a Big Loss

By MARK SCOTT

LONDON – Fictitious trading and brazen gambling by a single individual could have brought down the Swiss financial giant UBS, a British prosecutor said on Friday at the trial of a former bank employee accused of causing a multibillion-dollar trading loss.

That thesis is at the heart of the case against Kweku M. Adoboli, a former UBS trader in London who faces four counts of fraud and false accounting in connection with a $2.3 billion loss at the Swiss bank. He has pleaded not guilty to the charges.

In their opening statement, prosecutors portrayed Mr. Adoboli as a freewheeling trader who doctored documents, invented profits and fabricated clients to cover up his rogue activities. Sasha Wass, the lead prosecutor, told a jury that Mr. Adoboli was motivated by greed and ego as he looked to increase his salary and status at the bank.

At one point, the former UBS trader had $12 billion on the line, according to prosecutors. Those activities, they claimed, threatened the bank’s health.

“The scale of Mr. Adoboli’s gambling was so large and unchecked, he could quite easily have approached and even exceeded the limits of the bank’s resources,” Ms. Wass said in the Southwark Crown Court. “He was a gamble or two away from destroying Switzerland’s largest bank for his own benefit.”

Prosecutors previewed their case before a packed courtroom in central London. During the nearly five hours of opening statements, Mr. Adoboli, in a gray suit and purple tie, sat quietly, surrounded by lawyers, while several of his friends listened in the courtroom.

If convicted, Mr. Adoboli could face up to 10 years in prison.

The case has been a black eye for UBS. After discovering the trading loss, Oswald J. Grübel, who had been hired to lead a turnaround at the bank, stepped down as chief executive. The co-chiefs of global equities, the division where the loss occurred, also subsequently left UBS.

On Friday, prosecutors claimed Mr. Adoboli took pains to evade internal controls. According to prosecutors, the former UBS trader, who focused on a plain-vanilla version of derivatives trading, falsified trades valued from $5 million to $20 million. Mr. Adoboli even created separate accounts, which he called his umbrella, to hide the profits and losses of his unauthorized activities. In 2009, the so-called umbrella held $30 million, according to the prosecution.

At first, the tactics paid off. The former trader had earned a combined $90 million profit for both UBS and its clients by May 2011, prosecutors said. Mr. Adoboli’s salary rose tenfold, to £350,000 ($569,000) from 2006 to 2010, according to the prosecution.

Despite the early gains, Mr. Adoboli’s trades started to go bad in the summer of 2011 as the world’s financial markets grappled with the European debt crisis.

By June, the former trader had exceeded his trading limit by $1 billion after creating a series of fictitious trades, the prosecution said. His investments had risen to $5 billion as of August, and Mr. Adoboli posted a $1.8 billion loss on the activity, which he also hid through false accounting, Ms. Wass contended.

The unauthorized trades left the Swiss bank at risk. In an internal investigation, UBS found that the reported risk of Mr. Adoboli’s activity totaled $1.5 million by mid-September 2011, according to prosecutors. In reality, the financial risk stood at $8.1 billion.

“Mr. Adoboli had ceased to act as a professional investment banker and had begun to approach his work as a naked gambler,” Ms. Wass said.

Last August, risk managers at UBS began to ask questions about his positions. William Steward, an accountant at the firm, challenged Mr. Adoboli several times about discrepancies in his trades, Ms. Wass said.
After the bank raised further concerns, Mr. Adoboli walked out of UBS last Sept. 14 and wrote an e-mail to Mr. Steward that the prosecution referred to as a “bombshell e-mail.” In the note, Mr. Adoboli said his recent trades had not been hedged, leaving the bank exposed to potential multibillion-dollar losses. Ms. Wass said that in the e-mail, the former UBS trader initially said he had acted alone, though he later claimed that some of his colleagues were aware of his actions.

“Although I had a couple of opportunities to unwind the long trade for a negligible loss, I did not move quickly enough,” Mr. Adoboli wrote to UBS executives. “I take full responsibility for my actions.”

After senior managers received the e-mail, they demanded Mr. Adoboli return to the London office to explain his actions.

In a series of meetings that lasted until the early morning of last Sept. 15, UBS executives peppered Mr. Adoboli with questions about his trades. During the discussions, the former trader admitted that he had first falsified records in 2008 after making a $400,000 trading loss, according to the prosecution. Mr. Adoboli said that he had concealed the losses in the hopes of recovering the money through future trades.

“The bank cannot be faulted for trusting him,” Ms. Wass said. “They respected him, and he abused their trust to cheat them for his own eventual gain.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , | 35 Comments »

Bankruptcy Trustee Accuses banks of Manipulating “Margin Calls” on Mortgage Bonds

Posted on May 3, 2011 by Neil Garfield

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary SEE LIVINGLIES LITIGATION SUPPORT AT LUMINAQ.COM

COLLUSIVE SCHEME ALLEGED

EDITORIAL COMMENT: WELL it looks like this is not over yet. The accusations are right on target — the more they drill down the more they find which is what we have been saying on Livinglies for 3 1/2 years. That’s what we keep doing in our COMBO title and securitization analysis and what we are teaching lawyers in our seminars.

Maybe the judiciary will wake up and realize that all these title and securitization reports should not be the burden of homeowners to produce. Maybe they should realize, in line with existing law, that the party seeking affirmative relief is the pretender lender who wants to forcibly take a home away from otherwise good citizens. Maybe Judges will realize that the party seeking affirmative relief is the plaintiff no matter what foreclosure procedure is invoked and that party must plead and prove a foreclosure case just like banks have been doing for centuries.

Maybe everyone will realize that just because the borrower stops paying doesn’t mean the payment was due or that the creditor didn’t get the money and that the declaration of default and all that comes after that is a farce without the laughs. Deutsch was Trustee for most of these pools, followed by US Bank. We already know they lied, cheated and stole at all levels of the fake securitization that was never backed up by actual transfers, and that that the original mortgages were fatally defective. Acknowledging that fact will cause pain only to Wall Street which in all events MUST go through the pain of shrinking back down to a proper size of 12-14% of GDP instead of its current reign of 50% of all measured services and products produced by the United States.

Maybe the narrative wil finally shift to the truth. It isn’t borrowers who are delaying the inevitable foreclosure. It is the banks that are delaying the inevitable collapse of the entire foreclosure and mortgage structure and the reduction not just of principal due on the mortgages, but a reduction in the real value of assets on their balance sheets and hence their power and market-share in what SHOULD be a free market.

Banks Sued in Thornburg Bankruptcy

By REUTERS

WILMINGTON, Del. (Reuters) — The bankruptcy trustee for Thornburg Mortgage has sued Goldman Sachs, Barclays and other big banks for a combined $2.2 billion, blaming them for its bankruptcy.

The trustee filed four separate lawsuits, the most extensive of which blames a “collusive scheme” by units of JPMorgan Chase & Company, Citigroup, the Royal Bank of Scotland, Credit Suisse and UBS for driving the company into bankruptcy.

The trustee, Joel Sher, accused the five banks of acting together to use a series of unjustified margin calls to extend their control over Thornburg, which was once a leading provider of “jumbo” home loans.

The lawsuit seeks to recover $2 billon for fraudulent conveyances and transfers by the banks, which had financed Thornburg’s mortgage-backed securities.

The trustee said the banks eventually drove Thornburg into Chapter 11 in May 2009. It sought protection from creditors with $36.5 billion in assets, making it one of the largest bankruptcies during the financial crisis.

Citigroup said the lawsuit was without merit. Credit Suisse and UBS declined to comment. JPMorgan and RBS did not immediately return a call for comment.

Mr. Sher was appointed to run Thornburg after the company’s executives were accused of using Thornburg’s staff and offices, without creditors’ approval, to start a new company.

The trustee also sued Barclays, claiming it improperly seized mortgage bonds from Thornburg in 2007 by undervaluing the securities in a series of margin calls. The trustee is seeking at least $94 million.

Barclays declined to comment.

Mr. Sher sued Goldman Sachs, seeking at least $71 million and accusing the bank of scheming to seize hundreds of millions of dollars of investment-grade mortgage bonds that Thornburg had pledged as collateral.

Goldman Sachs declined to comment.

The final lawsuit claims Countrywide Home Loans, which was acquired by Bank of America, breached representations and warranties on the loans it sold to a unit of Thornburg.

That lawsuit was also brought on behalf of a group of investors known as the Zuni Investors, who were represented by David Grais of Grais & Ellsworth.

Mr. Grais has brought numerous “putback” lawsuits that seek to have originators like Countrywide repurchase mortgages that fell short of promised standards.

Bank of America did not immediately return a call for comment.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , , , , , , , , | 16 Comments »

SECRET BANKING ELITE: WHERE THE REAL DECISIONS ARE MADE

Posted on January 3, 2011 by Neil Garfield

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

Notable Quotes:

“The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.”

“big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.”

“The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.”

“None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are:

  • Thomas J. Benison of JPMorgan Chase & Company;
  • James J. Hill of Morgan Stanley;
  • Athanassios Diplas of Deutsche Bank;
  • Paul Hamill of UBS;
  • Paul Mitrokostas of Barclays;
  • Andy Hubbard of Credit Suisse;
  • Oliver Frankel of Goldman Sachs;
  • Ali Balali of Bank of America; and
  • Biswarup Chatterjee of Citigroup.”

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EDITOR’S ANALYSIS: For those of us tracking the strategies employed in courtrooms across the country and various foreclosure tactics, it has been obvious that there has been a single governing hand that is controlling the action. Hidden under the rubric of a risk control committee, this group actually makes all key decisions that affect the largest segment of the marketplace and thus the rest of the markets. These banks are operating for themselves, not in the interests of performing the service that Wall Street was always intended to do — create increasingly fluid access to the capital markets for businesses to innovate, start, grow, finance and merge.

They operate without any regulation. Quite the contrary. The decisions from this group actually effect both legislation that is proposed and passed and the rules and regulations of agencies that are supposed to be acting as referees to make sure the players don’t run amok. They dictate to government rather than the other way around and they create the strategies affect every individual in this country and many other countries. They are in essence a single virtual bank acting as though they are separate, each with profit centers that are strictly controlled by this elite group.

The upcoming WikiLeaks disclosures may have some references to this group which is comprised of the largest banks in the world and which exclude other large banks from membership, like Bank of New York/Mellon. Together they control the direction of the recession and how power is exercised by governments and central bankers around the world. That is because together they control nominal wealth many times the total currency in the world and “market value” that is roughly equal, at a minimum, to 2/3 of the GDP of the entire world.

We are at a crossroad whether we want to admit it or not. Either we simply give up and let bankers rule the world, or we stop them, disassemble them and bring them down to a size where they can be and are in fact regulated. But the choice is not up to government which now is owned by them as well. The choice is entirely up to the people — all the people — who ultimately, for the moment, have the power to dismiss the exercise of this kind of ultra vires power and bring things back to normal. Whatever we do, we are headed for turbulent times. The only real question is whether those turbulent times will be leading us down a path of abandoning our nation of laws or whether it will be as Teddy Roosevelt did, devoted to taking back the power for the people, by the people.

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A Secretive Banking Elite Rules Trading in Derivatives

By LOUISE STORY

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.

But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.

“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.

Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.

Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.

The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.

But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.

Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.

The Department of Justice is looking into derivatives, too. The department’s antitrust unit is actively investigating “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,” according to a department spokeswoman.

Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level — an enormous savings for investors.

“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”

Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation.

Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank, which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace.

The Deutsche spokeswoman also said the banks’ role in this process has been a success, saying in a statement that the effort “is one of the best examples of public-private partnerships.”

Established, But Can’t Get In

The Bank of New York Mellon’s origins go back to 1784, when it was founded by Alexander Hamilton. Today, it provides administrative services on more than $23 trillion of institutional money.

Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed.

Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis.

Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market.

The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. “But we don’t qualify. We certainly think that’s kind of crazy.”

The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.

Mr. Kannambadi said Bank of New York’s clients asked it to enter the derivatives business because they believe they are being charged too much by big banks. Its entry could lower fees. Others that have yet to gain full entry to the derivatives trading club are the State Street Corporation, and small brokerage firms like MF Global and Newedge.

The criteria seem arbitrary, said Marcus Katz, a senior vice president at Newedge, which is owned by two big French banks.

“It appears that the membership criteria were set so that a certain group of market participants could meet that, and everyone else would have to jump through hoops,” Mr. Katz said.

The one new derivatives clearinghouse that has welcomed Newedge, Bank of New York and the others — Nasdaq — has been avoided by the big derivatives banks.

Only the Insiders Know

How did big banks come to have such influence that they can decide who can compete with them?

Ironically, this development grew in part out of worries during the height of the financial crisis in 2008. A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds. The panic led to the need to bail out the American International Group, for instance, which had C.D.S. contracts with many large banks.

In the midst of the turmoil, regulators ordered banks to speed up plans — long in the making — to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market.

Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq.

Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive.

None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.

Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.

Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.

Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.

“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”

Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.

The precise amount that banks make trading derivatives isn’t known, but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives.

The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.

If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price — and the commission, or fee — are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition — and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002.

Not so with derivatives. For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a bank. The trader matches that order with someone selling the same type of derivative.

Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly.

And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.

It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.

An Electronic Exchange?

Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year.

But Mr. Griffin’s proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps.

Big banks that handle most derivatives trades, including Citadel’s, didn’t like Citadel’s idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.

So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICE’s clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICE’s clearinghouse, according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment.

The banks also refused to allow the deal with ICE to close until the clearinghouse’s rulebook was established, with provisions in the banks’ favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York.

The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.

Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves.

“The one thing I know the banks are concerned about is their risk capital,” he said. “You really are going to get some comfort that the way the entity operates isn’t going to put you at undue risk.”

Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit.

This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markit’s agreement. And so, essentially boxed in, they agreed to the terms, according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markit’s terms.)

Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffin’s dream of a new, electronic trading system.

With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchange’s clearinghouse effort. The exchange set up a risk committee that, like ICE’s committee, was mainly populated by bankers.

It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.

Kim Taylor, the president of Chicago Mercantile Exchange’s clearing division, said “the market” simply wasn’t interested in Mr. Griffin’s idea.

Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.

“It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.

Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee.

“We spent and we still continue to spend a lot of time on thinking about governance,” said Peter Barsoom, the chief operating officer of ICE Trust. “We want to be sure that we have all the right stakeholders appropriately represented.”

Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”

“It’s a stunning amount of money,” Mr. Griffin said. “The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since they’re not sure if they’ll be winners or losers, their basic instinct is to resist change.”

In, Out and Around Henhouse

The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States.

That puts them in a pivotal position to determine how derivatives are traded.

Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses.

Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt.

Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits.

The banks already have a head start. Even a newly proposed rule to limit the banks’ influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules — on topics like transparency and possible electronic trading — will drastically change derivatives trading, or leave the bankers with great control.

One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.

“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , , , , , , , , , , , , | 25 Comments »

Ron Paul: Currency Crisis Looming

Posted on December 15, 2010 by Neil Garfield

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

Editor’s Note: It’s human nature. Some messenger comes with information you don’t want to hear and you label him or her a crackpot. In this case, instead of me, the crackpot is Ron Paul, member of the House of Representatives (R. TX) and now head of the House financial services subcommittee that scrutinizes monetary policy. OK we all know he got that post because nobody in Congress actually knows what monetary policy is, much less how to regulate it. They figured they would give him a post that seemed to satisfy him, but where he could do no harm.

But Paul is the author of END THE FED, a surprising best seller. I’m not surprised. Public confidence in government institutions could not be lower. And somehow, despite the depths of mistrust by the public, it manages to get worse every day. I think it is the title that sold the book in such large numbers. People want to strike back and END THE FED because it is the only idea on the table that addresses their anger and frustration.

We now know that that the pillars of our financial institutions (HSBC, UBS, JP Morgan, Citi and the Bank of Medici (using the name of a centuries old family who controlled the finance of the western world) stand accused by the trustee of the Madoff mess of being directly responsible for $40 billion of the losses attributed to the Madoff Ponzi scheme. Nobody disputes that it WAS a Ponzi scheme, but everyone wanted to believe that it was a “single gunman,” who got lucky with a magic bullet fired from an impossible angle that struck thousands of people and financially killed them.The allegation is essentially that these institutions knew or should have known and the public knows not only did they know it was a scheme, but that they used the scheme to channel money into it and make “extra” fees in doing so.

What politicians and the media don’t seem to understand is that the public is far out in front of the their leaders and their revered sources of information in the media. People understand that it is impossible to fashion and maintain a $60 billion PONZI scheme spanning decades without active involvement of dozens of credible channels. Everyone on Wall Street knew that Madoff was reporting impossible returns and they all knew, for a fact, that nobody had EVER seen a single trade in a  single security from the Madoff enterprise.

