Category Archives: Credit markets

Quelle Surprise! Goldman Profited From AIG Bailout Via Abacus Trades (You Read It Here First)

Shahien Narisipour at Huffington Post revealed that the FCIC report, due to be released officially tomorrow, shows that contrary to its pious assertions to the contrary, Goldman received funds for its own account from the AIG bailout, to the tune of $2.9 billion.

Why is this significant? Because Goldman maintained that the monies it received from the rescue were for customer trades, not for its own account.

And while this may seem to be news, it isn’t, except for putting a firm dollar value on what Goldman received for its own account. We posted on Goldman’s AIG exposures both as principal and agent on February 7, 2010, and specifically flagged that the Abacus trades that Goldman insured with AIG were principal positions, not client trades. We caught some flack for it by the time from various commentators who seemed more persuaded by Goldman’s PR that the extensive work done by Tom Adams, which we presented in a series of posts in early 2010 (see here, here and here for some examples).

From the February 2010 post:

US Bankruptcy Trustee Takes Interest in “Ta Dah” Documents Mysteriously Appearing in Foreclosures (aka Probable Fabrications)

One of the sorry reminders of the decline of the rule of law in the United States is the frequency with which incidents of what look like document forgeries take place in foreclosure cases. The fact that a now-shuttered subsidiary of Lender Processing Services, a vendor to the servicing industry, had a price list for creating mortgage-related documents out of whole cloth attests to the long-standing demand for this sort of product.

The reason for this activity is simple. As we’ve stressed in various posts, in so-called private label securitizations (the non-Fannie/Freddie type), a great deal of evidence indicates that the originators and packagers of these deals did not bother complying with the contracts they created to govern these transactions on a widespread, perhaps pervasive basis sometime after 2003. And their shortcomings only come to light in foreclosures, and then (possibly) if the foreclosure is contested. Given how low foreclosure rates were historically, this was a risk the securitization industry seemed willing to take, and it is now reaping the fruit of this short-sighted bet.

The big problem for servicers and trustees (the parties that are responsible for the trust that holds the assets of the securitization) is that the pooling and servicing agreement which governs the securitization required that the note (the borrower’s IOU) be transferred though a specific set of parties by a specified time not all that long after the deal closed. Increasingly savvy anti-foreclosure lawyers recognize that the party attempting to foreclose may not have the legal standing to do so.

A new development is that the US Bankruptcy Trustee, which is part of the Department of Justice, has started poking around the nether world of slipshod and possible made-up documents, and is asking banks to explain what they are up to. These inquiries may be paving the ground for broader-based action.

FCIC Insiders Say Report Gives Wall Street a Free Pass, Simply Sought to Validate Conventional Wisdom About Crisis

From the very outset, the Financial Crisis Inquiry Commission was set up to fail. Its leadership, particularly its chairman, Phil Angelides, was seen as insufficiently experienced in sophisticated finance. The timetable was unrealistic for a thorough investigation of a crisis this complex, let alone one international in scope. Its budget and staffing were too small. The investigations were further hampered by the requirement that subpoenas have bi-partisan approval along with Its decision to hold hearings with high profile individuals, including top Wall Street executives, before much in the way of lower-level investigation had been completed. The usual way to get meaningful disclosure from a top executive is to confront him with hard-to-defend material or actions; interrogations under bright lights, while a fun bit of theater, generally yield little in the absence of adequate prep.

So with expectations for the FCIC low, recent reports that the panel urged various prosecutors to launch criminal probes were a hopeful sign that the commission might nevertheless come out with some important findings. But correspondence from insiders in the last few days suggests otherwise. One, for instance, wrote, “I’m still in the process of getting the stink out of my clothes.”

These ideologically-neutral sources close to the investigation depict the commissioners as having pre-conceived narratives and of fitting various tidbits unearthed during the investigation into these frameworks, with the majority focusing more on the problems caused by deregulation and the failure of the authorities to use even the powers they had, while the minority assigns blame to government meddling, particularly housing-friendly policies.

These insiders see both sides as wrong, and want to encourage investigative reporters to challenge both the majority and dissenting accounts. They contend that both versions help perpetuate the myth that Wall Street was as much a victim of the crisis as anyone else.

One of these sources sent this document in an effort to question the notion that any of the reports coming out of the FCIC were the result of a fact-based investigative process…

Virginia Legislature Proves Who Really Rules: Pro Consumer Mortgage Bills Sent to Siberia

What is it going to take to end rule by banksters? If Virginia is any sign, voters may need to adopt a policy of “Leave No Incumbent Standing” until legislators get the message. The Virginia House effectively sidetracked several pro-consumer mortgage bills, including one that would have given borrowers more time to mount defenses in […]

Iowa Attorney General Tom Miller, Head of 50 State Investigation, Retreats From “Tough With Banks” Stance

We were early to warn readers that Iowa Attorney General Tom Miller, who is heading the 50 state probe into mortgage abuses, was unlikely to take as tough a stand with banks as his early sabre-rattling suggested.

Now other close observers of the 50 state AG probe, like Marcy Wheeler of FireDogLake, have pointed out that expectations for this group were probably too high, given that some of the AGs had been opposed to the effort before, and they’d hobble the effort from the inside. But even though true, that observation still gives Miller more of an out than he deserves.

The fact is that Miller had decided, before any investigation was undertaken, that his group was not going to take any action that might allow investors to recover for losses. Why? Some of the parties in a position to recover would not be Americans. This came by e-mail before the December meeting at which Miller promised to “put people in jail” as well as obtain deep principal mods and compensation for defrauded homeowners:

The homeowners off to meet Tom Miller is a setup for a photo-op to imply buy-in.

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.