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Delaware Attorney General Joins in Dropping Bombs on Bank of America Settlement and Bank of New York

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Last week, Delaware attorney general Beau Biden indicated he might join New York state attorney general Eric Schneiderman in objecting to the proposed $8.5 billion settlement of a sweeping range of areas of possible liability by securitization trustee the Bank of New York. Bank of New York is allegedly acting on behalf of investors. 22 very large institutions were involved in the process, but as we pointed out, some of them, as well as Bank of New York, have substantial conflicts of interest.

Biden did file his petition yesterday, as was reported in Bloomberg just after midnight. The article is skeletal, and thanks to alert reader Deontos, we have the entire filing here. The meat of it is short, but don’t mistake short for unimportant.

Delaware Petition to Intervene in the Matter of Bank of New York Mellon

The immediate basis for the objection sounds modest:

The Delaware Department of Justice objects to the proposed settlement on the basis that it does not have sufficient information to evaluate the reasonableness of the proposal.

But it builds up steam as it lists concerns, first, that many investors have been kept in the dark:

The Delaware Department of Justice… has significant concerns that the proposed settlement does not adequately remedy the harm suffered by the beneficiaries of the Covered Trusts, some of whom are undoubtedly Delaware investors. Many of these investors have not intervened in this litigation and, indeed, may not even be aware of it…With its intervention, the Delaware Department of Justice will ensure that the interests of absent Delaware investors are adequately represented.

Second, as we have said and has been echoed in other petitions, the Bank of New York has a massive conflict of interest:

The Delaware Department of Justice’s intervention is particularly important given the evidence suggesting that BNYM negotiated the settlement on behalf of the trust beneficiaries under a conflict of interest. The proposed settlement confers substantial direct benefits to BNYM, primarily by a provision, contained in a side letter to the proposed settlement agreement, in which BoA agrees to expressly guarantee the indemnification obligations of Countrywide to BNYM under the terms contained in the PSAs. This expanded indemnification provision also covers BNYM’s negotiation and implementation of the terms of the settlement. The potential conflicts of BNYM go directly to the heart of the issue in this special proceeding, which is “did BNYM act reasonably in negotiating this settlement?”

And it goes straight to an issue we flagged, that the trustee makes annual certification in SEC filings, and the bar for securities fraud is much lower than under contract law theories. Delaware’s securities laws follow SEC 10(b)5 language re disclosure (that it not merely be narrowly accurate, but that it be free of material omissions). Boldface ours:

The acts and practices ofBNYM alleged herein may have violated 6 Del. C. § 7303(2), in that BNYM may have made untrue statements of material fact and/or omitted to state material facts in order to make the statements made, in light of the circumstances under which they were made, not misleading. BNYM’s conduct as described above may have violated the Delaware Securities Act insofar as the Trust PSA requires the Trust annually to certify the following “servicing criteria”:

• “Collateral or security on mortgage loans is maintained as required by the transaction agreements or related mortgage loan documents.
• “Mortgage loan and related documents are safeguarded as required by the transaction agreements;” and
• “Any addition, removals or substitutions to the asset pool are made, reviewed and approved in accordance with any conditions or requirements in the transaction agreements.” [See generally, Trust PSA, [Ex W to NY Petition]].

The Delaware investors in the Trusts may have been misled by BNYM into believing that BNYM would review the loan files for the mortgages securing their investment, and that any deficiencies would be cured.

As we reported in September, lawyers had found evidence that Countrywide did not transfer the notes (the borrower IOUs) to the securitization trusts as stipulated in the pooling and servicing agreements. This was confirmed in the lawsuit Kemp v. Countrywide, in which a senior employee in Countrywide’s servicing operation said it was a matter of policy for Countrywide to keep the notes.

Additional support came from a small scale study by lawyer Abigail Field, published in Fortune, who looked at foreclosures in two New York counties. Her conclusions were damning not just from the standpoint of the validity of the securitizations, but also for Bank of New York’s conduct in Countrywide and other deals:

DeMartini….testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts…

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical — and 104 out of 104 suggests it is — the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.

And that means they were not transferred through and endorsed by intermediary parties as stipulated by the pooling and servicing agreement.

