The LIBOR trading scandal could turn out to be far worse for Wall Street than its mortgage troubles.
CNN Money-
FORTUNE — Much of the talk about bad behavior on Wall Street since the financial crisis has been about mortgages with a little bit of insider trading sprinkled in. And that makes sense. Everyone immediately understands what a mortgage is. And the housing bust that resulted from all those bad home loans affected us all. And Hollywood has taught us to ooh and ah over insider trading.
But there is another scandal that has come out of the financial crisis that at least to me makes the mortgage underwriting scandal look like small peanuts, and it has been heating up lately. Two weeks ago, the government disclosed that it is looking into bringing criminal cases against traders and banks that manipulated a key bank lending rate, called LIBOR. A source close to the case says the government’s “may” will be dropped soon. Both Barclays and Deutsche Bank have disclosed that they have been the focus of investigations. Banks have suspended dozens of traders. Today, Credit Suisse announced that it was cooperating with regulators on the case. Traders at UBS reportedly are already working with the government on its investigation. Looking for instances in which Wall Streeters go to jail, unlike mortgages, this may be the one.
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF RICHMOND
WELLS FARGO BANK, N.A. 3476 Stateview Boulevard Ft. Mill, SC 29715
Plaintiff,
-against-
TINA McNEE, NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, PEOPLE OF THE STATE OF NEW YORK, WELLS FARGO BANK, N.A., CHRISTINE EAGLES and JAMES EAGLES, Defendants.
EXCERPT:
Plaintiff’s arguments notwithstanding, this Court is not persuaded by Wells Fargo’s laborious interpretation of the myriad of transfer documents or the breadth of the language employed therein to confer standing upon it. “[L]anguage cannot overcome the requirement that the foreclosing party be both the holder or assignee of the subject mortgage, and the holder or assignee of the underlying note at the time a foreclosure action is commenced” (Bank of NY v. Silverberg, 86 AD3d 274, 283). In this case, Wells Fargo has adduced no proof in opposition to McNee’s cross motion(s) sufficient to demonstrate that it was either. Plaintiff at bar clearly divested itself of the note and mortgage as early as March of 2007, when it sold both to Barclays Bank. It is alleged that Barclays thereafter divested itself of the note and mortgage on or about May 31, 2007, but it does not appear whether or when either came back into the possession of Wells Fargo prior to the commencement of this action on February 8, 2008. Hence, plaintiff has failed to demonstrate, prima facie or otherwise that it was, in fact, the holder of the McNee note and mortgage at the time the action was commenced. Neither has plaintiff demonstrated “by a preponderance of the evidence” (id. at 281-282, quoting Bank of N.Y. v. Alderazi, 28 Misc3d 376, 379-380 [Sup Ct, Kings Co 2010]), that it was acting in the capacity of, e.g., an agent of Deutsche Bank5.
It is well settled that “[s]tanding requires an inquiry into whether a litigant has an interest…in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request” (Carprer v. Nussbaum, 36 AD3d 176 [internal quotation marks omitted]; Wells Fargo Bank Minn., N.A. v. Mastropaolo, 42 AD3d 239). Where the issue of standing is raised by a defendant, a plaintiff must prove its standing in order to be entitled to relief (see US Bank N.A. v. Collymore, 68 AD3d 752, 753; Wells Fargo Bank Minn., N.A. v. Mastropaolo, 42 AD3d at 242). In an action, as here, to foreclose a mortgage, a plaintiff’s standing is normally dependant on its status as both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced (see US Bank, N.A. v. Collymore, 68 AD3d at 753; cf. Bank of NY v. Silverberg, 86 AD3d at 283). As a general rule, once the promissory note is tendered to and accepted by an assignee, the mortgage passes as an incident to the note (see Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 AD3d 674); However, the opposite is not true. “[A] transfer of the mortgage without the debt is a nullity, and no interest is acquired by it. The security cannot be separated from the debt and exist independently of it” (Merritt v. Bartholick, 36 NY 44, 45). Accordingly, a mortgage cannot be foreclosed by someone who has failed to demonstrate a right of recovery on the debt (see FGB Realty Advisors v. Parisi, 265 AD2d 297, 298; Bergman on New York Mortgage Foreclosures §12.05[1][a][1991]). As the First Department held in Katz v. East-Ville Realty Co., (249 AD2d 243, 243), a “[p]laintiff’s attempt to foreclose upon a mortgage in which he had no legal or equitable interest [is] without foundation in law or fact” (see Kluge v. Fugazy, 145 AD2d 537). Hence, Wells Fargo’s attempt to foreclose upon the subject mortgage must be denied, the complaint dismissed, and McNee’s cross-motion(s) to dismiss for lack of standing pursuant to CPLR 3211(a)(3) granted.
In view of this finding, the remaining grounds for relief in plaintiff’s motion have been rendered academic.
Banks blow up mortgage settlement talks, despite Iowa AG Tom Miller’s begging and whimpering!!
TIME-
The five biggest mortgage servicers have cancelled a planned negotiating session with representatives of the 50 State Attorneys General in apparent protest over a federal regulator filing suit against them, a source familiar with the matter tells TIME.
The banks canceled the meeting on Tuesday afternoon in protest over the announcement last Friday that the Federal Housing Finance Agency would bring a broad case against 17 firms, including those in talks with the State AGs. The FHFA, which oversees mortgage giants Fannie Mae and Freddie Mac, alleges the firms violated securities law by misrepresenting the value of bundles of high-risk mortgages they sold. FHFA did not say how much the case might be worth, but outside analysts have said it could potentially produce billions of dollars in compensatory damages from the firms.
Long before the banks started evicting delinquent homeowners, Wall Street, it appears, used robo-signers to ink mortgage deals that would eventually cost investors tens of billions of dollars and in part led to the financial crisis.
According to lawsuits filed last week by the U.S.’s Federal Housing Financing Agency, one individual was used by three different banks to sign off on 36 different mortgage bond deals in 2006 alone. Many of the deals contained as many as 4,000 home loans. Yet, according to the lawsuits, the individual Evelyn Echevarria signed documents attesting to the fact that all the loans – well over 100,o00 in 2006 alone
This is a great article written by Kevin Villani who was senior vice president and chief economist at Freddie Mac from 1982 to 1985.
American Banker-
In the 1980s Freddie Mac had a marketing campaign “The Gnomes Know,” touting their expertise in mortgage markets. Now the Federal Housing Finance Agency has filed a $200 billion lawsuit against 17 of the nation’s largest mortgage lenders arguing that during the subprime lending debacle of the last decade the gnomes didn’t know!
Last Friday the U.S. regulator, the Federal Housing Finance Agency (FHFA), which has the oversight responsibility of Fannie Mae and Freddie Mac, sued 17 large banks and financial institutions relating to losses on approximately $200 billion of Fannie Mae and Freddie Mac subprime bonds.
Now, let me be clear right from the start. I am no apologist for the banks. And historically my tendency has been to support better financial regulation and even the Democratic Party through my voting preference.
However, enough is enough. At this point in time the Government and the FHFA have no right to sue the banking industry on behalf of Fannie Mae and Freddie Mac. That is a joke.
If William K. Black and Janet would only team up to write a book?
HuffPO-
There were many factors that contributed to our recent financial bubble: deregulation, cheap money from the Fed, failure to enforce remaining regulations, crony capitalism, hubris, speculation, leverage, and fraud among other problems. While fraud wasn’t the only issue, it was and is a significant contributor to the credit bubble. Restraining fraud is a necessary but not sufficient condition for a sound financial system. Congressional investigations in recent years have put ample evidence of fraud in the public domain.
To illustrate just one type of malicious mischief, Senator Carl Levin (D. Mich.), Chairman of a senate investigative panel, issued a memo stating that Goldman ” magnified the impact of toxic mortgages.” The Wall Street Journal reviewed data showing that a $38 million subprime-mortgage bond created in June 2006 was referenced in more than 30 debt pool causing around$280 million in losses to investors by 2008. In other words, Goldman kept repackaging, reselling or protecting (buying credit default protection on) losers. It took the wrong kind of nerve for Goldman’s CEO to say he was doing “God’s work.”
Big U.S. banks in talks with state prosecutors to settle claims of improper mortgage practices have been offered a deal that is proposed to limit part of their legal liability, the Financial Times reported on Tuesday.
The FT said state prosecutors have proposed a deal to limit part of the banks’ liability in return for a multibillion-dollar payment.
The talks aim to settle allegations that banks including Bank of America (BAC.N), JPMorgan Chase (JPM.N), Wells Fargo (WFC.N), Citigroup (C.N) and Ally Financial (GKM.N). seized the homes of delinquent borrowers and broke state laws by employing so-called “robosigners”, workers who signed off on foreclosure documents en masse without reviewing the paperwork.
Reading the FHFA complaints against many of the world’s largest banks is a fascinating and troubling process for anyone that understands “accounting control fraud.” The FHFA, a federal regulatory agency, sued in its capacity as conservator for Fannie and Freddie. Its complaints are primarily based on fraud. The FHFA alleges that the fraud came from the top, i.e., it alleges that many of the world’s largest banks were control frauds and that they committed hundreds of thousands of fraudulent acts. The FHFA complaints emphasize that other governmental investigations have repeatedly confirmed that the defendant banks were engaged in endemic fraud. The failure of the Department of Justice to convict any senior official of a major bank, and the almost total failure to indict any senior official of a major bank has moved from scandal to farce.
The FHFA complaints are distressing, however, in their failure to explain why the frauds occurred and how an accounting control fraud works. The FHFA complaint against Countrywide is particularly disappointing because …
Again, who gave the green light to eliminate the need for assignments and to realize the greatest savings, lenders should close loans using standard security instruments containing “MOM” language back in April 26, 1999?
This was approved by Fannie Mae and Freddie Mac which named MERS as Original Mortgagee (MOM)!
Open Market-
“U.S. is set to sue dozen big banks over mortgages,” reads the front-page headline in today’s New York Times. The “deck” below the headline explains that that the Federal Housing Finance Agency, which oversees the government-sponsored enterprises Fannie Mae and Freddie Mac, is “seen as arguing that lenders lacked due diligence” in the loans they made.
A more apt description would probably be that Fannie and Freddie are suing the banks for selling them the very loans the GSEs helped designed and that government mandates encourage — and are still encouraging them to make. These conflicted actions are just one more of the government’s contributions to the uncertainty that is helping to keep unemployment at 9 percent.
Strangely the author of the Times piece, Nelson Schwartz, ignores the findings of a recent blockbuster
FHFA suit stops short of going nuclear, ignores the biggest flaw in securitization/REMICs – failure to properly convey the notes….instead, FHFA sez loans were xferred properly to trust, to prevent 100% taxation 4 failure 2 comply w/ IRC’s REMIC requirements. Cute…I worry that this is an attempt to fix / limit total bank exposure by getting uncontested ruling that REMIC provisions were followed…
What? Why is “WELLS FARGO” not listed? Let me know when they get to “W”.
FHFA Sues 17 Firms to Recover Losses to Fannie Mae and Freddie Mac
Washington, DC — The Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac (the Enterprises), today filed lawsuits against 17 financial institutions, certain of their officers and various unaffiliated lead underwriters. The suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities (PLS) to the Enterprises.
Complaints have been filed against the following lead defendants, in alphabetical order:
The cases are Federal Housing Finance Agency v. Bank of America Corp. (BAC), 11-CV-6195; FHFA v. Barclays Bank Plc., 11-CV- 6190; FHFA v. Citigroup, 11-CV-6196; FHFA v. Credit Suisse Holdings (USA) Inc., 11-CV-6200; FHFA v. Deutsche Bank AG, 11- CV-6192; FHFA v. First Horizon National Corp., 11-CV-6193; FHFA v. Goldman, Sachs & Co., 11-CV-6198; FHFA v. HSBC North America Holdings Inc., 11-CV-6189; FHFA v. JPMorgan Chase & Co., 11-CV- 6188; FHFA v. Merrill Lynch & Co., 11-CV-6202; FHFA v. Nomura Holding America Inc., 11-CV-6201; FHFA v. SG Americas Inc., 11- CV-6203, U.S. District Court, Southern District of New York
Security officials are warning the leaders of major Wall Street banks that al Qaeda terrorists in Yemen may be trying to plan attacks against those financial institutions or their leading executives.
Intelligence officials stress the threats are general in
Intelligence analysts added they have a general but growing concern that operatives in Yemen may again try to send package bombs or biological or chemical agents through the mail to Wall Street bankers.
In recent weeks, the FBI‘ Joint Terrorism Task Force and NYPD officials have been briefing bank executives and their security departments on the nature of the threat information. Much of it gleaned from al Qaeda writings like ‘Inspire’ magazine that recently warned of attacks targeting financial institutions.
The latest “Inspire” issue also made reference to trying to use Anthrax in an attack, officials said.
INVESTORS who lost billions on boatloads of faulty mortgage securities have had a hard time holding Wall Street accountable for selling the things in the first place.
For the most part, banks have said they can’t be called out in court on any of this because they had no idea that so many of these loans went to people who lacked the resources to make even their first mortgage payment.
Wall Street firms were intimately involved in the financing, bundling and sales of these loans, so their Sergeant Schultz defense rings hollow. They provided hundreds of millions of dollars in credit to dubious underwriters, and some even had their own people on site at the loan factories. Many Wall Street firms owned mortgage lenders outright.
Because many of the worst lenders are now out of business, investors in search of recoveries have turned to the banks that packaged the loans into securities. But successfully arguing that Wall Street aided lenders in a fraud is tough under federal securities laws. This is largely a result of Supreme Court decisions barring investors from bringing federal securities fraud cases that accuse underwriters and other third parties as enablers.
Where there’s a will, however, there’s a way. And state courts are proving to be a more fruitful place for mortgage investors seeking redress, legal experts say.
In late June, for example, Martha Coakley, the attorney general of Massachusetts, extracted $102 million from Morgan Stanley in a case involving Morgan’s extensive financing of loans made by New Century, a notorious and now defunct lender that was based in California.
Morgan packaged the loans into securities and sold them to clients, even after its due diligence uncovered problems with the underlying mortgages that New Century fed to the firm, Ms. Coakley said. In settling the matter, Morgan neither admitted nor denied the allegations. Her investigation is continuing.
One of the most interesting aspects of this case “is the active role of state regulators relying upon state law to protect investors,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels in New York. “This state focus may well fill a void left by the U.S. Supreme Court’s increasingly narrow interpretation of the antifraud provisions of the federal securities laws as well as the relatively few S.E.C. enforcement actions initiated in this area.”
Last Friday, an investment management firm that lost $1.2 billion in mortgage securities it bought for clients filed suit in Massachusetts state court against 15 banks, accusing them of abetting a fraud. The firm, Cambridge Place Investment Management of Concord, Mass., purchased $2 billion in mortgage securities from the banks, and it says the banks misrepresented the risks in the underlying loans — both in prospectuses and sales pitches.
The complaint says the banks misled Cambridge Place by maintaining that the mortgages in the securities it bought had met strict underwriting requirements related to the borrowers’ ability to repay the loans. Cambridge also contends it relied on the banks’ claims of having conducted due diligence to verify the quality of the loans bundled into the securities.
The complaint also details the anything-goes lending practices during the subprime mortgage boom.
Interviews in the complaint with 63 confidential witnesses turned up such gems as Fremont Investment & Loan, which had been based in California, approving loans for pizza delivery men with reported monthly incomes of $6,000, and management at Long Beach Mortgage, also in California, directing underwriters to “approve, approve, approve.”
One Long Beach program made loans to self-employed borrowers based on three letters of reference from past employers. A former worker said some letters amounted to “So-and-so cuts my lawn and does a good job,” adding that the company made no attempt to verify the information, the complaint stated.
Such tales are hardly shockers. But they provide important context when Cambridge moves up the ladder to the banks that bundled and sold the loans.
For example, the complaint contended that Credit Suisse, from whom it bought $88 million of mortgage securities in 2005 and 2006, told Cambridge of its “superior” due diligence, including a performance review of every loan. Three-quarters of these loans are delinquent, in default, foreclosure, bankruptcy or repossession, the complaint said.
Bear Stearns, now a unit of JPMorgan Chase, sold Cambridge $65 million of securities. It owned three mortgage lenders and told Cambridge it sampled the loans it sold to check underwriting procedures, borrower documentation and compliance, the complaint said.
CAMBRIDGE’S lawyers brought its case in Massachusetts under laws barring those who sell securities from making false statements about them or omitting material facts. Jerry Silk, a senior partner at Bernstein Litowitz Berger & Grossmann who represents Cambridge, said, “This case represents yet another example of Wall Street banks’ failure to live up to their basic responsibility to investors — to tell the truth about the securities they are selling.”
Mr. Silk’s firm has jousted with Wall Street underwriters before. In 2004, it recovered $6 billion in a suit against banks that underwrote debt issued by WorldCom, the defunct telecom. Denise L. Cote, the federal judge overseeing that matter, concluded that because investors rely so heavily on underwriters, courts must be “particularly scrupulous in examining the conduct,” she said.
It is too soon to tell if investors will recover losses in mortgage securities. But the efforts are reminiscent of those in the mid-90s against brokerage firms that cleared trades and provided capital to dubious penny-stock outfits such as A. R. Baron and Sterling Foster.
For decades, companies that cleared such trades — Bear Stearns was a big one — escaped liability for fraud at these so-called “bucket shops.” But regulators went after clearing firms by accusing them of facilitating such acts; in a 1999 lawsuit, the Securities & Exchange Commission accused Bear Stearns of enabling a fraud at A. R. Baron. Bear Stearns paid $35 million in fines and restitution to settle the case.
If trust in capital markets is to return, investors must be able to believe what they read in prospectuses. Without that minimum standard, how can Wall Street expect the markets to function again?
A version of this article appeared in print on July 11, 2010, on page BU1 of the New York edition.
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