Wells Fargo as MBS trustee ‘looted’ trusts to pay legal fees

(Reuters) – Several Pimco investment funds are accusing the mortgage-backed securities trustee Wells Fargo of misusing noteholder money to pay its own legal expenses.

In a newly filed complaint in Manhattan State Supreme Court, the Pimco funds are asking for a declaratory judgment that Wells Fargo is not entitled to use MBS trust money to fund its defense against noteholder claims that the bank breached its duties as an MBS trustee. Pimco’s lawyers at Bernstein Litowitz Berger & Grossmann allege that Wells Fargo has improperly reserved about $95 million across 20 MBS trusts.

The Pimco complaint is the latest wrinkle in increasingly complex litigation between MBS noteholders and trustees. Pimco is one of several major institutional investors pursuing Wells Fargo, Deutsche Bank, HSBC and other MBS trustees for supposedly failing to take action against MBS sponsors as the trusts began to lose money. As I’ve reported, noteholders have managed to get past trustee dismissal motions in several big cases in state and federal court, but still face the considerable obstacle of providing loan-specific proof that trustees were obliged to demand the repurchase of deficient underlying mortgages and didn’t live up to that obligation.

The trustees have aggressively defended the cases. In May, for example, Wells Fargo’s lawyers at Jones Day filed third-party complaints in Manhattan federal court against the advisory arms of three of the funds suing the trustee, claiming that the advisory firms knew as much as Wells Fargo about problems in the MBS market and should be jointly liable if the trustee is socked with a judgment for tort damages.

The new Pimco complaint alleges that Wells Fargo is improperly paying its lawyers in the trustee breach cases with money that rightfully belongs to noteholders. The trustee’s litigation reserves were exposed in April, according to the complaint, when an entity called New Residential Investment Corp exercised rights to call in Wells-overseen trusts with an unpaid principal balance of about $309.5 million. The complaint alleges that Wells Fargo withheld $57.2 million to establish “trustee reserve accounts” to cover legal expenses stemming from litigation over its conduct as trustee. (Nomura analysts disclosed the Wells Fargo reserve accounts in a report in June.)

Pimco contends Wells Fargo is not permitted, under the MBS contracts for the 11 trusts at issue in its suit, to use trust money to defend against allegations of willful wrongdoing, bad faith or negligence. Those are precisely the claims at issue in noteholder litigation against the MBS trustee, according to the complaint. “Neither the (MBS contracts) nor the law permit Wells Fargo’s taxing of the investors it was supposed to protect to indemnify itself and to finance its actual and expected defense costs,” the complaint said.

Pimco’s suit isn’t the first time a noteholder has raised questions about the funding of an MBS trustee’s defense in this wave of investor litigation. In March, lawyers for Royal Park Investment (RPI) moved for a court order requiring MBS trustee Deutsche Bank to disclose any legal fees and expenses it had billed to MBS trusts at issue in RPI’s case against the trustee. Like Pimco in the new Wells Fargo case, RPI and its lawyers from Robbins Geller Rudman & Dowd claimed that the trust contracts did not indemnify Deutsche Bank for claims of negligence or misconduct.

Deutsche Bank’s lawyers from Morgan Lewis & Bockius countered that the trust agreements expressly indemnify the MBS trustee from fees and costs associated with its duties as trustee. The judge overseeing the dispute, U.S. Magistrate Barbara Moses of Manhattan, ruled that RPI’s request was outside the scope of her jurisdiction. She suggested that if RPI wanted to pursue the matter, it should file a preliminary injunction motion – although she also warned at oral argument that if she were RPI, “I wouldn’t be terribly optimistic about the outcome of that motion.” (There’s no indication in the RPI docket that Robbins Geller filed a preliminary injunction motion on Deutsche Bank’s legal fees.)

Wells Fargo sent an email statement on the new Pimco suit. The bank said that as an MBS trustee, it “is entitled to indemnification of its legal fees and expenses under the contractual agreements at issue. We believe the lawsuit filed by the Pimco funds has no merit and will be vigorously defending the claim.”

Pimco counsel Blair Nicholas of Bernstein Litowitz declined to provide a statement.

Traveling on Empty for 35 Years, U.S. Government Traps Itself Into Teaser Rates Now Ready for Reset

NOW AVAILABLE ON KINDLE/AMAZON!

SEE calhoun_testimony LITANY of MORTGAGE LENDING ABUSES AND OTHER BANK ABUSES Admitted by Responsible Lending Association

Isn’t it interesting, frustrating, maddening that not only did Wall Street do it to 20 million homeowners in one form or another, they did it to the Federal Government too, which means they spread their pillage to all the taxpayers, not just the ones with mortgages.

By the way go get a copy of Nomi Prins, ex-director of Goldman Sachs, It Takes a Pillage. I saw her on C-Span “Afterwords” interviewed by Senator Bernie Sanders of Vermont (I). She’s brilliant and (2) knows the ins and outs not only of the structure of mortgage derivatives but the math too.

What annoys me and should annoy ALL taxpayers is that we have been tricked by Wall Street AND Government into accepting the losses of Wall Street’s wild ride. Teaser rates for the Federal Government on bailouts that should never have occurred, FED rates that charge banks nothing for loans so they can go out and speculate (since Glass Steagel) while the taxpayer is on the hook. At the same time the FED is paying the “banks” a little extra to make them healthier.

Why doesn’t anybody get the fact that now these monsters of financial chicanery have unfettered access to your bank deposits to go and play with it as they wish. And not only are your deposits at the “bank” being used in this way, you are also guaranteeing this behavior if ANY bank fails! Where do you think this is leading folks? Competition is in worse shape than it was over a year ago. There is MORE RISK IN THE FINANCIAL MARKETPLACE than there was over a year ago.

Economists are warning us in despondent tones that the worst is yet to come but absent from the scene is the outrage from the public which is needed to force change and break the claims and power of the incestuous relationship between Washington and Wall Street.

The following is the lead article in NY Times Today. Some snippets from it as follows:

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

November 23, 2009

Payback Time

Wave of Debt Payments Facing U.S. Government
By EDMUND L. ANDREWS

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.

The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.

Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.

This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.

“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”

%d bloggers like this: