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Archive for May, 2011

This is an adaptation from “Reckless Endangerment”, an exploration of the origins of the recent financial crisis, by Gretchen Morgenson and Joshua Rosner. The book will be published Tuesday by Times Books. This excerpt examines Wall Street’s role in the crisis and the relationship between Goldman Sachs, a leading investment bank, and Fremont, a freewheeling mortgage lender. Goldman declined to respond to detailed interview requests for this book.

Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street. If mortgage originators like NovaStar or Countrywide Financial were the equivalent of drug pushers hanging around a schoolyard and the ratings agencies were the narcotics cops looking the other way, brokerage firms providing capital to the anything-goes lenders were the overseers of the cartel.

Just as drug lords know that their products pose hazards to their customers, the Wall Street firms packaging and selling mortgage pools to investors knew well before their customers did that the loans inside the securities had begun to go bad.

It was a colossal breakdown in the duty Wall Street owed to its investing customers.

Years after the meltdown, investors began to understand how badly they’d been burned by Bear Stearns, Merrill Lynch, Lehman Brothers, Deutsche Bank, Greenwich Capital, Morgan Stanley, Goldman Sachs, and other smaller firms. Lawsuits against these firms alleging a dereliction of duty started cropping up in 2010 as investors began to realize that Wall Street’s secret loan assessments had identified severe problems in mortgages well before they stopped selling them.

Unlike many other firms, Goldman Sachs went negative on the mortgage market in the fall of 2006, well before others in its industry. Using its own money, the firm began amassing major bets against the same dubious loans it was peddling to investors at that time. Goldman, therefore, profited immensely from the losses its clients absorbed, losses its own practices helped to create.

It is unclear whether Goldman put on its hugely profitable and negative mortgage trades because of proprietary information turned up in its due-diligence reports. If that was indeed what happened, its failure to tell clients of the problems in the loans it was selling is even more disturbing.

Wall Street had financed questionable mortgages before, of course. But it was during the mania’s climactic period of 2005 and 2006 that these firms’ activities as the primary enablers to freewheeling lenders really went viral. No longer were the firms simply supplying capital to lenders trying to meet housing demand across America. Now Wall Street was supplying money to companies making increasingly poisonous loans to people with no ability to repay them. And the firms knew precisely what they were doing.

The relationship forged by Wall Street’s most prestigious firm, Goldman Sachs, with one of the nation’s most wanton mortgage originators — Fremont Investment & Loan — is a case in point. Fremont, a company with a regulatory rap sheet and a history of aggressive lending, received $1 billion in financing from Goldman in 2005, fully one-third of the total it received from all of its Wall Street enablers.

Goldman had begun financing Fremont’s workers’ compensation insurance unit in 2003 with a credit line of $500 million, but as the mortgage spree ramped up, it doubled that commitment. Goldman did so in spite of a serious run-in Fremont’s insurance unit had had with regulators just five years earlier.

With one of its units in operation since 1937, Fremont was no upstart lender like New Century or many of the other mortgage companies cropping up all over Southern California. Based in Santa Monica, Fremont boasted $8 billion in assets and declared its 100th consecutive quarterly cash dividend in November 2001.

The company was something of a family business, overseen by founder and patriarch Lee McIntyre, who had launched the company in 1963 with $800,000 in capital. Lee brought his two sons, David and James, into the business in the 1960s. David ran Fremont’s insurance operations while James ran the banking unit.

In 1969, James took up the task of decorating the company’s headquarters. He commissioned the world- renowned photographer/naturalist Ansel Adams to print 121 of his silver gelatin photographs of American parks and monuments to hang on Fremont’s walls. Some were massive, the size of murals, and Adams worked closely with McIntyre on the installation over five years. It was the largest private collection — much bigger than that of any museum — of Adams photographs.

The photographs sent a message to Fremont’s visitors that this was not just any financial concern — this was a classy enterprise that paid close attention to detail. When Fremont failed almost 40 years later, the artwork would become enmeshed in a fierce battle over the company’s assets.

