Archive for May 5th, 2011
JPMorgan Chase & Co. (JPM) was subpoenaed by the U.S. Securities and Exchange Commission over failed mortgages, a person familiar with the investigation said, as the agency probes banks sued for allegedly boosting their profits by failing to share refunds from sellers of faulty debt.
Credit Suisse Group AG (CSGN) also received a subpoena from the SEC last week, bond insurer MBIA Insurance Corp. said in a filing today in a lawsuit against three of that Zurich-based bank’s units. The agency asked New York-based JPMorgan for information after a court in January unsealed allegations made about Bear Stearns Cos.’ practices in another suit, said the person, who declined to be identified because the matter isn’t public.
U.S. investigators have been scrutinizing companies involved in the mortgage business after the worst collapse in home prices since the Great Depression. Bond insurers MBIA and Ambac Assurance Corp. have said Credit Suisse and Bear Stearns, which JPMorgan bought in 2008, demanded refunds from originators that sold the banks the loans that they packaged into bonds, and then failed to use those settlement amounts to fulfill their own contractual promises on the debt.
“We’re really starting to finally get into evidence that suggests blatant fraud,” said Isaac Gradman, a San Francisco- based litigation consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin.
Jennifer R. Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment. Steven Vames, a Credit Suisse spokesman in New York, declined to comment on MBIA’s statement about an SEC investigation. John Nester, an SEC spokesman, declined to comment.
Law Firm Subpoenaed
Kevin Brown, a spokesman for MBIA, said that Patterson Belknap Webb & Tyler LLP as counsel for the bond insurer was also subpoenaed by the SEC, seeking documents related to the Credit Suisse matter.
U.S. agencies have been seeking evidence of wrongdoing across the mortgage industry from before the market collapsed in 2007.
The Justice Department sued Deutsche Bank AG this week for more than $1 billion, saying the firm lied about its process for checking the quality of loans granted federal insurance.
Credit Suisse knowingly packaged bad loans into bonds, MBIA said in a court filing. The insurer included an exhibit in its suit composed of e-mails related to a “stated income” loan sought by a stripper in Charlotte, North Carolina, whose reported monthly pay of $12,000 was questioned by some bank employees.
MBIA Insurance Corp., the bond insurance unit of Armonk, New York-based MBIA Inc. (MBI), disclosed Credit Suisse’s SEC subpoena and the exhibit in a filing in New York State Supreme Court. The document, dated April 29, was filed yesterday.
“Credit Suisse is now the subject of an investigation by the Securities and Exchange Commission, which issued a subpoena this week seeking the same types of documents as MBIA seeks,” the insurer said.
MBIA alleges in its lawsuit that Credit Suisse failed to repurchase soured mortgages out of a 2007 securitization as it was contractually obligated to do. Earlier, the bank made demands similar to MBIA’s to recover funds from the originators of the loans — money it didn’t share with the securities’ buyers, MBIA said.
The allegations echo claims made in January in a suit brought by Ambac Assurance against the defunct investment bank Bear Stearns and JPMorgan. Ambac first sued in 2008 in federal court in Manhattan. The insurer filed a separate lawsuit over the issues in New York State Supreme court in February.
“Ambac is a large, sophisticated insurance company that is trying to blame others for risks it knowingly took and was paid for taking,” Zuccarelli said earlier this year. “We do not believe Ambac’s claims are meritorious and intend to defend Bear vigorously.”
Credit Suisse, in a filing in MBIA’s case on April 29, said contracts for its mortgage-bond transaction didn’t call for the bank to repurchase loans simply because they became delinquent within a few months or involved borrower fraud. That differed from contracts between mortgage originators and Credit Suisse, the bank said.
Credit Suisse cited e-mails between its employees and MBIA officials before the deal closed, which the bank argued had stated explicitly that those so-called representations and warranties wouldn’t be made. Representations and warranties are contractual promises that loans meet certain characteristics or will perform in certain ways.
The loan originators’ commitments to Credit Suisse “are different from — and materially broader than — Credit Suisse’s representations and warranties” tied to the securitization transaction, the bank said in court filings.
“MBIA is entitled to what its contracts with CS provide, and not more,” Vames, the Credit Suisse spokesman, said today in an e-mail.
MBIA said in today’s court filing that Credit Suisse in some cases cited the same issues as it later did to reach settlements with lenders, and that any early loan defaults should have been seen as “red flags” for further reviews of its obligations.
Read the rest at Bloomberg
I was wondering how long it would take for this sort of complaint to show up.
This is from Michael T. Pines, who has earned himself a history of doing rather, well, extraordinary things to fight what he has alleged are illegal foreclosures against his clients. That extraordinary level of activity recently earned him a suspension of his law license.
Not content to take that lying down, he has filed a rather interesting complaint, suing cities and their counsel.
The bottom line is that he contends that the vast majority of the foreclosures that are taking place are unlawful. They’re unlawful because the purported lender has no standing to foreclose as that lender suffered no injury.
The essence of the claim lies in the allegation that after all the credit enhancements, default swaps and other items are netted, the lender suffered no loss:
After default, even though the mortgage loan is technically paid in full if a proper accounting were done, and legally the Securitizers have no right to collect, the Securitizers, usually through “servicers”, pretend the loan is still owed by the borrowers.
And how did this happen? Well, beyond the credit enhancements and “protection”, we have this allegation:
31. The Sponsor is supposed to arrange for title to the mortgage loans to be transferred to an entity known as the Depositor, which then was supposed to transfer title to the loans to the trust, including the promissory notes.
32. As mentioned, the assignment of the notes and mortgages never properly occurred and this is the subject of countless lawsuits by the borrowers such as Property Owners.
33. The obligor of the certificates in a securitization is supposed to be the trust that purchases the loans in the collateral pool. However, this cannot be true because title to the mortgage loans was never perfected. The trust is a mere conduit that has no power to do anything, and has no real trustee.
34. The Pooling and Service Agreements provide certain time deadlines by which transfers were to be made, and these were not met.
35. When a trust has no assets it cannot satisfy the liabilities of an issuer of securities (the certificates). According to the Investor Cases, the law therefore treats the Depositor as the issuer of an asset-backed certificate.
In other words, the trusts are empty. And if the alleged “trust” never took in assets in the first place it cannot suffer damage from non-payment since it never actually owned the paper. Again, there’s no harm and thus no standing.
Who knows how far this goes. But if it gets legs……
Will “False Claims” Lawsuit Against AIG, Goldman, Deutsche, BofA, SocGen on Fed Funding Lead to New Round of Embarrassing Revelations?
Litigation may be slowly doing the job missed or only partially completed by various governmental investigations into the financial crisis. The Valukas report on the Lehman bankruptcy was revealing, and numerous foreclosure defense attorneys have opened cans of worms that the powers that be would rather pretend simply don’t exist.
The New York Times reports tonight that a case filed last year was unsealed last week. It plumbs a continuing sore point with the public, namely the generous terms of the AIG bailout, both to the company (which defied the government and insisted on remaining largely intact when the plan had been to sell its various units to repay the government funding) and to its credit default swap counterparties. The litigation has the potential to be revealing, particularly if it goes into discovery (various depositions are likely to become public in pre-trial jousting, um, motions). The Times gives an overview:
The lawsuit, filed by a pair of veteran political activists from the La Jolla area of San Diego, asserts that A.I.G. and two large banks engaged in a variety of fraudulent and speculative transactions, running up losses well into the billions of dollars. Then the three institutions persuaded the Federal Reserve Bank of New York to bail them out by giving A.I.G. two rescue loans, which were used to unwind hundreds of failed trades.
The loans were improper, the lawsuit says, because the Fed made them without getting a pledge of high-quality collateral from A.I.G., as required by law.
“To cover losses of those engaged in fraudulent financial transactions is an authority not yet given to the Fed board,” said the plaintiffs, Derek and Nancy Casady, in their complaint, filed in Federal District Court for the Southern District of California.
The lawsuit names A.I.G., Goldman Sachs and Deutsche Bank as defendants, but not the Fed.
The lawsuit itself names other defendants, including Merrill and its successor Bank of America, SocGen, and “Does 1 through 100.”
White shoe types will likely look down their noses at the filing. It makes rather eccentric use of graphics (for instance, including company logos) and includes charts, some of which are very helpful (tables with tabulations and timelines), while others are visual representations of arguments made in the text and hence would be deemed by style snobs to be redundant. It also is somewhat sensationalistic, even heated at points in tone (which does make for more lively reading) and does not unpack its arguments as much as appears to be typical in court filings.
Nevertheless, despite the rough style, there’s some intriguing reading, and the case does a clever job of juxtaposing e-mails and Congressional testimony by AIG executives with various disclosures of the AIG bailout process and the terms of the loan facilities.
To my non-expert eye, the case appears to hinge on the argument that begins on p. 43, that the Fed loans were in violation of the Fed’s authority under the widely-cited “unusual and exigent circumstances” clause. I had taken the reading of former central banker, now Citigroup economist Willem Buiter on this, that it gave the Fed the authority to lend against a dead dog if it chose to.
That appears to be inaccurate, and I wonder if the focus upon this section will embolden the Audit the Fed crowd to have another go at the central bank.
Specifically, the “unusual and exigent” language includes other restrictions, which I read as all being operative:
1. The central bank can lend against “notes, bills, and other drafts of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal reserve bank
2. The “notes, bills, and other drafts of exchange” must be discounted
3. The Federal reserve bank making the loan must obtain evidence that the non-bank party seeking the loan can’t get credit from other banks
4. “….five or more members of the Board of Governors must affirmatively vote to authorize the discount prior to the extension of credit.”
The case focuses on allegedly fraudulent representations made by AIG and the various major dealers in the course of obtaining the financing. But the part I find interesting is the Fed’s evident non-compliance with the requirements of this section, particularly the fact that the central bank lent 100% against the face value of the AIG CDOs, between taking out the CDS and then lending the bailout vehicle Maiden Lane III the funds to buy the CDOs. Interestingly, the SIGTARP investigation missed this issue. If this was at all considered, the argument may have been that the AIG equity in MLIII was tantamount to a discount, but the lawsuit argues that notion is bogus. Since AIG was broke, any money for the AIG equity came from the outside (in fairness, it’s a bit more complex, thanks to reserves set aside over the collateral dispute).
The suit argues that the initial loan was made under false premises, since the loan was secured by all assets of AIG, when the assets were already pledged (all the regulated subs have prior claims on them, both to creditors and policy-holders). The understanding, as depicted in various less-than-official accounts, like the Andrew Ross Sorkin Too Big Too Fail, is that the loans were secured by the equity of the subs. Fine in theory, but in practice, that isn’t what the loan document says, and as important (although not argued in the case) is the amount of the loan was based on what AIG needed to stay afloat, not on any effort to find a market value of the assets pledged and discount that.
In addition, the notion that it was acceptable to lend against stock appears to be based on the discount schedule that the Fed posts and revises from time to time as to the types of collateral that are accepted for lending and the various discount rates established for them. But note that schedule is for depositary institutions. The Fed acted as if it could simply lend against the same assets held by non-depositaries, but the language of the germane section does not appear to support that idea.
The various disclosures of how the Fed lent against pretty much anything the banks could round up, including defaulted securities, is troubling. Defenders of the central bank argue no harm was done since the securities have recovered from crisis lows (well save the ones that went to zero). The problem is that the logic is circular. In many cases, the value of the securities now depends on the fact that the Fed is willing to lend at super low interest rates. So the “market” values are fictive and dependent upon Fed intervention, which is coming at the expense of savers. The interdependence between the Fed’s rescue facilities and its continued interventions is given a free pass, but those of us who are not at the top of the food chain are continuing to pay the cost.
Such has been the siren song for the last few months on commodities in general.
Despite my repeated warnings that markets aren’t that simple, and that it has all been leverage – that is, cheap debt – that has powered them higher, nobody wanted to hear it. “Gold is money.” “Silver is money.”
So are you going to tell me, my friends, that there has been an inflation and then deflation of roughly 20% – on the upward side in the last month or so, and on the downside in the last couple of days?
Gold is getting hit pretty good too:
Then, of course, there’s oil.
How about “Dr. Copper”? What’s he saying about the economy?
“Cheap money” – that is, unlimited leverage – will drive markets higher. For a while. It creates speculative manias. It creates the feeling of wealth. It creates a “high”, much like an addictive drug.
But it is not wealth. It is not prosperity. And it is not sustainable.
The real economy, on the other hand, continues to suck. Gas prices have reached the point of demand destruction. It’s $3.96 for regular here today, although I’m sure with oil off $9 it’ll come in over the next few days.
GDP was soft as well. And the jobless claims numbers today? Horrible. Then there’s all the “great news” over in Europe – Ireland, Greece, German production number misses and Trichet claiming “We have this guys. Really, we have this.” Uh huh.
Are markets going higher? Based on what? Expectations on a forward basis and general bullishness are ridiculously high. Profit projections are for $100 on the SPX for the year. Really? With all the input cost pressures already in the cake and unable to come back out for six to nine months?
This was exactly what I was warning about last August when this pattern began to be evident – that those who chased and continued to pile in would eventually get their heads cut off.
Sure, if you just bought with cash back then you’re doing fine. But far too many people did not. They kept adding off their paper “profits” – margin debt is at extremely high levels, as people piled in more and more as prices rose.
Well, now there’s a problem and it’s especially bad if you’re in a levered instrument such as the futures markets.
You buy a contract that controls $50,000 of the underlying with a margin of $5,000. The contract’s value goes up 10%. You now have a 100% profit against your margin. You take that and buy another contract.
What happens if the price goes back to the original level? You’re in trouble, that’s what.
Not only is your original $5,000 margin “profit” gone but so is another $5,000, even though price just round-tripped up and then down! That is, you’re now broke as your entire original stake has evaporated into the ether, even though prices are right back to where they were.
If you think this isn’t common, you’re very wrong. It is. Traders blow up in this fashion all the time. It’s idiotic, but it happens on virtually every prolonged move where leverage becomes the gist of the action. It happened to real estate speculators during the real estate bubble, it happened to tech speculators during the 1990s and now it’s happening again.
Might this “stop” at some point before the market really unwinds? It might. But there’s no guarantee that it will. In fact, there’s plenty of reason to believe it won’t – that margin calls will in fact beget more margin calls.
In 2008, these sorts of margin-unwind trades are what fostered the instability that ultimately blew up in everyone’s face. The systemic imbalances in the system are worse now than they were in early 2008, and the policy response available to attempt to stop a collapse are nearly all spent.
Go ahead folks, buy the dip. It’s been a good trade for the last year or so, especially from August onward.
Just be aware that you’re buying into a margin liquidation, and if the “Cheap Money” disappears, you’re going to be dealing with a lot of sleepless nights.
Financial raiders and the loss of the American middle class. 5 charts showing the slow erosion of the middle class in America. 12 states have underemployment rates above 17 percent, insiders selling out, Great Recession in perspective, and a race to the financial bottom.
The current economy is built on a flashy digital casino interface and most of the middle class in the United States is at risk of moving backwards in the coming years. Millions have already fallen a few rungs lower on the economic ladder. The stock market no longer benefits the buy and hold investor but those who have the ability to quickly jump in and exploit short term trends. The working and middle class have no chance against high frequency traders and sophisticated hedge funds that actually profit on the financial destruction of the middle class. Just think of the billion dollar bets placed by a hedge fund manager that millions of Americans would lose their home. In no shape or form does this even benefit the real economy. Many enjoy this fantasy world of derivatives but the unfortunate consequences of these bad bets are shouldered by the working public. Need we discuss the cost of the bailouts to banks and the $2.7 trillion Federal Reserve balance sheet? If we look closer at key data points in the economy, we see that the foundation is still largely made of financial sand and many are sinking fast even as a recovery is touted.
Insiders selling out
Who would know better about a company’s health than actual insiders? If we look at actual purchases and sales we start seeing a clear pattern. Insiders are moving out of their own positions. Now I realize that many of these people are simply cashing in but if you truly believed in your company and the health of the economy, wouldn’t you want to buy more stock in your organization? The above figures seem highly unbalanced with many more planning on selling their stock instead of buying. So much for buy and hold even from those at the very top.
