FedUpUSA

It just never ends.

So the Justice Department has sued S&P claiming that they issued knowingly-false ratings on various structured products that they knew were going to blow up.

There is one glaring problem - the supposed “injured party” is the issuer!

That’s right folks — the claim is apparently that Citibank (among others) created crap, asked S&P to rate it, they did, and then they bought their own crap and were injured by it.

But you see, in this fairy-tale land of the SEC, the creator of the crap didn’t know it was crap, even though in in the instant case that Citibank’s former risk officer testified under oath that in 2006 60% of their loans were defective — and 80% were defective in 2007.

This was the Chief Risk Officer and his assessment of whether the loans were “authentic” (as represented) or whether they were chock full of lies and material misrepresentations.

How can you sue when you knowingly buy something that your own people intentionally created in a bogus manner and which you thus knew was crap, irrespective of what someone else said?  How could you rely on someone’s outside opinion when you know the facts and do not need to rely on opinions at all?

There’s no basis for this lawsuit.  There are a crazy number of reasons that people should be sued and prosecuted, but this isn’t one of them.  If I create rat poison and then having done so, eat it, it’s my own damn fault if I die as a consequence.

What was going on here is that BAC and Citibank (among others) were intentionally defrauding everyone in sight — including the regulators.  By taking crap loans (which they owned) and packaging them into securities that they then bought a “AAA” label forthey were improving their capital ratios since the risk was made to magically disappear.

Citibank wasn’t a victim of anything — they were the protagonist and the entity committing the offense!  The entity playing the games here was the bank itself, not the ratings agency.  They knowingly took crap and packaged it, then bought the packaged crap they solicited the bogus ratings on for the purpose of improving their apparent capital and thus making the firm look stronger than it really was, and all of this was intended to (and did) result in bonuses for executives and stock price advances — until it blew up in their face.

Rather than prosecute the bad guys Eric Holder now chases after someone who went along because they were paid rather than busting the entity that orchestrated the entire mess in the first place.

This is yet another political farce intended to protect the guilty.

Wow, you’re so on-the-ball that it only took you five years to start raising hell beyond when multiple people, myself included, began to howl about exactly this point?

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities.  This calamity is compounded by the fact that those professional advisers should have known that the REMICs they created were flawed from the start.  If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.  That is, unless the Wall Street Rule is applied.

No kidding?

From 2010-10-03 on The Ticker, which re-hashed a theme I’ve been pounding on since 2007:

See, there’s this little problem.  A REMIC (Real Estate Mortgage Investment Conduit, or “MBS”) is a special thing under IRS rules.  Normally a business would have to operate at a profit or loss, pay taxes, and then pay dividends.  This results in double-taxation.

A REMIC has a special status under the IRS code which avoids this; the interest flows through to the investor without being separately taxed at the business-level of the REMIC itself.

But in exchange for this, there are constraints.  One of them is that a REMIC cannot acquire ”distressed” assets – that is, notes that have defaulted.  It cannot, in other words, engage (intentionally, up front) in what would be considered “recovery operations” if you will.

The reason for this is that if it could, every “distressed asset” acquirer would set up such a structure and avoid monstrous amounts of tax.  So, as to avoid this problem, a REMIC can acquire only loans that are current.

And of course if there are no notes that are transferred this explains many things.

Like robosigned documents.

Like “lost document” affidavits (it explains notes being intentionally lost, since they can’t be transferred to their correct place late, as the time window has long expired to meet legal requirements.)

Like allonges that magically appear on a document years later (and which are barred under the UCC because otherwise fraud becomes trivial to commit.)

Because REMICs did not file the correct returns and may have committed fraud, the statute of limitations for earlier years will remain open indefinitely, giving the IRS adequate time to pursue REMIC litigation after it obtains the information it needs.If the IRS does not take action at the appropriate time, however, it will be a serious failure and will result in the loss of billions of dollars of tax revenue for the federal government.

More troubling still is the IRS’s failure to address the wide-scale abuse and problems that existed during the years leading up to the financial meltdown.  The IRS’s failure to adequately police REMICs is one more reason that the mortgage industry was able to overly inflate the housing market.  And that, inexorably, led to the crash and our tepid recovery from it.

More generally, by overlooking the serious defects in the transactions, courts and governmental agencies encourage the type of behavior that led to the financial crisis.  Lawmakers, law enforcement agencies and the judiciary cede their governing functions to private industry if they allow players to disregard the law and stride to create law through their own practices.

And until We The People demand through political process that this crap stop and if necessary form a new political party to do so, trampling the existing parties who refuse, you will continue to get screwed and both you and your children will be serially robbed and financially abused by these latter-day robber barons.

“Here it comes”

Release Date: September 13, 2012

For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

In other words all the stuff The Fed has done has not worked.

       Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

In other words what The Fed has done thus far has not worked.

       To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Ah, now we get to the rub, don’t we?

