The Fourteenth Banker Blog

October 3, 2010

Too Big Too Care

Filed under: Running Commentary — thefourteenthbanker @ 9:03 AM

Here is a new but unsurprising development in the foreclosure fraud mess. We already knew legal documents are being fabricated. Now we have evidence of a price sheet outlining the cost of these fabrication services.

I would imagine the shredders are getting cranked up as the rats work to destroy evidence that they knew of the elements of this fraud.

Obviously they knew. Many, many bank employees and managers knew. Attorneys General of at least two states have halted foreclosures. These foreclosure freezes may not be voluntary for long. Judges are waking up. The American people will not stand for a legal bailout. After skating past TARP I and the credit market meltdown, it is hard to see how banks, trustees, and servicers are going to get past this one. The dollars involved are staggering. How can the RMBS market not take a hit? When it does, how can those who made the decisions to do business in this manner not bear the brunt of the cost? All that “risk” that was so profitably offloaded to investors may be coming back, morphed into other forms. Would that not be justice served?

Shareholders are impotent. This is a matter that shareholder oversight might have helped with if shareholders were engaged and empowered. The shareholder rights movement has been neutered by corporate lobbies. Shareholders need to be able to elect Board Members over the objections of management. This fiasco and it’s consequences needs to provide impetus for a revisiting of the governance issues. For management, no matter how many “get out of jail, free” cards are issued, has proven itself unable to govern these “Too Big Too Care” institutions. Some of these employees, I have no doubt, objected vigorously to these practices. Some are no longer with these banks. Run out. Others were marginalized or intimidated. It is time for these to come forward and help usher in a new age of responsible enterprise.

It is time to end Too Big Too Care.



  1. It was Basel II regulators who authorized the banks to leverage themselves 62.5 to 1 when lending or investing in something related to a triple-A, which allowed a 1 percent margin to morph into a 62.5 percent return on poorly defined bank capital, precisely that stuff that big bonuses and too big to fail banks are made of, which created and insatiable demand for these MBS.

    And the market, given the extreme scarcity of real triple-As did what markets normally do, they kept the customer satisfied, and supplied plenty of Potemkin type triple-A rated securities, much of it surely in fraudulent ways or at least very close of being so.

    And now Basel III, though with much better defined bank capital, allow the banks to leverage 71.4 to 1 when investing in precisely the same type of securities that set of the current crisis. Are you ok with this?

    Comment by Per Kurowski — October 3, 2010 @ 9:53 AM | Reply

    • Relying on rating agencies to ascertain risk is clearly a fail. What happened fueled a misallocation of capital to consumer consumption and has gutted our economy and left us with as yet indeterminate consequences. So my answer is no.

      We can and must do better.

      Comment by thefourteenthbanker — October 3, 2010 @ 12:29 PM | Reply

  2. In that case act accordingly and before going after some bankers you should go after go after the regulators you should go even more after.

    Comment by Per Kurowski — October 3, 2010 @ 1:49 PM | Reply

  3. From what I can observe about RMBS ownership of the actual cash flow , a big plurality of the total cash flows, even a majority, were covered by Credit Default Swap contract purchases. The big hit will be at market for those that went naked as in big European finance. Even then, the price destruction in the RMBS will mostly force these holders to hold long for the cash flow. Thus, the market value in a mark to market situation is a non cash bookkeeping entry. If the market is off say 40 % , what would the cash flow reduction that reflected the market actually work out to? Even a 15% loss of total cash flow on a total RMBS contract would almost kill the value at market. It seems to me, the debtor situation now and in the near future guarantees a very large loss in total contracted cash flow. The discounted cash flow would be highly damaging assuming a “normal” long term interest rate. I saw an ad by Ally today offering 1.71 % on a two year CD. The actual long term discount rate would be at least three times the ALLY offer in the next several years. We cannot seriously assume low interest rates without time deposit and Treasury money bailing to equities. These low rates required panic, induced or otherwise, to sustain in the last two years. Soon, the panic in deposit exit will get underway.

    But what about the CDS contract linked to most pools of RMBS’s? If you look at the Comtroller of the Currency numbers the top 25 banks have bought more protection than they sold. But , taken together, they look from a practical perspective to have more or less just swapped specific losses. They still have massive losses .This problem still lays off the losses on the depositor based system. The government must still guarantee these institutions at the end of the day. One solution might be for the governments to force holding the RMBS’s to maturity or legal end of the cash flow generation. The government funds the liquidity needs and leans very , very hard on depositor churning their deposits. I do not see the political will developing in the US to make such policy decisions stick. The 2008 panic solutions shot the bolt given the moronic economic beliefs of Americans. Think of a President Boehner.

    As an aside, where will the funds exiting deposits and Treasuries go? I have had a long time investment in the oil trust Permian Basin Trust. It provides a long term decent yield based on the moribund accounting of Proved Reserves. If you look at the enhanced oil recovery possibilities of the Permian basin and this includes virtually all of the PBT owned leases, techically recoverable light crude using EOR is around 20 -25 times so called Proved Reserves. Massive work has been done on the EOR of the Permian Basin funded by the DOE. The forgoing technically recoverable multiples may even be understated from the virtually guaranteed presence of relatively massive Residual Oil Zone recoveries over and above EOR estimates. Sooner or later, these types of investments will be bought up for the cash flow and future potential. PBT is hardly alone in their fortunate circumstances. So, what will we get but another panic bubble as investors leave debt instruments? A lot of money chasing a far, far smaller market. The entire surplus capital problem in spades? It seems to me that the government must stabilize the debt market yields or face ruin. Even by decree? In doing that though, the government must force real estate debtor restructuring or else. I doubt they are capable and President Boehner would not have a clue. The problem is one of advanced quantum physics and President Boehner would be a Plymouth Bretheren so to speak. Political capacity of the US is in a terminal stage?

    Comment by Jerry J — October 3, 2010 @ 3:58 PM | Reply

  4. 14th writes: “I would imagine the shredders are getting cranked up as the rats work to destroy evidence”

    lol, a banker with a literary bent 🙂

    Comment by tippygolden press — October 3, 2010 @ 5:28 PM | Reply

  5. The Judges in Florida must be cringing. There is a Judicial Election on November 2, 2010. Supreme Court, Appelate Court and District Court. If there is even marginal voter interest surrounding the issue of fraud on the courts and judicial pimpery to the finance sector it will show up in incumbent defeats. There is excellent political pot stirring going on with this issue. Will it matter sufficiently to toss masses of incumbent judges top to bottom? Judicial elections always have some negative bias against incumbents. Consequently, a relatively small induced anti incumbency vote would probably cause a lot of judges to get tossed out. Are there enough people in Florida that even care about foreclosure fraud on the part of the banks and servicers? What I cannot figure out, given that in Florida post foreclosure Note Deficiencies may be pursued, is why people just do not do a bankruptcy. This goes double or triple for oldsters in that at least $1 million per person of 401(k)’s and other retirement funds are excluded from the Bankruptcy Estate. In my state, BK attorneys will tell those nearing retirement to time their retirement so as to go straight to a Chapter 7? It takes a little planning if you are on the cusp of retiring anyway. I see this technique as the way for Yuppie bail outs of the McMansion. Throw in the rest of the debt as long as you are at it. Soon to be SOP. When it is over and the discharge has been granted. Use your retirement funds to buy a nice , very in, little house in a very depressed market. You know, your kids can help out here too. You use a car they own. Besides, one can squirrel away stuff on the side. There are tricks like holding your allowed cash mostly in American Eagle Currency where it is valued at face value. The Supreme Court Gold Cases will amaze you. Currency is only valued by the state at the value set by Congress. There is literally no legal difference between a $50 Federal Reserve Note and a $ 50 American Eagle.

    Anyway, what do you think the voters of Florida think about foreclosure fraud? I am tending to think the voters could not care less. Indeed, many voters think those losing their homes are the scum of the Earth. A lot of middle class people held Fannies, Freddies and similar paper and took a bath. These voters might not make a difference though. I would love to be wrong here. (Look up the 1910 SC case 7 Ling Su Fan v. U.S. The 1934 Gold Cases followed earlier cases .)

    Comment by Jerry J — October 4, 2010 @ 1:44 PM | Reply

  6. The above linked story from Naked Capitalism secondarily links to I am looking over the message board. A couple of hours ago, there was a post by Caveat Lector. Lector reports a friend in Palm Beach was talking with a closing attorney and was told the Title Company now has a blanket exemption from title coverage if the property was ever foreclosed in the past. Might this be the end of title insurance since it is a total rip off with such a clause. If you sell a house and it is not title insurable for past encumbrances what does this do to conforming mortgages ? I cannot concieve of the Federal bureacracy at the GSE’s accepting such a proposition. It does say that the title companies understand their risk is unsupportable by the fees they take in.

    Lector says these exemptions from liability are slipping by the buyer, the borrower and lender.

    The legal system now has a real built in problem. As I posted a few days ago, why would I pay off a Note and not get the original Note back with proper endorsements without a surety bond from the lender or an escrow of my pay off funds until the Note is back in my hands? Of course, I would have to seek a court order that the lender produce a title chain, even if the note was blank endorsed , or provide a bond at the least. Here is future massive legal breakdown. I expect this conundrum will permanently break securitization of secured interest loans. 14th, what do you think?? This problem will soon stare me in the face if I buy another house. The foreclosure problem is tiny in comparison to clear title in future real estate transfers.

    Comment by Jerry J — October 4, 2010 @ 3:52 PM | Reply

    • So the Title Policies themselves will carry an exclusion for foreclosed property? That should not be acceptable to any buyer of the property or the note. It would also be a “taking” of sorts for anyone that bought a foreclosed house in the past because how would they get fair value for it? Maybe this is the bait to get a legislative bailout? Title Insurance companies to the rescue of lenders?

      I think this must be a strategic move and cannot ultimately be the final outcome. Maybe Title Insurers want to negotiate indemnifications.

      Comment by thefourteenthbanker — October 4, 2010 @ 6:08 PM | Reply

      • The circumstances in Lector’s post were that the title company attorney inserted the exclusion from coverage clause in the policy at the closing. He obviously executed the policy on behalf of the title policy. Nothing new here. I suspect the title company attorney wanted chain of note endorsements from the lender before he distributed the settlement check to the lender and saw a gaping hole.His/ her only out was an exclusion if the buyers of the policy consented. That or call off the closing…. big time liability their for the lender being paid off. The buyers probably did not know what was going on. That puts the buyer’s attorney on the spot big time if note claims showed up. The attorney’s for the buyer must be very careful. Seller attorney’s in seemingly clean property transfers have big risks too. We have many title companies in the US and they all write their own policies. The attorney involved probably owned or had a piece of the title company. Obviously, the title company Lector was being told about was scared into this kind of exclusion.

        This fraudulent messing with mortgage releases and note chains is breaking out big time in the media. It is a big lead item on MSN. com tonight. The banks have walked into something really big. I know how they think in back rooms and the mortgage payoff / foreclosure back rooms just push out the shit as they are always told to do. My company tended to have these same problems with payout claims when we had a younger Project Accountant. The paperwork will kill you. Every month I saw billings and back up six inches thick with AIA docs as an organizer get bounced by the title company.

        What all this says to me is that the title companies are terrified of what they are seeing. Their most important constituient is the real estate broker after the advent of the present system. When the local bank carried the paper, the local banker was their most important constituent. Well, the local banker just pushes the drivel though now like any fly by nighter. The broker needs a clean closing to get paid just as contractors do.

        There must be a lot confrontation going on now in the few real estate deals that close. Just think of the headaches in closing a bank foreclosure with knowing buyers.

        There are a whole array of professionals at risk for damages in letting the lenders off the hook. In most cases nearly all of these professionals have little connection to the involved fraudulent lenders or their captive servicers. Especially on a continuing basis. Getting real hot for big finance.

        This time the banks have walked into the biggest CYA wall of all. CYA required against the banks.

        Comment by Jerry J — October 4, 2010 @ 8:15 PM

    • From Diana Olick “The banks managed to do it to us again. They couldn’t handle the mess they made, so they just made it bigger.”

      Will the taxpayer be looking at another costly bailout?

      Comment by ella — October 5, 2010 @ 7:53 AM | Reply

      • PS. It is best to get the original note but if that is not possible you can obtain a legal document from the lender and servicer that the note, and mortgage debt has been paid (satisfied) and that the note and mortgage are canceled. It should be in legal form and notarized. When you obtain it, it should be recorded with your deed with the county auditor / recorded. Contact your title company for the proper form of the document before requesting the same from the lender and servicer. This should verify the chain of title.

        What a mess!

        Comment by ella — October 5, 2010 @ 8:01 AM

      • It looks like FNF is whistling in the dark. But the key problem is where notes are paid off and another party shows up legitmately owning the Note you never got back or were given a fraudulent reopresentation that no Note was outstanding. The lender being paid off simply has given a fraudulent representation and a fraudulent Mortgage Release. What then? I as the new buyer get stuck with the cost of litigating away amy claim against the title of the property I bought. Thus, in theory, I as the new buyer should insist on an indemnity bond written by someone in lieu of title insurance. Now I get stuck with both. Had we gone over to the Torrens System a century ago, all this would be moot.

        FNF is representing away claim exposure. That is all they care about now. Interestingly, why would they even put out such a PR piece if they were not worried about the problem?

        Similarly, as the debtor paying off my loan and not getting my original Note back, why should I risk litigation and claims that my note was paid off with funds going to the proper party? At the least, I would insist that my attorney involved in paying off the Note get a principle reduction in the payoff in lieu of getting my Note back. That or I am provided with a surety bond. Failing that, I get my proceeds payoff impounded by a judge until they comply. That would make the lender settle for less than what I owe. They would shaft me any way they can as a matter of right. I do the same. That is our system. Look out for number 1. Either way the sharpies will explot the advantage.

        Comment by Jerry J — October 5, 2010 @ 10:12 AM

  7. O/T…..What are the implications of the $20 Trillion increase in the total notional derivatives of the top 4 major banks (basically, all of the total increase) in the latest OCC report?
    Y-o-y, that represents just about 150% of the nation’s GDP. (pg 24) (pg 22)

    Comment by iceobar — October 4, 2010 @ 10:40 PM | Reply

    • Thank you for the links. The systemic risk is profound and that is why these institutions are Too Big Too Fail and why the public is at risk for the downside while the earnings and bonuses go to the managers and shareholders.

      Comment by thefourteenthbanker — October 5, 2010 @ 2:52 PM | Reply

  8. Last Friday, I heard part of an interview with the maker of the new documentary, “Inside Job”, Charles Ferguson. Here is a piece that is, I think, a new piece of the puzzle on how this all came about. I’ve not heard anyone else touch on this before:

    BLOCK: You make some claims toward the end of the film that have to do with academia, with people at institutions of higher learning. And your claim is that the financial industry has corrupted the study of economics itself. What do you mean by that?

    Mr. FERGUSON: What you find is that very prominent professors of economics, often people who have also held high government posts, are paid to testify in Congress. They are paid to be expert witnesses in both civil and criminal trials. They’re often paid to write papers that praise the financial services industry and argue on behalf of deregulation of the industry. They make millions, in some cases tens of millions, of dollars doing this. And this is usually not disclosed. And in fact, university regulations do not require disclosure of these payments.

    BLOCK: You include an exchange that gets increasingly angry with Glenn Hubbard, he was the chief economic adviser to President George W. Bush, he’s now dean of Columbia Business School. And you’re asking him about this outside income that you’re talking about, the income he gets from being on the boards of companies in the financial services industry. And it leads up to this. Let me play you this bit of tape.

    (Soundbite of film, “Inside Job”)

    Mr. FERGUSON: Do they include other financial services firms?

    Mr. GLENN HUBBARD (Dean, Columbia Business School): Possibly.

    Mr. FERGUSON: You don’t remember?

    Mr. HUBBARD: This isn’t a deposition, sir. I was polite enough to give you time, foolishly I now see. But you have three more minutes. Give it your best shot.

    I suppose if I had thought it through, it would have been a “duh!”, because we’ve all read about the influence of The Chicago School, etc. But that was, I always thought, in terms of “oh, yeah, this is their ideology”, but not that it was a deliberate attempt to really corrupt entire the field. I suppose “corrupt” is in the eyes of the beholder…………..

    Comment by sandi — October 5, 2010 @ 2:06 PM | Reply

    • After the BP spill I heard they were hiring many of the profs in the south that had expertise in Gulf of Mexico ecology as consultants. This is a sad development for our country. I suppose the first question any congressional panel should ask, under oath, is “are you a paid consultant, expert witness or advisor for any entity other than the employer you represent?” Transparency would help somewhat, though the media would probably edit these answers out.

      Comment by thefourteenthbanker — October 5, 2010 @ 2:46 PM | Reply

    • Bottom line is there has been decades when only the corrupt have been able to move up. It doesn’t matter what the organization or even the country itself.

      What’s gone from the land of the free is honesty and love for America. What’s left is, winnner takes it all.

      As long as the winners were able to throw crumbs for the rest 98% that worked. Next few years will be very interesting!!!

      Comment by Vocalbanker — October 7, 2010 @ 1:29 PM | Reply

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