Because those agreements had strict cut off dates as to when those transfers had to be completed, and governing law for the overwhelming majority of the trusts (New York law) is unforgiving on this matter (New York trusts are not permitted to deviate from their written directives) the failure to perform as stipulated cannot be remedied. Securitization expert and Georgetown Law professor Adam Levitin has described securitization agreements as “immutable contracts”. Hence the widespread use of document fabrication to get around this mess.

Note that Biden is not going directly after Bank of New York. He is merely seeking to question and perhaps block the settlement with Bank of America. But the issue he raises is a nuclear weapon. Bank of New York was the preferred trustee for Countrywide. There is good reason to believe the Countrywide securitizations were a total fail as far as living up to the requirements of the PSA are concerned. Bank of New York nevertheless piously made multiple false certifications on which investors relied (if you doubt the evidence above, a Pacer scrape of foreclosures on Countrywide trusts will provide further support).

This liability would almost certainly wipe out Bank of New York, which has $34 billion in equity. But Bank of New York is too big to fail by virtue of playing a crucial role in settlement, transfers, and custody. But the real reason no one is likely to sue on this issue is that confirming that the transfers were not done correctly and that this impairs the value of residential mortgage securitizations on a widespread basis. It makes them, again per Levitin, at best “non mortgage backed securities” (as counterintuitive as it sounds, treating regular borrower payments as if the deal were done correctly may well be a viable legal position but the ability of the trust to foreclose would be hopelessly impaired).

And if that isn’t enough, Biden has more goodies in his petition:

The acts and practices of BNYM alleged herein also may have violated Delaware’s Deceptive Trade Practices Act, 6 Del. C. § 2432(12), in that BNYM’s conduct created “a likelihood of confusion or misunderstanding” in the investors in the Trusts, for the reasons cited above.

Finally, the Delaware AG notes that at least two of the 530 trusts involved in the settlement are Delaware trusts, hence the state has a “substantial” interest in making sure they are not used to violate the law. This may sound like a throwaway argument, but a securitization expert commented via e-mail:

WaMu and Chase, in particular, typically issued their private label MBS via agreements governed by Delaware law and Delaware trusts.

In addition, Chase and WaMu typically did not have a requirement that the issuer deliver the mortgage loan files to the trustee in their trust agreements. Instead, they allowed the mortgage loan files to remain with the seller. In their prospectuses for the deals, they disclose that this could create risks for investors in the event the seller became insolvent. The reason this could be a problem is that the loans could be clawed back to the estate of the seller, at the expense of the investors in the MBS. (It is possible that the status of the mortgage loans held by WaMu as seller to MBS trusts played a role in how the FDIC resolved WaMu.)

MBS trusts governed by NY law clearly require the mortgage loans to be transferred to the trustee. For NY Law MBS, it is a pretty straight forward argument that notes or assignments of mortgage which fail to follow the chain of title create a liability problem for both the seller and the trustee.

However, for the Delaware trust deals which do not have a mortgage file delivery requirement, it is much harder to win the argument on bad chain of title.

I’ll be very interested to see what Biden’s investigation into these issues has turned up and whether he makes similar arguments to AG Scheiderman about the trustee’s liability for improper mortgage loan delivery and chain of title issues. If Biden does make such an argument, it seems to me like he would be advancing the legal issues on this front in a significant way.

Notice that Biden has not made such an argument in this filing; it looks (unlike the New York petition, which it includes in its submission) to be minimalist. That may reflect the fact that Biden regards the grounds he has spelled out as more than sufficient. However, the petition’s “we don’t know enough to know if this deal is fair” may be an accurate description of how he intends to play this matter, as in he may add more issues or flesh out the ones already set forth as the process moves forward.

It is encouraging to see the old saw, “The wheels of justice grind slowly, but the grind exceedingly fine,” proves true now and again. The fact that the rule of law is not completely dead in the US is looking increasingly likely to provide a very costly lesson to some very large banks and their asleep at the wheel regulators.

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46 comments

  1. Cilly

    Dare we hope? Many reasons to be skeptical – including Beau’s lineage. But perhaps he sees an opportunity to make a name for himself.

    1. Yves Smith Post author

      The fact that Schneiderman has gone first reduces the risk for him. But I am surprised and gratified that he’s gone this far.

