I’ve talked about this before. It is why we offer a Risk Analysis Report to Community Banks and Credit Unions. The report analyzes the potential risk of holding MBS instruments in lieu of Treasury Bonds. And it provides guidance to the bank on making new loans on property where there is a history of assignments, transfers and other indicia of claims of securitization.
The risks include but are not limited to
- MBS Instrument issued by New York common law trust that was never funded, and has no assets or expectation of same.
- MBS Instrument was issued by NY common law trust on a tranche that appeared safe but was tied by CDS to the most toxic tranche.
- Insurance paid to investment bank instead of investors
- Credit default swap proceeds paid to investment banks instead of investors
- Guarantees paid to investment banks after they have drained all value through excessive fees charged against the investor and the borrowers on loans.
- Tier 2 Yield Spread Premiums of as much as 50% of the investment amount.
- Intentional low underwriting standards to produce high nominal interest to justify the Tier 2 yield spread premium.
- Funding direct from investor funds while creating notes and mortgages that named other parties than the investors or the “trust.”
- Forcing foreclosure as the only option on people who could pay far more than the proceeds of foreclosure.
- Turning down modifications or settlements on the basis that the investor rejected it when in fact the investor knew nothing about it. This could result in actions against an investor that is charged with violations of federal law.
- Making loans on property with a history of “securitization” and realizing later that the intended mortgage lien was junior to other off record transactions in which previous satisfactions of mortgage or even foreclosure sales could be invalidated.
The problem, as these small financial institutions are just beginning to realize, is that the MBS instruments that were supposedly so safe, are not safe and may not be worth anything at all — especially if the trust that issued them was never funded by the investment bank who did the underwriting and sales of the MBS to relatively unsophisticated community banks and credit unions. In a word, these small institutions were sitting ducks and probably, knowing Wall Street the way I do, were lured into the most toxic of the “bonds.”
Unless these small banks get ahead of the curve they face intervention by the FDIC or other regulatory agencies because some part of their assets and required reserves might vanish. These small institutions, unlike the big ones that caused the problem, don’t have agreements with the Federal government to prop them up regardless of whether the bonds were real or worthless.
Most of the small banks and credit unions are carrying these assets at cost, which is to say 100 cents on the dollar when in fact it is doubtful they are worth even half that amount. The question is whether the bank or credit union is at risk and what they can do about it. There are several claims mechanisms that can employed for the bank that finds itself facing a write-off of catastrophic or damaging proportions.
The plain fact is that nearly everyone in government and law enforcement considers what happens to small banks to be “collateral damage,” unworthy of any effort to assist these institutions even though the government was complicit in the fraud that has resulted in jury verdicts, settlements, fines and sanctions totaling into the hundreds of billions of dollars.
This is a ticking time bomb for many institutions that put their money into higher yielding MBS instruments believing they were about as safe as US Treasury bonds. They were wrong but not because of any fault of anyone at the bank. They were lied to by experts who covered their lies with false promises of ratings, insurance, hedges and guarantees.
Those small institutions who have opted to take the bank public, may face even worse problems with the SEC and shareholders if they don’t report properly on the balance sheet as it is effected by the downgrade of MBS securities. The problem is that most auditing firms are not familiar with the actual facts behind these securities and are likely a this point to disclaim any responsibility for the accounting that produces the financial statements of the bank.
I have seen this play out before. The big investment banks are going to throw the small institutions under the bus and call it unavoidable damage that isn’t their problem. despite the hard-headed insistence on autonomy and devotion to customer service at each bank, considerable thought should be given to banding together into associations that are not controlled by regional banks are are part of the problem and will most likely block any solution. Traditional community bank associations and traditional credit unions might not be the best place to go if you are looking to a real solution.
Community Banks and Credit Unions MUST protect themselves and make claims as fast as possible to stay ahead of the curve. They must be proactive in getting a credible report that will stand up in court, if necessary, and make claims for the balance. Current suits by investors are producing large returns for the lawyers and poor returns to the investors. Our entire team stands ready to assist small institutions achieve parity and restitution.
FOR MORE INFORMATION OR TO SCHEDULE CONSULTATIONS BETWEEN NEIL GARFIELD AND THE BANK OFFICERS (WITH THE BANK’S LAWYER) ON THE LINE, EXECUTIVES FOR SMALL COMMUNITY BANKS AND CREDIT UNIONS SHOULD CALL OUR TALLAHASSEE NUMBER 850-765-1236 or OUR WEST COAST NUMBER AT 520-405-1688.
BLK | Thu, Nov 14
BlackRock with ETF push to smaller banks • The roughly 7K regional and community banks in the U.S. have securities portfolios totaling $1.5T, the majority of which is in MBS, putting them at a particularly high interest rate risk, and on the screens of regulators who would like to see banks diversify their holdings. • “This is going to be a multiple-year trend and dialogue,” says BlackRock’s (BLK) Jared Murphy who is overseeing the iSharesBonds ETFs campaign. • The funds come with an expense ratio of 0.1% and the holdings are designed to limit interest rate risk. BlackRock scored its first big sale in Q3 when a west coast regional invested $100M in one of the funds. • At issue are years of bank habits – when they want to reduce mortgage exposure, they typically turn to Treasurys. For more credit exposure, they habitually turn to municipal bonds. “Community bankers feel like they’re going to be the last in the food chain to know if there are any problems with a corporate issuer,” says a community bank consultant.
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