More on $8.5 Billion BofA Settlement Conflicts: 2/3 of Trustee’s RMBS Business is From BofA

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No wonder Bank of New York was so eager to roll the investors to whom it is nominally responsible and sign up for a settlement deal in which it effectively sold their interests out (and didn’t bother even going through the motions of advance notice, much the less consultation). Bank of America not only used the carrot of a very juicy indemnification, it had the stick of the amount of RMBS trustee business it has directed to Bank of New York and presumably could send elsewhere on future deals if it became displeased.

In a 2011 paper on mortgage servicing in the Yale Journal on Regulation, Adam Levitin and Tara Twomey present data that shows that over 3/5 of BoNY’s RMBS trustee business comes from BofA/Countrywide. From pages 60 and 61:

Additionally, there is often a very close relationship between the servicer and the trustee; many originators and servicers have a ―pet‖ or ―pocket‖ trustee that they use for most of their deals. For example, nearly two-thirds of Bank of New York Mellon‘s (―BNY Mellon‖) RMBS trusteeships are for Countrywide-Bank of America deals.228 This is hardly unique given the concentration in the trustee market, shown in Figures 13 and 14, with seven trustees making up around 90% of the market, and four trustees comprising around two-thirds of the market. This broader relationship has the potential to reduce monitoring of the servicer by the trustee. Because such a large portion of BNY Mellon‘s RMBS trustee business comes from one single depositor, BNY Mellon will inevitably have to be deferential to that depositor. And because the depositor frequently serves as the servicer, BNY Mellon as trustee will have a strong incentive to be deferential to Countrywide as servicer.

And a couple of pages later…

Corporate trustees can easily have oblique conflicts of interest like a business relationship dependency, such as the one between Countrywide and BNY Mellon. This oblique conflict further diminishes the trustee‘s already limited incentive to monitor the servicer, even within its limited duties.

So understand again how this worked: BofA and Countrywide, who Bank of New York is supposed to be monitoring, and directing to do certain things, like buy back bad loans on behalf of the investors, took a big bribe from BofA not to do so (see details in our earlier post). Sweet, no?

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    1. Susan

      Don’t know if someone commented on this earlier, and once again I cannot cite my source – I just surf and read and go on, but yesterday I found a long account of the liquidation of one or two of Bear Stearns’ RMBSs in 2007. The bottom fell out of the bucket, they couldn’t sell and churn and they jetted off to the Cayman Islands where they did a liquidation of the trust(s). Two jurisdictions in New York ruled the Cayman liquidations illegal and nothing was done about it. The following year Bear collapsed.

  1. steelhead23

    This seems symptomatic of a nation in decline. Pardon the off-topic reference, but entrusting one’s money to BoA, or BNY is the functional equivalent to seeking justice from one Clarence Thomas

  2. The lives of others

    I am not sure corruption ever rose to that scale in Greece, although the international commentariat would have you think that Greece is the ultimate corrupt state.
    Only obscure references to U.S. corruption, such as in this blog.
    The silence is deafening.

  3. Jean-Paul marat

    Five or six hundred [bankers] heads lopped off would have assured you repose and happiness; a false humanity has restrained your arm and suspended your blows; it will cost the lives of millions of your brothers.
    – Jean-Paul Marat

    1. bmeisen

      That was modernity, when the individual was a weighty argument and death was unmediated. Thanks to science modernity has come undone, the individual through immortality devolved, debt unto debt, bees in the garden, humming, paying to us their last respects, we open up, les fleurs du pall mall.

  4. Lyle

    Perhaps a part of a hint why Bank of New York Mellon was in the first wave of tarp. They are custodian and trustee for an aweful lot of the investment universe. I know at one time they provided the brokerage house for Vanguard (Pershing). It is descended from Alexander Hamiltons bank, as well as the Mellon money (Alcoa, Gulf Oil, Westinghouse etc, apparently the family was a group of venture capitalists in the later part of the 19th century).

  5. Richard


    At least Bank of New York sold out the investors because it has a very large conflict of interest to go along with a desperate need for an indemnity for not performing its duties as a trustee. Would have look much worse if they sold out only to cover their failure to perform.

    Why is it that the financial regulators never look at the conflicts of interest raging across Wall Street. Wouldn’t it make sense to break up the trustee business and divide it evenly over say 25 smaller regional banks?


    1. Cedric Regula

      I think having the IRS shred the REMIC tax laws is the way to go at this point. No more “trustees”. RMBS gone too. We could try and make them wear red shirts and green shirts to keep things straight (and blue shirts for the rating agencies), but they’d probably just cheat.

    2. Francois T

      “Why is it that the financial regulators never look at the conflicts of interest raging across Wall Street?”

      Elementary my dear Richard! Regulators did not consider regulating as part of their job. They viewed their job as “helping the industry”. Don’t you remember this GOP fuckhead who said Congress was there to “serve the banks”?

      There is much more here:

      Best 57 minutes I’ve spent to understand the concept of control fraud and its history in the US and the nefarious role of the regulators under Bush.

      The other best 57 minutes were on the same show, listening to Yves explaining the mortgage and credit market. :-D

  6. chrislahaie

    Is this ever going to stop? And will anyone ever be held accountable for ruining the economy? Please explain to me why we are now allowing corruption to go on with no repercussions? How can we recovery when the bankers are free to be criminals? Is it possible?

    1. Francois T

      As Frank Rich asserted very astutely, the most daunting aspect of Obama’s legacy will be the “stunning lack of accountability for greed and misdeeds”.

      The irony cannot be more deliciously bitter; a Constitutional Law professor who, after turning President, actively participated in the definitive consolidation of a two-tiered system of justice in the US of A.

      That is why I now refer to him as Obysmal.

    2. Patrick

      The reason we allow it is because we are under the delusion that getting the opportunity to vote every couple of years gives us control. As one cynic said, “If voting really worked they’d abolish it!”. The failed promise of Obama’s election is proof positive.

    1. Francois T

      What truly amazes me is that Obysmal seems to believe congressional democrats will just go along with cuts in Medicare, Medicaid and Social Security, in exchange for potential revenues in a 3-to-1 ratio, while military and national security state budgets completely off the table.

      How deluded must he be to believe any of his supporters will tolerate such a selling out.

      Personally, I’m done with this guy; he can lose his re-election for all I care.

      Bring me a real republican, pure breed of supply side voodoo economics and prayer in the schools, anti-science…c’wan man! The real deal one can oppose with all ferocity w/o mercy or compromise. That’ll be real good for all the Obamabots who just can’t understand what’s cooking here.

      1. skippy

        Ideology is a bitter mistress, for whence, she dose not reciprocate, a malaise occurs, this is the *Mental Mandelbrot Set*…that plagues humanity.

        Skippy…would we give it time…a solution could be had…yet…its full speed ahead.

      2. David

        Agreed, Obama certainly seems deluded, probably of the narcissistic variety. In his mind, he no doubt thinks he is the “great compromiser”, the man that can bring disparate people together. To me though, Obama is the “great sell-out”. A third-rate Tony Blair.

        1. skippy

          Ummm…is it historical, normative or other….that those seek]ing provisional power…within the auspices of sovereignty…could be referred too…the self seeking pivot man…in an oligarchic circle jerk.


      3. Jean-Paul marat

        Bachman/ Rand 2012 ’cause a swift thrust to the throat is faster than a death by a thousand cuts.

    2. Patrick

      Read Robert Brownings poem the Lost Leader…”never is it glad, confident morning again”.

  7. NYT


    Todays WSJ has this article
    Is there a problem with sticking the cash into the trusts as part of a settlement?” says Adam Levitin, an associate law professor at Georgetown Law. “I don’t know what the IRS would say, because it’s not really contemplated by the Internal Revenue code.”

    From my reading this is saying that part of the settlement is for IRS to ignore the laws about ringfencing of the trust assets and allow BofA to put cash into the trusts long after they are supposed to be closed off.

    Did I read that right?

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