ALL US Mortgage Backed Securities an absolute Scam....from inception, and the USA is utterly corrupt to the core, without any hope of redemption ever.....Pensions and other large investors may sue the banks which sold them mortgage backed securities (mbs) based upon fraudulent misrepresentation.
Clayton found very high percentages of mortgages which did not meet minimal underwriting standards.
However, instead of disclosing to the investors purchasing mbs that many of the mortgages were bad - or even that there were samples and statistical analyzes performed by Clayton and the banks - the banks simply kept it to themselves, and used that inside information about poor mortgage quality to negotiate a discount of the price that the banks paid when purchasing the loan portfolios from the folks who originated the loans.
This is like buying a used car, but having a mechanic look it over first. Once the mechanic discovered a cracked engine block, the buyer negotiates the purchase price way down, but then turns around and sells the car for a higher price without ever disclosing that there was a cracked engine block or even that a mechanic had looked it over.
Indeed, its worse ... at least with the car, there is something physical to inspect. But because many of the underlying mortgage documents have gone missing, there is nothing for the mbs buyer to investigate even if he wanted to. For example, as I've previously noted, MERS - the holder of 60% of all U.S. residential mortgages (and many commercial mortgages) - is a shell company, and many mortgage documents were forged.
"The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.
"Therefore, as everyone knows, the loans were 'bundled' into REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then "sliced & diced"...split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.
"This slicing and dicing created 'senior tranches,' where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created 'junior tranches,' where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)
"These various tranches were sold to different investors, according to their risk appetite. That's why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.
"But here's the key issue: When an MBS was first created, all the mortgages were pristine...none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full...but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads...but what will the result be of, say, the 723rd toss? No one knows.
"Same with mortgages.
"So in fact, it wasn't that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.
"But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn't be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.
"Therefore, how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?
"Enter stage right the famed MERS...the Mortgage Electronic Registration System.
"MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again ...I know, I know: like the chlamydia and the gonorrhea of the financial world...you cure 'em, but they just keep coming back).
"The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein's operating table, where the beast got put together.
"However, legally...and this is the important part...MERS didn't hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.
"But the REMICs didn't own the notes either, because of a fluke of the ratings agencies: the REMICs had to be "bankruptcy remote," in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors.
So are all mortgage backed securities a scam?
The following 2007 chart from Janet Tavakoli might provide a hint:
Bank of America alleged in a court filing this June:
It appears as though many loans and other mortgage-related assets have been double and even triple-pledged to various constituencies....
April Charney - a consumer lawyer with Jacksonville Area Legal Aid - and CNBC's Dennis Kneale noted in February 2009 that courts have found that some mortgages have been sold again and again to different trusts, when they should have only been sold once.
Kneale explained that that is the reason that two different banks sometimes try to simultaneously foreclose on the same home:
And today, Chris Whalen told CNBC's Larry Kudlow that Bear Stearns will be exposed as having sold the same loan to different investors on numerous occasions:
As I have repeatedly pointed out, the failure of the mortgage originators and banks to prepare and record proper documentation has led to an epidemic of fraud. The pledging of the same mortgage again and again to different trusts related to mortgage backed securities is just one result.
And as long-time foreclosure investigator Nye Lavalle writes:
On thousands of occasions I stated to regulators, CEOS, banks, Fannie and Freddie that the practices of the banks were that they were double and multi-pledging assets and pledging paid off and refinance notes to securitizations. This is something April, Max and I have discussed for years now. Now, they come and admit that each of my allegations were true Without analyzing the deal, as complex as they are, you WILL NEVER KNOW IF THE FORECLOSING PARTY HAS “ANY” RIGHT TO FORECLOSE!!!The motives I identified for the “Blank Endorsements” and missing assignments and "pre-notarized" “Blank Assignments” and “Blank Allonges” that “were placed into the “custodial/collateral” files were to be able to:Multi-pledge collateral (Notes) so as to cook the books ....
As I've repeatedly pointed out, the big banks intentionally signed up as many borrowers as possible, even if there was no way they could repay their loans.
For example, I recently wrote:
But there might have been another reason that loaning to borrower who couldn't repay was the prevalent business model.
[Professor William] Black explained that fraud by a financial company usually involves the company:1) Growing like crazy2) Making loans to people who are uncreditworthy, because they’ll agree to pay you more, and that’s how you grow rapidly. You can grow really fast if you loan to people who can’t you pay you backand3) Using extreme leverage.This combination guarantees stratospheric initial profits during the expansion phase of the bubble.
But it guarantees a catastrophic subsequent failure when the bubble loses steam.
And collectively - if a lot of companies are playing this game - it produces extraordinary losses (more than all other forms of property crime combined), and a crash.
In other words, the companies intentionally make loans to people who will not be able to repay them, because - during an expanding bubble phase - they'll make huge sums of money. The top executives of these companies will make massive salaries and bonuses during the bubble (enough to live like kings even even if the companies go belly up after the bubble phase).
[Simon] Johnson confirmed that a high housing default rate was part of the banks' models. The financial giants knew they would make huge sums during the boom, and then transfer their losses to the American people during the bust.
As foreclosure expert Neil Garfield notes, mortgages are worth a lot more if they default than if they perform.
Specifically, a mortgage worth $300,000 if the homeowner repays in full might be worth $9 million to the various owners of synthetic cdos and credit default swaps if the owner defaults.
We know - as alleged by the SEC:
Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure.Paulson also advised Los Angeles apartment mogul Jeff Greene to do something similar. Greene was heavily involved in the subprime market, and he bought the worst of the mortgage backed securities, and then bet against the bonds using CDS.
But Garfield says that it is broader than just a couple of investors like Paulson and Greene. He believes that was basically the business model for the entire mortgage industry.
He said that the big banks that packaged mortgage backed securities had an incentive to suck in really bad mortgages. If a certain percentage of the mortgages default, the cdo and cds side bets pay many times more than the actual mortgage could possibly pay.
The state attorneys general, Sigtarp, and other federal and state authorities investigating foreclosure fraud should determine the extent to which these incentives motivated the mbs packagers to include mortgages which did not meet underwriting standards and then hide the bad loans.
They should also investigate the extent to which these incentives motivated mortgage originators to create "liar's loans", "ninja loans", "neutron loans", and "toxic waste".
See this on how credit default swaps can be used like buying fire insurance on someone else's house and then burning down the house, and this explanation by Ellen Brown (starting about half way into video).
HR3808 would have legalized World Bankster MERS title recordings and fraudulent verification signatures. Congress will take up the mortgage fraud issue after the November elections so the Justice Department will continue to sit on their hands waiting for the bankster criminals to legalize their utter fraud.....
Is this a great county, or what! Ha. Ha. Proud to be American!USA! USA! USA!
How about the CNBC commentary by the “brightest in the room” these clowns remind me of carnival barkers who are all talking at the same time.....
Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that the U.S. economy is a giant Ponzi scheme.
But many on Wall Street and in D.C. - and many investors - believe that we should just "go with the flow". They hope that we can restart our economy and make some more money if we just let things continue the way they are.
But the assumption that a system built on fraud can continue without crashing is false.
In fact, top economists and financial experts agree that - unless fraud is prosecuted - the economy cannot recover.
Fraud Leads to a Break Down in Trust and Instability in the Markets
As Alan Greenspan said recently:
Fraud creates very considerable instability in competitive markets. If you cannot trust your counterparties, it would not work
Similarly, leading economist Anna Schwartz - co-author of the leading book on the Great Depression with Milton Friedman - told the Wall Street journal in 2008:
"The Fed ... has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement."
And economics professor and former Secretary of Labor Robert Reich wrote in 2008:
The underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.
Robert Shiller - one of the top housing experts in the United States - said recently that failing to address the legal issues will cause Americans to lose faith in business and the government:
Shiller said the danger of foreclosuregate -- the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt -- is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.
Nobel prize-winning economist Joseph Stiglitz says about the failure to prosecute Wall Street fraud:
The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that's really the problem that's going on.
I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That's the point. There were victims all over the world.
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
Wall Street insider and New York Times columnist Andrew Ross Sorkin writes:
“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”Economics professor James Galbraith says:
Fraud at big corporations surely dwarfs by orders of magnitude the shareholders’ losses of $8 billion that Mr. Holder highlighted. If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.
There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that's a process which needs to get underway.
No wonder Galbraith says that economists should move into the background, and "criminologists to the forefront"
Failure to Stop Fraud and Prosecute Criminals Causes a Loss of Trust in Government, Which Makes Government Less Effective
As Shiller stated in the quote above, the failure of government officials to stop fraud and prosecute the financial fraudsters has caused a lack of trust in government itself.
A psychologist wrote an essay published by the Wharton School of Business arguing that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:
According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. "Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG." The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. "Normal expectations of what is safe and dependable were abruptly shattered," Sachs noted. "As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred."
People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.
He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. "She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.
"By no means a sophisticated economist, she knew ... that some people had become fantastically wealthy by misusing other people's money -- hers included," Sachs said. "In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished."
Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.
Government regulators know this - or at least pay lip service to it - as well. For example, as the Director of the Securities and Exchange Commission's enforcement division told Congress:
Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public's fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.
If people don't trust their government to enforce the law, government will become more and more impotent in addressing our economic problems. If government leaders take action, the market will not necessarily respond as expected. When government leaders make optimistic statements about the economy, people will no longer believe them.
Trying to Cover Up the Truth Extends Financial Crises
Elizabeth Warren, William Black and others say that attempting to cover up the truth extended Japan's financial problems into an entire "Lost Decade".
As Joseph Stiglitz said about Wall Street fraud:
So the whole strategy of the banks has been to hide the losses, muddle through and get the government to keep interest rates really low.
As long as we keep up this strategy, it's going to be a long time before the economy recovers ....
Pam Martens - who worked on Wall Street for 21 years - writes:
The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...To the extent that the government tries to cover up - instead of openly discuss - financial fraud, it will only extend America's economic malaise.
It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate.
Failing to Prosecute Fraud Encourages Financial Players to Take Bigger and More Blatantly Illegal Actions
Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals - and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. Joseph Stiglitz, Professor Black, and many others agree. See this, this and this.
It was largely fraud which brought down the financial system in 2008. Unless we prosecute the fraudsters, they will do even bigger, stupider and more blatantly illegal things in the future which will lead to even bigger crises.
Failure to Prosecute Fraud Exacerbates the Sovereign Debt Crisis
The governments of the world have spent trillions trying to paper over the fraud and prop up the big, insolvent banks, instead of forcing them to restructure and forcing bondholders and shareholders to take a haircut.
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent drives up the costs to the country:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
The American banks and government have certainly pretended that all of the big banks are solvent. As ABC wrote in October 2009:
The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, [the special inspector general for the Troubled Asset Relief Program] states in a new report released today.Similarly, the stress tests were a complete and utter sham.
The government has given the giant banks huge amounts in loans and guarantees based upon their false representations about their financial health. The Fed has larded up its balance sheet with toxic assets from the banks.
Debt levels are also getting dangerously close to the level that they become a drag on the economy. See this and this. When Keynesian economists argue that debt does not harm the economy, they are talking about debt incurred to pay for stimulus and productive things for the economy. But throwing trillions at the giant banks - who are mainly using the money to gamble - is not stimulus. It helps the executives of the big banks and their shareholders and bondholders, but not the broader economy.
Indeed, attempting to prop up big, insolvent banks is preventing stimulus from getting out into the economy.
Fraud Causes Growing Inequality, Which Undermines the Economy
Growing inequality is very harmful to our economy. Indeed, if wealth is concentrated in too few hands, the "poker game" ends, as only too few fat cats are left with all of the chips. See this, this, this and this.
Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (making up between 40- 70% of all stock trades) which not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, this, this and this.
Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country's derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance in the market to manipulate the market.
Fraud Increases the Severity of Boom-Bust Cycles
Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.
Without strong laws against fraud, bubble after bubble will be blown, guaranteeing that the financial system cannot be stabilized in a fundamental sense.
Failure to Prosecute Fraud Is Worsening the Housing Crisis