      1. hermanas

        None of them would have a clue if it weren’t for you.
        Thank-you Yves.
        Is this what’s moving the market today?

      2. required

        i’m sure it’s just my insatiable cynicism but is there any chance the DE AG (Biden isn’t it?) is related to the current US VP (again, Biden isn’t it?)

        that said, there’s not a snowball’s chance in he|| anything will come of this, guaran-effing-teed

  2. beowulf

    Provides Eric Schneiderman a tremendous amount of political cover.
    The Administration is constrained from attacking Schneiderman for going off the political reservation (after all, he did kind of blow up that banks-state AGs “”grand bargain”) when the son of the Vice President is doing the same.

  3. LeeAnne

    Thanks Yves: its great to see some light in this tunnel.

    “With its intervention, the Delaware Department of Justice will ensure that the interests of absent Delaware investors are adequately represented”

    If this is accomplished, would it mean the end of securitization of residential real estate?

    Would the end of ‘securitization’ restore property rights with rule of law on the state level for residential real estate transactions?

    Is securitization of private property the requirement for the end of sovereignty. Is securitization (the bundling of massive numbers of homes into billion dollar deals traded by the international banking cabal without bothersome pesky meddling home owners involvement) required to accomplish open rule by international banks as opposed to the stealth rule going on now; the BIS Central Bank of Central Banks fronted by the US FED?

  4. Skippy

    Yes…which will curry favor…too which extent…too sacrifice…so as not to be consumed…by the mindless….children…they husbandry birthed.

    Skippy..ownership has a responsibility, like creation, nanna’s in the attic, suffering from melancholy, a hundred years later, we find, its a case of hyper thyroid, selective breeding is a bitch…eh…peas in a pod.

  5. GCL

    Hopefully, Beau Biden is embarking on the obvious high-stakes path that Obama shied away from: facing down the robber barons and becoming the people’s hero in the process.

    1. ambrit

      GCL;
      If this works out, could we see Biden Jr. dipping his toes in National Politics? Then we could rest easy knowing that the heir apparant to one of our ‘political’ aristocratic clans is ready to take up the onerous burdens of ‘public service.’

    1. ambrit

      Mr Huber;
      I personally am starting to read Thomas Paine. Reminds me of that wonderful scene at the beginning of Melvilles’ “Billy Budd” where our hero, on being ‘impressed’ into the crew of the warship, turns back to view his former home and remarks; “Farewell to thee, o Rights of Man.”

    2. psychohistorian

      We need to return to rule of law but we need to go a bit further than that. The link I am going to provide is from Crooks & Liars and it is about the attitude of some other AG’s in our country that go beyond the “black and white” of rule of law.

      http://videocafe.crooksandliars.com/heather/nebraska-ag-bruning-compares-welfare-recip

      We unfortunately have some folks with fairly sick attitudes about the less fortunate among us pond scum and I am tired of their myopic hatred.

  6. aeolius

    I see the support of Beau somewhat differently. He is the ideal left hand doing other then the right hand. Seeing past Biden interactions, I doubt Beau would do this without Joe’s go-ahead and likewise Joe and Obama.
    Obama seems to have delegated financial matters to Timmie and sees his role of supporting his subordinate. Obviously
    Timmie’s “decision to resign” involved a major tiff which is now resolved
    However personally I do believe our PC correct POTUS does feel that the banks should be punished. And so this is a good way for him to get it does
    Jumping threads a little I its not that he is Narcissistic
    He is just not very bright or original. He is what he originally
    chose to be a butt-busting corporate lawyer.
    In general, people would rather be ruled by a malevolent intelligence then no intelligence at all

    1. psychohistorian

      We are early into this world shock doctrine event. There is quite a bit of clarity that needs to be squeezed out yet of the emerging situations around the world.

      The fat lady has not even cleared her throat on this and many of us are continuing to smoke that hopium stuff and are starting to laugh at the opprobrium of the global inherited rich.

