Forbes: TBTF Banks have $3.8 Trillion in Reported Loan Portfolios — How much of it is real?

The five largest U.S. banks have a combined loan portfolio of almost $3.8 trillion, which represents 40% of the total loans handed out by all U.S. commercial banks.

See Forbes: $3.8 Trillion in Portfolio Loans

I can spot around $300 billion that isn’t real.

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When interviewing the FDIC receiver back in 2008 he told me that WAMU had originated around $1 Trillion in loans. He also told me that most of them were subject to claims of securitization (i.e., they had been sold). Then when I asked him how much had been sold, he said that Chase had told him the total was around 2/3. Translation: With zero consideration, Chase was about to use the agreement of October 25, 2008 as an excuse to claim ownership and servicing rights on over $300 billion in loans. Chase was claiming ownership when it suited them. By my count they foreclosed on over $100 billion of those “WAMU” loans and, for the most part, collected the proceeds for itself.

Point One: If there really were $300 Billion in loans left in WAMU inventory, there would have been no receivership nor would there have been any bankruptcy.

Point Two: If there were $300 Billion in loans left in WAMU inventory, or even if there was 1/10th that amount, neither the FDIC receiver nor the US Trustee in WAMU bankruptcy would have allowed the portfolio to be given to Chase without Chase paying more than zero. The receiver and the US Trustee would have been liable for civil and even criminal penalties. But they were not liable because there were no loans to sell.

So it should come as no surprise that a class action lawsuit has been filed against Chase for falsely claiming the payments from performing loans and keeping them, and for falsely claiming the proceeds on foreclosure as if they were the creditor when they were most clearly not. whether the lawyers know it or not, they might just have filed the largest lawsuit in history.

see Young v Chase Class Action – WaMu Loans – EDNY June 2018

This isn’t unique. Chase had its WAMU. BofA had its Countrywide. Wells Fargo had its Wachovia. Citi had lots of alter egos. The you have OneWest with its IndyMac. And there are others. All of them had one thing in common: they were claiming ownership rights over mortgages that were falsely claimed to have been “acquired through merger or acquisition using the FDIC (enter Sheila Bair screaming) as a governmental rubber stamp such that it would appear that they purchased over a trillion dollars in residential mortgage loans when in fact they merely created the illusion of those loans which had been sold long ago.

None of this was lost on the insurers that were defrauded when they issued insurance policies that were procured under false pretenses on supposedly non-securities where the truth is that, like the residential loans themselves, the “securities” and the loans were guaranteed to fail.

Simplistically, if you underwrite a loan to an family whose total income is less than the payments will be when the loan resets to full amortization you can be sure of two things: (1) the loan will fail short-term and (2) the “certificates” will fail along with them. If you know that in advance you can bet strong against the loans and the certificates by purchasing insurance from insurers who were inclined to trust the underwriters (a/k/a “Master Servicer” of nonexistent trust issuing the certificates).

see AMBAC Insurance Case vs U.S. Bank

The bottom line is that inside the smoke and mirrors palace, there is around $1 Trillion in loans that probably were sold (leveraged) dozens of times where the debt is owned by nobody in particular — just the TBTF bank that claims it. Once they get to foreclosure, the presumption arises that everything that preceded the foreclosure sale is valid. And its very hard to convince judges that they just rubber stamped another theft.

New Jersey Court Invokes Golden Chicken of Law

Not only did this court get it wrong, it apparently knew it was getting it wrong and so ordered that the case could not be used as precedent.

Steve Mnuchin, now Secretary of our Treasury, was hand picked by the major banks to lead a brand new Federal Savings Bank, called OneWest, which was literally organized over a single weekend to pick up the pieces of IndyMac. By the time of its announced failure in the fall of 2008 IndyMac was a thinly capitalized shell  conduit converted from regular commercial banking to a conduit to support the illusion of securitization.

The important part is that in terms of loans IndyMac literally owned as close to nothing as you could get. OneWest consisted of a group of people who don’t ordinarily invest in banks. But this was irresistible. Over the shrieking objections of FDIC chairwoman who lost her job, OneWest was allowed to claim (a) that it owned the loans that IndyMac and “originated” and (b) to claim 80% of claimed losses which the FDIC paid.

see OneWest “Wins” Again

Thus OneWest claimed losses vastly exceeding the “investment” by certain members of the 1% whom I won’t name here. This enabled them to do 2 things. Claim 80% of the fictitious losses from loans that were not owned by Indymac and the foreclose to collect the entire amount.

Mnuchin was put in charge of “operations.” He ran nothing and basically did as he was told. He knew that the IndyMac residential loan portfolio was at practically zero, he knew that the 80% claim was fictitious, and he knew that neither IndyMac nor OneWest, its supposed successor owned the loans. Nonetheless the “foreclosure king” was entirely happy with foreclosing on homeowners who were caught in a world of spin.

The investors in the OneWest deal split the spoils of war. To be fair they didn’t actually know the truth of the situation. Mnuchin painted a very rosy profit picture that would happen over the short-term and he was right.

As with WAMU, Countrywide et al, the business of IndyMac was largely run through remote vehicles posing as mortgage brokers, originators or just sellers. These entities did exactly what IndyMac told them to do and in so doing IndyMac was doing exactly what it was told to do by the likes of Merrill Lynch, and indirectly Bank of America, Chase, Goldman Sachs, and Citi.

As the descriptive literature on securitization says, all vehicles are remote and special purpose so as to protect everyone else against allegations of wrongdoing. But there was nothing remote about these companies. Yet here in this decision in New Jersey the court predicated its ruling on the proposition that none of the players were liable for any of the unlawful activities of their predecessors.

It’s decisions like this that leave us with the knowledge that we have a long way to go before the courts get curious enough to apply the law as it is — not as the courts and others say it is.

FDIC Employee Quits and Goes Public With Complaint Against Chase, WAMU, Citi and two law firms

For further information and assistance please call 954-495-9867 or 520-405-1688

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See Eric Mains Federal Complaint

see Mains – Table of Contents.petition 2 transfer

On Monday Eric Mains resigned from his employment with the FDIC. He had just filed a lawsuit against Chase, Citi, WAMU-HE2 Trust, Cynthia Riley, LPS, WAMU, and two law firms. Since he felt he had a conflict of interest, he believed the best course of action was to resign effective immediately.

His lawsuit, told from the prospective of a true insider, reveals in astonishing detail the worst of the practices that have resulted in millions of illegal foreclosures. Some of his allegations cast a dark shadow over claims of Chase Bank on its balance sheet, as reported to the public and the SEC and the reporting of both Chase and Citi as to their potential liability for wrongful foreclosures. If he is right, and he proves these allegations, much of what Chase has reported as its financial condition will vanish from its financial statements and the liability side of the balance sheets of both Citi (as Trustee) and Chase (as servicer and “owner’) will increase exponentially. This may well have the effect of bringing both giants into the position of insufficient reserve capital and force the government to take action against both entities. Elizabeth Warren might have been right when she said that Citi should have been broken into pieces. And the same logic might apply to Chase.

He has also penned the phrase “wild goose Chase” referring to discovery of the true creditors and processing of applications for modification of loans. And he has opened the door for RICO actions against the banks and individuals who did the bidding of the banks as well as the individuals who directed those actions.

His Indiana lawsuit is filed in federal court. He alleges that

1. WAMU was not the actual lender in his own loan
2. That the loan was part of an illegal scheme from the start
3. That his loan was subject to claims of securitization but that those claims were false
4. That the REMIC Trust was never funded and therefore never had the capacity to originate or buy loans
5. That the intermediaries never followed the law or the documents for securitization of his loan
6. That the REMIC Trust never did purchase his loan
7. That Citi was therefore “trustee” for an unfunded trust
8. That Chase never purchased the loans from WAMU
9. That Chase could not have been the legal servicer over the loan because the loan was not in the trust
10. That Chase has filed conflicting claims as to ownership of the loans
11. That the affidavit of Robert Schoppe, whom Mains worked for, as to ownership of the loans was false when it states that Chase owned the loans
12. That the use of WAMU’s name on the loan documents was a false representation
13. That his loan may have been pledged several times by various parties
14. That multiple payments from multiple parties were likely received by Chase and others on account of the Mains “loan” but were never accounted for to the investors whose money was being used as though it was the Banks themselves who were funding originations and a acquisitions of loans
15. That the industry practice was to reap multiple payments on the same loan — and the foreclose as though there was balance due when in fact the balance claimed was entirely incorrect
16. That the investors were defrauded and that foreclosure was part of the fraudulent scheme
17. That Mains name and identity was used without his consent to justify numerous illegal transactions in which the banks repeated huge profits
18. That neither WAMU nor Chase had any rights to collect money from Mains
19. That Citi had no right to enforce a loan it did not own and had no authority to represent the owner(s) of the loan
20. That the modification procedures adopted by the Banks were used intentionally to force the borrower into the illusions a default
21. That Sheila Bair, Chairman of the FDIC, said that Chase and other banks used HAMP modifications as “a kind of predatory lending program.”
22. That Mains stopped making payments when he discovered that there was no known or identified creditor.
23. The despite stopping payments, his loan balance went down, according to statements sent to him.
24. That Chase has routinely violated the terms of consent judgments and settlements with respect to the processing of payments and the filing of foreclosures.
25. That the affidavits filed by persons purportedly representing Chase were neither true nor based upon personal knowledge
26. That the note and mortgage are void from the start.
27. That Mains has found “incontrovertible evidence of fraud, forgery and possibly backdating as well.” (referring to Chase)
28. That the law firms suborned perjury and intentionally made misrepresentations to the Court
29. That Cynthia Riley “is one overwhelmingly productive and multi-talented bank officer. Apparently she was even capable of endorsing hundreds of loan documents a day, and in Mains’ case, even after she was no longer employed by Washington Mutual Bank. [Mains cites to deposition of Riley in JPM Morgan Chase v Orazco Case no 29997 CA, 11th Judicial Circuit, Florida.
30 That Cynthia Riley was laid off in November 2006 and never again employed as a note review examiner by WAMU nor at JP Morgan Chase.
30. That LPS (now Black Knight) owns and operates LPS Desktop Software, which was used to create false documents to be executed by LPS employees for recording in the Offices of the Indiana County recorder.
31. That the false documents in the mains case were created by LPS employee Jodi Sobotta and signed by her with no authority to do so.
32. Neither the notary nor the LPS employee had any real documents nor knowledge when they signed and notarized the documents used against Mains.
33. Chase and its lawyer pursued the foreclosure with full knowledge that the assignment was fraudulent and forged.
34. That LPS was established as an intermediary to provide “plausible deniability” to Chase and others who used LPS.
35. That the law firms also represented LPS in a blatant conflict of interest and with knowledge of LPS fraud and forgery.

Some Quotes form the Complaint:

“Mains perspective on this case is a rather unique one, as Main is an employee of the FDIC (hereinafter, FDIC) who worked in the Dallas field office of the FDIC in the Division of Resolutions and Receiverships (hereinafter DRR), said division which was the one responsible for closing WAMU and acting as its receiver. Mains worked with one Robert Schoppe in his division, whom the defendant Chase Bank often cites to when pulling out an affidavit Robert signed. This affidavit states that Chase Bank had purchased “certain assets and liabilities” of WAMU in the purchase transaction from the FDIC as receiver for WAMU in 2008. Chase Bank uses this affidavit ad museum to convince the court system in foreclosure cases that this affidavit somehow proves that Chase Bank purchased “every conceivable asset” of WAMU, so it must have standing in all cases involving homeowner loans originated through WAMU, or to put it simply that this proves Chase became a holder with rights to enforce or a holder in due course of the loan as defined by the Uniform Commercial Code. Antithetically, when it wants to sue the FDIC for a billion dollars… due to mounting expenses from the WAMU purchase transaction, it complains that the purchase agreement it signed didn’t really entail the purchase of “every asset and liability” of WAMU… Chase Bank claims this when it is to their advantage in a lawsuit to do so.

Mains worked as team leader in the DRR Dallas field office

[The] violation of REMIC trust rules occurred because the entities involved, for reasons of control, speed of transaction, and to hide what they were actually doing with the investors money

Unfortunately for the investors, many of the banks involved in the securitization process (like Wahoo) failed to perform the securitizations properly, hence as mentioned above, the securitizations were botched and ineffective as to passing ownership of the notes or underlying collateral. The loans purchased were not purchased THROUGH the REMIC. … The REMIC trust entity must be the one actually purchasing the mortgages directly.

This violation of REMIC trust rules occurred because the entities involved, for reasons of control, speed of transaction, and to hide what they were actually doing with the investors funds once received, held the investor funds in the “lender” banks owned subsidiary accounts, instead of funding the REMIC trusts with the money so that the trust could then purchase the loan from the “lender”, making it an actual buy and sell transaction.”

Innovative Lawsuits Test the Credibility of Securitized Loans

For further information or assistance please call 954-495-9867 or 520-405-1688.

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see http://dealbook.nytimes.com/2014/11/27/u-s-backed-mortgages-put-to-test-in-a-lawsuit/

If you ever saw the movie “The Firm” from the book by John Grisham, you know the ending. The whole system was rigged but what finally produced a result was mail fraud, which is generally off the radar screen for any lawyer combating powerful opponents. The lesson for the perpetrators of crimes, predatory loans and so forth is that they can’t cover everything. There are too many ways that they faked the deals from top to bottom. Mail fraud might be one of them. And as you will see, talking to the borrower might be another. One lawsuit against US Bank shows that anyone who really does their homework might be able to take down Goliath with just such an innocuous provision.

A word of caution here  — these strategies are predicated in part on the assumption that the entire loan process was fraudulent, where there were dozens of undisclosed entities taking undisclosed fees from a large pool of investor money used in part to fund mortgage that were not tied to any documents signed at closing. The documents that were signed had no connection to the actual lender and the entity identified as the lender was a pretender paid to act as though it was loaning money. The reason I mention this is not to hammer down on the reality of those mortgages, but to suggest that a judge who still thinks that the borrower is a deadbeat trying to get out of legitimate loan, is likely to find problems with “innovative strategies.” But it is also true that there are a variety of things that bother many judges more and more about these loans and the foreclosures.

The article in the New York Times by Peter Eavis goes into some detail, but the essence is in this quote:

Not engaging with borrowers who have missed payments may not seem like the strongest grounds for litigation against a bank. Yet that is the basis for an innovative lawsuit against U.S. Bank, a division of U.S. Bancorp, one of the largest banks in the country. The legal action could mean fresh legal problems for other big mortgage banks, as well. It is the latest threat to emerge from a barrage of cases that have forced big banks to pay tens of billions of dollars in recent months.

The lawsuit focuses on a popular type of government-guaranteed mortgage that in fact requires that banks take distinct steps — like trying to arrange a meeting — when borrowers stop paying.

The lawsuit is being brought by Advocates for Basic Legal Equality, a legal aid group. In a twist, the group is suing U.S. Bank in federal court in Ohio on behalf of the United States government, using the False Claims Act. This legislation, which dates to the Civil War, allows private citizens and groups to pursue legal action against companies and other entities for receiving payments from the government on false grounds.

The more you drill down on the existing laws, rules and regulations the more violations you will find. And when it comes to foreclosing, anyone watching this nightmare unfold must get to to wondering about why all of these deals went to foreclosure instead of workouts. The answer is that the foreclosure judgment and the foreclosure sale is part of a massive cover-up of massive fraud. And for the most part, the government has decided to (a) not prosecute real claims for real damages and real crimes and (b) not provide individual homeowners with information already obtained about their homes, their mortgages and their foreclosures that would shut the process down if known. The latter is what most irks Elizabeth Warren who now officially speaks for the average American and who seeks a level playing field in the Senate of the U.S. Congress.

People like Senator Warren, Sheila Bair, former FDIC chief, and others who have been outspoken about the out right fraud — i.e., nonexistence of the loans being used as a basis for foreclosure — keep getting stepped on, but the recent “promotion” of Warren is at least somewhat encouraging in that it shows that the leadership of the Democratic party recognizes they can no longer ignore her or the issues she speaks about. She speaks at gathering that attract voters from across the political spectrum and she is proving what I said years ago a constantly ever since — if you want to win by a landslide, run against the banks  and the people they own in our government.

People Who Were Wrong Are the Winners — SO FAR

First of all I don’t think Geithner caused the financial crisis. He certainly contributed to it but it probably would have happened even if he had not undercut Sheila Bair at every opportunity; and yes he should have listened to other people who were saying that the corruption on Wall Street had reached epic proportions.

Second, I think that neither Geithner nor his predecessor, Hank Paulson, as Treasury secretaries, had a real understanding of the crisis at any time up through today. And their bosses, Presidents Bush and Obama were even more clueless. And while they are probably culpable for their negligence and mismanagement of the crisis, the foreclosure madness would have occurred anyway.

Third, it is my belief that the culprits on Wall Street with all their tentacles stretched out across the globe were unstoppable by anyone except a good government with the resources to actually get to the bottom of it. What was missing was the desire to get rid of the problem and the naivete of the leaders in government in failing to notice that the entire banking industry was engaged in faking transactions and documents — and failing to ask why that was necessary.

Fourth my opinion is that the fault lies with the failure of anyone in government to learn anything relevant about the industries they were supposed to be regulating. If they had done so, starting in 1983 when derivatives became adolescent, the adult would have been far more tame and the crises would have been averted entirely.

Homeowners did not create the crisis. Tens of millions of homeowners did not congregate in a room thinking up 450 loan products when there were only 4 or 5. And saying they had bad judgment would absolve almost any perpetrator of economic crime because his victim was too stupid.

The laws were already in place. It was knowledgeable people that were missing. We needed and had faithful servants of the people — but as a society and as a nation each country contributed to the enormous problem that has now been created. And we will keep paying for it as banks take over all commodities we hold dear and “legally” corner the markets with stolen cash and property.

In Nocera’s article on Bankrupt Housing Policy, he points out that ” in the course of perusing another new book about the financial crisis, “Other People’s Houses,” by Jennifer Taub, an associate professor at Vermont Law School, I was reminded of an effort that took place in the spring of 2009 that could have made an enormous difference to homeowners, one that would have required no taxpayer money and might well have become law with a little energetic lobbying from the likes of, well, Tim Geithner. That was an attempt, led by Dick Durbin, the Illinois senator, to change the bankruptcy code so that homeowners who were underwater could modify their mortgages during the bankruptcy process. The moment has been largely forgotten; Taub has done us a favor by putting it back on the table.”

He goes on to say that he had correspondence with Sheila Bair who was undermined and stomped on by the Obama administration for even thinking about relief to homeowners. She was head of the FDIC and prevented from doing her job by a bankrupt policy of save the banks and damn the homeowners. “Because, as Bair told me in an email, “It would have been a powerful bargaining chip for borrowers.” Without the ability to file for bankruptcy, underwater homeowners unable to pay their mortgages were helpless to prevent foreclosures. With it, however, servicers and banks were far more likely to negotiate the debt load. And if they weren’t, a bankruptcy judge would rule on the appropriate debt to be repaid. For all the talk about the need for principal reduction, this change would have been the easiest way to get it.”

According to Adam Levitin, in the same article by Nocera, this should have been a “no-brainer.” I take that too mean that as I have explained above, brains were in short supply during the worst of what we have yet seen of the economic crisis that most of us think is not even half over. Obama may be leaving the crisis as his legacy not because he caused it but because he didn’t do anything about it — or at least anything right.

