Category Archives: Credit markets

Class Action Lawsuit Alleges JP Morgan Engaged in Systematic Document Fabrication to Move Mortgage Losses from Its Books into Mortgage Backed Securities

To our knowledge, the suit filed by Ernest Michael Bakenie against JP Morgan is the first to accuse a major bank of widespread, systematic residential mortgage documentation and fraud. I don’t have a copy of the filing and am relying on the summary in Courtroom News Service (hat tip Jesse via reader Scott) but it is a doozy. (The case is described as a class action, but has yet to obtain class certification by the court).

We’ve reported repeatedly of widespread evidence of grotesque procedural abuses as servicers and foreclosure mill lawyers try to cover up for the fact that in many cases, mortgage notes were not transferred properly to securitization trusts, and the rigid way these deals were structured makes it impossible to remedy those failures at this juncture. Absent creating a time machine, the only fix is to fabricate documents that make it appear than things were done correctly. We’ve seen (as in in person) obvious forgeries submitted to the court (signatures obviously Photoshop shrunk to fit) and servicer personnel caught perjuring themselves, yet judges are remarkably unwilling to issue a ruling that hinges on finding that the plaintiff filed phony documents.

If this case moves forward, that reticence may change.

So Why Has the IMF Asked for $500 Billion That it Probably Won’t Get?

An odd development today was that Christine Lagarde, the head of the IMF, put forward the idea of having members pony up $500 billion for rescue loans, since the agency said it foresees demand of $1 trillion over the next two years and it has only $387 billion uncommitted. It goes without saying that the most of the anticipated need is in Europe.

There are two puzzling aspects of this story

Greece Poised to Default

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Another melee won by the ECB overnight with the LTRO once again pushing sub 3 year sovereign auctions into a “happy place”.

#Occupy the SEC Submits Letter on Volcker Rule to House Financial Services Committee Hearing (#OWS)

For those who are fond of depicting Occupy Wall Street as a bunch of hippies with no point of view, counterevidence comes in the letter submitted by the Occupy the SEC subcommittee for a joint subcommittee hearing tomorrow, January 18, of the House Financial Services Committee on the Volcker Rule. The title of the hearing broadcasts that financial professionals are ganging up against the provision: “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation.” The supposed “business” representatives are firm defenders of the financial services uber alles orthodoxy, and there is a noteworthy absence of economists or independent commentators on the broader economic effects. The one non-regulator opponent to the effort to curb the Volcker Rule is Walter Turbeville of Americans for Financial Reform. However, they made the fatal mistake of accepting the banksters’ framing about financial markets liquidity and merely disputed the data submitted.

The letter is well documented and well argued. It goes directly after the financial services industry claim that implementation of a ban on proprietary trading will cause damage by hurting vaunted and mystical “liquidity.” An illustrative extract:

Satyajit Das: Europe’s The Road to Nowhere, Part II – Roadblocks Ahead

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Over the next few months, the Euro-Zone faces a number of challenges including: the implementation of the new arrangements, possible further downgrading of a number of nations, refinancing maturing debt and meeting required economic targets. There will also be complex political and social pressures.

Implementation of the new fiscal compact may not be a fait accompli.

S&P Downgrades Europe Rescue Fund

This site and many others deemed the European rescue fund, the European Financial Stability Fund, to be unworkable (among other things, the device of having troubled countries on the hook to finance their own rescues seemed absurd). But it’s one thing to have informed critics view this contraption with skepticism, quite another for a ratings agency to ding it formally.

US investors can still treat the EFSF as AAA based on Moody’s and Fitch AAA ratings. But who with an operating brain cell would buy bonds that are so clearly exposed to downgrade risk?

Wolf Richter: Greece – Disagreement Everywhere, Rift in the Troika

Austerity measures are taking their daily toll on Greece. Suicides and attempted suicides have jumped by 22.5%. Unemployment rose to 18.2%. Pharmacies are having difficulties obtaining medications. More cuts are coming. If there is no agreement with the bailout Troika, Greece will default in March. But now, even the Troika is in disarray.

