Wall Street Banks Don't Own Toxic Loans: ABC

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This is why it is critically important that (a) you get help in organizing your information (b) getting a forensic analysis, review or even a TILA Audit (c) that you secure a third party expert declaration that puts the the facts in issue and (d) that you aggressively pursue discovery without trying to convince the Judge that the mortgage, note or obligation is invalid.

see how-to-be-an-expert-witness

Everyone seems to be getting it right — including the New York Times lead editorial this morning — except the main point. It’s been said that there are two kinds of truth — reality and the collective perception of reality whether it is wrong or right. see self-dealing-part-ii-investigations-started

REALITY: The main point missed by nearly everyone is that in the securitization of real estate loans — residential and commercial — the Wall Street Banks do not own the toxic loans and never did. The simple ABC is that the loans were executed by homeowners and then trafficked like illegal drugs through middlemen until they ended up in the hands of investors (pension funds, sovereign wealth funds etc.).

The actual amount and movement of money was kept carefully hidden from investors and homeowners, violating Federal, State, and common law. Much of this money actually belongs in the hands of homeowners, investors, and taxing authorities from Federal State and Local governments.

CONSENSUS FALSEHOOD: The banks made loans that were too risky and “relaxed” their underwriting standards. A slew of defaults occurred causing a danger of a run on the banks. [The truth is that risk never entered the picture: there is no risk in arranging a loan (with investor funds) that you know for sure is guaranteed to fail because it will reset to a payment level that the homeowner could never be able to pay under any conceivable circumstances.]

THE INCONVENIENT TRUTH: Profits piled up off-shore that are being repatriated on a gradual basis showing incredible gains at the Wall Street Banks that supposedly lost hundreds of billions of dollars. The truth is they never lost a dime. The truth is the loan was sold multiple times through multiple intermediaries each of whom in each “sale” were paid fees and profits vastly exceeding any prior compensation to those who arranged or made loans prior to securitization.

Second Hidden Yield Spread Premium: As I have pointed out before the hidden yield spread premium was jaw-dropping (when the loans were packaged by the aggregator and then sold to the Special Purpose Vehicle that issued and sold the mortgage-backed securities. This second YSP was sent off-shore to the Bahamas or the Caymans to Structured Investment Vehicles with their own trustees, who scattered the actual depository accounts all around the world. The beneficiaries were the 100 Club — the main players in the creation, promotions and protection of the scheme through government contacts, plausible deniability, and simple non-disclosure sometimes achieved through the sheer complexity of the arrangements.

Nobody wants to acknowledge this fact because it would be admission that the con game is still on and that government is still part of it. They took many trillions of dollars to “bail out” banks that had arranged the bad loans but never underwrote them.

After centuries of lending in which banks made loans and were the obvious source of funds and the obvious losers if the loans went bad, it seems that there is hardly a soul in media, government, or the judiciary that is willing to come right out and say the banks are by nature intermediaries and that they carried their business of intermediation too far (removing the risk for bad loans).

In the old model, prior to Glass Steagel being repealed, the use of money held on deposit (i.e, your checking, savings or CD account) at a depository institution was the source of funds for the loans, thus putting the bank at risk. A bad loan meant that the payback had to be covered by the bank’s capital reserves that were regulated to make sure there was always enough money on hand to satisfy the demands of depositors who needed the use of the money they had deposited into the bank, for safe-keeping.

In fact, the scheme was built upon the premise that by not actually having any risk and by entering into “hedge (insurance) contracts, they could make far more money arranging bad loans than good loans. Logistically they guaranteed their profit by inserting terms into mortgage backed bond indentures that cut the investor out of the bounty.

The result, as always, was that Wall Street won and everyone else lost. 1 in 50 people now are living strictly on food stamps in this country. And the number is rising. Leading the pack are white-haired white people whose numbers are growing exponentially, followed by blacks and Hispanics. Fifty percent of the securitized loans were refi’s. Yet the misconception is that this crisis only affects people who bought houses they could not afford.

Avoiding a Japanese Decade

Thankfully, 2009 ended better than it began. Economists talk about green shoots of recovery taking hold. Consumer confidence has improved. Equity markets have soared. But for all the progress, the American economy remains extremely vulnerable.

To understand those economic risks, it is worth considering Japan’s experience in the 1990s. A bursting housing bubble there sparked a banking crisis that was followed by a decade of economic stagnation.

The Japanese government lacked the resolve to do what was necessary. It failed to fix its banks and stopped its early fiscal stimulus before recovery had taken hold, leaving the economy all too vulnerable to outside shocks, including the Asian currency crisis and the dot-com collapse in 2001. Japan’s annual growth rate — which had averaged 4 percent since 1973 — slowed to less than 1 percent, on average, from 1992 to 2003.

President Obama’s economic advisers have learned from Japan’s experience. But they may not have learned enough. (Certainly Congress has not been paying attention.) If they are not careful, they could end up repeating some of the big mistakes that condemned Japan’s economy to a lost decade.

The green shoots are barely out of the ground and Republicans and conservative Democrats in Congress are already demanding that the administration “do something” to cut the budget gap. We worry that the political drumbeat may be too hard to resist. In 1997, after three years of tepid growth, the Japanese government stopped its stimulus: it raised a consumption tax, ended a temporary income tax cut, increased social security premiums and nipped recovery in the bud.

Japan’s other blunder was its unwillingness to fix its banks. Regulators did not force banks and indebted firms to recognize trillions of yen worth of bad loans. Banks trundled along like zombies, squandering credit to keep insolvent firms on their feet. When the Asian currency crisis hit, many undercapitalized banks toppled over.

The Obama administration has not been quite as forgiving with the banks, but it still has been nowhere near aggressive enough. The regulatory reform meant to curb bankers’ destructive risk-taking is moving at a snail’s pace through Congress. While the Treasury has forced banks to raise capital, many — including some of the largest — remain thinly capitalized and weak.

Banks have been unwilling to sell bad assets and take a loss. They remain stuffed with risky commercial and residential mortgages and consumer debt. Bankers, meanwhile, have made things worse by insisting on paying themselves huge bonuses after profiting so handsomely from the taxpayers’ tolerance and largess.

There are two big problems with that. The bankers’ taste for risk has not been in any way quenched. And the American public is, justifiably, fed up. That means if there is another bank crisis — say when the Federal Reserve takes away the punch bowl of low interest rates — it will be a lot harder to get Congress to approve another bailout, no matter how necessary.

The Obama administration has still done a far better job — up to now — in addressing the crisis than Japan’s governments did. As dismal as 2009 was, it pales when compared with what would have happened without the fiscal stimulus and the Fed’s enormous monetary boost.

The White House is now pushing another mini-stimulus plan for next year. Chances are it will need to do a lot more to push reform and boost the economy. If there is an overarching lesson from Japan’s lost decade, it is that half measures don’t pay.

Tags: Bahamas, Cayman, declaration, defaults, discovery, expert witness, forensic analysis, Glass Steagel, homeowners, intake assistance, intermediaries, investors, Mortgage, mortgage securitization, note, Obligation, SIV, structured investment vehicles, TILA audits, toxic loans
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