    2. KnotRP

      > the banks should be punished

      the banks middle class & pension fun shareholders should be punished, now that the insiders have made off with their winnings

      1. steelhead23

        I sense that you lament the fact that good people would be hurt by successful litigation of this issue. I am no philosopher, but I believe this is a moral trap – that injustice should be preserved if seeking justice has a higher cost than living with injustice. My view is that even if serving justice were to bankrupt BAC, hurt thousands of little ol lady investors, wreak havoc in the markets, etc., serving justice is the right thing to do. BTW – I think this moral trap has been used to great effect by the banksters and I must admit, that were I sitting on a pile of BAC I might have a different perspective.

        1. nonclassical

          “justice” is somewhat beside the point as payback…more to the point in terms of future example of what will be tolerated…Pecora and all..

  7. Brett

    Yves — this is offtopic, but you need to update your Beat the Press link on the right-hand side of the website. It points to the old Prospect blog and not the new one at CEPR.

  8. Bub in PA

    I would much rather that the “wheels of justice grind slowly” while the perpetrators were in jail!

  9. Hamersley Partners

    Sounds like a job for Michael Hamersley of Hamersley Partners the well known whistle blowing tax shelter crusader who turned his own clients confidential information over to the U.S. Senate and misrepresented his very own clients activities for personal gain all the while obscuring his extensive involvement in selling and marketing abusive tax shelters. None of that matters of course, since Michael Hamersley is viewed as a tax shelter hero and may be coming to visit you soon to confiscate your income, of course the death and destruction Michael Hamersley has wrought on many with his misrepresentations may be a little off putting to some. Michael Hamersley of Hamersley Partners is the man for the job (unless of course you are one of his victims, then you may end up dead like Jane).

  10. Pat

    What if a Countrywide mortgage gets foreclosed by BofA and there’s a deficiency? Does securitization fail hinder BofA’s standing to collect the deficiency?

  11. Vikas

    I have a question. Under NY law if the notes were never actually put into the trust then who “owns” the mortgage. I’m probably using conflicting language here, so let me simplify. Who has the right to foreclose under that situation?

    V

  12. Susan the other

    Just saw Jamie Dimon interview on cnbc as the market is crashing. he didn’t seemed concerned but instead almost giddy about how much money JPM is loaning small business around the country and how a recovery is only a year or two down the road, etc. The thing that is strange is how can anyone foresee such growth and prosperity, let alone Mr. Dimon. But he was so optimistic, and sounded sincere, it made me wonder if the AGs had just reached an agreement with the TBTFs. Maybe he knows BAC has had it and JPM will be the only player left standing. The millstone around Jamie Dimon’s neck has been the mortgage disaster. Something tells me it isn’t there anymore.

    1. Doug Terpstra

      Yup, salesman Dimon is “out with the folks” today and “thrilled that Tim Geithner is staying on” [he's got my back]. To a question on confidence, Dimon exudes that “secret sauce” from his pores:

      http://classic.cnbc.com/id/44090455

      “This nation is still the greatest nation on the planet. It was the first democracy on the planet. We have the best military on the planet, and God bless our veterans all around the world . . . we have the best universities on the planet and the best businesses . . . the best rule of law . . . most innovation . . . hardest working ethic of all . . . the strength of the system is going to blow your socks off, when it comes out of this malaise we’re in . . .”

      “We shot ourselves in the foot; this debt-ceiling thing was kinda demoralizing to the American public . . . we gotta pull together, get together, and we will get through this . . . Hey I’m positive and very optimistic in the long run. . .”

      “I believe if Tom Freidman wrote a paper in the New York Times today . . . and so did [former Fed gov] Kevin Warsh . . . in the Wall Street Journal about how we could get this country going again . . . if we did those things this country would get going again, and it wouldn’t take four years.”

      About JPM outlook, a bit of levity: “we might cut back on a little of our advertising . . . [host: uh-oh!] . . . No I’m just kidding . . . just scaring CNBC.” (Nervous chuckles all around)

      “In California —two hundred new branches, 4,000 new employees. We’re not gonna stop opening new branches because the market’s down 500 points . . . we’re gonna add 500 bankers in California alone to service small businesses and middle markets. We’re not gonna stop that, even if there’s a recession . . .”

      Wy does Jamie Dimon remind me so much of Terry McAuliffe? Maybe they’re from the same used car lot down on Camelback: (Mal Credito? No Problema!)