Wall Street firms helped Fremont sell its loans and they were happy to further the company’s efforts to become one of the heavyweights of the subprime world. By 2000, Fremont was a giant in that world, originating $2.2 billion in mortgages. But this was only the beginning; in 2006, when the home-loan frenzy was peaking, Fremont would originate $28 billion in mortgages.

Although California insurance regulators accused Fremont executives of a scheme that boosted their pay but contributed directly to the collapse of its workers’ comp insurance unit’s collapse, few on Wall Street appeared to care about such problems.

* * * * *

Even as Fremont’s executives were sparring with the California insurance regulator, the company was rushing to get in front of the highly lucrative parade involving subprime mortgage securitization.

In 2001, mortgage lenders like Fremont understood that the low-interest-rate environment was driving investors to securities that yielded more than Treasury bonds and other relatively conservative fixed-income instruments. The Federal Reserve Board’s decision to slash interest rates to propel the economy was hurting investors who lived on the income generated by their holdings. Mortgages, with their relatively higher yields, provided a handy answer to this problem. Many investors still believed that home loans were relatively conservative instruments. Ratings agencies, blessing the majority of these securities with triple-A ratings, only confirmed this rosy view.

Teaming up with lenders, major brokerage firms like Bear Stearns, Lehman Brothers, Morgan Stanley, and Goldman Sachs pressed them for loans to feed the mortgage securities machine. It didn’t hurt that the fees generated by these securities made up for stagnant businesses — such as investment banking and stock trading — that were generating only paltry revenues on Wall Street.

With yield-hungry investors on the prowl for profits, and Wall Street eager to please, the subprime mortgage market started to rouse. The billions of dollars being dangled before cash-strapped lenders were mighty alluring; they knew that tapping those funds could juice their volumes and their profits.

In a world of tough sells, this wasn’t one. The race to the bottom had begun.

With the Fed on a rate-cutting rampage, demand for adjustable-rate mortgages with relatively low initial interest costs had become incendiary. One of a raft of “affordability” products that Countrywide and other lenders were peddling to counter the effects of the housing bubble, adjustable-rate mortgages with their low rates allowed borrowers who’d previously been shut out of homeownership to join the party.

It is not surprising then that 2003 was the year to remember in mortgage originations. A record 13.6 million mortgages worth $3.7 trillion were written that year; Wall Street’s issuance of mortgage-backed securities also peaked, reaching $463 billion in 2003. The top 25 lenders underwrote most of these loans. While these companies had accounted for only 28 percent of new mortgages written in 1990, by 2003, the top 25 were responsible for generating 77 percent of the $3.7 trillion in loans.

The bad news — for Wall Street, anyway — was that the blistering pace simply could not continue. Mortgage originations had been propelled by the Fed’s rate cuts, but with prevailing rates at 1 percent, there was little room for further declines. This was meaningful because borrowers who had reached for more home than they could afford would no longer be able to lower their costs by refinancing when rates fell again.

As 2004 dawned, therefore, it had become more and more evident that the mortgage lending machine was sputtering. By midyear, Citigroup, Bear Stearns, and Morgan Stanley had all reported serious declines in their mortgage-backed securities deals. Lehman’s volumes had fallen 35 percent from the previous year while Goldman Sachs’s had plummeted by more than 70 percent. But instead of serving as a warning to the banks, this hiccup in loan origination only made them redouble their efforts in the subprime arena.

It was a moment of truth for Wall Street, an industry not known for veracity. The firms that had made so much money on the American dream of homeownership were faced with a decision. Recognizing that the easy money days were over, the firms knew that continuing down the path of big mortgage profits was going to require a more concerted effort, greater creativity. Wall Street, always at the ready for such duty, concocted new types of loans to be offered to borrowers as well as new entities that would buy them.

But keeping the mortgage machine humming would also require that investment banks ignore numerous signs of wrongdoing along the way. This meant putting their own interests ahead of their clients’ at every turn.

While nobody mistook Wall Street banks for charity organizations, the degree to which these firms embraced and facilitated corrupt mortgage lending was stunning. Their greed and self-interest took the mortgage mania to heights (or depths, depending on your view) it could not possibly have reached without Wall Street’s involvement. And in so doing, Wall Street helped propel world financial markets to the brink of collapse.

The voraciousness of these firms would also push the nation’s economy into its most serious recession in more than 75 years. Their avarice would finally, and forcefully, demonstrate how a noble idea like homeownership could be corrupted into something that so poisoned the global economy it was left in a semi-vegetative state.

Recognizing how risky these loans were, Bear Stearns, Lehman Brothers, Goldman, and the rest were careful to bundle them with more traditional mortgages in the securities they were selling to investors. Prior to investing in the pools, prospective buyers were given only broad and generalized information about the loans inside them — details like average borrower credit scores and average loan-to-value ratios. That meant they rarely knew how many tricky loans they wound up owning. Until they started going bad, of course.

As usual, the ratings agencies were chronically behind on developments in the financial markets and they could barely keep up with the new instruments springing from the brains of Wall Street’s rocket scientists. Fitch, Moody’s, and S&P paid their analysts far less than the big brokerage firms did and, not surprisingly, wound up employing people who were often looking to befriend, accommodate, and impress the Wall Street clients in hopes of getting hired by them for a multiple increase in pay.

There were other impediments to good ratings at the agencies. They had a limited history with the newfangled mortgages that were filling these instruments. Their failure to recognize that mortgage underwriting standards had decayed or to account for the possibility that real estate prices could decline completely undermined the ratings agencies’ models and undercut their ability to estimate losses that these securities might generate.

The creation of collateralized debt obligations as a sort of secret refuse heap for toxic mortgages created even more demand for bad loans from wanton lenders. CDOs, which were essentially big bundles of pooled mortgages, prolonged the mania — vastly amplifying the losses that investors would suffer and ballooning the amounts of taxpayer money that would be required to rescue companies like Citigroup and the American International Group.

While the ratings agencies were snoozing, the CDO issuers were working overtime. In 2004, CDO issuance totaled $157.4 billion; by 2005, the figure had risen to a quarter trillion. Issuance peaked in 2006 when investors bought a staggering $521 billion of this dressed-up dross.

To Wall Streeters, CDOs had several amazing attributes. First, they were often compiled and overseen by veterans of Wall Street and these CDO managers worked hand in glove with the big firms who peddled them to customers. This meant the CDO managers were often in on the con, so instead of scrutinizing closely the loans that Wall Street and their friendly originators delivered, the managers waved dubious loans in by the billions.

But CDOs had another, major allure for the Wall Street firms that peddled them. Because of the way some were structured, they allowed the firms who were selling them to bet against the clients buying them. Among the first to embrace this concept was Goldman Sachs, the most esteemed of the nation’s investment banks and often the first mover in any profitable trade.

Goldman was founded in 1869 by Marcus Goldman, a German immigrant. In 1882, his son-in-law, Samuel Sachs, joined the small firm. In the early 20th century, Goldman specialized in initial public offerings, raising money for companies from public investors.

Over the years, Goldman grew into the preeminent investment bank. For decades it was run with one goal in mind — to do best by its customers. Goldman executives were known as Wall Street’s best and brightest and after serving out their time at the company often went into public service. Henry M. Paulson, the Treasury secretary during the early years of the mortgage meltdown, was the last in a long line of federal officials who came to Washington by way of Goldman.

But after Goldman gave up its private partnership structure, raising money from the public in 1999, the tone at the company changed. Profits took priority over customer care and trading desks soon dominated the firm’s previous power center — the investment banking arm. Lloyd Blankfein, a commodities trader who joined the firm when it bought J. Aron and Company, a trading house, was a driver of this shift at Goldman. He became its chief executive when Paulson left for Treasury.

Given that traders were in control at Goldman, it is not surprising that the firm’s mortgage desk convinced top company officials to make a major bet against the home-loan market. Recognizing that the market was overheated and starting to cool, Goldman quietly began wagering against the very securities it was selling to its clients. This dubious practice took hold at Goldman in the third quarter of 2006. Later, other CDO managers did the same thing, betting against the instruments they were charged with overseeing for the benefit of their clients.

Investors who relied on the ratings agencies to vet the CDOs never had a chance. The agencies did not see how toxic the loans in them were; in fact the largest ratings firms didn’t do loan-level analysis. Moreover, the instruments were far too complex to be analyzed by outsiders — some contained dozens of pieces of other loan pools referencing thousands of mortgages.

As CDO issuance soared, investment banks increased their cash commitments to small lenders, securing critical loan production. They also bought their own mortgage companies so they could be sure the supply of loans met the demand fueled by CDOs. With CDO managers lapping up all manner of mortgages, lenders soon found that their production targets were harder and harder to achieve. Countrywide, NovaStar, Fremont, and the rest responded by ramping up the profits generated in each loan. This meant steering borrowers who would otherwise qualify for lower cost mortgages into highly profitable but much more toxic loans.

Borrowers who could prove that their incomes and assets were ample were pushed into more expensive loans that required no documentation. Mortgage brokers peddled them as easy and hassle-free. These and other tricks hurt borrowers. But they increased the industry’s and investment banks’ profits. At the same time, lenders redoubled their efforts to refinance existing borrowers into more exotic mortgage products. The push for production fueled by Wall Street’s CDO factories fostered the massive growth in “liar loans,” for which borrowers did not have to produce any proof of income or assets.

Behind these creative bankers stood an increasingly powerful participant in the game: mortgage-backed securities traders employed by major investment banks. Generating immense profits to their firms, these traders gained more importance every day. They became drivers of the mortgage securitization process, making decisions that regularly overrode credit risk officers whose job was to prevent the disasters that resulted from trader excess.

* * * * *

In July 2005 the executives at Fremont Investment and Loan got some very good news. Fitch Ratings had announced it was upgrading Fremont’s subprime servicer rating on the strength of “notable improvements” in the company’s operations.

Like many mortgage originators, Fremont did not just write mortgages, it also serviced them, performing administrative tasks such as taking in borrowers’ monthly payments and tracking their escrow accounts and insurance obligations. Servicers also performed these duties for other lenders, for a fee, of course.

Read the rest here:  Huffington Post

We now have an oligarchy. People cannot get a democratic outcome out of an alleged democratic government. We’re seeing this all over the West. Some of these countries aren’t even run by their own governments. They’re run by Wall Street. The whole thing is a fraud. There’s probably more democracy in China…. Revolution is the only answer. Would default be ‘catastrophic’? Catastrophic for who?! The bankers?!

As we reported here on April 26th, the Michigan Court of Appeals handed down a ruling that pretty much shuts down non-judicial foreclosures by MERS in Michigan.  As we indicated at the time, this is probably the most sweeping mortgage foreclosure case since Ibanez and has even further reaching consequences than any of the other MERS decisions handed down this year.   (See Residential Funding LLC v. Saurman, Case No. 290248 ).

As we had hoped at the time, this means things are a-changin’ in Michigan.  Since appellate court rulings set precedent in their respective states, lower courts are now required to take their cues from this case when hearing foreclosure suits before them.  Now it is just a matter of getting suits filed on behalf of wronged homeowners. 

Taking the lead in this regard is Justin Grove of the Dailey Law Firm, P.C. in Royal Oak, Michigan.  In addition to filing a class action lawsuit against Bank of America, Justin has now filed more than 15 actions to quiet title.   While these suits will take time, and there are no guarantees, the precedent now set by the Michigan Court of Appeals has given these homeowners a shot at leveling the playing field against the rampant and prolific number of fraudulent foreclosures perpetrated by the big mortgage banks in this state.

Just as important, is that the Dailey Law Firm is getting the word out about the fraud and corruption.  They’re bending more than a few ears, too.  With a weekly radio program airing in two markets, Detroit and Chicago, they are educating homeowners in a vast portion of the Midwest on two of the biggest mega-watt radio stations, WJR and WLS. 

In the past couple of years, almost as many scam law firms have sprung up taking advantage of homeowners, as there are fraudulent mortgage companies.  Unfortunately, an unsuspecting homeowner, desperate for help, may not recognize a scam when they see one.  A page everyone should bookmark and keep for reference for helping to spot a scam is READ THIS FIRST — DON’T GET SCAMMED!  This is also permanently linked on our Links page here on FedUpUSA.

However, let me assure you that Justin Grove and the Dailey Law Firm, P.C. are no scam.  They’ve not only done their homework, but as the Founder and Director of FedUpUSA, I’m going to personally vouch for their integrity.  Much of their work in this area to date has essentially been pro bono.  Filing suits on behalf of homeowners in foreclosure in a non-judicial state with absolutely no case precedent for defense, is a heck of a long shot.  Yet, they did it anyway.  Why?  Because fraud is a crime, but it is not a crime to default on a debt. 

As we’ve said before, this isn’t about anyone getting a free home; this is about the rule of law.  Those rules have been thrown three sheets to the wind in the past 4 years.  Property law has been violated by the banks; rules of accounting have been violated and circumvented (much with the blessing of Congress making special ‘exceptions’); and tax law has been completely thrown out the window, which has resulted in horrific losses of revenue for municipalities.  All of this is FRAUD.  Yet, no one has gone to jail.  Sure, there’ve been fines handed out here and there, but no one has been prosecuted — but many people have lost their homes, and a good portion of those have been the lenders utilizing the aforementioned methods of fraud.

So where does it end?  That’s the question we here at FedUpUSA have been asking since April of 2008.  Perhaps it ends when good people no longer remain silent and good attorneys are willing to stand up and say, ‘You know, there’s no point in my having a job, no point to my profession, unless the rule of law can actually be restored and followed.’  Justin Grove is one of those lawyers.

So, if you’re facing foreclosure, if you’re worried about the chain of title to your home, if you know MERS is part of that chain of title, tune in to The Law Show With Brian Dailey.   Get educated, and if you’re in Michigan and MERS has initiated foreclosure proceedings on your home, then call the Dailey Law firm.: (248) 744-5005 or (866) 66-Lawyer (866-665-2993)

FedUpUSA will be featuring permanent links to The Law Show in our side bar and the Dailey Law Firm, P.C. contact information can be found on our Links page.

Live Video Stream DETROIT Sunday 11:00 AM Eastern:

Live Video Stream CHICAGO Saturday 10:00 AM Central:

And in case you missed it, Justin Grove talked foreclosures and the recent Michigan Appeals Court ruling on their May 8, 2011 show.  Give a listen.

Justin Grove, Esq.

A protest movement that started in Spain has now spread to Italy. The Spanish government has banned protests, but that has only encouraged more protests.

I picked the story up two days ago in Protests Mount in Spain; Sovereign Debt Crisis to Follow

Acting on a tip, the New York Times picked up the story a day later in Protesters Rally in Madrid Despite Ban.

Protest Images

Here are a few protest images by Juan Luis Sanchez on Yfrog.

Spain’s Icelandic revolt

Protests in Iceland helped bring down the Icelandic government and stopped the bailouts of banks at the expense of Icelandic taxpayers. Can the same thing happen in Spain?

Please consider Spain’s Icelandic revolt

After passively submitting to the crisis, young Spaniards have finally taken to the street. Breaking out on the eve of municipal elections, the protests of recent days have been inspired by those in Iceland that led to the fall of the government in Reykjavik.

One morning in October 2008, Torfason Hördur turned up at what Icelanders call the “Althing”, the Icelandic parliament in the capital city, Reykjavik. By then, the country’s biggest bank, the Kaupthing, had already gone into receivership and the Icelandic financial system itself was in danger of going under. Torfason, with his guitar, grabbed a microphone and invited people to talk about their dissatisfaction with the freefall of their country and to speak their minds.

A movement spawned by the internet

But those voices calling for real democracy are not just being raised in Iceland, a country of about 320,000 inhabitants. Here in Spain, the umbrella organisation for various Spanish movements – Democracia Real Ya (Real Democracy Now) – already lists among its proposals some 40 points ranging from controlling parliamentary absenteeism to reducing military spending through to abolishing the so-called Sinde law (a law restricting on-line infringements of copyright).

The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the “alternative globalisation” movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland.

All this is happening at astonishing speed via the Internet, which has amplified the echo of discontent and opened the lanes of cyberactivism to groups such as Anonymous, notable for intervening against companies like PayPal and Visa during the advocacy campaign for Wikileaks chief Julian Assange. Yet it was also there at the beginning of the revolts in the Arab world, to help people get round the censorship of the Tunisian and Egyptian dictatorships.

“When we grow up, we want to be Icelanders!” cried one of the leaders of the organisation during the march on Sunday May 15 before a column of young – and not so young – parents and children, students and workers, the jobless and pensioners. Many Saturdays in Iceland were needed before citizens won the changes they had demanded. Spain’s first Sunday has taken place, and was followed by a Tuesday [May 17]- but there’s still a long way to go.

Protests have now spread to Italy and beyond.

Protest Camps

Green tents are current protest camps. Purple tents are planned protest camps.

My friend Bran who lives in Spain writes …

A Spanish revolution is slowly gaining coverage, both internationally and locally. http://www.ikimap.com/map/2CYF is a map of existing, planned and evicted camps. Politicians and administrations are trying to claim sympathy and similarity to the protests expression, yet no one has good faith in the political class.

‘Revolution’ jumps from Spain to Italy

Courtesy of Google Translate (a choppy one, slightly edited by me) please consider ‘Revolution’ jumps from Spain to Italy and Italy to the rest of the world

Agglutinated protests in Spain by platform Real Democracy Now has called for demonstrations in at least six cities in the country, today and tomorrow at 20.00 .

Concentrations have been summoned by a profile of the social networking site Facebook entitled ‘Italian Revolution. Reale Democrazia Ora ‘, launched yesterday. The cities are Florence are scheduled today at 20.00, and Rome (Plaza of Spain), Milan, Bologna, Padua and Pisa, tomorrow at the same time.

The manifesto makes specific reference to the protests in Madrid, which cites as inspiration and express their solidarity. And the story is repeated all over the world

After Spain and Italy are numerous cities that have emulated the system concentrations.

Berlin joins the struggle for real democracy, support to Spain and joined the protest. “This decision May 20 Berlin Street,” announced their posters.

Paris or Buenos Aires will focus today. Brussels, Birmingham and Bogotá Ahram, tomorrow.

Amsterdam will hold a rally on Saturday 20.

For Spanish speaking readers, here is the original link: http://ecodiario.eleconomista.es/espana/noticias/3081817/05/11/Italia-copia-a-Espana-y-crea-su-Italian-Revolution.html

It is difficult to know what exactly might transpire from these protests, but we certainly have seen some shocking results in Africa and the Mideast already.

Watch Italian and Spanish Government Bonds

Most eyes remain focused on Greece. It is more important, to pay attention to Spain and Italy. Here are the charts I have been watching.

Spain 10-Year Government Bonds

Italy 10-Year Government Bonds

If yields break North of those zones shown in the above charts it will signify a lack of faith in the government bonds of those countries. Spain is huge, but Italy is massive. Italy has as much debt as Germany in an economy nowhere near as big.

I believe it is simply a matter of time before the markets start questioning Spanish government debt. Should Italian debt come into question, so will the very existence of the Euro itself.

Mike “Mish” Shedlock
Global Economic Analysis