And I obviously agree with Nocera’s ending comment — “Why is it that the fear of moral hazard only applies to homeowners, and not to the banks?”

Gretchen Morgenson says Geithner admitted he was inept at times. ““We were human.” But this fails to address head-on the possibility that he was a captured regulator, a man locked into the mind-set of the very bankers he was supposed to oversee.”

Gretchen reports without objection from Geithner — “Last week, I asked Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, for her recollection of these events. She replied with an email recalling that in 2006, she attended her first Basel Committee meeting, the international negotiations that Mr. Geithner was referring to. While there, she pushed unsuccessfully to raise bank capital levels.

Why was she unsuccessful? “I was actively undermined by the Fed, the New York Fed and the comptroller of the currency,” she said. “I later complained to Tim about the way his representative on the Basel Committee had undermined me. He was unapologetic.”

Gretchen has not been given the resources to prove the corruption on Wall Street, but she knows it is there and as the fourth estate the NY Times should have provided her with a blank check for what would have been a Pulitzer or even a Nobel prize. for now we can only agree with her — “We were the lenders of last resort and should have been paid an enormous premium for the use of our money. We were not.”

There are suddenly a spate of articles on what went wrong because Geithner wrote a book and is selling it enhancing his own fortunes while he presided over the worst hit the middle class has had in our history.

Here is what investigators should have been looking for:

Behind door number 1 were the fools. These are the money managers who for reasons the defy explanation did no due diligence and bought empty mortgage bonds issued by a trust that was never going to receive the money, the loans or the property.

Behind door number 2 were the wolves of Wall Street including all the different brokers, dealers, banks, rating agencies and insurers, all the mortgage brokers, real estate brokers, and closing agents and title companies all in league to take as much money as they could out of the system and the hide it behind shadow money equivalent to ten times all the actual money in the world.

Behind door number 3 are the victims. These are the people who knew nothing about mortgages, derivatives or anything else. In the end they were convinced by super salespeople that they could never understand how they could afford the loan nor could they even understand why they must do it anyway. In Florida alone 10,000 such sales people were convicted felons. And yet when we talk of moral hazard we speak of people, and not banks. Why is that?

Sheila Bair Paints Picture of President concerned with borrowers vs Team Concerned with Banks

Editor’s Note: Sheila Bair might have been thrown under the bus but she is still alive. Get her book if you really want to know about Obama and his team — it was a war in the White House. When Obama gets a second term I think we are going to see a large shakeout of old economic advisers who care about banks and new economic advisers who care about the country the people who live in it.

Sheila Bair Bashes Obama’s Economic Team — Here’s What She Has To Say About The President
http://www.businessinsider.com/sheila-bair-on-barack-obama-2012-9

Everything Built on Myth Eventually Fails

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Editor’s Comment:

The good news is that the myth of Jamie Dimon’s infallaibility is at least called into question. Perhaps better news is that, as pointed out by Simon Johnson’s article below, the mega banks are not only Too Big to Fail, they are Too Big to Manage, which leads to the question, of why it has taken this long for Congress and the Obama administration to conclude that these Banks are Too Big to Regulate. So the answer, now introduced by Senator Brown, is to make the banks smaller and  put caps on them as to what they can and cannot do with their risk management.

But the real question that will come to fore is whether lawmakers in Dimon’s pocket will start feeling a bit squeamish about doing whatever Dimon asks. He is now becoming a political and financial liability. The $2.3 billion loss (and still counting) that has been reported seems to be traced to the improper trading in credit default swaps, an old enemy of ours from the mortgage battle that continues to rage throughout the land.  The problem is that the JPM people came to believe in their own myth which is sometimes referred to as sucking on your own exhaust. They obviously felt that their “risk management” was impregnable because in the end Jamie would save the day.

This time, Jamie can’t turn to investors to dump the loss on, thus drying up liquidity all over the world. This time he can’t go to government for a bailout, and this time the traction to bring the mega banks under control is getting larger. The last vote received only 33 votes from the Senate floor, indicating that Dimon and the wall Street lobby had control of 2/3 of the senate. So let ius bask in the possibility that this is the the beginning of the end for the mega banks, whose balance sheets, business practices and public announcements have all been based upon lies and half truths.

This time the regulators are being forced by public opinion to actually peak under the hood and see what is going on there. And what they will find is that the assets booked on the balance sheet of Dimon’s monolith are largely fictitious. This time the regulators must look at what assets were presented to the Federal Reserve window in exchange for interest free loans. The narrative is shifting from the “free house” myth to the reality of free money. And that will lead to the question of who is the creditor in each of the transactions in which a mortgage loan is said to exist.

Those mortgage loans are thought to exist because of a number of incorrect presumptions. One of them is that the obligation remains unpaid and is secured. Neither is true. Some loans might still have a balance due but even they have had their balances reduced by the receipt of insurance proceeds and the payoff from credit default swaps and other credit enhancements, not to speak of the taxpayer bailout.

This money was diverted from investor lenders who were entitled to that money because their contracts and the representations inducing them to purchase bogus mortgage bonds, stated that the investment was investment grade (Triple A) and because they thought they were insured several times over. It is true that the insurance was several layers thick and it is equally true that the insurance payoff covered most if not all the balances of all the mortgages that were funded between 1996 and the present. The investor lenders should have received at least enough of that money to make them whole — i.e., all principal and interest as promissed.

Instead the Banks did the unthinkable and that is what is about to come to light. They kept the money for themselves and then claimed the loss of investors on the toxic loans and tranches that were created in pools of money and mortgages — pools that in fact never came into existence, leaving the investors with a loose partnership with other investors, no manager, and no accounting. Every creditor is entitled to payment in full — ONCE, not multiple times unless they have separate contracts (bets) with parties other than the borrower. In this case, with the money received by the investment banks diverted from the investors, the creditors thought they had a loss when in fact they had a claim against deep pocket mega banks to receive their share of the proceeds of insurance, CDS payoffs and taxpayer bailouts.

What the banks were banking on was the stupidity of government regulators and the stupidity of the American public. But it wasn’t stupidity. it was ignorance of the intentional flipping of mortgage lending onto its head, resulting in loan portfolios whose main characteristic was that they would fail. And fail they did because the investment banks “declared” through the Master servicer that they had failed regardless of whether people were making payments on their mortgage loans or not. But the only parties with an actual receivable wherein they were expecting to be paid in real money were the investor lenders.

Had the investor lenders received the money that was taken by their agents, they would have been required to reduce the balances due from borrowers. Any other position would negate their claim to status as a REMIC. But the banks and servicers take the position that there exists an entitlement to get paid in full on the loan AND to take the house because the payment didn’t come from the borrower.

This reduction in the balance owed from borrowers would in and of itself have resulted in the equivalent of “principal reduction” which in many cases was to zero and quite possibly resulting in a claim against the participants in the securitization chain for all of the ill-gotten gains. remember that the Truth In Lending Law states unequivocally that the undisclosed profits and compensation of ANYONE involved in the origination of the loan must be paid, with interest to the borrower. Crazy you say? Is it any crazier than the banks getting $15 million for a $300,000 loan. Somebody needs to win here and I see no reason why it should be the megabanks who created, incited, encouraged and covered up outright fraud on investor lenders and homeowner borrowers.

Making Banks Small Enough And Simple Enough To Fail

By Simon Johnson

Almost exactly two years ago, at the height of the Senate debate on financial reform, a serious attempt was made to impose a binding size constraint on our largest banks. That effort – sometimes referred to as the Brown-Kaufman amendment – received the support of 33 senators and failed on the floor of the Senate. (Here is some of my Economix coverage from the time.)

On Wednesday, Senator Sherrod Brown, Democrat of Ohio, introduced the Safe, Accountable, Fair and Efficient Banking Act, or SAFE, which would force the largest four banks in the country to shrink. (Details of this proposal, similar in name to the original Brown-Kaufman plan, are in this briefing memo for a Senate banking subcommittee hearing on Wednesday, available through Politico; see also these press release materials).

His proposal, while not likely to immediately become law, is garnering support from across the political spectrum – and more support than essentially the same ideas received two years ago.  This week’s debacle at JP Morgan only strengthens the case for this kind of legislative action in the near future.

The proposition is simple: Too-big-to-fail banks should be made smaller, and preferably small enough to fail without causing global panic. This idea had been gathering momentum since the fall of 2008 and, while the Brown-Kaufman amendment originated on the Democratic side, support was beginning to appear across the aisle. But big banks and the Treasury Department both opposed it, parliamentary maneuvers ensured there was little real debate. (For a compelling account of how the financial lobby works, both in general and in this instance, look for an upcoming book by Jeff Connaughton, former chief of staff to former Senator Ted Kaufman of Delaware.)

The issue has not gone away. And while the financial sector has pushed back with some success against various components of the Dodd-Frank reform legislation, the idea of breaking up very large banks has gained momentum.

In particular, informed sentiment has shifted against continuing to allow very large banks to operate in their current highly leveraged form, with a great deal of debt and very little equity.  There is increasing recognition of the massive and unfair costs that these structures impose on the rest of the economy.  The implicit subsidies provided to “too big to fail” companies allow them to boost compensation over the cycle by hundreds of millions of dollars.  But the costs imposed on the rest of us are in the trillions of dollars.  This is a monstrously unfair and inefficient system – and sensible public figures are increasingly pointing this out (including Jamie Dimon, however inadvertently).

American Banker, a leading trade publication, recently posted a slide show, “Who Wants to Break Up the Big Banks?” Its gallery included people from across the political spectrum, with a great deal of financial sector and public policy experience, along with quotations that appear to support either Senator Brown’s approach or a similar shift in philosophy with regard to big banks in the United States. (The slide show is available only to subscribers.)

According to American Banker, we now have in the “break up the banks” corner (in order of appearance in that feature): Richard Fisher, president of the Federal Reserve Bank of Dallas; Sheila Bair, former chairman of the Federal Deposit Insurance Corporation; Tom Hoenig, a board member of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas City; Jon Huntsman, former Republican presidential candidate and former governor of Utah; Senator Brown; Mervyn King, governor of the Bank of England; Senator Bernie Sanders of Vermont; and Camden Fine, president of the Independent Community Bankers of America. (I am also on the American Banker list).

Anat Admati of Stanford and her colleagues have led the push for much higher capital requirements – emphasizing the particular dangers around allowing our largest banks to operate in their current highly leveraged fashion. This position has also been gaining support in the policy and media mainstream, most recently in the form of a powerful Bloomberg View editorial.

(You can follow her work and related discussion on this Web site; on twitter she is @anatadmati.)

Senator Brown’s legislation reflects also the idea that banks should fund themselves more with equity and less with debt. Professor Admati and I submitted a letter of support, together with 11 colleagues whose expertise spans almost all dimensions of how the financial sector really operates.

We particularly stress the appeal of having a binding “leverage ratio” for the largest banks. This would require them to have at least 10 percent equity relative to their total assets, using a simple measure of assets not adjusted for any of the complicated “risk weights” that banks can game.

We also agree with the SAFE Banking Act that to limit the risk and potential cost to taxpayers, caps on the size of an individual bank’s liabilities relative to the economy can also serve a useful role (and the same kind of rule should apply to non-bank financial institutions).

Under the proposed law, no bank-holding company could have more than $1.3 trillion in total liabilities (i.e., that would be the maximum size). This would affect our largest banks, which are $2 trillion or more in total size, but in no way undermine their global competitiveness. This is a moderate and entirely reasonable proposal.

No one is suggesting that making JPMorgan Chase, Bank of America, Citigroup and Wells Fargo smaller would be sufficient to ensure financial stability.

But this idea continues to gain traction, as a measure complementary to further strengthening and simplifying capital requirements and generally in support of other efforts to make it easier to handle the failure of financial institutions.

Watch for the SAFE Banking Act to gain further support over time.

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