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.
I’ve always said if walls could talk in these secretive rooms, look no further than Gretchen to shut it down with a story.
NYT-
A FRESH account emerged last week about the magnitude of financial aid that the Federal Reserve bestowed on big banks during the 2008-09 credit crisis. The report came from Bloomberg News, which had to mount a lengthy legal fight to wrest documents from the Fed that detailed its rescue efforts.
It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.
New Bloomberg Report Estimates that Banks Reaped $13 Billion from Below-Market Rate Loans
Washington, DC (Nov. 28, 2011) – Today, Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, sent a letter to Chairman Darrell Issa requesting that the Committee hold a hearing with Federal Reserve Chairman Ben Bernanke and officials from the nation’s largest financial institutions that benefitted from trillions of dollars in previously undisclosed government loans provided at below-market rates.
“Many Americans are struggling to understand why banks deserve such preferential treatment while millions of homeowners are being denied assistance and are at increasing risk of foreclosure,” said Cummings.
Cummings requested the hearing in light of a report in Bloomberg Markets Magazine that revealed that the Federal Reserve secretly committed more than $7 trillion as of March 2009 to rescuing the nation’s top financial institutions, and that these banks “reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.”
According to economists cited in the Bloomberg report, this “secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.” The Bloomberg report disclosed that total assets at the largest six banks increased by 39% and executive compensation increased by 20% over the past five years.
According to the Bloomberg report, information about these secret loans was withheld from Congress as it debated reforms ultimately included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and banks also failed to disclose this information to their shareholders.
The full letter follows: November 28, 2011
The Honorable Darrell E. Issa Chairman Committee on Oversight and Government Reform U.S. House of Representatives Washington, DC 20515
Dear Mr. Chairman:
I am writing to request that the Committee hold a hearing with Federal Reserve Chairman Ben Bernanke and officials from the nation’s largest financial institutions that benefitted from trillions of dollars in previously undisclosed government loans provided at below-market rates.
In the past, the Oversight Committee has played a prominent role in investigating the actions of government entities and private sector corporations that led to the financial collapse. On October 23, 2008, for example, former Federal Reserve Chairman Alan Greenspan testified before our Committee, stating: “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders.”
Yet, a report yesterday in Bloomberg Markets Magazine disclosed that the Federal Reserve secretly committed more than $7 trillion as of March 2009 to rescuing the nation’s top financial institutions. As a result, the banks that received these loans “reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.” This report was based on 29,000 pages of Federal Reserve documents obtained under the Freedom of Information Act after a protracted legal dispute.
According to economists cited in the Bloomberg report, the scope of these previously undisclosed loans resulted in a financial windfall for the banks. For example, Dean Baker, co-director of the Center for Economic and Policy Research, stated: “getting loans at below-market rates during a financial crisis—is quite a gift.” Similarly, Viral Acharya, an economics professor at New York University, stated: “Banks don’t give lines of credit to corporations for free. Why should all these government guarantees and liquidity facilities be for free?”
The Bloomberg report disclosed that this “secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.” According to Federal Reserve data cited in the report, total assets held by the six largest U.S. banks increased 39% from 2006 to 2011. In addition, based on data from the Bureau of Labor Statistics, employees at these banks received more than $146 billion in compensation in 2010, an increase of nearly 20% from five years earlier. According to Anil Kashyap, a former Federal Reserve economist, “The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out.”
The Bloomberg report explained that Congress lacked access to information about the secret Federal Reserve loans while it debated reforms ultimately included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. For example, former Senator Judd Gregg stated: “We didn’t know the specifics.” Similarly, Senator Richard Shelby stated: “I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability.” According to Neil Barofsky, the former Special Inspector General for the Troubled Asset Relief Program, “The lack of transparency is not just frustrating; it really blocked accountability.”
When Congress passed the Dodd-Frank Act, it required the Government Accountability Office to “conduct a onetime audit of all loans and other financial assistance” from December 1, 2007, to July 21, 2010. Although GAO issued its report in July, it analyzed assistance—including mortgage-backed securities purchased through open market operations—with peak outstanding balances of only $3.5 trillion. Even with respect to these amounts, GAO concluded:
The context for the Federal Reserve System’s management of risk of losses on its loans differed from that for private sector institutions. In contrast to private banks that seek to maximize profits on their lending activities, the Federal Reserve System stood ready to accept risks that the market participants were not willing to accept to help stabilize markets.
In addition to withholding information about these loans from Congress, banks also apparently failed to disclose this information to their shareholders. For example, Kenneth D. Lewis, the Chief Executive Officer of Bank of America, told shareholders on November 26, 2008, that the company was “one of the strongest and most stable major banks in the world.” According to the Bloomberg report, however, he failed to disclose that “his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.”
Many Americans are struggling to understand why banks deserve such preferential treatment while millions of homeowners are being denied assistance and are at increasing risk of foreclosure. Unfortunately, officials from many of these financial institutions declined to comment about these loans, including officials from Goldman Sachs, JPMorgan, Bank of America, Citigroup, and Morgan Stanley.
For all of these reasons, I respectfully request that the Committee hold a hearing with the Federal Reserve chairman and officials from each of these financial institutions to examine these issues in greater detail. Thank you for your consideration of this request.
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.
Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.
Massive Collateral Damage has been done and in the age of having files held in electronic data, this is very disturbing.
Executive Gov-
The Securities and Exchange Commission has forbidden its employees from destroying investigative documents, as fallout spreads from a whistleblower’s recent claim that the agency has illegally destroyed thousands of preliminary investigation documents.
An SEC attorney alerted Sen. Chuck Grassley (R-Iowa) of the possible crimes in August. The whistleblower said the documents in question were “matters under inquiry,” including reviews of AIG, Morgan Stanley, Lehman Brothers and Bernie Madoff.
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
Thanks to Darcy Flynn, a longtime attorney at the Securities and Exchange Commission, we now have all the ammunition we need to do what should have been done years ago: terminate the SEC, with extreme prejudice, and in its place construct a new regulatory watchdog for Wall Street free of obvious conflicts of interest.
Flynn’s courage has almost been lost in all the recent apocalyptic talk of earthquakes and hurricanes, but a few weeks back he did something remarkable. After raising concerns internally at the SEC last year — and getting nowhere — Flynn went public and alleged in a formal whistleblower complaint that for at least 17 years the SEC “followed a policy of systematically destroying documents” related to what are known as Matters Under Investigation, or MUIs, most of which were focused on possibly illicit or illegal behavior at Wall Street firms. MUIs are the first step in investigating a case that may lead to a formal SEC inquiry.
A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation’s worst financial criminals.
Rollingstone-
Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.
WASHINGTON (MarketWatch) — The Securities and Exchange Commission may have destroyed documents and compromised enforcement cases involving activity at large banks and hedge funds during the height of the financial crisis in 2008, according to allegations made by a lawmaker on Wednesday.
Federal Reserve Lending Revelations Intensify Criticism Of Central Bank’s Secrecy
HuffPO-
In the midst of the global financial crisis in 2008, the Federal Reserve lent Goldman Sachs, Credit Suisse and Royal Bank of Scotland at least $30 billion each at interest rates as low as 0.01 percent with no public disclosure of the details, Bloomberg News reported on Thursday.
The latest revelations about the covert infusions of credit provided by the Fed to some of the world’s largest banks has amplified accusations that the central bank is a power unto itself, operating according to its own devices and in the interest of major financial institutions — and beyond accountability to taxpayers.
“It just points out that this was about secrecy to protect banks basically from embarrassment from transparency, which is not supposed to be what the Fed’s about,” said Dean Baker, co-director of the Center for Economic Policy and Research, in Washington.
“That is the fundamental problem with the Fed,” Baker added. “They’re supposed to be an agency of the government, not an agency of the banks. But reflexively, there they are protecting the banks, again and again and again.”
MARK C. DILLON, J.P.
DANIEL D. ANGIOLILLO
ARIEL E. BELEN
SHERI S. ROMAN, JJ.
2010-03065
2010-05864
(Index No. 6174/09)
Aurora Loan Services, LLC, respondent,
v
Steven Weisblum, et al., appellants, et al., defendants.
Excerpt:
In order to commence a foreclosure action, the plaintiff must have a legal or equitable interest in the mortgage (see Wells Fargo Bank, N.A. v Marchione, 69 AD3d 204, 207). A plaintiff [*7]has standing where it is both (1) the holder or assignee of the subject mortgage and (2) the holder or assignee of the underlying note, either by physical delivery or execution of a written assignment prior to the commencement of the action with the filing of the complaint (see Wells Fargo Bank, N.A. v Marchione, 69 AD3d at 207-209; U.S. Bank, N.A. v Collymore, 68 AD3d 752, 754). Thus, as long as the plaintiff can establish its lawful status as assignee, either by written assignment or physical delivery, prior to the filing of the complaint, the recording of a written assignment after the commencement of the action does not defeat standing (see U.S. Bank, N.A. v Collymore, 68 AD3d at 754). We find that Aurora has failed to make this showing.
Here, the note and mortgage at issue were originally comprised of a first and second note and mortgage, which were consolidated into a single note in the amount of $704,000 and the single lien reflected in the CEMA. The document submitted by Aurora in support of its motion for summary judgment and in opposition to the Weisblums’ cross motion purports to be an assignment of only the first note and mortgage in the amount of $672,000 to Aurora by MERS, as nominee for Lehman Brothers. However, Aurora failed to produce evidence of MERS’ authority to assign the first note. On its motion for summary judgment, Aurora failed to provide a copy of the first note but submitted a copy of the original first mortgage and a series of assignments culminating in the purported assignment of the first note and mortgage to Aurora. The first mortgage was originally held by MERS, as nominee for Credit Suisse; the mortgage document recites that the lender on the first note is Credit Suisse, but there is nothing in this document to establish the authority of MERS to assign the first note. MERS later assigned the first mortgage “together with” the underlying note, and thereafter, successive assignees assigned the first mortgage “together with” the underlying note. While, in some circumstances, the assignment of a note may effect the transfer of the mortgage as an inseparable incident of the debt (see U.S. Bank, N.A. v Collymore, 68 AD3d at 754), here the assignment instruments purport to do the opposite, without any evidence that MERS initially physically possessed the note or had the authority from the lender to assign it (see LPP Mtge. Ltd. v Sabine Props, LLC, 2010 NY Slip Op 32367[U]; OneWest Bank, F.S.B. v Drayton, 29 Misc 3d 1021, 1038-1041; Bank of N.Y. v Alderazi, 28 Misc 3d 376; cf. Mortgage Elec. Registration Sys., Inc. v Coakley, 41 AD3d 674, 674-675).
Moreover, Aurora produced no documents indicating an assignment to it of the second note and mortgage or of the entire consolidated note and CEMA in the amount of $704,000. Although Aurora’s vice president averred in conclusory fashion that Aurora became holder of the mortgage which is the subject of the action “by delivery without a written assignment,” the affiant failed to give any factual detail of a physical delivery of both the consolidated note and the CEMA to Aurora prior to the commencement of the action. Thus, Aurora failed to establish its standing to commence the action.
Accordingly, the appeal from the order dated February 25, 2010, is dismissed, as that order was superseded by the order dated May 19, 2010, made upon renewal. The order dated May 19, 2010, is reversed insofar as appealed from, on the law and, upon renewal, the order dated February 25, 2010, is vacated, the plaintiff’s motions for summary judgment on the complaint and for an order of reference are denied, and the Weisblums’ cross motion for summary judgment dismissing the complaint insofar as asserted against them is granted.
DILLON, J.P., BELEN and ROMAN, JJ., concur.
ORDERED that the appeal from the order dated February 25, 2010, is dismissed, as that order was superseded by the order dated May 19, 2010, made upon renewal; and it is further,
ORDERED that the order dated May 19, 2010, is reversed insofar as appealed from, on the law, and, upon renewal, the order dated February 25, 2010, is vacated, the plaintiff’s motions for summary judgment on the complaint and for an order of reference are denied, and the cross motion of the defendants Steven Weisblum and Patti Weisblum for summary judgment dismissing the complaint insofar as asserted against them is granted; and it is further,
ORDERED that one bill of costs is awarded to the defendants Steven Weisblum and Patti Weisblum.
ENTER:
Matthew G. Kiernan
Clerk of the Court
Footnotes
Footnote 1:1 Former RPAPL 1304(5)(c) and (d), defined “subprime home loan” as a home loan consummated between January 1, 2003, and September 1, 2008, in which, for a first lien mortgage loan, the annual percentage rate exceeded three percentage points over the yield on treasury securities, or for a subordinate mortgage lien, the annual percentage rate exceeded five percentage points over the yield on treasury securities. The parties here do not dispute that the consolidated loan at issue falls within the definition of subprime.
JPMorgan Chase & Co. (JPM) received a subpoena from the U.S. Securities and Exchange Commission over failed mortgages, a person familiar with the investigation said, as the agency probes banks including Credit Suisse Group AG (CS) for allegedly failing to share refunds from sellers of faulty debt.
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