Category Archives: Credit markets

Banks Win Again: Weak Mortgage Settlement Proposal Undermined by Phony Consent Decrees

hink I’ve ever seen anything so craven heretofore.

As readers may recall, we weren’t terribly impressed with the so-called mortgage settlement talks. It started out as a 50 state action in the wake of the robosigning scandal, and was problematic from the outset. Some state AGs who were philosophically opposed to the entire exercise joined at the last minute, presumably to undermine it. Not that they needed to expend much effort in that direction, since plenty of Quislings have signed up for the job.

Amar Bhidé on the Role of Human Judgment

Rob Johnson of INET interviews Amar Bhide, an old McKinsey colleague and author of the book A Call for Judgment. From the introduction to this video:

The Professor of International Business at the Fletcher School of Law and Diplomacy criticizes the tendency in many quarters to rely on mathematical models to inform investment decisions. It’s that overreliance on models that tend to generalize and simplify that helped drive the world into the global financial crash of 2008 and the ensuing Great Recession. Bhidé makes a strong case that human actors need to immerse in the details of individual cases and weigh many different factors to come up with tailored decisions that more closely apply to the complexities of the real world. Bhide also argues that regulators need to take a similarly human-centered approach.

More Journalists Dignifying “TARP Was a Success” Propaganda

I hope NC readers don’t mind my belaboring the issue of the TARP’s phony success, but every time I see the Administration’s propaganda parroted I feel compelled to weigh in.

The trigger was an effort at a balanced assessment by Annie Lowrey at Slate, to which I have some objections, followed by some shameless and misguided cheerleading by Andrew Sullivan:

But two years ago, I sure didn’t expect the government to make a profit from TARP. And I sure didn’t expect the auto bailouts to become such huge successes.

What’s surprising to me is how pallid is the Obama administration’s spin has been on this. I never hear them bragging about how they managed to pull us out of the economic nose-dive we were facing. I know why: the recession isn’t over, even if TARP was a success, no one wants to hear about it, etc. But it’s one of the strongest and least valued part of Obama’s record – along with the cost control innovations in health insurance reform.

At some point, you have to stand up and defend your record. No doubt Obama is biding his time on this. But count me as surprised as I am impressed.

Cease and Desist Orders as Regulatory Theater in Mortgage Settlement Negotiations

I must confess to being puzzled last week by an American Banker article that claimed that Federal banking regulators were looking to send out cease and desist letters to serviers as a way to light a fire under banks who were dragging their feet at the now somewhat infamous so called settlement negotiations among 50 state attorneys general, various Federal regulators, the Department of Justice, and the major banks/servicers.

Now on the surface, this sounds sensible. The banks are not cooperating, so pull out a big gun and if needed, use it on them. But American Banker provided a link to the form of the cease and desist order and it looks remarkably weak. Its requirements are far less demanding than those set forth in the famed 27 page settlement draft that was presented by the AGs and the Federal authorities to the banks.

It’s important to stress that a threat of action that is weaker than what you are demanding in a settlement makes no sense in a negotiating context. It’s like offering to settle a lawsuit for $500,000 when the case only asks for $250,000 in damages. No one would accept the settlement, they’d either fight in court or accept a default judgment.

Judges in Florida Start Inflicting Pain on Foreclosure Mills and Trusts

Several readers pointed to an article in the Palm Beach Post, “Foreclosure crisis: Fed-up judges crack down disorder in the courts,” about how judges are having to resort to increasingly forceful measures to get foreclosure mill lawyers to comply with court orders. I had refrained from discussing it here because one aspect of the news story struck me as potential misreporting, so I wanted to verify it (and Lisa Epstein pointed to the transcript which enabled me to do so).

There have already been a number of reports of a marked shift in attitudes among judges in the wake of the robosigning scandal. In many courtrooms, the presumption that the bank is right has vanished. For instance, Mark Stopa reported late in March:

60 Minutes on Mortgage Securitization Document Lapses and Foreclosure Fraud

For readers of Naked Capitalism and any of the foreclosure-related blogs, this 60 Minutes report covers familiar ground. However, the fact that the story is coming now shows that even with bank efforts to pretend that there is nothing to see here, in fact the problems are widespread and difficult to solve. This segment, as highlighted in the text advanced release last Friday, includes a discussion of DocX and the practice of using “surrogate signers“, which are temps signing….in the name of robosigners! Having robosigners relying on corporate authorizations wasn’t low cost enough, apparently. Rather than take the time and effort to have more robosigners authorized (which is already not kosher, as we know, since the robosigners were attesting to have personal knowledge when they clearly didn’t), they went beyond providing bogus affidavits to having workers engage in forgery.

It also showed the work of NACA, but didn’t provide the most crisp description of the NACA process and how it addresses servicer bottlenecks (see here for more details). But it does feature Lynn Szymoniak and the procedures of the now-shuttered DocX, the infamous document fabricating subsidiary of LPS.

So consider this an interesting view of the state of play.

Magnetar Strikes Again: JP Morgan Negotiating Settlement with SEC on Toxic CDO

As longstanding readers of this blog presumably know, we broke the story of Magnetar, a Chicago-based hedge fund. Magnetar was arguably the biggest player in driving toxic subprime demand through its program of creating hybrid CDOs (largely consisting of credit default swaps, but also including cash bonds by design).

Magnetar constructed a strategy that was a trader’s wet dream, enabling it to show a thin profit even as it amassed ever larger short bets (the cost of maintaining the position was a vexing problem for all the other shorts, from John Paulson on down) and profit impressively when the market finally imploded. Both market participant estimates and repeated, conservative analyses indicate that Magnetar’s CDO program drove the demand for between 35% and 60% of toxic subprime bond demand. And this trade was lauded and copied by proprietary trading desks in 2006.

As a source who worked in the structured credit area of a firm that did Magnetar trades explained in ECONNED:

Alabama Judge Accepts New York Trust Theory, Dismisses Foreclosure Action for Failure to Comply With Pooling and Servicing Agreement (Updated)

Paul Jackson has been forced to eat a bit of crow. A judge in Alabama in a case called Horace v. LaSalle overturned a foreclosure action based on the failure of the trust to comply with the terms of the pooling & servicing agreement. As you see, the judge ruled that the borrower can assert rights under the Pooling and Servicing agreement as a third party beneficiary and that he was “surprised to the point of astonishment” that the trust had not complied with the terms of its PSA.

The ruling in favor of the borrower endorses an argument we have made since last year on this blog, that the pooling and servicing agreement stipulated a specific set of transfers be undertaken to convey the borrower note (the IOU) to the securitization trust within a specified time frame. New York trust law was chosen to govern the trusts precisely because it is unforgiving; any act not specifically stipulated by the governing documents is deemed to be a “void act” and has no legal force. So if a the parties to a securitization failed to convey a note to the trust within the stipulated timetable, retroactive fixes don’t work. In this case, the note had been endorsed by the originator, Encore, but not by the later parties in the securitization chain as required in the pooling and servicing agreement. See the order below:

Banksters’ Mortgage Counteroffer Makes a Further Mockery of Fraudclosure Settlement Negotiations

It should really be no surprise that the banksters have the temerity to take a weak mortgage fraud settlement proposal, advanced by the 50 state attorneys general and various Federal agencies, and water it down to drivel. Since March 2009, when the Obama administration cast its lot with them, major financial firms have become increasingly intransigent. And this has proven to be a winning strategy, since Obama’s pattern over his entire political career has been to offer proposals that don’t live up to their billing, then eagerly trade away what little substance was there in the interest of having bragging rights for yet another “achievement”. The degree of exaggeration involved is roughly equivalent to him claiming he’d bedded every woman he had ever met for coffee.

David Apgar: Is That a Horse’s Head Under the Sheets or Are You Just Happy to Fleece Me?

By David Apgar, the Director of ApgarPartners LLC, a new business that applies assumption-based metrics to the performance evaluation problems of development organizations, individual corporate executives, and emerging-markets investors, and author of Risk Intelligence (Harvard Business School Press 2006) and Relevance: Hitting Your Goals by Knowing What Matters (Jossey-Bass 2008). He blogs at WhatMatters. The […]

Quelle Surprise! Fed Lent Over $110 Billion Against Junk Collateral During Crisis

Former central banker Willem Buiter once remarked that the Federal Reserve’s “unusual and exigent circumstances” clause, which enables it to lend to “any individual, partnership or corporation” if it can’t get the dough from other banks, allows the Fed to lend against a dead dog if it so chooses.

It looks like the US central bank did precisely that.

Matt Stoller: Comptroller of the Currency Orders National Banks to Cover Up Foreclosure Scandal

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is:
http://www.twitter.com/matthewstoller. Cross posted from New Deal 2.0

Acting OCC head John Walsh is standing in the way of information that could help desperate homeowners.

I was rereading some testimony by Mark Kaufman, the Maryland Commissioner of Financial Regulation, on mortgage servicer behavior. He testified this month before the House Oversight Committee on something quite scandalous.

Why Liberals Are Lame (Part 2)

It may seem churlish to pick on a specific, well intentioned liberal organization to illustrate a rampant pathology within what passes for the left in the US. Nevertheless, examples serve as important case studies and hopefully will help both the object of presumably unwanted attention and its broader constituency understand that many of their campaigns actually undermine the causes they purport to represent.

Let’s look at an example, an e-mail from the Progressive Change Campaign Committee to constituents of Alabama’s Spencer Bachus, the Chairman of the House Financial Services Committee and self-proclaimed Best Friend of Banks (“My view is that Washington and the regulators are there to serve the banks”):

Josh Rosner: Dodd Frank is a Farce on Too Big to Fail

Note: Josh Rosner, managing director of Graham Fisher & Co., submitted this written testimony for a March 30 panel for the House Oversight Committee that was cancelled. His testimony has been entered into the Congressional Record and will be available on the House Oversight Committee website in the near future. The text appears below..

Has Dodd-Frank Ended Too Big to Fail?

Almost three years have passed since the United States financial system shook, began to seize up, and threatened to bring the global economy crashing down. The seismic event followed a long period of neglect in bank supervision led by lobbyist-influenced legislators, “a chicken in every pot” administrations, and neutered bank examiners.

While the current cultural mythology suggests the underlying causes of the crisis were unobservable and unforeseeable, the reality is quite different. Structural changes in the mortgage finance system and the risks they posed were visible as early as 2001. Even as late as 2007 warnings of the misapplications of ratings in securitized assets such as collateralized debt obligations and the risks these errors posed to investors, to markets, and to the greater economy were either unseen or ignored by regulators who believed financial innovation meant that risk was “less concentrated in the banking system” and “made the economy less vulnerable to shocks that start in the financial system.” Borrowers, these regulators argued, had “a greater variety of credit sources and (had become) less vulnerable to the disruption of any one credit channel.”

In the wake of the crisis, and before either the Congressional Oversight Panel or the Financial Crisis Inquiry Commission delivered their final reports on the causes of the crisis, Congress passed the Dodd-Frank Act. The act claimed to end the era of “too-big-to-fail” institutions and sought to address the fundamental structural weaknesses and conflicts within the financial system. To falsely declare an end to Too Big to Fail without actually accomplishing that end is more damaging to the credibility of U.S. markets than a failure to act at all. The historic understanding that our markets were the most free to fair competition, most well regulated and transparent, has been the underlying basis of our ability to attract foreign capital. It is this view that, in turn, had supported our markets as the deepest, broadest, and most liquid.

In fact, Dodd-Frank reinforces the market perception that a small and elite group of large firms are different from the rest.

Hooray! Jamie Dimon Says New Capital Rules Will Kill Zombie Banks!

It really is a sign of how complete a victory that the banks have won over the rest of us that Jamie Dimon has the nerve to complain about banking regulations. Even worse, he is egging on a effort by Republican bank-owned Congresscritters to roll weak bank capital rules back.

His position is pure, simple, unadulterated bank propaganda: what is good for banks is good for America, when the converse is true. Simon Johnson warned in his May 2009 article “The Quiet Coup” that the financial crisis had turned American into a banana republic with a few more zeros attached, a country in the hands of oligarchs, in this instance, the financiers. And we playing out the same script he saw again and again in emerging economies: