The Fourteenth Banker Blog

September 28, 2010

Colossal Failures in Judgment

Filed under: Running Commentary — thefourteenthbanker @ 7:42 AM

Once again our largest banks have botched things up. Hat tips all around on this one. Everyone has been covering it but I will recognize specifically the Huffington Post, New York Times, Washington Post, Bloomberg, Naked Capitalism, and Representative Alan Grayson’s office. A few days ago I blogged on foreclosure fraud in Florida, so I won’t run through that background again. What has newly developed in the last several days are these facts:

The banking industry is still reeling and in denial on this one. This excerpt is from Yves Smith:

One of my colleagues had a long conversation with the CEO of a major subprime lender that was later acquired by a larger bank that was a major residential mortgage player. This buddy went through his explanation of why he thought mortgage trusts were in trouble if more people wised up to how they had messed up with making sure they got the note. The former CEO was initially resistant, arguing that they had gotten opinions from top law firms. My contact was very familiar with those opinions, and told him how qualified they were, and did not cover the little problem of not complying with the terms of the pooling and servicing agreement. He also rebutted other objections of the CEO. They guy then laughed nervously and said, “Well, if you’re right, we’re f****d. We never transferred the paper. No one in the industry transferred the paper.”

This creates a lot of problems. If the originator is bankrupt (New Century, IndyMac), the bankruptcy trustee is supposed to approve any assets leaving the BK’d estate. I’m told bankruptcy judges who have been asked were not happy to hear this sort of thing might be taking place, which strongly suggests this activity is going on without the requisite approvals. And who from the BK’d entity can endorse it over? It doesn’t have any more officers or employees. Similarly, a lot of the intermediary entities (the B and C in the A-B-C-D chain earlier) are long dead. How do you obtain their endorsements?

Now you understand why everyone is resorting to fabricated documents and bogus affidavits. There is no simple way to fix this mess. The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS.

The former subprime lender CEO still refused this to consider this a problem: “Oh, Congress will pass a law.” My colleague pointed out that this was a state law matter, Congress had no authority, and even the Supreme Court was unlikely to intervene in well settled real estate law. The arguments from the CEO were distressingly familiar, bank industry incumbents seem to resort to the same script: any borrower friendly solution will wreck the economy, the banks will have to get another bailout to get themselves out of this mess.

So here we are back to 2007-8. If you and I make a serious mistake at our jobs, we get fired, and if we make a really serious error, our company could perish. But when bankers screw up, and leave a lot of collateral damage in their wake, they are confident that their sugar daddies in DC will clean up the mess for them.

The question must be asked, how does this happen again and again in the financial system? Lets face facts. This is the system we have. There will likely never be a good post-mortem on this. Many details will emerge, individual cases will be litigated, perhaps there will be hearings. But the root of the problem will not be discussed because exposing the rot is too problematic. The rot goes to the top. It is too pervasive not to go to the top.

These things do not happen in a vacuum. The old “rogue employee” line will be trotted out. “Errors in judgement” will be admitted. But it will not be admitted that errors in judgement are produced systematically. You see, the cost of such errors in judgment is less than the ill-gotten gains. Such costs are a “cost of doing business”. The profits that were generated by this activity dwarf the potential cost. Executives incentives are to produce gains today and they do not pay for the risks that are left for tomorrow. The decision to have individual employees sit and sign affidavits that are false was made consciously. Someone decided to save the expense of doing it right. Or someone figured out that the chain of title had already been broken and it is better to whistle past the graveyard and defraud a court, a debtor, an investor, or a shareholder, than it is to do the right thing. All of those someones will likely not be identified or will get a slap on the wrist. The shareholders will never really know what happened and how certain executives created the culture in which these decisions made sense. But the truth is that decisions to cut corners, commit fraud, abuse clients, or mislead investors are generally cognitively rational given the position in which the individual employee is put.

Do any executives get that? Let’s hear one Wall Street CEO stand up this week and say, “I created this. I was wrong. I will pay the price and I will change the system in my bank so that employees never feel they have to choose to commit fraud. I will root out the responsible managers. Until this is complete I will work without pay. When it is complete I will offer my resignation to the Board of Directors and ask that it be put to a vote of the shareholders at the next annual meeting.” Oops, I’m dreaming.



  1. Lovely, lovely piece 14th. Please keep it up.

    What is never mentioned though is that literally everyone in big business works on the assumption that the electronics is the be all and do all and the legal paperwork is from the snail era. Even bringing up the relevance of actual paperwork could get you axed in much of finance because it “proves” you are not electronically avante garde. My industry is literally buried in snail era legal devices but you get paid through the title companies and deliver the paperwork or else. That’s real estate. Real estate law requirements are highly entrenched and account for vast amounts of lawyer gross revenues. So, indeed the banks and financing vehicles that did not bother with the paperwork are going to be out of luck. If the paperwork in real estate transactions were overridden the law firms , big and small would permanently lose a massive revenue source. I often hear the comment that lawyers now run everything . In other words, soon, a lot of paperwork will be set set aside as fraudulent. The horses are now out of the barn and gone with the wind .

    As an aside , in states where post foreclosure loan deficiencies may be pursued I can soon see a bankruptcy filing as at least an intermediate step.

    Going further. If you were a title insurer insuring a foreclosed property with no proper chain of endorsements would you insure? Just think how easy it would be to sell a note in the files of a bankrupt estate . You buy the asset and it is endorsed over to you. It later turns out that the note had been sold downstream so that there are title questions about the note. Just think of the mischief a clerk in the BK trustee system could perpetrate. The files get tossed . The clerk takes the note from the files and can endorse the note, especially when the note is clean on the note itself to that point. WOW, what a scam possibility.

    The entire legal system relating to Statute of Frauds matters will soon be at risk if they allow the banks to get off the hook. Might there soon be an AARP of mortgage debtors doing class actions?

    Comment by Jerry J — September 28, 2010 @ 11:28 AM | Reply

  2. The corruption in the banking industry undermines our economy. Period. As long as the banks are screwing their customers, the multiplier effect which is the basis of our economic growth will not function.

    So, once again I will say – we need Federally funded elections NOW! – the only way I see to resolve the pay-to-play quid pro quo is to get the money out of politics.

    Comment by Lucy Honeychurch — September 28, 2010 @ 1:29 PM | Reply

  3. Actually, there is potential here for destruction of the entire system of legal ownership of real estate. The magnitude of the statement that all of the paperwork of mortgages originated by Countrywide remains at Countrywide is difficult to understate given that Countrywide resold 96 % of the mortgages. The problem is not concentrated in proving the Note in foreclosure cases. The real problem is the validity of the Mortgage Release when mortgages are paid off. There is no real assurance anymore that an unencumbered title exists to the property if it is subjected to an encumbrance. The buyer of the property now has a problem , the potential that he bought an encumbered property the buyer and his title insurer thought was unencumbered. Uncertainty kills value and this is a big uncertainty when the problem is extended to all future mortgage payoffs.

    It is obvious that the only practical way out of this mess would be a national Torrens System type of insurance pool that all handlers of future mortgages pay into. These costs will be passed onto the buyer of real estate that finances via a mortgage. In a Torrens type system, the Torrens Funds make good the losses to persons who owned an undisclosed security interest or title in the property sold. The title companies will fight this to the death and charge huge amounts for title insurance. But, given the local natures of title insurance companies they could all be buying more risk they can handle outside of outrageous fees like 5 % of the real estate transfer value. This raises real problems because it effectively takes away from downpayments or radically increases up front cash requirements of buyers of real estate. Given the huge future oversupply of undesireable properties like McMansion’s, bank losses will only increase from the correlative aspects of the mortgage crisis.

    The pols will soon be looking into a national Torrens type title insurance system. Either that , or all mortgage securitization will terminate. That result guarantees a lot fewer mortgages and an even greater collapse of housing values. Mortgage securitization has all but collapsed since most mortgages are going to Fanny, Freddie and such. The Federal Reserve will have to buy these mortgages as backing for a Federal Electronic Currency at some point. But the Fed will require very clear titles out of necessity. So, the title insurance requirement will get ever more expensive for a couple of decades. That still kills off real estate values triggering more systemic losses from debtors bailing out.

    Comment by Jerry J — September 28, 2010 @ 2:02 PM | Reply

    • I should have added another aspect to the problem. Only a fool would pay off a Note at a closing without receiving back his Original Note and a valid Mortgage Release. Similarly, one now risks paying his monthly payment to the wrong party. That was NOT a risk the Note maker agreed to. The legal quid pro quo is getting back the Original Note. If I cannot get back the Original Note I am utterly open to risk that I paid the wrong person. If I get the Note back, I at least know the person I paid possessed my evidence property conveyed to them. This protection has been absolute for many centuries if not millennia.

      The losses belong to the careless people that bought securitized mortgages. That does kill the present system if even 15 % of the mortgages wind up with total loss of security if the Note is foreclosed.

      Comment by Jerry J — September 28, 2010 @ 2:18 PM | Reply

      • That would be an appropriate free market consequence. And if there were misrepresentations, torts back to the sellers are also appropriate.

        Comment by thefourteenthbanker — September 28, 2010 @ 2:33 PM

      • It occurred to me that any lender that is unable to convey a traceable valid Original Note in a payoff should be required to provide the debtor paying off the note with a first rate surety bond that covers the debtor until the statute is down in every respect. That would be a very expensive proposition and who would provide it in a case of securitization. The trust has no assets from which to provide a surety bond and is unable to reduce proceeds payable downstream from the trust. The Feds could enact an excise on the industry and provide the surety bond itself. Fat chance. But sooner or later there will be class actionlegal problems as loans are paid off or go to term.

        Comment by Jerry J — September 28, 2010 @ 3:04 PM

  4. We have an interesting tie in to 14th’s blog today. In today’s WSJ, Money and Investing,the bottom page one feature is ” J P Morgan Targeting FDIC Funds for WaMu Claims” JPM is going to claim around $6 bn in purchase claims from the FDIC that resulted from mostly WAMU forced mortgage repurchases. I would have expected JPM to be covered in just such a way. Dimon is no fool and must have known he could force such a side letter commitment from the FDIC to do the Wa Mu deal. We obviously have another Jamie Deal coming to light. It is all about knowing your factual position and the chutzpah to stick to your guns. Jamie knows his facts and has the chutzpah. I was wondering what the real WaMu deal was. Undoubtedly the FDIC was bepissing itself as all politically oriented special vehicles are prone to do when they are against the wall. They beg rather than attack.

    Comment by Jerry J — September 28, 2010 @ 5:12 PM | Reply

  5. Wow!!!

    No prosecutions = No clean up

    I would like to know if the top executive of mortgage banking at JPM still has a job. And if yes, WHY?

    How can these CEOs not fire these people….unless, they are the ones that gave the orders!

    Is there way this post can be delivered to evey TBTF CEO I this country? They will never do what 14th is asking them to do, but at least they’ll know that people still expect ethics out of them….. Even if they have lost the capability to deliver ethics anymore. And maybe they’ll also know that Americans are not stupid, they get the games. Unfortunately the games are too rigged agAinst them.

    Comment by Vocalbanker — September 28, 2010 @ 11:14 PM | Reply

    • It is quite clear from the circumstances that developed in the last two decades that the mortgage business policies of these banks were very much promoted by the CEO’s and more importantly, the Boards of Directors. The circumstances follow from a business model that the leadership accepted as describing their reality. Their reality was that the business model was riskless to their institutions due to the matching of credit default swaps with mortgages as a marketing device. This marketing device also protected the wholesaling business in mortgages of the big banks and investment banks in the US. The ultimate purchasers of these mortgage backed and credit insurance protected cash flow assets were understood by the purchasers too as being riskless. Every one of these units basic frame of reference was their business unit and not the collective result of the model being systemically flawed from a collective perspective.