See, The Fed has no short-term securities left; they’ve basically sold them all, and at the end of “Twist” will have sold them all.  They also own something like 70% of the long end of the curve, and if they buy much more they’ll destroy what little liquidity is left.

So the question is this: Can this do anything positive?

The answer is this: Let’s look at the figures.

Let us assume we get 50 basis points in downward movement from today’s figures — which means a 30 year mortgage goes from ~3.5% to 3.25% for a conforming note.

Let’s further presume that we’re going to finance $200,000.  This produces a payment of $895.48.

If the rate moves to 3.25% then the financed amount rises to $206,317, or about a 3% increase in house prices.

That’s all Bernanke gets out of this, assuming you get 50 basis points — and you won’t, as the 10 year will move up while MBS move down.  You’ll probably get 25 basis points, which means you’ll get a whole 1.5% increase in home prices.

The net effect is null in terms of market impact.

The stock market is up nearly 200 points but the fact of the matter is that Bernanke is lying about the expected results — they are an economic nullity.

This is the reality of the lower boundary; the difference in price support from 5% to 3% is large but as you approach zero the additional movement you can actually achieve becomes smaller and smaller while the required amount of purchases to effect that change becomes larger and larger.

Worse, the potential impact of a dislocation event in the market goes way up as the leverage at The Fed goes up as well.

       The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

No you won’t.  You didn’t this time and you won’t forward either.

       To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

That’s even worse.  The PPI number was smoking and oil is now up 1.25% today, with basically all of it coming after the announcement.

       Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

This “accomodation” cannot work because for each dollar emitted into the economy purchasing power is debased by the same dollar.  This is an effectivetax on everyone — including saved capital.

But in this case the real problem is that the “impact” from this program is an economic nullity.

Bernanke took this action, in my opinion, in an attempt to find the last few points on the stock market because he knows, as does the rest of the FOMC, that Europe (and China, for that matter) is about to blow — and that we’re simply not making any progress economically. Therefore he felt compelled to “do something”, even if the “something” is economically pointless, simply to avoid the stock market throwing a temper tantrum.

In the end the bottom line is that The Fed has shot its last bullet and it was a dud, as it is simply impossible for them to provide effective policy accommodation at this point in the cycle.

After nearly four years in which I’ve outlined that I don’t believe the formalities of MBS securitization were followed, and two years of increasing evidence, despite intentional obstruction by OTS, OCC, the FDIC, The Fed and Congress, along with a rapidly-increasing number of court rulings that strongly suggest that I (and a few others) have been right while the naysayers are wrong, we finally have a law enforcement agency looking into this matter:

New York Attorney General Eric Schneiderman has targeted Bank of America, the biggest U.S. bank by assets, in a new probe that questions the validity of potentially thousands of mortgage securities and their associated foreclosures, two people familiar with the matter said.

The investigation, which began quietly in recent weeks, is part of a larger inquiry that is scrutinizing whether mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities, these people said, who requested anonymity because they weren’t authorized to speak publicly about the probe.

There’s plenty of reason to ask these questions.  Like, for example, the court ruling that I cited last week.  Then there’s this ruling which just popped up as well, this time from the 9th Circuit in Arizona.

Again, the record shows that the note was not properly indorsed into the trust.  A late assignment was attempted but was judged legally defective.

Note, however, that this leaves open the question of what’s in the MBS box that the presumed holders of certificates which were issued against this obligation?

It appears, in this case and in literally hundreds of thousands of others, that these assignments are being made – whether legally sufficient at the time or not – well beyond the legal closing date of the trust involved.

That is, for the purpose of assigning interest they may (or may not) be sufficient to permit a foreclosure but as a matter of law and fact they cannot transfer the asset, in this case the note, into a trust that closed a year, two or even five years in the past!

The record in these cases is quite clear: When these fraudclosures are contested assignments “magically appear” (as opposed to being documented as having occurred contemporary with the creation of the trust in question) and often are dated on or near the date of the foreclosure proceeding.  This may be legal to effectuate a foreclosure but at the same time it documents that the MBS certificate holders bought an empty box since these assignments invariably are not from the Trust to a servicer or institution for the purpose of foreclosure and recovery (perfectly legal) but rather are typically from the originator to the servicer, documenting that the transfer that was supposed to have taken place years previously did not as a matter of both law and fact.

Well folks?  You can’t have this both ways.  If the legal formalities of NY Trust Law (and IRS REMIC requirements) were complied with then what should be presented to the court is the original or a certified copy of the original assignment chain that took place into the trust prior to its closing date.

I challenge you to find documents evidencing these alleged transfers.  What I keep seeing in these cases, in virtually every contested case I’ve seen, is instead a transfer that purports to grant the rights in the mortgage to the servicer-cum-foreclosing party from the originator on or about the time the foreclosure is filed.

The problem is that the originator was paid within days of the issuance of the mortgage and according to NY Trust Law had to indorse and tender that note to the Securitizer, who then had to tender it to the Depositor, and who then was supposed to have tendered it into the trust.

Well?

***and***