Category Archives: Credit markets

Ambac Accues JP Morgan of Fraud in Ongoing Mortgage Suit

One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, “fraud” is pretty difficult to prove. Needless to say, that puts commentators in a bit of a bind, because they can be depicted as being hysterical if they use the “f” words, since behavior that is often fraud by any common sense standard may be hard or impossible to prove in court.

The hurdle in litigation and prosecution is proving intent. Basically, the party who is being accused has to not only have done something bad, he has to have been demonstrably aware that he was up to no good. Thus po-faced claims of “I had no idea this was improper, my accountants/lawyers knew about it and didn’t say anything” or “everyone in the industry was doing it, so I had not reason to think this was irregular” is a “get out of jail free” card. Similarly, even if lower level employees knew that their company was up to stuff that stank, if the decision-makers can plausibly claim ignorance, again they can probably get away with it.

So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn’t know he was pulling a fast one. And even more fun, it involves JP Morgan, which has somehow managed to create the impression that it was better than all the other TARP banks, when on the mortgage front, there is plenty evidence to suggest that all the major banks have been up to their eyeballs in bad practices.

The case involves the bond insurer Ambac and the mortgage company EMC, which was the Bear Stearns conduit for buying mortgages to securitize and now thus part of JP Morgan.

State Banks, or, If You Can’t Regulate TBTF Banks, Why Not Compete Instead?

Once in a while, you’ll see stories pop up about state governments looking into setting up a state bank, Washington being the latest sighting, along the lines of the only state bank in the US, the Bank of North Dakota. And there’s good reason. The Bank of North Dakota has an enviable track record, having remained profitable during the credit crisis. Moreover, in the ten years prior, the bank returned roughly half its profits, or roughly a third of a billion dollars, to the state government. That is a substantial amount in a state with only 600,000 people. The bank was also able to pay a special dividend to the state the last time it was on the verge of having a budget deficit, during the dot-bomb era, thus keeping state finances in the black.

But the good financial performance is simply an important side benefit. The bank’s real raison d’etre is to assist the local economy. And it has done so for a very long time. It was established in 1919 as part of a multi-pronged effort by farmers to wield more power against entrenched interests in the East.

And the most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks.

Bill Black: Why our Fundamental Approach to Banking Regulation is Inherently Unsound

Our current approach to banking regulation exposes us to recurrent, intensifying financial crises. The good news is that because we reached an all time low in Basel II, Basel III almost has to be an improvement. The bad news is that Basel III has not reexamined the fundamental assumptions underlying the Basel process. As a result, Basel III will be a variant on the common ineffective theme of banking regulation designed by economists and the industry.

The Basel process is built upon three flawed assumptions.

1. Capital requirements are the ideal form of banking regulation.
2. Capital requirements can be set without establishing sound accounting.
3. Accounting control fraud is not a serious concern.

Capital requirements are the ideal form of banking regulation under conventional economic wisdom. The attraction of capital requirements to neoclassical economists is elegance. Their theory is that while private market discipline ensures that normal corporations are inherently safe, private market discipline poses an inherent dilemma for banks.

Financial Crisis Inquiry Commission Makes Criminal Prosecution Referrals

Given that the Financial Crisis Inquiry Commission has found what it sees as ground for criminal prosecution, apparently extending to several yet to be named Wall Street executives, what are we to make of the exodus of its Republican members? That they prefer rule by banksters to rule of law?

I must confess I had little hope for the FCIC having any impact. The unduly short time allotted to it, its composition (not enough representation of individuals at the commissioner level with meaningful expertise) and its restrictions on issuing subpoenas (which effectively required sign off from members of both parties) seemed intended to hamstring it. The fact that they’ve gotten this far, and may make more waves with the issuance of their report, which is due out later this week, is an unexpected positive development.

Shahien Narsiripour of the Huffington Post broke this story but juicy details appear thin at this juncture:

John Hempton: What to do with Fannie and Freddie

By John Hempton, a Sydney-based investor, recovering financial services analyst, and former Australian government official who writes at Bronte Capital

There are a bunch of ideologues out there with solutions to the Fannie and Freddie situation. They argue that government intervention has to end and then propose a system with a permanent role for government. It is not just nonsensical – it is usually in the interest of some large financial institution. All they want is Frannie out of their part of the business. They like government subsidies in the rest of their business.

Anyway I have the free market solution to the Fannie and Freddie situation – and – I hate to say it – it is dead obvious.

MERS Exposed II: General Counsel Tells Whoppers in Testimony Before Virginia House

t has become so common for members of the securitization industry to play fast and loose with the truth that nothing should surprise me any more. Nevertheless, I am taken aback by a rough transcript of the remarks by William Hultman, the general counsel of MERS, before members of the Virginia House of Representatives last week. The overwhelming majority of statements he made about matters that can be verified are either untrue or at best disingenuous.

Here is the transcript.

MERS Exposed I: Process Expert Catalogues Fundamental Flaws

Proposed legislation in Virginia, House Bill 1506, which if passed would eliminate the role of the electronic registry system MERS in that state by requiring every mortgage transfer to be recorded in the local courthouse, is having the salutary effect of exposing more information about this generally less than forthcoming company.

Various interested parties offered testimony about the bill. One particularly interesting presentation came from a process and systems expert, Daniel Pennell, who was operating in a private capacity as a concerned citizen. His presentation raises numerous red flags about MERS.

Lender Processing Services Has Yet Another Bad Day in Court

In October, Lender Processing Servicer was targeted in two lawsuits, one filed in Federal bankruptcy court, both alleging illegal sharing of legal fees. The Federal suit sought class action status and was joined shortly thereafter by the Chapter 13 bankruptcy trustee for Northern Mississippi on behalf of herself and all other US Chapter 13 bankruptcy trustees as a class.

Lender Processing Services dismissed the suit as a “fishing expedition“. Funny, it appears the judge does not agree. I hope to get a transcript of the hearing on Friday, since he authorized the case against both firms moving into discovery and from what I understand, not on a very narrow basis as both defendants had sought.

If successful, this litigation would do tremendous damage to LPS.

Mass Supreme Court to Consider Whether Buyers Out of Faulty Foreclosures Actually Own Property

Oh boy, if you think the Massachusetts Supreme Judicial Court decision on Ibanez, which raised serious questions about the validity of transfers in mortgage securitizations, turned heads in the banking industry, you ain’t seen nothin’ yet. The SJC is considering what has the potential to be another widely-watched case, Bevilacqua v. Rodriguez. Note this case […]

Matt Stoller: The Real China Problem Runs Through JPM and Goldman

By Matt Stoller, the former Senior Policy Advisor for Rep. Alan Grayson. His Twitter feed is @matthewstoller

The Federal Open Market Committee releases its transcripts on a five year time lag. Last week, we learned what they were saying in 2005. Dylan Ratigan blogged an interesting catch: Dallas Fed President Richard Fisher expressed his frustration about Chinese imports. Not, of course, that there were too many imports, but that our ports weren’t big enough to allow all the outsourcing American CEOs wanted.

Fisher is just the latest Fed official to applaud this trend. Here’s the backstory. In the 1970s, there was a lot of inflation. The oligarchs of the time didn’t like this, because it made their portfolios worth less money. So they decided they would clamp down on inflation by no longer allowing wage increases. To get the goods they needed without a high wage work force, they would ship in everything they needed from East Asia and Mexico. The strategy worked. Inflation collapsed. Wages stopped going up. There were no more strikes. Unemployment jumped….But basically this was a way of ensuring that banks and creditors could make a lot of money that would instead go to workers.

Bank Board Member Proposes Legislation in Virginia to Change UCC to Help Banks Escape Foreclosure Woes

Earlier this week, we discussed how several measures proposed in Virginia would have the effect of redressing the power imbalance between banks and borrowers in the foreclosure process. One would give borrowers more time to mount defensed (Virginia has one of the fastest track processes in the US); another would require judicial approval for a foreclosure to become final. But the farthest-reaching proposal would force banks to maintain accurate property records in local government offices, which would end the use of MERS in that state.

Not surprisingly, the industry is not about to let this go down without a fight.

More Evidence of Undercapitalization/Insolvency of Major Banks

Even as we and other commentators have noted the underlying weakness of major bank balance sheets, which have been propped up by asset-price-flattering super low interest rates and regulatory forbearance, we still witness the unseemly spectacle of major banks keen to leverage up again. The current ruse is raising dividends to shareholders, a move the Fed seems likely to approve. Anat Admati reminded us in the Financial Times on Wednesday that we are about to repeat the mistakes of the crisis:

To Bailout or Not to Bailout: Mortgage Mess Endgames Emerging

In the last week, several ideas for fixing the housing market have surfaced. One is the Third Way proposal, which appears to be an Administration trial balloon. Predictably, it is yet anther bailout, with plenty of smoke and mirrors to disguise that fact.

A second proposal, from Sheila Bair yesterday, is to establish a “foreclosure claims commission“. This scheme sounds more promising that the Third Way proposal, but is very likely to wind up in bailout territory.

Third is a not-widely-covered plan by Senator Jeff Merkley.

The Merkley proposal is pro consumer and pro investor; the other two are pro bank. Sadly, it isn’t hard to see which is likely to prevail in the absence of public pressure.

Banks Halting Foreclosures in Parts of Florida

This is starting to get interesting. Having achieved the creation of special courts to whittle down a backlog of foreclosures, called the “rocket docket” due to the propensity of many of its judges to operate on an accelerated timetable that too often led to a refusal to hear borrower objections and evidence, servicers are now withdrawing foreclosure cases in Southwest Florida en masse.

It is not yet clear whether these cases are being abandoned or whether the banks will refile once they find a way to argue their action is valid. However, reading between the lines, one has to question whether they will succeed.

The Goldman Uncertainty Principle of Securities Regulation

I wish I had bandwidth to cover the Goldman-Facebook egg-on-its-face fiasco long form, but since other able writers are all over this story, I suspect NC readers will not find coverage wanting.

However, I could not let this remark pass without comment. From the Wall Street Journal: