Emergency Manager Kevyn Orr launched a probe of the city’s pension funds Thursday amid concerns about corruption, spending and management while union officials signaled they would fight proposed benefit cuts in bankruptcy court.
Indeed, he damn well should launch a probe into those pension funds. There are most likely very big, very bad things being hidden. What Mr. Orr and the City of Detroit residents, as well as the City union members should know, is that those who managed the funds, and those on Wall Street from whom the managers bought investments, would prefer you not look too closely at what’s in the pension funds.
The probe was met with anger from pension officials, who are armed with a $5 million war chest to fight attempts to takeover a retirement system worth more than $5 billion. Orr announced the probe ahead of a closed-door meeting at the Coleman A. Young Municipal Center with about 125 union officials to discuss a restructuring proposal that includes health-care and pension cuts.
You see, back in 2009, I had occasion to be in Washington DC where I ran into a rather large protest in front of the AFLCIO. Seems that after the big stock market collapse in 2008, a lot of pensions were, shall we say, not making positive cash flow. The union members, justifiably so, wanted to know why. They’d demanded a number of times to be able to examine the contents of these funds, but were denied at every turn by leadership. So, they were turning to the AFLCIO for help. Needless to say, the union members were never given access. That should tell union members something. I’ll point it out for those slow on the uptake: the union leadership and those who manage your pension funds, are NOT your friends.
For years, FedUpUSA has carried a multitude of articles regarding the investments that were put into these government pension funds. Karl Denninger has written at length about the investment vehicle referred to as a REMIC (real estate mortgage investment conduit). These were basically bundles of mortgages from Wall Street placed into a special tax status, which allows for tax exemption. It is governed primarily under 26 U.S.C. §§ 860A–860G of Part IV of Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code (26 U.S.C.). They were introduced in 1987 as the typical vehicle for the securitization of residential mortgages in the United States. In order to qualify as a REMIC, 26 U.S.C. provides for a number of special requirements, one being a very finite time in which to ‘perfect’ these investments. The first qualification is that the wet-ink copy of the mortgage note be physically present in the conduit. But that’s not all. From the time of the creation of the REMIC, the law requires that the wet-ink copy be placed into the investment within 30 days! Thirty days. If there is a failure to do so, the REMIC is invalid.
Let that sink in. Do the words ‘robosigning’ or ‘fraudulent foreclosure’ bring back any memories for you? How about this one? MERS (Mortgage Electronic Registration Service). Why did Wall Street and the mortgage companies develop MERS in the first place? So, they didn’t have to assign or transfer any actual mortgage notes as well as to have the ability to circumvent municipal recording fees. So, what is REQUIRED to be in the REMICs? Wet ink copies of the actual mortgage notes and they must be placed there within 30 days of the investment’s creation. What if they aren’t? Then the tax-exempt status is null and void, as is the entire investment. Let me be clear: If the wet-ink copies of the notes are not held by the REMICs inside the pension funds, they are worth exactly ZERO.
Judging from the sheer number of foreclosures in this country over the past 5 years, in which notes were either non-existent, forged or otherwise created out of whole cloth, I’d say that the chances are better that pigs will fly tomorrow than any of those wet-ink notes being held in the REMICs.
So, what does this mean? It means that this is intentional, purposeful, conspired and pre-planned fraud. F-R-A-U-D. This was something orchestrated between Wall Street and the pension fund managers. They figured if the housing market never came down, then no one would ever know the REMICs weren’t perfected. The pension fund managers got a ‘cut’ when they purchased these investments from Wall Street. Wall Street got to unload all of their risky mortgage-backed securities and they did it by telling the pension fund managers they could get a 7-8% annual return, and the fund managers in turn, told the plan participants! Historically speaking no long-term (30-40 years+) investment has ever netted more than 2.5% annually.
To the union members: You were promised something that was never mathematically possible. You were defrauded by being told your pension fund was in compliance with the legal requirements for the investments contained therein. Your pension fund managers are going to fight to keep this truth from seeing the light of day. Wall Street and the brokers who sold these things to the fund managers are going to fight to keep this from you. DO NOT STAND FOR THIS! There is absolutely NO REASON for you to agree to cuts in your pensions of any kind, until or unless the fraud is exposed and prosecuted! You have a RIGHT to know. You also have a right not to have to bear the consequences of the fraud. Likewise for the taxpayers of the State of Michigan. Neither city workers nor the taxpayers of Michigan are at fault for any fraud and we should NOT bear the burden of its consequences!
To Kevyn Orr: You have an obligation to the people of the City of Detroit to root out the fraud, find who is responsible and hold them accountable. You were not hired to take the ‘easy way out’ and put the burden of this fraud on the taxpayers of the State of Michigan or cut the promised pensions of the city workers to zero. Neither the taxpayers nor the city employees are at fault for any fraud perpetrated here. There should be NO talk of what burdens city employees or taxpayers will bear until or unless the people responsible are prosecuted.
In other words, Detroit, it’s time to: