The Fourteenth Banker Blog

October 14, 2010

What Did They Know? When Did They Know It?

Filed under: Running Commentary — thefourteenthbanker @ 8:36 PM

The markets finally woke up to the mortgage fraud debacle. JP Morgan, a day after beating earnings expectations, is off 4.18% for the high water mark of 48 hours ago. Bank of America is off 11.9% and Wells Fargo is off 5.9%.

Even CNBC is acknowledging the fears that are sweeping the marketplace. Today they reported that there are fears that earnings could be impacted more than expected, perhaps way more than expected.

With perhaps a tiny bit of understatement, David Fabor states that:

It appears the mortgage content of many of those pools—created when the banks were dominating the mortgage securitization market in 2005, 2006 and 2007—may have been misrepresented.


Yet perhaps most interesting is admission by JPM that they ceased using MERS on some transactions two years ago. One wonders why? The answer from spokesman Tom Kelly was vague,

So I asked Kelly why they dropped MERS. First he said, “In truth some courts won’t accept MERS for foreclosures.” But then he said it was “a matter of policy.” I’m sure they don’t want to come right out and say, well, we’re not exactly sure MERS is all that legal.

Oh, and something I noticed in the earnings … JP Morgan upped its reserves for “litigation and repurchase.” Repurchase refers to when the bank is forced to buy back loans (called “putbacks”) from the investor or security due to some problem with the origination. They have the biggest reserves of all the banks, according to experts.

This is not a new crisis. This is a continuation of the crisis that surfaced three years ago but began years before that. The many individual stories of homeowners who were wrongly evicted, or had their homes broken into, or had false documents created and presented to the courts are all pointers to the rot, the toxicity of the assets in question.

So the questions above are addressed both to the CEOs of the major banks and to the primary architects and defenders of the bailouts. See, despite all the assurances by Geithner and Bernanke, all is not well with the bailout. Instead, the government and the mega banks are in collusion to deceive the broad public, the investing community, (which keeps getting smaller) and international private and public economic players. It appears JP Morgan has known that all is not well but has been acting as if it were.

This post addresses much more thoroughly what I alluded to a few days ago. The Fed owns this crap and that puts the government in bed with the bankers. I will just pull out one section.

The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with. Don’t look at what they’re doing, that might hurt the boom. Don’t ask them for anything in return for bailouts — that might clog the system. Don’t stop them from churning foreclosed properties — that might stop the recovery.

But the real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior.

The government owns or is backing trillions of dollars worth of assets predicated on the same or similar suspicious loans that defaulted during the 2008 crisis period, which they did nothing to stop (or force banks to restructure).

I believe the intent of Geithner has been to deceive for political purposes and to protect the markets, which is really to protect the existing wealth distribution and power structure.

It is time for an investigation of banks, the executive branch, and the Fed to answer the questions, what did they know and when did they know it?



  1. Anyone want to take odds on whether or not we’ll see perp walks down Wall St. now? I wouldn’t – actually I would – I’d bet my last dollar that it won’t happen. The oligarchs have won and the rest of us are toast.

    Comment by Sandi — October 15, 2010 @ 2:36 PM | Reply

  2. Another great post 14th. Of course, the entire upper echelon inside the beltway has been terrified of a total melt down for two years now and running. They forsaw very little of the multiple panics that ensued from their ad hoc behaviour early on starting with the Jamie Deal involving Bear Stearns. There were at least a dozen reawakened panics that rippled through the entire financial system. We can never forget that a big bust in the financial system will cause a breakdown of distribution. Food and fuel logistics would quickly breakdown. Even water supplies in the big cities were dependent on things like chlorine supplies in the era of just in time. I can imagine the presentations based on logistical facts as they stood in September 2008 that the military presented on a top secret basis. The big three Geithner, Bernanke and Paulson must have been briefed… but perhaps not. Even so, a mere thought of the logistical weaknesses that surfaced after Katrina should have caused brown stains in the Lederhosen of all the Beltway big shots.

    The problem is latently just as bad tonight if the mortgage fraud blow up ignites another financial panic with another damned election just 18 days away. Two years ago tonight, Lehman’s death from ideological blinders was decreed. The problem,as immediate susequent experience showed, was the behaviour of the investing public. They panicked their asses off and continued to do so while blabbering ” no bailouts” as if in a stupor in Obrien’s Bar.

    OK, where is the courage of their convictions among the top tier pols? Is their real courage residing in resistance against the blabbering fool citizen? Or. Is their courage to back the enlightened citizen seeking revenge? Before or after the fix? Which comes first, fixing the problem or simply hiding behind their dignatas as people of high office? I say this because Angelo Mozilo today settled his SEC problems with a no fault clause for $45 million plus a penalty. My guess is that his cost was pre contracted to paid for by Countrywide after the merger. Just a guess though, a standard idemnification arrangement by the shrewd.

    Right now, it seems all that will happen is the arrest of a few employee perps doing their job as the probably have done it for years?

    But these arses still have to fix this problem because too many future parties to transactions would need clear titles or idemifications not offered. They fix it or all the cash flows those mortgages owned or guaranteed by all government organizations will really become cash flow losers.

    I thought the Nomi Prins piece was marvelous. Well these guys wanted to be big shots . Now delivery is on their heads.

    Comment by Jerry J — October 15, 2010 @ 8:56 PM | Reply

    • Breakdown in distribution, is that what Treasury Secretary Hank Paulson warned the politicians about two years ago (tanks on the streets)?

      It looks to me like if the problems in the financial system is much more severe today compared to two years ago (although I don’t feel the same tension like in 2008 yet).