Madoff understood a basic fact about Wall Street that we don’t like to talk about but we all know it true. Wall Street exists to create capital and move it around. It isn’t supposed to have a conscience and it doesn’t. It never did. Because of that it is supposed to be strictly regulated so they don’t wreck world governments, societies and the marketplace that they provide the financing, hedging of risk, and opportunities for speculators. Instead we put them in charge of the government, the referees left the field and the players were free to do any damn thing they wanted.

The presumption that the managers of these Wall Street firms would self regulate because banking is built on trust and reputation was false — because there was no risk whatsoever to the managers of these enterprises — that ended when Wall Street firms were permitted to sell their shares to the public. It’s the shareholders who have the risk. The managers objective is simple: make it look like you are making a ton of money for the shareholders and take as much of that for yourself as “compensation” as is humanly possible.

Now in the face of all that comes Ron Paul crying what other people are calling “wolf” when in fact he is completely correct in his warning. Government is attempting to catch up with the overindulgence in the issuing of proprietary currency that dwarfs government currency. Private issuance of currency now represents 1200% of all the money in the world that is circulating as “money.” Nobody has any confidence in any of this money (currency). So governments are going to the next level of using “government guarantees” as a shadow currency in attempt to re-assert themselves in the game of commerce. But nobody is buying that either.

So Paul concludes that we have no money or currency that can be sustained under current policy because as long as we let the megabanks control the information we get, control the laws we make, and control the regulation of their multinational organizations, everyone will know that people with no conscience, no loyalty to the system, and no sense of public duty are in charge. Paul understands that money and currency is nothing more than symbolic as a belief system. And he understands that no currency will survive without an active belief on the part of virtually everyone that the currency is “real.”

While there are several large flaws in his proposition of going on the gold standard, he might still be right, inasmuch it is about the only thing left that people believe and accept as a medium of exchange and a storage of value — but beware that even if we followed Paul’s prescription, the proliferation of gold certificates issued by private entities will lead to the same bubble.

Current policy is based upon the weakest of all premises — if we can just keep this PONZI scheme of mortgage bonds and the synthetic derivatives going for a while, we will reach some sort of equilibrium eventually. Our leaders are scared to death of what Paul and others are demanding: THE TRUTH. So they find it more expedient to perpetuate the lie because they really don’t know (nobody does) what happens when that $600 trillion in notional value of “cash equivalent” derivatives conflates, each being a private contract deriving its value from some other private contract, and each being either a bet or a hedge on a bet. Truthfully, I don’t know either.

But I DO know that everyone seems to know the game is up and so unless we come up with a currency that people can believe in, a crisis of unimaginable proportion will come, making the last GREAT RECESSION look like something that was manageable. People would do well to listen to Ron Paul because his politics and philosophy are about to go mainstream. Not all of it is right, agreeable or even feasible — and little of it is a catchy tune like Republicans like to play or Democrats like to invent. Paul may be giving us the last message we will ever hear before what we assume is society and government comes crashing in around us. Listen up.

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US warned on currency crisis

By Tom Braithwaite in Washington, Financial Times

Published: December 13 2010 03:22 | Last updated: December 13 2010 03:22

Ron Paul, the newly empowered Federal Reserve watchdog in the House of Representatives, said the US was on the verge of a currency crisis brought about by monetary policy and pledged to introduce sweeping audits of the central bank.

The libertarian author of End the Fed, a polemical 2009 attack on the bank that became a surprise best-seller, Mr Paul was last week appointed by his fellow Republicans to head the House financial services subcommittee that scrutinises monetary policy.

“What I really fear is that when the Fed comes to an end it will not be by my planning but it will end with a catastrophic financial dollar crisis,” said Mr Paul. “This crisis when it comes, and I think we’re approaching it, affects everybody because it’s such an important currency. I think we’re moving into very, very dangerous times.”

The Texan congressman’s ambitions stop short of an abrupt end to the central bank. But he wants to reintroduce legislation to audit the Fed.

While Mr Paul may have once been dismissed by the establishment as a crank, he has recently garnered widespread support from left and right for his attempts to increase transparency.

US policymakers are proud of their aggressive response to the financial crisis and contend that the raft of liquidity programmes made possible by the Fed’s power have proven superior to the European response.

Amid widespread public suspicion, Ben Bernanke, Fed chairman, and other Fed governors have gone public in their defence of the $600bn monetary stimulus – or quantitative easing – plan the bank rolled out last month to bring down long-term interest rates.

Last week saw yields on US Treasury bonds increase sharply, in spite of the Fed’s move, making mortgages more expensive to refinance and obtain. Mr Paul sees the “American people waking up” to what he sees as the Fed’s dangerous policies.

“Nobody’s going to really understand it until you see the inflationary pressures – when interest rates go significantly higher and prices start to move along and I think they’ve already started in that direction,” he said.

Mr Paul, who is soft-spoken and has polite debates with Mr Bernanke in spite of his anti-Fed position, said there was not “much good” to be had from more “esoteric” back-and-forth with the Fed chairman at congressional hearings.

Instead, he wants members of the Austrian School of economics to debate Paul Krugman, the Nobel prize winner and standard bearer of liberals. “Let Paul Krugman argue ‘spend more, print more’ and have somebody else come out and give the correct answers,” he said.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , | 14 Comments »

INVESTORS SUE FOR INFLATED HOME APPRAISALS, WHY DON’T YOU?

Posted on June 21, 2010 by Neil Garfield

The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.

In one pool with 3,543 loans, for example, the CoreLogic model had enough information to evaluate 2,097 loans. Of those, it determined that 1,114 mortgages — or more than half — had loan-to-value ratios of 105 percent or more. The valuations on those properties exceeded their true market value by $65 million,

EDITOR’S NOTE:  POINTS TO BE MADE:

  • Investors’ are proving the case for appraisal fraud, aligning themselves with borrowers. They are doing the borrower’s work. Get yourself copies of these complaints, discovery etc., send them to me and use them in your own case.
  • The little guy is starting to get attention. The court’s are getting the point that these loans were fraudulent. In my surveys I have found that appraisal fraud accounts for nearly all the loans 2003-2008, and that the amount of the fraud was a s much as 150% in some cases with an average of around 35%. The moment you closed, whatever down payment you made was lost and you were underwater.
  • The obligation to present a proper appraisal is on the lender not the borrower.
  • Just like the investors, borrowers were deprived of vital information about their loan that would have prevented any reasonable person from closing. Thus whether the Court’s like it or not, rescission, is a proper remedy, if not under TILA then under fraud statues and common law doctrines of fraud. Combine that with damages available, and the prospect of getting loan reduction and adjustment of loan terms comes into clearer view.
  • THE CONNECTION BETWEEN THE INVESTOR’S ADVANCE OF FUNDS AND THE HOME APPRAISAL IS PRESUMED AND ALLEGED. THUS THE ARGUMENT THAT THE INVESTOR WAS THE CREDITOR AND THE BORROWER IS THE DEBTOR IS CORROBORATED BY THE PLEADINGS OF THE INVESTORS.
June 18, 2010

The Inflatable Loan Pool

By GRETCHEN MORGENSON

AMID the legal battles between investors who lost money in mortgage securities and the investment banks that sold the stuff, one thing seems clear: the investment banks appear to be winning a good many of the early skirmishes.

But some cases are faring better for individual plaintiffs, with judges allowing them to proceed even as banks ask that they be dismissed. Still, these matters are hard to litigate because investors must persuade the judges overseeing them that their losses were not simply a result of a market crash. Investors must argue, convincingly, that the banks misrepresented the quality of the loans in the pools and made material misstatements about them in prospectuses provided to buyers.

Recent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.

You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.

The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.

These findings are compelling because they involve some 525,000 mortgage loans in 156 pools sold by 10 investment banks from 2005 through 2007. And because the research was conducted using a valuation model devised by CoreLogic, an information analytics company that is a trusted source for mortgage loan data, the conclusions are even more credible.

The analysis used CoreLogic’s valuation model, called VP4, which is used by many in the mortgage industry to verify accuracy of property appraisals. It homed in on loan-to-value ratios, a crucial measure in predicting defaults.

An overwhelming majority of the loan-to-value ratios stated in the securities’ prospectuses used appraisals, court documents say. Investors rely on the ratios because it is well known that the higher the loan relative to an underlying property’s appraised value, the more likely the borrower will walk away when financial troubles arise.

By back-testing the loans using the CoreLogic model from the time the mortgage securities were originated, the analysis compared those values with the loans’ appraised values as stated in prospectuses. Then the analysts reassessed the weighted average loan-to-value ratios of the pools’ mortgages.

The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.

That means inflated appraisals were involved in six times as many loans as were understated appraisals.

David J. Grais, a lawyer at Grais & Ellsworth in New York, represents the Home Loan Banks in the lawsuits. “The information in these complaints shows that the disclosure documents for these securities did not describe the collateral accurately,” Mr. Grais said last week. “Courts have shown great interest in loan-by-loan and trust-by-trust information in cases like these. We think these complaints will satisfy that interest.”

The banks are requesting that the firms that sold the securities repurchase them. The San Francisco Home Loan Bank paid $19 billion for the mortgage securities covered by the lawsuit, and the Seattle Home Loan Bank paid $4 billion. It is unclear how much the banks would get if they won their suits.

Among the 10 defendants in the cases are Deutsche Bank, Credit Suisse, Merrill Lynch, Countrywide and UBS. None of these banks would comment.

As outlined in the San Francisco Bank’s amended complaint, it did not receive detailed data about the loans in the securities it purchased. Instead, the complaint says, the banks used the loan data to compile statistics about the loans, which were then presented to potential investors. These disclosures were misleading, the San Francisco Bank contends.

In one pool with 3,543 loans, for example, the CoreLogic model had enough information to evaluate 2,097 loans. Of those, it determined that 1,114 mortgages — or more than half — had loan-to-value ratios of 105 percent or more. The valuations on those properties exceeded their true market value by $65 million, the complaint contends.

The selling document for that pool said that all of the mortgages had loan-to-value ratios of 100 percent or less, the complaint said. But the CoreLogic analysis identified 169 loans with ratios over 100 percent. The pool prospectus also stated that the weighted average loan-to-value ratio of mortgages in the portion of the security purchased by Home Loan Bank was 69.5 percent. But the loans the CoreLogic model valued had an average ratio of almost 77 percent.

IT is unclear, of course, how these court cases will turn out. But it certainly is true that the more investors dig, the more they learn how freewheeling the Wall Street mortgage machine was back in the day. Each bit of evidence clearly points to the same lesson: investors must have access to loan details, and the time to analyze them, before they are likely to want to invest in these kinds of securities again.

Filed under: bubble, CASES, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: , , , , , , , , , , , , , , | 24 Comments »

AND the indictments start

Posted on May 21, 2010 by Neil Garfield

“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 wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net

Last Updated: May 18, 2010 08:55 EDT

Filed under: bubble, CASES, CORRUPTION, expert witness, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, Investor, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, STATUTES, trustee, workshop | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 10 Comments »

Bank Accuses Investment Houses of Lying About Mortgage Backed Bonds

Posted on March 18, 2010 by Neil Garfield

“(T)he differences between the values ascribed to these properties and the prices at which the properties were sold in foreclosure are significantly greater than the declines in house prices in the same geographical areas over the same periods,”

Editor’s Comment: BINGO! Use this complaint for both discovery and as a pleading guide. Send me a copy of al pleadings when you get them. There a bank that gets it. They are manipulating the home values on the back end the same as they did on the front end. First they lied to borrower (debtor) and investor (creditor) about the value of the property when the loan was funded and then they lied about the value when the house was sold in foreclosure. Charles Koppa is close to publishing a study that shows that the price of most homes sold on the courthouse steps is dropped the morning of the sale to a price far below the fair market value of even the most distressed property.

‘About That $19 Billion …’

By DAVE TARTRE

SAN FRANCISCO (CN) – The Federal Home Loan Bank of San Francisco demands $19 billion from major banks and investment houses it accuses of lying about the quality of the subprime mortgage-backed securities they created and sold. The FHLB sued Deutsche Bank, Credit Suisse, JPMorgan Stanley, UBS, Banc of America, Countrywide Financial and others in two Superior Court complaints.
The FHLB claims the lending giants, including now-defunct Bear Stearns, Greenwich Capital Markets, RBS Securities and others failed to disclose material facts about the mortgages, such as how much equity the borrowers had in their homes, and that the omissions and misrepresentation led to much greater rates of foreclosures than promised.
The firms used exaggerated property appraisals so the loan-to-value ratios of the mortgage loans in the securities’ collateral pools understated the risks, according to the complaint.
“(T)he differences between the values ascribed to these properties and the prices at which the properties were sold in foreclosure are significantly greater than the declines in house prices in the same geographical areas over the same periods,” the FHLB says.
In addition, the number of borrowers who actually lived in the houses was lower than the defendants represented, and the borrowers’ credit scores were lower too, the FHLB says.
The lending giants did not tell the FHLB that their loan “originators were making frequent … exceptions to underwriting guidelines when no compensating factor was present,” and the originators systematically failed to detect or prevent borrower fraud, according to the complaints.
According to one complaint, “the Defendants sold or issued to the Bank 98 certificates in 80 securitization trusts backed by residential mortgage loans. The Bank paid more than $13.7 billion for those certificates. When they offered and then sold these certificates to the Bank, the defendants made numerous statements to the bank about the certificates and the credit quality of the mortgage loans that backed them. On information and belief many of those statements were untrue. Moreover, on information and belief the defendants omitted to state many material facts that were necessary in order to make their statements not misleading.”
The other complaint states: “the defendants sold or issued to the bank 36 certificates in 33 securitization trusts backed by residential mortgage loans. The bank paid more than $5.4 billion for those certificates. When they offered and then sold these certificates to the bank, the defendants made numerous statements to the bank about the certificates and the credit quality of the mortgage loans that backed them. On information and belief, many of those statements were untrue.”
The FHLB would like its $19.1 billion back. Its lead counsel is Robert Goodin with Goodin, MacBride, Squeri, Day & Lamprey. 

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, expert witness, foreclosure, Forensic Analysis Workshop, GTC | Honor, Investor, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, workshop | Tagged: , , , , , , , , , , , , , , , , , , , , , , , | 9 Comments »

Self Dealing Part II: Investigations Started

Posted on December 25, 2009 by Neil Garfield

NY Times: “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Mr. Lippmann made his pitch to select hedge fund clients, arguing they should short the mortgage market. He sometimes distributed a T-shirt that read “I’m Short Your House!!!” in black and red letters.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them,

Editor’s Note: It would be wise to pay careful attention to news reports and press releases from investigating agencies and to track the discovery in class action and other cases filed. A lot of your work might already be done, right down to the same lender you are  dealing with.

December 24, 2009

Banks Bundled Bad Debt, Bet Against It and Won

In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.

But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.

Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.

From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.

Goldman Saw It Coming

Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.

A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall Street had introduced a new index, called the ABX, that became a way to invest in the direction of mortgage securities. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.

Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.

Even before then, however, pockets of the investment bank had also started using C.D.O.’s to place bets against mortgage securities, in some cases to hedge the firm’s mortgage investments, as protection against a fall in housing prices and an increase in defaults.

Mr. Egol was a prime mover behind these securities. Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion.

Abacus allowed investors to bet for or against the mortgage securities that were linked to the deal. The C.D.O.’s didn’t contain actual mortgages. Instead, they consisted of credit-default swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier to place large bets on mortgage failures.

Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades.

Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying to make the assets in Abacus deals look better than they were, according to notes taken by a Wall Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.

On the call, the two traders noted that they were trying to persuade analysts at Moody’s Investors Service, a credit rating agency, to assign a higher rating to one part of an Abacus C.D.O. but were having trouble, according to the investor’s notes, which were provided by a colleague who asked for anonymity because he was not authorized to release them. Goldman declined to discuss the selection of the assets in the C.D.O.’s, but a spokesman said investors could have rejected the C.D.O. if they did not like the assets.

Goldman’s bets against the performances of the Abacus C.D.O.’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.

“Egol and Fabrice were way ahead of their time,” said one of the former Goldman workers. “They saw the writing on the wall in this market as early as 2005.” By creating the Abacus C.D.O.’s, they helped protect Goldman against losses that others would suffer.

As early as the summer of 2006, Goldman’s sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.

A Deal Gone Bad, for Some

The woeful performance of some C.D.O.’s issued by Goldman made them ideal for betting against. As of September 2007, for example, just five months after Goldman had sold a new Abacus C.D.O., the ratings on 84 percent of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers’ ability to repay the loans, according to research from UBS, the big Swiss bank. Of more than 500 C.D.O.’s analyzed by UBS, only two were worse than the Abacus deal.

Goldman created other mortgage-linked C.D.O.’s that performed poorly, too. One, in October 2006, was a $800 million C.D.O. known as Hudson Mezzanine. It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index; Hudson buyers would make money if the housing market stayed healthy — but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so it would profit if they failed, according to three of the former Goldman employees.