Big Defection in Attorney General Mortgage Settlement: 12 States Having Parallel Talks

At least when Penelope was resisting her suitors, it was clear what her objectives were. She was holding out on her belief that her husband Odysseus would return. And the suitors come off like real boors, so maybe she had also decided the single life was a better option than marrying any of them.

By contrast, it seems as if the Obama administration has completely lost the plot in what was formerly called the 50 state attorney general negotiations, and that appears to have fed directly into the news today of meetings of a breakaway group interested in concrete results.

Bank of America Prepares Emergency Plans at Fed Behest, May Need to Amputate on Geographic Basis

As we’ve said repeatedly, despite bank executives braying about the need to be bigger to compete or to gain efficiencies, the evidence runs completely the other way. Every study on bank efficiency in the US has found that once banks hit a certain size level (the most commonly found one seems to be ~$5 billion in assets) banks exhibit a slightly positive cost curve, which means they are more, not less, costly to run. Any economies of scale are probably offset by diseconomies of scope.

So why do bank executives sell and act on a patently phony story? Aside from the fact that doing deals is much more fun than managing a business, the BIG reason is CEO pay is highly correlated with the size of the bank, measured in total assets.

So no one should cry at the prospect that Bank of America might have to shrink to if it continues to be in financial and litigation hot water.

Satyajit Das: Europe’s The Road to Nowhere, Part I – Fiscal Bondage

Yves here. As much as the image of Frau Merkel decked out as a domme is more than my tender sensibilities can take, the metaphor seems to apt for writers like Das to pass it by.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Financially futile, economically erroneous, politically puzzling and socially irresponsible, the December 2011 European summit was a failure. Only the attending leaders and their acolytes believe otherwise. German Chancellor Angela Merkel’s post-summit homilies about the “long run”, “running a marathon” and “more Europe” rang hollow.

Michael Olenick: 9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom

By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick

“Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors. This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.

Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely.

GAO Goes After Administration “TARP Made Money” Claim

I don’t know how many times we’ve gone after the “TARP made a profit” bunk, but that topic requires an annoying amount of vigilance (the latest shill was Austan Gooslbee a mere week ago).

NY Fed President Dudley Crosses Swords With GSEs and Board of Governors on Housing/Mortgage Mess

A speech by New York Fed president William Dudley is a bit of a surprise, in that it acknowledges the severity of the deepening mortgage crisis and sets forth some specific policy proposals. I still find these recommendations frustrating, in that they are insufficient given the severity of the problem and also fail to come to grips with widespread servicer abuses (not just servicer driven foreclosures, but also what amounts to theft from investors, via schemes such as double charging fees to borrowers and investors, inflating principal balances, reporting REO as sold months later than the transaction closed, and getting kickbacks on third party charges). But they are more serious than other ideas from senior financial officials. Specifically, the Dudley advocates principal relief via a program of “earned principal reduction” which would allow for put options for all severely underwater borrowers who stay current on their mortgages for three years. But as we will discuss, this proposal is less meaningful than it sounds.

Quelle Surprise! Banks Plan to Fob off Some of the Costs of Multi-State Mortgage Settlement on Investors

Never underestimate the ability of banks to find new and creative ways to steal.

Quelle Surprise! Fed Sees We Have a Big Mortgage Problem

It certainly is gratifying to see the Board of Governors of the Federal Reserve, via a paper released on Wednesday, “The U.S. Housing Market: Current Conditions and Policy Considerations,” (hat tip Calculated Risk) finally acknowledge that US has a mortgage/foreclosure mess that is not going to go away by virtue of QE or other efforts to goose financial asset prices. However, just as the Fed was late to see the global housing bubble (even the Economist was on to it in June 2005), so to is it behind the curve in its take on the housing problem. This paper at best constitutes a good start, when, pace Churchill, the Fed is at the end of the beginning when it really needs to be at the beginning of the end.

However, before we get to the housing/mortgage market issues, we wanted to focus on a political element of the paper which may be more important that its analytical content. The Fed is openly crossing swords with the FHFA.