Today, a Key West, Florida Circuit Court Judge dismissed a foreclosure action filed by Florida Default Law Group (FDLG), which was representing Bank of New York as the alleged “Trustee” of a Bear Stearns securitized mortgage loan trust. The borrower, who was represented by FDN’s Jeff Barnes, Esq., had served discovery on FDLG in late February, 2009. FDLG filed one of its form “open ended” Motions for Extension of Time to respond to the discovery (that being with no date certain for the response). FDLG failed to respond to Mr. Barnes’ good-faith request as to how much time FDLG needed to respond to the borrower’s discovery. The first “response” from FDLG came over 13 months later when FDLG objected to practically everything which Mr. Barnes asked for.
FDLG also failed to comply with the Court’s Pretrial Order, and had a history in the case of violating court orders and actually paid sanctions on prior Motion filed by Mr. Barnes. The Court dismissed the case and conditioned any re-filing on full compliance with Mr. Barnes’ discovery and the Court’s Orders.
Jeff Barnes, Esq., www.ForeclosureDefenseNationwide.com
BY Lynn E. Szymoniak, Esq., Editor, Fraud Digest (szymoniak@mac.com),
April 15, 2010
On May 11, 2010, Judge Arthur J. Schack, Supreme Court, Kings County, New York, entered an order denying a foreclosure action with prejudice. The case involved a mortgage-backed securitized trust, SG Mortgage Securities Asset Backed Certificates, Series 2006-FRE2. U.S. Bank, N.A. served as Trustee for the SG Trust. See U.S. Bank, N.A. v. Emmanuel, 2010 NY Slip Op 50819 (u), Supreme Court, Kings County, decided May 11, 2010. In this case, as in hundreds of thousands of other cases involving securitized trusts, the trust inexplicably did not produce mortgage assignments from the original lender to the depositor to the securities company to the trust.
This particular residential mortgage-backed securities trust in the Emmanuel case had a cut-off date of July 1, 2006. The entities involved in the creation and early agreements of this trust included Wells Fargo Bank, N.A., as servicer, U.S. Bank, N.A. as trustee, Bear Stearns Financial Products as the “swap provider” and SG Mortgage Securities, LLC. The Class A Certificates in the trust were given a rating of “AAA” by Dominion Bond Rating Services on July 13, 2006.
The designation “FRE” in the title of this particular trust indicates that the loans in the trust were made by Fremont Investment & Loan, a bank and subprime lender and subsidiary of Fremont General Corporation. The “SG” in the title of the trust indicates that the loans were “securitized” by Signature Securities Group Corporation, or an affiliate.
Fremont, a California-based corporation, filed for Chapter 11 bankruptcy protection on June 19, 2008, but continued in business as a debtor-in-possession. On March 31, 2008, Fremont General sold its mortgage servicing rights to Carrington Capital Management, a hedge fund focused on the subprime residential mortgage securities market. Carrington Capital operated Carrington Mortgage Services, a company that had already acquired the mortgage servicing business of New Century after that large sub-prime lender also filed for bankruptcy. Carrington Mortgage Services provides services a portfolio of nearly 90,000 loans with an outstanding principal balance of over $16 billion. Nearly 63% of the portfolio is comprised of adjustable rate mortgages. Mortgage servicing companies charge substantially higher fees for servicing adjustable rate mortgages than fixed-rate mortgages. Those fees, often considered the most lucrative part of the subprime mortgage business, are paid by the securitized trusts that bought the loans from the original lenders (Fremont & New Century), after the loans had been combined into trusts by securities companies, like Financial Assets Securities Corporation, SG and Carrington Capital.
Carrington Capital in Greenwich, Connecticut, is headed by Bruce Rose, who left Salomon Brothers in 2003 to start Carrington. At Carrington, Rose packaged $23 billion in subprime mortgages. Many of those securities included loans originated by now-bankrupt New Century Financial. Carrington forged unique contracts that let it direct any foreclosure and liquidations of the underlying loans. Foreclosure management is also a very lucrative part of the subprime mortgage business. As with servicing adjustable rate mortgages, the fees for the foreclosure management are paid ultimately by the trust. There is little or no oversight of the fees charged for the foreclosure actions. The vast majority of foreclosure cases are uncontested, but the foreclosure management firms may nevertheless charge the trust several thousand dollars for each foreclosure of a property in the trust.
The securities companies and their affiliates also benefit from the bankruptcies of the original lenders. On May 12, 2010, Signature Group Holdings LLP, (“SG”) announced that it had been chosen to revive fallen subprime mortgage lender Freemont General, once the fifth-largest U.S. subprime mortgage lender. A decision to approve Signature’s reorganization plan for Fremont was made through a bench ruling issued by the U.S. Bankruptcy Court in Santa Ana, CA. The bid for Fremont lasted nearly two years, with several firms competing for the acquisition.
The purchase became much more lucrative for prospective purchasers in late March, 2010, when Fremont General announced that it would settle more than $89 million in tax obligations to the Internal Revenue Service without actually paying a majority of the back taxes. The U.S. Bankruptcy Court for the Central District of California, Santa Ana Division, approved a motion that allowed Fremont General to claim a net operating loss deduction for 2004 that is attributable for its 2006 tax obligations, according to a regulatory filing with the Securities and Exchange Commission.
In addition, Fremont General will deduct additional 2004 taxes, because of a temporary extension to the period when companies can claim the credit. The extension from two years to five went into effect when President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009. While approved by the bankruptcy court judge, the agreement must also meet the approval of the Congressional Joint Committee on Taxation, but according to the SEC filing, both Fremont General and the IRS anticipate that it will be approved. In all, Fremont’s nearly $89.4 million tax assessment was reduced to about $2.8 million, including interest. In addition, as a result of the IRS agreement, a California Franchise Tax Board tax claim of $13.3 million was reduced to $550,000.
Another development that made the purchase especially favorable for SG was the announcement on May 10, 2010, that Federal Insurance Co. has agreed to pay Fremont General Corp. the full $10 million loss limits of an errors and omissions policy to cover subprime lending claims, dropping an 18-month battle over whether the claims were outside the scope of its bankers professional liability policies.
All of these favorable developments are part of a long history of success for Craig Noell, the head of Signature Group Holdings, the winning bidder for Fremont. Previously, as a member of the distressed investing area at Goldman Sachs, Noell founded and ran Goldman Sachs Specialty Lending, investing Goldman’s proprietary capital in “special situations opportunities.”
Bruce Rose’s Carrington Mortgage Services and Craig Noell’s Signature Group Holdings are part of the story of the attempted foreclosure on Arianna Emmanuel in Brooklyn, New York. U.S. Bank, N.A., as Trustee for SG Mortgage Securities Asset-Backed Certificates, Series 2006 FRE-2 attempted to foreclose on Arianna Emmanuel. The original mortgage had been made by Fremont Investment & Loan (the beneficiary of the $100 milion tax break and the $10 million insurance payout discussed above).
To successfully foreclose, the Trustee needed to produce proof that the Trust had acquired the loan from Fremont. At this point, the document custodian for the trust needed only to produce the mortgage assignment. The securities company that made the SG Trust, the mortgage servicing company that serviced the trust and U.S. Bank as Trustee had all made frequent sworn statements to the SEC and shareholders that these documents were safely stored in a fire-proof vault.
Despite these frequent representations to the SEC, the assignment relied upon by U.S. Bank, the trustee, was one executed by Elpiniki Bechakas as assistant secretary and vice president of MERS, as nominee for Freemont. In foreclosure cases all over the U.S., assignments signed by Elpiniki Bechakas are never questioned. But on May 11, 2010, the judge examining the mortgage assignment was the Honorable Arthur J. Schack in Brooklyn, New York.
Bechakas signed as an officer of MERS, as nominee for Fremont, representing that the property had been acquired by the SG Trust in June, 2009. None of this was true. Judge Schack determined sua sponte that Bechakas was an associate in the law offices of Steven J. Baum, the firm representing the trustee and trust in the foreclosure. Judge Schack recognized that the Baum firm was thus working for both the GRANTOR and GRANTEE. Judge Schack wrote, “The Court is concerned that the concurrent representation by Steven J. Baum, P.C. of both assignor MERS, as nominee for FREMONT, and assignee plaintiff U.S. BANK is a conflict of interest, in violation of 22 NYCRR § 1200.0 (Rules of Professional Conduct, effective April 1, 2009) Rule 1.7, “Conflict of Interest: Current Clients.”
Judge Schack focused squarely on an issue that pro se homeowner litigants and foreclosure defense lawyers often attempt to raise – the authority of the individuals signing mortgage assignments that are used by trusts to foreclose. In tens of thousands of cases, law firm employees sign as MERS officers, without disclosing to the Court or to homeowners that they are actually employed by the law firm, not MERS, and that the firm is being paid and working on behalf of the Trust/Grantee while the firm employee is signing on behalf of the original lender/Grantor.
Did the SG Trust acquire the Emmanuel loan in 2006, the closing date of the trust, or in 2009, the date chosen by Belchakas and her employers? There are tremendous tax advantages being claimed by banks and mortgage companies based on their portfolio of nonperforming loans. There are also millions of dollars in insurance payouts being made ultimately because of non-performing loans. There are substantial fees being charged by mortgage servicing companies and mortgage default management companies – being paid by trusts and assessed on homeowners in default. The question of the date of the transfer is much more than an academic exercise.
As important as the question of WHEN, there is also the question of WHAT – what exactly did the trust acquire? What is the reason for the millions of assignments to trusts that flooded recorders’ offices nationwide starting in 2007 that were prepared by law firm employees like Bechakas or by employees of mortgage default companies or document preparation companies specializing is providing “replacement” mortgage documents. Why, in judicial foreclosure states, are there thousands of Complaints for Foreclosure filed with the allegations: “We Own the Note; we had the note; we lost the note.” Why do bankruptcy courts repeatedly see these same three allegations in Motions For Relief of Stay filed by securitized trusts attempting to foreclose? If the assignments and notes are missing, has the trust acquired anything (other than investors’ money, tax advantages and insurance payouts)? In many cases, the mortgage servicing company does eventually acquire the property – often by purchasing the property after foreclosure for ten dollars and selling it to the trust that had claimed ownership from the start.
Fed Reveals Bear Stearns Assets It Swallowed in Firm’s Rescue (Bloomberg)
By Craig Torres, Bob Ivry and Scott Lanman
April 1 (Bloomberg) — After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.
In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating. Jumbo loans were larger than government-sponsored mortgage buyers such as Fannie Mae could finance — $417,000 at the time.
“The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.”
The Bear Stearns deal marked a turning point in the financial crisis for the Fed. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend, a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh.
‘Panic’ Cause
“Lack of clarity on the boundary between responsibilities of the Fed and of the Congress as much as anything else created panic in the fall of 2008,” Goodfriend said. “That created a situation in which what had been a serious recession became something near a Great Depression.”
Central bankers also created moral hazard, or a perception for investors that any financial firm bigger than Bear Stearns wouldn’t be allowed to fail, said David Kotok, chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey.
Policy makers’ resolve was tested months later by runs against the largest financial companies. Lehman Brothers Holdings Inc. collapsed into bankruptcy in September 2008. The ensuing panic caused the Fed to take even more emergency measures to push liquidity into markets and institutions. It rescued American International Group Inc. from collapse and allowed Goldman Sachs Group Inc. and Morgan Stanley to convert into bank holding companies, putting them under greater oversight by the central bank.
Early Failure
“Letting somebody fail early would have been a better choice,” Kotok said. “You would have ratcheted moral hazard lower and Lehman wouldn’t have been so severe.”
The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts.
The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages.
More than a year after Washington Mutual, the largest U.S. savings and loan, was purchased by JPMorgan Chase in a distressed sale arranged by the Federal Deposit Insurance Corp., the home loans that helped bring down the Seattle-based thrift live on in the Maiden Lane portfolio.
Lending Standards
For example, 94 percent of the mortgages in one security, called WAMU 06-A13 2XPPP, required limited documentation from borrowers, meaning the lender often didn’t ask customers for proof of their incomes. Almost 10 percent of the borrowers whose mortgages make up the security have been foreclosed on, and almost a quarter are more than two months late with payments, according to data compiled by Bloomberg.
The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade. All the underlying loans are adjustable- rate mortgages, with about 88 percent requiring only limited borrower documentation, according to Bloomberg data. About 33.6 percent of the borrowers are at least 60 days late. Countrywide is now part of Charlotte, North Carolina-based Bank of America Corp.
CDO Holdings
Maiden Lane has $19.5 million of securities from a series of collateralized debt obligations called Tropic CDO that are backed by trust preferred securities of community banks and thrifts. CDOs are investment pools made up of a variety of assets that provide a flow of cash.
Trust preferred securities, or TruPS, have characteristics of debt and equity and their interest payments are tax- deductible.
The securities created by Bear Stearns are rated C, one level above default, by Moody’s Investors Service and Fitch Ratings.
CDO securities have tumbled in value as banks are failing at the fastest rate in 17 years, according to data compiled by Bloomberg. The average price of TruPS CDO debt of this rating is pennies on the dollar, according to Citigroup Inc.
“The trust of the taxpayer was abused,” said Janet Tavakoli, president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. CDOs rated CCC and lower “have a high likelihood of default,” she said.
Bernanke Defense
Chairman Ben S. Bernanke defended the Bear Stearns deal as a rescue of the financial system. He said in a speech at the Kansas City Fed’s annual Jackson Hole, Wyoming conference in August 2008 that a sudden Bear Stearns failure would have caused a “vicious circle of forced selling” and increased volatility.
“The broader economy could hardly have remained immune from such severe financial disruptions,” Bernanke said in the speech. The Fed chief, who took office in 2006 and began his second term as chairman this year, also has repeatedly called for an overhaul of financial regulations that would allow authorities to take over a failing financial institution and oversee an orderly unwinding of its positions.
Bernanke said last year that nothing made him “more angry” than the AIG case, blaming the insurer for making “irresponsible bets” and a lack of regulatory oversight for the debacle. Officials “had no choice but to try and stabilize the system” by aiding the firm in September 2008, he said.
Yesterday’s release by the Fed, through its New York regional bank, also identified securities acquired in the bailout of AIG held in vehicles known as Maiden Lane II and III.
Market Value
Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.
Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.
“The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement.
Deal With Chase
The central bank said it reached agreement on “issues of confidentiality” for the assets with JPMorgan Chase, which bought Bear Stearns in 2008, and AIG. New York-based JPMorgan and AIG would incur the first losses on the portfolios.
Joe Evangelisti, a spokesman for JPMorgan, and Mark Herr, a spokesman for AIG, declined to comment.
In April 2008, Bloomberg News requested records under the federal Freedom of Information Act from the Fed’s Board of Governors related to JPMorgan’s acquisition of Bear Stearns. The central bank responded that records retained by the New York Fed “were proprietary records of the Reserve Bank, and not Board records subject” to the request, court records show.
Bloomberg filed suit in November 2008 in U.S. District Court in New York, challenging the Fed’s denial, as well as the denial of a separate request made in May 2008, seeking records of four other emergency lending programs.
The district court held that the Fed should release documents related to those four programs, and should search documents held by the New York regional bank to determine whether any of them should be considered records of the board of governors.
The U.S. Court of Appeals on March 19 upheld the district court’s ruling on the lending programs.
Representative Darrell Issa of California said in a statement that yesterday’s disclosure may “signal a new willingness to cooperate with Congress as we investigate how these bailout deals were structured and what the decision making process entailed.”
This in combination with A.K. Barnett-Hart’s Thesis make’s one hell of a Discovery.
LEGAL AND ECONOMIC ISSUES IN
SUBPRIME LITIGATION
Jennifer E. Bethel*
Allen Ferrell**
Gang Hu***
Discussion Paper No. 612
03/2008
Harvard Law School Cambridge, MA 02138
ABSTRACT
This paper explores the economic and legal causes and consequences of recent difficulties in the subprime mortgage market. We provide basic descriptive statistics and institutional details on the mortgage origination process, mortgage-backed securities (MBS), and collateralized debt obligations (CDOs). We examine a number of aspects of these markets, including the identity of MBS and CDO sponsors, CDO trustees, CDO liquidations, MBS insured and registered amounts, the evolution of MBS tranche structure over time, mortgage originations, underwriting quality of mortgage originations, and write-downs of investment banks. In light of this discussion, the paper then addresses questions as to how these difficulties might have not been foreseen, and some of the main legal issues that will play an important role in the extensive subprime litigation (summarized in the paper) that is underway, including the Rule 10b-5 class actions that have already been filed against the investment banks, pending ERISA litigation, the causes-of-action available to MBS and CDO purchasers, and litigation against the rating agencies. In the course of this discussion, the paper highlights three distinctions that will likely prove central in the resolution of this litigation: The distinction between reasonable ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market. ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market.
Deal Journal has yet to read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit stores today. We did, however, read his acknowledgments, where Lewis praises “A.K. Barnett-Hart, a Harvard undergraduate who had just written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.”
A.K. Barnett-Hart
While unsure if we can stomach yet another book on the crisis, a killer thesis on the topic? Now that piqued our curiosity. We tracked down Barnett-Hart, a 24-year-old financial analyst at a large New York investment bank. She met us for coffee last week to discuss her thesis, “The Story of the CDO Market Meltdown: An Empirical Analysis.” Handed in a year ago this week at the depths of the market collapse, the paper was awarded summa cum laude and won virtually every thesis honor, including the Harvard Hoopes Prize for outstanding scholarly work.
Last October, Barnett-Hart, already pulling all-nighters at the bank (we agreed to not name her employer), received a call from Lewis, who had heard about her thesis from a Harvard doctoral student. Lewis was blown away.
“It was a classic example of the innocent going to Wall Street and asking the right questions,” said Mr. Lewis, who in his 20s wrote “Liar’s Poker,” considered a defining book on Wall Street culture. “Her thesis shows there were ways to discover things that everyone should have wanted to know. That it took a 22-year-old Harvard student to find them out is just outrageous.”
Barnett-Hart says she wasn’t the most obvious candidate to produce such scholarship. She grew up in Boulder, Colo., the daughter of a physics professor and full-time homemaker. A gifted violinist, Barnett-Hart deferred admission at Harvard to attend Juilliard, where she was accepted into a program studying the violin under Itzhak Perlman. After a year, she headed to Cambridge, Mass., for a broader education. There, with vague designs on being pre-Med, she randomly took “Ec 10,” the legendary introductory economics course taught by Martin Feldstein.
“I thought maybe this would help me, like, learn to manage my money or something,” said Barnett-Hart, digging into a granola parfait at Le Pain Quotidien. She enjoyed how the subject mixed current events with history, got an A (natch) and declared economics her concentration.
Barnett-Hart’s interest in CDOs stemmed from a summer job at an investment bank in the summer of 2008 between junior and senior years. During a rotation on the mortgage securitization desk, she noticed everyone was in a complete panic. “These CDOs had contaminated everything,” she said. “The stock market was collapsing and these securities were affecting the broader economy. At that moment I became obsessed and decided I wanted to write about the financial crisis.”
Back at Harvard, against the backdrop of the financial system’s near-total collapse, Barnett-Hart approached professors with an idea of writing a thesis about CDOs and their role in the crisis. “Everyone discouraged me because they said I’d never be able to find the data,” she said. “I was urged to do something more narrow, more focused, more knowable. That made me more determined.”
She emailed scores of Harvard alumni. One pointed her toward LehmanLive, a comprehensive database on CDOs. She received scores of other data leads. She began putting together charts and visuals, holding off on analysis until she began to see patterns–how Merrill Lynch and Citigroup were the top originators, how collateral became heavily concentrated in subprime mortgages and other CDOs, how the credit ratings procedures were flawed, etc.
“If you just randomly start regressing everything, you can end up doing an unlimited amount of regressions,” she said, rolling her eyes. She says nearly all the work was in the research; once completed, she jammed out the paper in a couple of weeks.
“It’s an incredibly impressive piece of work,” said Jeremy Stein, a Harvard economics professor who included the thesis on a reading list for a course he’s teaching this semester on the financial crisis. “She pulled together an enormous amount of information in a way that’s both intelligent and accessible.”
Barnett-Hart’s thesis is highly critical of Wall Street and “their irresponsible underwriting practices.” So how is it that she can work for the very institutions that helped create the notorious CDOs she wrote about?
“After writing my thesis, it became clear to me that the culture at these investment banks needed to change and that incentives needed to be realigned to reward more than just short-term profit seeking,” she wrote in an email. “And how would Wall Street ever change, I thought, if the people that work there do not change? What these banks needed is for outsiders to come in with a fresh perspective, question the way business was done, and bring a new appreciation for the true purpose of an investment bank – providing necessary financial services, not creating unnecessary products to bolster their own profits.”
Short-Selling Vs. Naked Short-Selling: An Explanation
In “Wall Street’s Naked Swindle,” Matt Taibbi examines how a scheme to flood the market with counterfeit stocks helped kill Bears Stearns and Lehman Brothers — and the feds have yet to bust the culprits. The scheme that helped do in two of the five major investment banks in the U.S. is known as naked short-selling — the sale of shares you don’t have or won’t deliver. Normal short-selling, however, is legal and good for the market: it lets investors bet against companies that they believe will decrease in value.
To help explain his story, Taibbi heads to the white board and breaks down the differences between the two: click above to watch him explain short-selling (our buyer: Wilford Brimley, broker: Count Chocula, short-seller: Hervé Villechaize), and below for a discussion of its evil twin, naked short-selling. — Rolling Stone
Wall Street’s Naked Swindle
A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits
MATT TAIBBI Posted Oct 14, 2009 9:30 AM
On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — “like buying 1.7 million lottery tickets,” according to one financial analyst.
But what’s even crazier is that the bet paid.
At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.
The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…
Or what? That this was a brazen case of insider manipulation was so obvious that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking Committee, couldn’t help but remark on it a few weeks later, when questioning Christopher Cox, the then-chief of the Securities and Exchange Commission. “I would hope that you’re looking at this,” Dodd said. “This kind of spike must have triggered some sort of bells and whistles at the SEC. This goes beyond rumors.”
Cox nodded sternly and promised, yes, he would look into it. What actually happened is another matter. Although the SEC issued more than 50 subpoenas to Wall Street firms, it has yet to identify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in a matter of days. “I’ve seen the SEC send agents overseas in a simple insider-trading case to investigate profits of maybe $2,000,” says Brent Baker, a former senior counsel for the commission. “But they did nothing to stop this.”
The SEC’s halfhearted oversight didn’t go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.
Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.
See the movie “Stock Shock” on DVD to learn more about this. trailer at www.stockshockmovie.com
The Experts: “In NY they call us the plumbers. We’re the plumbers of Wall Street…and Nobody wants to hear what the plumber has to say until the SHIT backs up in the livingroom”
If you really get into all, you might want to visit DeepCapture by Patrick Byrne it was a mind-blowing experience and opened my eyes to a “whole new world”. He takes it to another level with names.
Here is another video of Matt Taibbi explaining how Goldman Sachs makes money.
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