Great Recession losses
It usually takes financial reflection to realize how bad things are in this Great Recession. 4 of the worst 20 stock market days for the Dow Jones Industrial Average occurred in 2008. Now think about how significant this is. 20 percent of the 20 worst days in the last 120 years occurred in one year in 2008. This is how crazy and manic the market got during the Great Recession. Volatility is never a sign of a healthy market. We are seeing volatility shift from the stock market to other sectors of our economy. Most of this has to do with the massive amount of liquidity the Federal Reserve has pumped into the too big to fail banks. Without any reform, the casino is back to full capacity and money is seeking the places with the fastest potential spot for returns even if it doesn’t pertain to the real underlying economy.
Keep in mind these deep down days occurred during a time where investor transparency was supposedly high (i.e., 10-K filings, up to the second financial information, etc). Of course in a supposedly perfect and efficient market, the actual stock value should reflect the true worth of a company. Clearly people are irrational and act in fear, panic, or other human emotions that cloud judgment. It doesn’t help that the game is rigged in favor for the too big to fail banks while the public is fleeced.
Housing starts have fallen precipitously from the peak in 2006. They remain at multi-decade lows. Part of this involves the enormous amount of inventory on the market and another large pipeline of distressed properties that will eventually end up on the market. A good part of our economy revolves around building and selling homes. Yet that process has hit a road block because consumer demand is for cheap priced homes and this part of the market is being satisfied via the large number of foreclosures. Sadly many foreclosures are happening because working and middle class families are unable to cover their mortgage payment because of the transforming employment market.
I’ve put together an analysis showing a weak housing market well into 2020 based on demographics and current inventory trends. There is little reason to think this trend will suddenly reverse any time soon. When it does turn around, it will be a slow process out of the bottom.
Continuing on the weak employment trend, just look at the above chart and the U-6 rate which reflects the underemployment rate. 3 states including the state with the largest population have a U-6 rate above 20 percent. A total of 12 states have a U-6 rate of 17 percent or higher. This is simply too high and little by little the middle class erodes into the ocean. We have another 45,000,000 Americans receiving food stamps ,which is stunning given that we are currently in a supposed recovery.
I’m sure many Americans are wondering what is actually meant by recovery. Is a recovery simply looking at GDP growing because big corporations and big banks are putting the average American in financial vices and squeezing out every ounce of productivity while not sharing the profits? The too big to fail bailouts are symptomatic of the problems in our current welfare for the rich.
The weaker U.S. Dollar
All the bailouts orchestrated by the Federal Reserve come at a very hefty cost. The fact that the U.S. dollar has fallen so strongly is reflected in higher food costs and also higher energy costs. Anyone that has traveled recently realizes how much the U.S. dollar has changed outside of our country. The Federal Reserve artificially keeps rates low but also bails out banks and grows its own balance sheet to $2.7 trillion and we are surprised that the above chart pattern occurs? This is on purpose.
We then hear the argument that we “need” to compete globally but nowhere in the world do banking CEOs make so much money for such bad performance. Plus, are we really looking forward to China like wages in the U.S.? This is the implication of what is being peddled in the media.
Ultimately we have to rethink what we want from our economy and government. If we want to go back to the days of the Gilded Age then we better gear up for the evaporation of the middle class. I think many Americans realize that there is a price to pay for fully unregulated banks running wild and buying out politicians via lobbyists. That cost is typically their future financial well being. The reason this is even allowed is that a large number of Americans believe they are only temporarily embarrassed millionaires and will someday be multi-millionaires (even though the average per capita income is $25,000 per year).
In the week ending April 30, the advance figure for seasonally adjusted initial claims was 474,000, an increase of 43,000 from the previous week’s revised figure of 431,000. The 4-week moving average was 431,250, an increase of 22,250 from the previous week’s revised average of 409,000.
Oh, and the previous week was adjusted…. once again, up by 2,000. Unbroken we are, aren’t we?
The futures dropped instantly on that release, down about 6 handles. The dollar took a nice leg up.
The amusing part of the release was the explanation – the claim that a “new” program in Oregon was responsible. Yeah, ok. And that explains the +400k number the previous weeks too, right?
This number will not show up in the employment report tomorrow, but it certainly ought to be on your mind. We’re now three weeks solid into the “4″ handle area, and we didn’t miss a “5″ handle by much.
To those who claimed that employment is turning around: Would you care to revisit that thesis and the efficacy of the programs and policies of our government and Federal Reserve that you have cheered as “saving” the American economy?