Based upon very recent double-speak and ongoing portraits in
regulatory capture and
spinelessness, along with other disappointments (SEE: "
Iowa Attorney General Tom Miller, Head of 50 State Investigation, Retreats From 'Tough With Banks' Stance") from supposedly respected proponents of truth, justice and the American way--at least when it comes to being real voices for those of us suffering on Main Street--I'm not going to hold my breath when it comes to thinking we're actually going to see anyone in the status quo taking a real perp walk anytime soon. But, one never knows. There's always
hope! (And, you thought I wasn't an optimist?) # # #
Diarist's Note: Naked Capitalism Publisher Yves Smith has authorized diarist to reprint her blog's posts in their entirety for the benefit of the DKos community.)
Financial Crisis Inquiry Commission Makes Criminal Prosecution Referrals
Yves Smith
Naked Capitalism
Monday, January 24, 2011 Given that the Financial Crisis Inquiry Commission has found what it sees as ground for criminal prosecution, apparently extending to several yet to be named Wall Street executives, what are we to make of the exodus of its Republican members? That they prefer rule by banksters to rule of law?
I must confess I had little hope for the FCIC having any impact. The unduly short time allotted to it, its composition (not enough representation of individuals at the commissioner level with meaningful expertise) and its restrictions on issuing subpoenas (which effectively required sign off from members of both parties) seemed intended to hamstring it. The fact that they've gotten this far, and may make more waves with the issuance of their report, which is due out later this week, is an unexpected positive development.
Shahien Narsiripour of the Huffington Post broke this story but juicy details appear thin at this juncture:
The bipartisan panel appointed by Congress to investigate the financial crisis has concluded that several financial industry figures appear to have broken the law and has referred multiple cases to state or federal authorities for potential prosecution.... The sources, who spoke on condition they not be named, declined to identify the people implicated or the names of their institutions. But they characterized the panel's decision to make referrals to prosecutors as a significant escalation in the government's response to the financial crisis...The commission's decision to refer conduct for prosecution underscores the severity of the activities it has uncovered and plans to detail in its widely anticipated final report.
The report will include an audio archive of 600 people they interviewed and will be accessible to the public. I was interviewed by three staffers (all pretty senior) and at least two of them had read ECONNED.
# # #
Folks throughout the blogosphere are speculating as to whom might be on the "business end"--most likely to be at the forefront of any criminal prosecutorial efforts--of the FCIC's wrath, with anyone and everyone, including top executives from
Bank of America (and their Countrywide subsidiary),
JPMorgan Chase (and its Bear Stearns division), [
http://www.nytimes.com/...
Goldman-Sachs, American International Group (AIG)],
Citigroup, and the now-defunct
Lehman Brothers, being mentioned at the tops of various pundits' "wish" lists.
(Ahhh, yes...so much crime and so little (air)time.)
As noted by the pundits over the past few days, here are some of the usual suspects--those being most likely to face threats of criminal prosecution tomorrow morning...
# # #
JPMorgan Chase/Bear Stearns...
(IMHO,
this is the story getting the most attention at the moment, in terms of those most likely to face criminal prosecution...or not. Perhaps, what I find most interesting are the implications of the breadth of this story, tomorrow, in terms of the last sentence of her commentary.)
Diarist's Note: Naked Capitalism Publisher Yves Smith has authorized diarist to reprint her blog's posts in their entirety for the benefit of the DKos community.)
Ambac Accues JP Morgan of Fraud in Ongoing Mortgage Suit
Yves Smith
Naked Capitalism
Tuesday, January 25, 2011 3:24 PM One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, "fraud" is pretty difficult to prove. Needless to say, that puts commentators in a bit of a bind, because they can be depicted as being hysterical if they use the "f" words, since behavior that is often fraud by any common sense standard may be hard or impossible to prove in court.
The hurdle in litigation and prosecution is proving intent. Basically, the party who is being accused has to not only have done something bad, he has to have been demonstrably aware that he was up to no good. Thus po-faced claims of "I had no idea this was improper, my accountants/lawyers knew about it and didn't say anything" or "everyone in the industry was doing it, so I had not reason to think this was irregular" is a "get out of jail free" card. Similarly, even if lower level employees knew that their company was up to stuff that stank, if the decision-makers can plausibly claim ignorance, again they can probably get away with it.
So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn't know he was pulling a fast one. And even more fun, it involves JP Morgan, which has somehow managed to create the impression that it was better than all the other TARP banks, when on the mortgage front, there is plenty evidence to suggest that all the major banks have been up to their eyeballs in bad practices.
The case involves the bond insurer Ambac and the mortgage company EMC, which was the Bear Stearns conduit for buying mortgages to securitize and now thus part of JP Morgan. In 2010, reports surfaced that EMC had been falsifying mortgage data to keep its pipeline moving as fast as Bear wanted and contain costs.
