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:
- Banks were aware they were buying (for resale) loans that did not meet qualification guidelines. They pawned these off on investors.
- The largest loan servicers in the country were cutting corners and providing unverified or intentionally false affidavits to courts to support foreclosure. See this and this and this and this.
- Such false affidavits were produced as perhaps the only means of actually foreclosing on the non-performing mortgage loans that has been sold to investors or remained on the books of the banks.
- Deceiving the courts to facilitate foreclosures has been going on for years.
- Some judges don’t care about legal procedure. They just want to clear the dockets.
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.