A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman’s incentives. “Here we are selling this, but we think the market is going the other way,” he said.

A hedge fund investor in Hudson, who spoke on the condition of anonymity, said that because Goldman was betting against the deal, he wondered whether the bank built Hudson with “bonds they really think are going to get into trouble.”

Indeed, Hudson investors suffered large losses. In March 2008, just 18 months after Goldman created that C.D.O., so many borrowers had defaulted that holders of the security paid out about $310 million to Goldman and others who had bet against it, according to correspondence sent to Hudson investors.

The Goldman salesman said that C.D.O. buyers were not misled because they were advised that Goldman was placing large bets against the securities. “We were very open with all the risks that we thought we sold. When you’re facing a tidal wave of people who want to invest, it’s hard to stop them,” he said. The salesman added that investors could have placed bets against Abacus and similar C.D.O.’s if they had wanted to.

A Goldman spokesman said the firm’s negative bets didn’t keep it from suffering losses on its mortgage assets, taking $1.7 billion in write-downs on them in 2008; but he would not say how much the bank had since earned on its short positions, which former Goldman workers say will be far more lucrative over time. For instance, Goldman profited to the tune of $1.5 billion from one series of mortgage-related trades by Mr. Egol with Wall Street rival Morgan Stanley, which had to book a steep loss, according to people at both firms.

Tetsuya Ishikawa, a salesman on several Abacus and Hudson deals, left Goldman and later published a novel, “How I Caused the Credit Crunch.” In it, he wrote that bankers deserted their clients who had bought mortgage bonds when that market collapsed: “We had moved on to hurting others in our quest for self-preservation.” Mr. Ishikawa, who now works for another financial firm in London, declined to comment on his work at Goldman.

Profits From a Collapse

Just as synthetic C.D.O.’s began growing rapidly, some Wall Street banks pushed for technical modifications governing how they worked in ways that made it possible for C.D.O.’s to expand even faster, and also tilted the playing field in favor of banks and hedge funds that bet against C.D.O.’s, according to investors.

In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. The traders then went to the International Swaps and Derivatives Association, the group that governs trading in derivatives like C.D.O.’s. The new system was presented as a fait accompli, and adopted.

Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked. Previously, investors took losses only in certain dire “credit events,” as when the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt.

But the new rules meant that C.D.O. holders would have to make payments to short sellers under less onerous outcomes, or “triggers,” like a ratings downgrade on a bond. This meant that anyone who bet against a C.D.O. could collect on the bet more easily.

“In the early deals you see none of these triggers,” said one investor who asked for anonymity to preserve relationships. “These things were built in to provide the dealers with a big payoff when something bad happened.”

Banks also set up ever more complex deals that favored those betting against C.D.O.’s. Morgan Stanley established a series of C.D.O.’s named after United States presidents (Buchanan and Jackson) with an unusual feature: short-sellers could lock in very cheap bets against mortgages, even beyond the life of the mortgage bonds. It was akin to allowing someone paying a low insurance premium for coverage on one automobile to pay the same on another one even if premiums over all had increased because of high accident rates.

At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.

Selling Bad Debt

Other Wall Street firms also created risky mortgage-related securities that they bet against.

At Deutsche Bank, the point man on betting against the mortgage market was Greg Lippmann, a trader. Mr. Lippmann made his pitch to select hedge fund clients, arguing they should short the mortgage market. He sometimes distributed a T-shirt that read “I’m Short Your House!!!” in black and red letters.

Deutsche, which declined to comment, at the same time was selling synthetic C.D.O.’s to its clients, and those deals created more short-selling opportunities for traders like Mr. Lippmann.

Among the most aggressive C.D.O. creators was Tricadia, a management company that was a unit of Mariner Investment Group. Until he became a senior adviser to the Treasury secretary early this year, Lewis Sachs was Mariner’s vice chairman. Mr. Sachs oversaw about 20 portfolios there, including Tricadia, and its documents also show that Mr. Sachs sat atop the firm’s C.D.O. management committee.

From 2003 to 2007, Tricadia issued 14 mortgage-linked C.D.O.’s, which it called TABS. Even when the market was starting to implode, Tricadia continued to create TABS deals in early 2007 to sell to investors. The deal documents referring to conflicts of interest stated that affiliates and clients of Tricadia might place bets against the types of securities in the TABS deal.

Even so, the sales material also boasted that the mortgages linked to C.D.O.’s had historically low default rates, citing a “recently completed” study by Standard & Poor’s ratings agency — though fine print indicated that the date of the study was September 2002, almost five years earlier.

At a financial symposium in New York in September 2006, Michael Barnes, the co-head of Tricadia, described how a hedge fund could put on a negative mortgage bet by shorting assets to C.D.O. investors, according to his presentation, which was reviewed by The New York Times.

Mr. Barnes declined to comment. James E. McKee, general counsel at Tricadia, said, “Tricadia has never shorted assets into the TABS deals, and Tricadia has always acted in the best interests of its clients and investors.”

Mr. Sachs, through a spokesman at the Treasury Department, declined to comment.

Like investors in some of Goldman’s Abacus deals, buyers of some TABS experienced heavy losses. By the end of 2007, UBS research showed that two TABS deals were the eighth- and ninth-worst performing C.D.O.’s. Both had been downgraded on at least 75 percent of their associated assets within a year of being issued.

Tricadia’s hedge fund did far better, earning roughly a 50 percent return in 2007 and similar profits in 2008, in part from the short bets.

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Pursuit v UBS: Investor Case Proves Homeowners’ Cases

Posted on November 30, 2009 by Neil Garfield

NOW AVAILABLE ON AMAZON KINDLE!!