      1. And They Deserved It

        Dimon is a tragic degenerate, even more unfortunate, he’s on the wrong side of the war of terror. You heard it straight from the horses mouth, count the bodies piled high in Iraq, Afghanistan and Libya. To hell with subtlety: “At JP Morgan, violence is an acceptable solution. Go troops! We won’t foreclose on you anytime soon.”

        1. Doug Terpstra

          Banksters are the ultimate merchants of death, key enablers and cohorts of the MIC, who fund and thrive on mass-slaughter in the wars of terror and the war of drugs. In fact, Taibbi’s “vampire squid” label for Goldman Sachs fits all “investment” banks. They literally profit from blood —and all are too dangerous to fail.

          I recently watched “The International” with Clive Owen, about the BCCI bank’s role in funding conflicts for profit, including a key Israeli-Iran connection. It’s a good thriller on deadly-serious global banksterism. This system is only vulnerable through internal collapse. That can’t be too far off.

  13. Save Bank of America

    Looks like the Treasury Department/Fannie is soothing Bank of ‘Murica. Slow elaborate strokes followed by increased pressure. Remember, if the Treasury Department needs to execute someone, I believe they have that authority:

    [Bank of America's back-door TARP]

    “Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.” – Abigail Field

    1. steelhead23

      Aargh! OK, I am not a lawyer, but this appears to be fraud. Fannie is under federal conservatorship. Who authorized this purchase? I had to be someone at FHFA or above (Treasury). Geithner? Damn this makes me mad. Is this what they raised the debt ceiling to finance. Yves, this needs to be explored – and deplored.

  14. Abigail Caplovitz Field

    Meanwhile, we just gave BofA a $500 million+ mini bailout: http://finance.fortune.cnn.com/2011/08/10/bank-of-americas-back-door-tarp/

    We had Fannie Mae buy some *really* lousy mortgage servicing rights for a price surely above their value, giving BofA the added bonus of limiting its ongoing servicer liability and removing the huge costs of processing foreclosures and mods for these loans. Also, I don’t know if the deal’s really legit; assuming some of these loans are securitized–how could they not be–is Fannie Mae really a subservicer such that the rights can be transferred to it? I can only assume the deal was vetted thoroughly enough that the answer’s yes, but things have been so sloppy in recent years I’m just not sure. I’d love to hear some takes on the deal.

    1. Doug Terpstra

      Yes, thanks Abigail for an excellent article on more criminal disgrace. You clearly underscore the PLUS after $500+ million. It’s taxpayer-assumed liability that’s the big score. Apparently all the too-big-to-give-a-damn banks have this back-door tarp flap loosely accessible for frequent injections.

      In “Wealth and Democracy”, Kevin Phillips wrote that the US Chamber of Commerce pursued a unoffical mission slogan: “Less Government in Business; More Business in Government.” Thanks to Obama, they have certainly achieved that mission.

    2. Cedric Regula

      I may be getting confused, but wasn’t F&F supposed to be giving back crappy mortgages to BofA?

      1. Because

        Yes, FF already had it essentially and will never give it back. Because BofA and Citi’s of the world aren’t going to last much longer. They will be nationalized once the collatoral triggers ala the S&L crisis(which was much much smaller).

        This is what should of happened in the fall of 08.

  15. Sauron

    The first democracy on the planet, Mr. Dimon. And to think, all this time I thought it was Greece.

  16. razzz

    No wonder the rating agencies are trying to apply pressure for the next round of QE, or banks will shrivel up and die without the next liquidity fix. Banksters could careless what happens to savings rate, interest rates or the local economy. Burn baby burn…banksters could care-less.

    States need to start pulling bank charters, hell, States should start their own banks.

  17. ANON

    Re: The Delaware Trust issue:

    If the notes weren’t assigned to the trustees, what exactly was settled into the trusts? That is, if all the trustee holds is a contractual right to receive payments from a pool of loans actually held by the settleor (or depositor, in PSA terms), then isn’t the transaction more of a CDO squared, where the trust only has quasi-certificate rights to all tranches of the waterfall? A trustee is usually supposed to be the legal owner of an underlying asset, but the post makes it sound as if that isn’t what happened in Delaware.

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