But a suit by bond insurer Ambac alleges far more serious misbehavior. The discovery process in outstanding putback litigation has unearthed a scheme to defraud investors and Ambac and led the bond insurer to add fraud charges to its complaint. The Atlantic, which broke the 2010 story, gives a good overview:
According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The [Tom] Marano-led traders [Marano was Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations] also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear. The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, [Mike] Nierenberg [head of the adjustable-rate mortgage trading desk] and [Jeff] Verschleiser [another senior managing director on the same desk] were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.
The complaint is duly indignant:
This evidence - obtained for the first time through discovery - demonstrates that at the same time that JP Morgan and EMC were touting to Ambac the quality of the Mortgage Loans and the rigorous procedures for verifying their quality, JP Morgan personnel understood that the loans underlying the transactions were in fact - to use one JP Morgan employee's unequivocal if impolite words - a "sack of shit."
And there is another layer of this ugly picture. A much smaller monoline, Sycora, had also insured some Bear mortgages. Bear was pushing the originator to take back some dud mortgages insured by Syncora while simultaneously refusing to let Syncora put them back.
FTAlphaville recounts how JP Morgan continued to rebuff putback claims, even when EMC found them to be legitimate:
Ambac says JPM barred Bear from fulfilling repurchase requests right after it snapped up in 2008. In doing so, a JPM executive director also went against a review by EMC, it is claimed, that said more than half of a set of loans were in breach of reps and warranties. That, Ambac says, enabled the exec to eliminate up to $14m in JPM liabilities and reduce accounting reserves for the loans by almost 50 per cent.
So it will be rather difficult for JP Morgan to claim it has clean hands on this one and merely picked up an outstanding mess when it bought Bear.
This suit is at a minimum a black eye for JP Morgan, which fought tooth and nail to keep it sealed, and may embolden other litigants, like the investors in Bear's deals. But sadly, it also demonstrates that crime does pay. The executives named in this case as being at the heart of this scheme now run the mortgage businesses at Ally, JP Morgan, and Goldman.
Bold type is diarist's emphasis. Here's some of Dday's outstanding coverage (he refers to it as a
"doozy" of a story, and I agree) on this...
The Ambac Suit: Bear Stearns Execs Double-Dipped, Committed Criminal Fraud on Investors
By: David Dayen Tuesday January 25, 2011 11:01 am I mentioned this earlier when writing about the FCIC's plan to refer individuals for potential criminal prosecution. But the Atlantic's Teri Buhl has additional details about the Ambac lawsuit against the remnants of Bear Stearns. And it's quite a doozy.
The mortgage traders at Bear, who now are spread out across the financial sector, sold purposefully bad securities to investors - emails revealed show that they told superiors they were selling "a sack of shit." They got data on their pools of mortgages bundled up in securities deals that came back with high percentages of bad underwriting or even loans already slipping into default. They falsified that data for the rating agencies to get AAA ratings, never told the investors about the bad loans in the pools, and sold the shit as gold. But it gets worse.
But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books [...] According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.
... They got paid by the investors for selling the mortgage-backed security, AND they got paid by the originator for taking back the bad loan...
...
...There is no legal universe under the sun where that isn't just criminal fraud and theft...
Here's a link to Zero Hedge's coverage of this story: "
JP Morgan Sold Investors MBS Covered By "SACK OF SHIT" Loans... Then Shorted All Those With Exposure: A Goldman-AIG Redux."
# # #
Bank of America/Countrywide...
BofA's Countrywide Sued, Accused of Massive Fraud
Jonathan Stempel
Reuters
NEW YORK | Tue Jan 25, 2011 6:41pm EST NEW YORK (Reuters) - Bank of America Corp's Countrywide mortgage unit has been sued by investors claiming they were victimized in a "massive fraud" when they bought mortgage-backed securities.
The lawsuit was filed on Monday in a New York state court by 12 plaintiffs including the TIAA-CREF fund family, New York Life Insurance Co and Dexia Holdings Inc...
...
...The investors said Countrywide misrepresented the securities' safety in offering documents and elsewhere, and compromised their investments by ignoring its underwriting guidelines...
...
...Other defendants include several former Countrywide officials, including longtime Chief Executive Angelo Mozilo.
David Siegel, a lawyer for Mozilo, said the lawsuit has no basis in law or fact.
...
The case is Dexia Holdings Inc et al v. Countrywide Financial Corp et al, New York State Supreme Court, New York County, No. 650185/2011.
Here are my two most recent diaries on Bank of America's many problems...
"
Was It As Good For You As It Was For Bank of America? (updated)" 1/5/11
"
Hell To Pay: Bank of America's Double Trouble," 12/1/10
# # #
Goldman-Sachs/AIG...
Here's some history, courtesy of the NY Times' Sewell Chan and Louise Story, on a topic upon which I've written, literally, dozens of posts over the past 2-1/2 years...
Goldman Pays $550 Million to Settle Fraud Case
By SEWELL CHAN and LOUISE STORY
NY Times
July 15, 2010 WASHINGTON -- Goldman Sachs has agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse, officials said Thursday.
If approved by a federal judge in Manhattan, the settlement would rank among the largest in the 76-year history of the Securities and Exchange Commission, but it would represent only a small financial dent for Goldman, which reported $13.39 billion in profit last year.
News of the settlement sent Goldman's shares 5 percent higher in after-hours trading, adding far more to the firm's market value than the amount it will have to pay in the settlement...
For a sense of perspective, please consider this:
Goldman's SEC settlement amounted to approximately 4% of their pre-tax profit in 2009. Yes, a mere
"hassle tax."
For a close-up look as to why some of the top folks at Goldman might lose a few moments of sleep tonight, checkout Chris Whalen's excellent piece (love the title), summarized via Zero Hedge: "
Chris Whalen On The Zombie IPO: Is American International Group the "Blood Doll" of Wall Street?"
And, if you're feeling a bit wonkish, here are some of the dirty details--actually a hell of a LOT of incriminating dirty details, IMHO--from my favorite Wall Street "deal wonk," David Fiderer, who posts much of his work over at HuffPo (but this is from Zero Hedge): "
Guest Post: Dirty Little Secrets About Goldman's Collateral Calls on AIG."
Awhile back, David gave me blanket permission to reproduce his work, in its entirety, here at DKos. I don't take advantage of it much, again, because he's a bit too wonk-ish for many in the community. But, here's the backend of a more lengthier post...
Guest Post: Dirty Little Secrets About Goldman's Collateral Calls on AIG
Submitted by Tyler Durden on 01/25/2011 17:06 -0500 ...How Goldman Tried to Scam AIG
A few days after executives at Goldman made their initial demands in July 2007, they started playing hardball with Tom Athan of AIGFP. "Tough conf call with Goldman," he emailed afterwards. "They are not budging and are acting irrational." The issue was a "test case" that had gone to "the highest levels" at Goldman. But--here's the smoking gun--Goldman insisted that AIG present it "actionable firm bids and firm offers" to come up with a "mid market quotation," for valuing the insured assets. The idea was patently nonsensical. There never were and there never would be any bona fide bids of any kind, be they "actionable and firm," or merely "indicative," because no one ever intended to buy or sell the assets, which were never available for sale on a free-and-clear basis. But the people at AIG never put two and two together. Like a bunch of suckers, they went out soliciting "quotes," which Merrill Lynch would only offer on a confidential basis. They also got quotes from Goldman and SG.
Goldman clearly wanted to override the wording of the documents, which prevented the bank from asserting the upper hand, according to reporting in The New York Times:
[David] Viniar, Goldman's chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman's valuations, according to a person with knowledge of the discussions.
The New York Times:
[David] Viniar, Goldman's chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman's valuations, according to a person with knowledge of the discussions. When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, [AIGFP CEO Joe] Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman's vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.
Mr. Sherwood said he did not want to ask other firms to value the securities because "it would be 'embarrassing' if we brought the market into our disagreement," according to an e-mail message from Mr. Cassano that described the call.
The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology
As noted here eariler, you need to take everything Cassano says with a pound of salt, especially since he "retired." three days after sending the e-mail in question.
Nonetheless, it sure looks as if Goldman has been trying to scam the Financial Crisis Inquiry Commission in much the same manner that it scammed AIG, with a lot of dissembling about "market values." Again, Goldman's auditor, PriceWaterhouse and, Deloitte & Touche, the auditor for Maiden Lane III, the entity holding the toxic CDOs once insured by AIG, found that these assets had no "market value;" they could not neither be measured according to actual sales nor comparable sales of similar assets in the marketplace. The only valid way to ascertain their fair value would be to perform fundamental cash flow analyses.
Why Goldman Never Shares Its Cash Flow Calculations With Anyone Else
There's no indication that Goldman shared its cash flow evaluations with AIG or with anyone else. A lot of documents have been released so far by Goldman, the FCIC, the Senate Permanent Subcommittee on Investigations, and the Congressional Oversight Panel. None of those documents show any contemporaneous communication by Goldman to AIG about how the bank actually calculated the values of the CDOs. In its highly selective and misleading history of events written after the fact, Goldman glosses over the fact that the reference assets were never available for sale on the open market, and that its valuations based on comparable sales violated fair value accounting standards.