Pursuit vs. UBS Drills Down to Real Benefits to Intermediaries While Real PARTIES — Investors and Homeowners — get the shaft UBS090909

This is a case of an investor suing the underwriter of the mortgage backed bonds purchased as “investment grade securities.” As we have pointed out on these pages for two years, the underwriter wears so many hats that it is impossible to track them without nailing them down in discovery and motions to compel. It is only when the real flow of documents and the real flow of money is analyzed that you can see the pattern of deception designed to screw the investors, screw the homeowners and run with the money and now, through illegal and improper foreclosures, they run with the property too. Here is an excerpt from the attached Opinion dated September, 2009.

“Based on the above-mentioned evidence, the court finds that the Plaintiffs’ have presented sufficient evidence to satisfy the probable cause standard with respect to their claim that UBS was in possession of superior knowledge that was not readily available to the Plaintiffs. This material nonpublic information related to rating agency downgrades that would significantly decrease, if not render worthless, the CDO Notes it was selling Pursuit. Further, UBS was aware the Pursuit was only seeking to invest in CDO Notes rated “investment grade,” and UBS knew that byinvesting in the subject CDO Notes, Pursuitwas acting on the basis of misleading information. Moreover, because UBS was in the position of “Super-senior Noteholder” in the structure of these CDOs, such ratings downgrades, while working to the detriment of buyers like the Plaintiffs, could work to the benefit of sellers like UBS in the super-senior position, because super-seniors have first dibs on whatever payments are made on a CDO. A UBS Securities LLC credit analyst explained it in an October 16, 2007 email sent to Morelli and others. Writing about the billions of dollars in Moody’s downgrades, downgrades that were now public knowledge,
the UBS analyst wrote, “These bonds [subject to downgrades] appear in countless CDOs.

The downgrades were more severe than what the market seemed to anticipate !!! And !!! The downgrades could constitute a triggering event that would be an Event of Default for various for various CDOs. . . If this occurs, then it may prove salutary for the Super-senior holders [like UBS] as more cash flow would be preserved for their protection.”

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New York Sues UBS — Fraud in Selling Mortgage Backed Securities

Posted on July 25, 2008 by Neil Garfield

Editor’s Note. The significance of this to those involved in foreclosure defense and offense is that the entire transaction is being laid out for us by the State investigations and lawsuits. The fraud was at both ends of the transaction — over-appraisal of the value, under appraisal of risk and outright deception and negligence in the sale of the securities that funded the loans and the same behavior as to the property values and mortgage instruments in the sale of loans to consumers.

And the “free market” enthusiasts that oppose a bailout for homeowners suddenly don’t like their own theory when the chips fall back on them. The SINGLE TRANSACTION approach advocated in this blog is the key to proving your case. Pay attention to both ends and all the logistical errors and ignorance of property law that took place in between the investor’s funding of the loan and the borrower signing the loan documents.

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July 25, 2008

New York Sues UBS for Securities Fraud

By LOUISE STORY

The attorney general of New York accused UBS of consumer and securities fraud on Thursday, saying the bank had misled investors when it sold them auction-rate securities.

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. But the $300 billion market for these instruments collapsed in February, trapping investors who had been told that they were safe and easy to cash in.

Even as a senior executive at UBS called the market “a complete loser,” the bank continued to pitch the securities as short-term, liquid investments, according to the civil complaint filed by Andrew M. Cuomo, attorney general of New York.

At the same time, seven executives at the bank sold their personal holdings of the securities, which totaled $21 million, to avoid losses, according to the complaint.

“Once they knew the auctions were failing, they removed their personal money and corporate money from the auctions and were still bringing consumers into the auctions,” Mr. Cuomo said. “Now people have their funds locked up in a way they can’t access them.”

UBS halted the auctions of these securities on Feb. 13, leaving more than 50,000 UBS customers holding about $37 billion in the investments, according to the complaint. These investors — city governments, companies, individual investors — remain unable to sell them in many cases.

UBS has offered to lend its customers up to 100 percent of the value of the securities until liquidity returns. Mr. Cuomo has asked the bank to return the full value of the securities to investors in cash.

The bank rebutted Mr. Cuomo’s accusations. “We will vigorously defend ourselves against this complaint,” UBS said. “It is frustrating that the New York attorney general has filed this complaint while we have been fully engaged in good-faith negotiations with his office to bring liquidity to our clients holding auction-rate securities.”

Mr. Cuomo’s office is the third state authority take UBS to task over the auction-rate market, after William F. Galvin, the secretary of the Commonwealth of Massachusetts, and the Texas State Securities Board.

Mr. Cuomo’s case could have greater impact because UBS’s bond desk is based in New York, giving Mr. Cuomo the right to bring a case on behalf of UBS customers everywhere.

The case centers on e-mail messages among UBS executives and the attorney general expects to bring several more cases in coming weeks related to the auction-rate market.

At UBS, senior executives were aware of the growing problem in the auction-rate market by December last year and, despite concerns from the bank’s risk officer, they covered up problems while continuing to sell the securities to investors, the New York complaint says.

In January, when UBS executives halted some of the auctions, the bank’s head of public finance banking wrote in an e-mail message that UBS officials should not tell bankers about those auctions because “it will be another indication (perhaps preliminarily) that we are killing this thing.”

The bank’s global head of municipal securities wrote some of the more colorful e-mail messages, saying in January that it would be “scary and delicate” to tell the bank’s financial advisers who sold the securities about the growing problem. In February, that executive described the situation in the market as “absolute torture.”

Lawyers specializing in white-collar crime said they expected to see many more cases filed in the coming months. Bank of America, Merrill Lynch and Wachovia have been named by other state regulators as targets in auction-rate investigations.

“When there is a financial crisis and the public is looking for scalps, the law enforcement officers will respond in kind,” said Bradley D. Simon, a lawyer with Simon & Partners in New York.

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