      Comment by Jakob W — October 16, 2010 @ 5:50 PM | Reply

      • The breakdown of the state causing collapse of essential logistics is so fearful, it is really a taboo subject outside of apocalyptic groups. You really have to wonder though given how rapidly the USSR collapsed. Just what kind of disunities accelerate these kinds of breakdowns? Accelerated precursor breakdown situations have been experienced in the US a few times during the last decade. 911 was an indication that misplaced compassions might really get in the way of abilities to stop collapse situation expansion if the event were truly too big. The leadership events of the Second Gulf War were more than sufficient proof that leadership has a low capacity for realistically solving problems that get out of hand. In the case of the Second Gulf war, the problem was what amounted to a kind of political dementia. The US leadership based everything on the a priori assumption that Iraq had WMD without questioning the assumption’s reality . Those serving the leadership deliberately forced facts to fit the assumption the leadership desired. Nowhere , where it counted, did leadership stop to sort out beliefs from facts to the point where the Secretary of State embarassed himself before the world. Worse still, assuming the conclusions that they desired the war and that it was important that that desire be marketed to the world, did they make sure that WMD were found in Iraq. Having decided on being despicable the leadership could not pull it off. This brings up systemic very poor political and military judgement along with the morals involved. Simply put. Leadership no longer understands realities and sees realitiy as their desires. ( I think this defines Wall Street.) Fast forward to Katrina. Here we have palpable failure across the board. No reserved logistics were retained for unexpected events. The state local federal interconnects failed to work across all lines with any degree of timliness to satisfactorily interdict the problems of the Katrina time frame. It is quite clear that the entire problem as a singularity centered here along leadership and organizational lines. In most respects, we saw demonstrated the organizational problems, in principle, that led to the events in France in the spring of 1940. Along comes the widely expected , but with unknown parameters, that culminated in the crisis of 2007-2009. The political organizational patterns demonstrated in the last decade were probably worse in 2008. Ideology of many kinds stood over facts and did not allow high leadership self delusions to be set aside. That is still true , even though the leadership was forced to smarten up and apply ad hoc solutions because they were the only solutions possible. ( What fire department in a major city could attack a very major fire if they were organized as has evolved in the US along with delusions that fires do not do harm? That fires are even excellent creative destruction.)

        The politico-economic- federalist system is simply not capable of addressing problems it self creates from over complexities. At least the Roman Republic participants understood the problem to legally provide for a temporary but defined dictator.

        The problems simply expand in more hidden ways like the mortgage fraud crisis.

        Comment by Jerry J — October 16, 2010 @ 8:52 PM

  3. Oops, two years and one month for Lehman.

    Comment by Jerry J — October 15, 2010 @ 8:58 PM | Reply

  4. you used the phrase “free market” and i thought of the term laissez-faire

    “The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with”

    i had not consciously realized that the popular “free market” economic philosophy is nothing more than a restatement of the unpopular “laissez-faire” economic doctrine

    free market sounds so “american”, so patriotic, so yankee doodle

    to keep myself objective i consulted wikipedia, i would let myself be influenced by the laissez-faire and free market entrees published there


    A free market is a market in which there is no economic intervention and regulation by the state, except to enforce private contracts and the ownership of property. It is the opposite of a controlled market, in which the state directly regulates how goods, services and labor may be used, priced, or distributed, rather than relying on the mechanism of private ownership. Advocates of a free market traditionally consider the term to imply that the means of production is under private, not state control as well. This is the contemporary use of the term “free market” by economists and in popular culture; the term has had other uses historically.

    In economics, laissez-faire (English pronunciation: /ˌlɛseɪˈfɛər/ ( listen), French: [lɛsefɛʁ] ( listen)) describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.

    The phrase is French and literally means “let do”, but it broadly implies “let it be”, or “leave it alone.”

    Comment by jamzo — October 16, 2010 @ 10:55 AM | Reply

    • Yes, you are correct. The term “free market” has almost become meaningless. It is more of a political construct than anything else. I think more precisely in this context you could say the market was unregulated by either the government or by self regulation of the participants. Things in the banking industry have gotten to the stage where making money is everything and anyone who espouses a social value or public goods consideration is just crushed and pushed to the side of the road. Here is an article that describes the money frenzy in the actual foreclosure process. I think the general tone of it would apply to the whole origination and securitization process as well.

      Comment by thefourteenthbanker — October 16, 2010 @ 12:21 PM | Reply

  5. I am curious about what the Fed knew under the rubric of Sam Erven’s shibboleth. Thought he was a kindly silly old fool. Yikes, I am now almost as old as he was.

    Do you really think Bernanke understood the grifting nature of finance, if it be that? After all, his ideology believed what I think of as grifting , in theory, as being how the financial system properly behaves. Geithner is a superb functionary whose is superb because he functions within the system he understands but the problems involved are outside the sphere he functions in. A really interesting comparison would be Albert Speer. Speer understood the Nazi’s and was able to be very effective as head of logistics to keep the war going. Paulson certainly understood the real world of finance capitalism as filtered through his ideological true and only heavens until he got knocked on his ass and went into survival mode.

    So, is not the real question the issue of how they understood the vessel containing a liquid exactly 50 % of the volume of the vessel. Did they have the imaginal brains to understand the reality of the liquid as opposed to the assumption the was ideologically pure in nature?

    Methinks, they understood little of the reality of situation until it knocked them right on their asses.

    Comment by Jerry J — October 16, 2010 @ 11:46 AM | Reply

  6. And just when you thought the banksters couldn’t get more gut-wrenching greedy –

    I guess they took Peter Lynch’s advice – when there’s a gold rush, be the guy selling the picks and shovels………or somethin’ like that. I read this right after I read a new report on the disproportionate distribution of wealth. But these social Darwinists would insist they deserve the greater share, because they are so exceptional………..Jeez……

    Comment by Sandi — October 19, 2010 @ 4:38 PM | Reply

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