There's no doubt that Goldman performed fundamental cash flow analyses on all its mortgage assets. As management relayed to the Board of Directors in a slide titled, "Independent Price Verification" :
A dedicated group within Controllers performs an independent price verification of the mortgage inventory. The team is highly specialized and has extensive experience in the valuation of mortgage related products...Price verification analysis utilizes four core strategies, [including] Fundamental analysis [which] utilizes discounted cash flow (DCF), option adjusted spread (OAS) or securitization analysis. Observable market data or inputs are incorporated when available and appropriate.
Almost certainly, the disclosure of those cash flows would have been damning, not because Goldman had overstated the declines in values of the CDOs insured by AIG, quite the opposite. It might have revealed how Goldman and others had been artificially propping up the values of toxic securities, as part of an elaborate pump and dump scheme.
Two years ago, Sylvain Raynes, formerly of Goldman and Moody's and currently a principal at R&R Consulting, replicated the type of cash flow analysis done by Goldman and every major Wall Street bank. By statistically evaluating the cash flows of the 20 subprime bonds referenced in the ABX 2006-1 indice s, Raynes calculated their composite values beginning in January 2006, when the ABX was first launched. Beginning in January 2006, all of the indices, aside from the AAA index, were worth pennies on the dollar. In December 2006, Goldman closed on its new $2 billion CDO, Hudson Mezzanine Funding I, which insured all of the BBB and BBB- bonds in the ABX at 100 cents on the dollar. In the months that followed, Goldman offered up ABACUS 2007 AC-1, Anderson Mezzanine Funding, and other toxic CDOs that were designed to fail.
CHART: R&R Consulting Cashflow Analysis of ABX 2006-1 indice
# # #
Since 2007-2008, there have been many Wall Street stories (I didn't even do a deeper dive here on the likes of Citigroup, Lehman Brothers and so many others) smacking of greed and corruption that I'd be surprised if sites like
Intrade or similar online "bookmaking" centers are
not laying odds on who's most likely to go to the big house in this horse race. As for me, unlike everyone on Wall Street, still, I'm not really one to frequent casinos.
Yes, tomorrow's FCIC event will be one for the history books. I'll read everything I can get my hands on about it, for sure. And, the one thing that is certain to be fascinating is that the players--the firms and the individuals--will be named for all to see. Then again, this has all been public record for quite some time, hasn't it?
And, where's that taken us?
Will anything come of it? More than likely, much less than most would like.
In fact, as I've stated many times over three years, it all looks like just another early
Groundhog Day celebration to me.
But, one may still hope...
I'll leave you, tonight, with a couple of excerpts from my diary of May 2, 2010: "
Taibbi, Naked Capitalism Re: Our Bipartisan 'Fraudemocracy'."
From Matt Taibbi and Gretchen Morgenson, respectively...
...Yes, it's all about those Wall Street masters of the universe that pretty much run everything. I'm talking about Morgan Stanley, J.P. Morgan, Citigroup, Bank of America and...drumroll please...everyone's favorite vampire squid, Goldman-Sachs: "[http://www.rollingstone.com/...
The Feds vs. Goldman.]" Even Matt Taibbi is saying that we've reached a critical juncture.
The Feds vs. Goldman
Rolling Stone Magazine
(This article originally appeared in RS 1104 from May 13, 2010.)
By Matt Taibbi
Apr 26, 2010 5:30 PM EDT ...The truth is that what Goldman is alleged to have done in this SEC case is even worse than what all these assholes laughed at us for talking about last year.
...
...I had heard rumors that Goldman had gone out and intentionally scared up toxic mortgages and swaps in order to get short of them with sucker bookies like AIG. But - and this seems funny in retrospect - I foolishly dismissed those tales as being too conspiratorial. I thought it was bad enough that Goldman was shorting the subprime market even as it was selling toxic subprime-backed securities to chumps on the open market. The notion that the bank would actually go out and create big balls of crap that would be designed to fail seemed too nuts even for my tastes.
In the year since - and this, to me, is the main lesson from the SEC case against Goldman - the public has quickly come to accept that when it comes to the once-great institutions of modern Wall Street, literally no deal that makes money is too low to be contemplated.
Gretchen Morgenson, in Sunday's NY Times, provides even greater detail on this over-the-top spin: "Repaying Taxpayers With Their Own Cash."
Repaying Taxpayers With Their Own Cash
By GRETCHEN MORGENSON
New York Times
May 2, 2010 AS we inch closer to a clearer understanding of the products and practices that unleashed the credit crisis of 2008, it's becoming apparent that those seeking the whole truth are still outnumbered by those aiming to obscure it. This is the case not only on Wall Street but also in Washington...