      You are a banker, what were the attitudes of your colleages in your bank? Are not most of these colleages free market types where the assumption is that the collective automatically corrects itself? But , where does the corrective take place? It hits the bankers first and the sum of the hits on the bankers and other investors is the collective result. I have never yet met a free market type that did not assume the collective result was laid on others and not his or her own institutions and selves. Just look at all the recourse transactions involved in the whole marketing scheme of mortgage syndications. Every firm that engaged in recourse transactions assumed the actual recourse transactions were within their model parameters. They were wrong.

      In survival circumstances the tendency is to blame others to survive yourself. The very essence of finance capitalism is maximizing personal economic survival at the expense of the loser on the other side of the transaction. You sell the buyer a pig while deceiving yourself to feel good that you sold the buyer a silk purse. The salesmen always touts a silk purse to earn his her commission.
      Just look at what GS sold CDS protection for to people like John Paulson and what they laid off the bet for to a fool at AIG. Then GS almost got bit with a failure of AIG. They still had to make good to John Paulson and similar persons. That meant forcing the Treasury to come to their rescue.

      Comment by Jerry J — September 30, 2010 @ 1:28 PM | Reply

      • Jerry, to answer your question, there are no thinkers left in commercial banking. And I mean this with all sincerity.

        Decades ago in addition to deregation there was another change that happened in bread and butter banking, the so called “credit training programs” were done away with. If I was a beleiver in conspiracy theories I’d say that was all part of the plan, but I can’t say for sure. I can however say this much that end of those programs was the beginning of the end of common sense banking, the know your customer banking, and what followed was a period of “hunter and skinner” approach to banking. Obviously I’m only speaking for commercial banking since that is my area of expertise. The credit that was the heart of American prosperity and job creation. The kind that senator kauffman mentioned in his last speech.

        Fast forward 25 years, professionals in my industry today are now of two types the ones who want to be exactly like their managers and their managers manager and the CEO (I.e. Like their leaders). That shouldn’t be a surprise, that’s what followers do, they follow the lead.

        The other kind are like yours truly, hateful of making money and gaining positions at the expense of destroying the integrity of the profession. My types see through the lying and cheating and the shameless continuity of it.

        Please don’t be offended because I love your comments and respect your immense knowledge, but sometimes I do think that I wonder if you ever experienced what we today are experiencing. Today it’s not just about manipulating the rules to benefit the company. Today there are truly abusive practices in place, entrenched. So much so that dissent or even politely pointing out to what might be construed as fraud and theft is met with immediate and tough punishments, demotions, no salary raises, even petty things like no invitation to fun events.

        So the bottom line is that bankers today are Zombies who are either only interested in making money, lots of it. Or they are miserable with a vague sense that something feels very wrong, but how can I be the only one to even try to change it.

        There are no thinking bankers anymore that have the capability to even consider the long term implication of their little, every day decisions. And the ones that are left are anonymously blogging and commenting…… That’s it.

        Comment by Vocalbanker — September 30, 2010 @ 5:15 PM

  6. 14,

    Another great, well documented post! Required reading for my class!


    Comment by Lawrence — September 29, 2010 @ 11:00 AM | Reply

  7. Thanks Vocalbanker. I deliberately pursue my inquiries on as non judgemental a basis as I can summon. In trying to figure out “what is” or the assortment of facts behind actions judgement greatly impedes the process. I am personally as offended as any life long Socialist could be about the state of affairs in the Western World. I came to realize this viewpoint much earlier in life than most people. I tend to follow the Eastern civilizational viewpoints hence I realized too the limits of Socialism and the great bugaboo of the modern human… the one great truth. What I look into socially follows more the tenets of a circular quantum physics as opposed to linear Newtonian physics.Jokingly,Capitalism is about as Newtonian a set of beliefs as there could be.

    Getting to the nub of the moral issue is the predilection of the present belief structures to destroy personal understandings of individual place in society. These deceitful people in banking got the way they have become just as you eloquently describe in your answer to my question. The bankers found a few systems to believe in just as any horse bettor. I never saw a betting system for nags or dogs yet that worked. The failure only deepens their belief, it seems. These bankers today are beliver’s believers.

    The solution to the problem of morality in the modern world or any time in the past is understanding how human beliefs got to where they are. A Buddhist like the Dalai Lama has described these people with lapsed views of how to maintain human and natural commonwealth as a form of excuse. He has said in various interviews that these people are doing their best. That they lapse back, gain ground and so forth . I am not excusing moral lapses , but we do live in a system where every economic action promotes the very lapses we ought to object to. Almost all of these people will tell you they are doing good. How do you change their illusion of good? That raises the question of changing beliefs in a society that I think is beyond belief change until compelled by dire circumstances. So there, I judge too. But my view will not change their belief. Indeed, they will dig in deeper.

    From the perspective of say the revolutionary. The revolutionary that might succeed in putting together a corrective movement must understand the enemy of the revolution far better than the enemy understands himself to prevail in a revolutionary correction of the moral lapses that offend so heavily. That action occurs. What do we almost certainly get as a result? A new offending morality as developed in the Communist countries.

    So the modern world that is killing itself and everything on the planet has a set of politico/economic beliefs that are failing and a counter system that has failed too in it’s early primitive version. ( My delusion?) That is one hell of a fix to be in and surely must perplex the Dalai Lama too. ” We are all related”, a principal religious statement of the Lakota Sioux, I think defines the problem. Certainly, tribal and feudal societies may be able to understand the Lakota and more or less have done so for millennia. Our system simply destroys the very idea of commonwealth among people and the planet as a whole. What you describe is the natural result of many , if not most, of American cherished ideals. Our principal statement might well be ” We are all enemies.”

    I have experienced very much what you have experienced. I know organized crime because I grew up on the fringes. I was a junior accountant in the mid fifties while going to college. One of my clients was a used car dealer who financed ala Buy Here Pay Here. His bookkeeper said the principal brother owning the place was a ” Murderer with a pen”. He sure was. After that I spent the next quarter of a century in publishing and for many of those years I was heavily involved in Newsstand Circulation even though I was the tax manager. I doubt there was a more potentially corrupt business in the US. My job was to keep their theft from the publisher to a minimum through anyalsis of circulation reports and eventually meeting with many of them. After that, I went into my second love beyond publishing… heavy industrial and commercial construction. I was the tax manager but the company really wanted me to be the ” countercunning” doer to prevent the company getting arrested due to machinations of the ” cunning” they were involved with. The worst were the clients. I know a lot about crooks and I have certainly been one over the years in my own mind. I cannot claim the Dalai Lama’s out. Besides, Baksheesh is universal in human relations . Even the Native American tribes complain about how corrupt things now are in tribal government. Things do get out of hand to use a favorite expression of Lee’s about why orders exist.

    I am not in the least offended.

    Comment by Jerry J — October 1, 2010 @ 9:19 PM | Reply

  8. […] (if they exist) smashed to bits. Here’s how the anonymous financial exec who writes over at The Fourteenth Banker put it: The profits that were generated by this activity dwarf the potential cost. Executives’ […]

    Pingback by Smoking Loans Prove Wall Street Committed Fraud « Livinglies's Weblog — October 14, 2010 @ 3:45 AM | Reply

  9. […] (if they exist) smashed to bits. Here’s how the anonymous financial exec who writes over at The Fourteenth Banker put it: The profits that were generated by this activity dwarf the potential cost. Executives’ […]

    Pingback by Explaining Wall Street Fraud | Foreclosure Defense & Strategic Default — August 27, 2011 @ 5:02 PM | Reply

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