Big US Banks Make Laughable Excuses for Preserving Failed Universal Bank Model

In today’s lead story at the Financial Times, Big US banks defy calls that they should be broken up, American megabanks make clear that they don’t think much of the financial savvy of investors or the business press. In quarterly earning calls, bank analysts were pressing executives on the news reports that former Goldman exec, now director of the National Economic Council Gary Cohn told senators last week told a group of senators that he was in favor of Glass-Steagall break-up-the-banks style legislation.

Our comments:

Wake me up when this gets serious. Cohn made it clear that he supported a breakup bill. While Trump has also said he wanted to revive Glass-Steagall, he didn’t say that very often on the campaign trail and there are many things he did say often and pretty consistently, like questioning why the US is carrying so much of the cost of NATO, he’s either reversed himself or is now backing a weak-tea version that his base regards as a sellout, such as Trump’s promises about NAFTA. Plus any Glass-Steagall type bill gets passed only over rabid anti-regulation House Financial Services committee chairman Jeb Hensarling’s dead body.

Don’t buy Jamie Dimon’s Brooklyn Bridge. Big complicated banks are not good for investors, no matter how much banks put their hands on their hearts and try to convince you otherwise. Here was the argument, per the pink paper:

The biggest banks in America are defying calls to break themselves up, arguing that the benefits of size and diversity were on display during a very mixed set of first-quarter results.

At JPMorgan Chase, finance chief Marianne Lake said on Thursday that the bank’s universal model was a “source of strength” for the broader economy, as she unveiled a 20 per cent drop in quarterly profits from consumer banking.

In the investment-banking part of the business, however, profits were up 64 per cent from a bleak period a year ago, boosted by a surge in bond trading and plenty of sales of debt and equity by big companies.

Anyone with proper finance training can tell you this is nonsense. Investors should be making portfolio diversification choices, not corporate execs asserting “synergy” on their behalf. Investors love earnings streams that are not much or better yet negatively correlated with the stock market; that’s one of the reasons they were willing to pay hedgies their inflated management and carry fees. Hedge funds promised returns that didn’t synch with stock market averages. When that proved to be less and less true and the results weren’t so hot generally, investors started beating a major retreat from the strategy.

If banks have all sorts of interesting return profiles hidden away in their various business lines, it would be much better in terms of the overall returns for investors owning those stocks to break them up.1

However, big complicated banks are good for securities analysts, since the complexity gives them more to do and thus creates the appearance that they are adding value to investors. So don’t expect any critical scrutiny of this bank PR from them.

The idea that bigger banks are better is a flat-out canard that we’ve debunked regularly since the inception of this site. Suffice it to say that every study ever done of US banks shows that they have a slightly negative cost curve once a certain asset size threshold is passed. Translation: bigger banks are actually have higher expenses per dollar of bank assets than smaller banks.

Now you might say, “But what about those bank mergers where they fire lots of people! Doesn’t that prove bank consolidation saves costs?”

No. The cost curve issue means the banks that were combined could have gotten those expenses lowered all on their own, and maybe some more. However, mergers provide an excuse to do what managements normally are too nice or too lazy to do, which is get ruthless about headcount.

Finally, the one real synergy is one that is dangerous to the public: the use of bank deposits to fund derivatives. Yes, Virginia, a whole lot of derivatives are booked in bank depositaries. For instance, to a bit of outcry, in 2011, Bank of America moved derivatives from Merrill Lynch into Bank of America NA. And why was that? The banking subsidiary had a better credit rating, meaning lower costs, because that’s where the deposits sat. As we wrote at the time:

Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that.

And in case you think I’m exaggerating, the FDIC objected to the move, but the Fed took the position that it would “give relief” to the bank holding company. Bank of America took the position it has the authority to make this move, and since JP Morgan then had 99% of the notional value of its $79 trillion of derivatives booked in its depositary, JPMorgan Chase Bank NA, there was ample precedent. 2

And as we’ve also written regularly, over the counter derivatives are the biggest source of interconnected among too-big-too-fail banks. So getting derivatives out of depositaries would shrink the derivatives market by making them more costly and reduce systemic risk.

Keep your eye on the ball of the real reason for bankers wanting ginormous banks: executive pay. Bank CEO and C-suite pay is a function of bank size and complexity. Simpler, smaller banks mean much less egregiously paid top brass.

Thus bear in mind the incentives for banks to bulk up: The bank that buys another bank gets to pay everyone at the top more, and the execs of the gobbled-up bank get huge consolation prizes. And all sorts of other people are feeding at the trough too: merger & acquisition professionals, lawyers, accountants, and all sorts of consultants and integration specialists. Our reader Clive will probably tell you the folks that have it the worst who still stay on the payroll are the people in IT.

Fortunately, even without all understanding the sordid details, the great unwashed public understands that overly large banks are hard to unwind and will therefore always be propped up, and separately exercise too much political power. But whether popular support will ever become important to Trump is very much in doubt.

____
1 Absent, of course, breakup costs, but don’t expect banks to give you an honest idea about that if the threat starts looking more serious.

2 Yes, most of these are plain vanilla swaps. But still, no subsidy of this sort is warranted. Taxpayers should not be backstopping capital markets activities.

http://www.nakedcapitalism.com/2017/04/big-us-banks-make-laughable-excuses-for-preserving-failed-universal-bank-model.html

ELIZABETH WARREN AND JOHN MCCAIN TEAM UP TO REIGN IN BANKS

Go to http://www.msnbc.com. CONTACT YOUR SENATORS AND CONGRESSMEN AND WOMEN. LET THEM KNOW THEY ALREADY HAVE YOUR SUPPORT FOR THIS LAW AND THAT THEY DON’T NEED TO SELL THEMSELVES TO GET SUPPORT FROM THEIR CONSTITUENCY.

MSNBC had a segment today in which they interviewed Elizabeth Warren about a new set of laws reinstating the old style of Chinese walls. There are probably similar interviews on other channels with Senator Warren or Senator McCain and others. Just go to your favorite news channel and look it up. Their approach has bi partisan support because of its simplicity and its history. Historically it is merely a tune-up of the old laws to include definitions of new financial products that did not exist and were not adequately considered in the 1930’s when EVERYONE AGREED THE RESTRICTIONS WERE NEEDED.

Bottom Line: RETURN TO THE BORING BANK SAFETY WITHOUT BOOMS AND BUSTS FROM 1930’s into the 1990’s: leading republicans and democrats are stepping out of gridlock into agreement. They want to stop Wall Street from access to checking and savings accounts for use in high risk investment banking because that is what brought us to the brink and some say brought us Into the abyss. And it would stop commercial banks that are depository institutions for your checking and savings accounts from using your money on deposit in ways where there is a substantial risk of loss that would require FDIC ((taxpayer) intervention.

Banking should be boring. In the years when restrictions were in place we only had one serious breach of banking practices — the S&L Scandal in the 1980’s. But it didn’t threaten the viability of our entire economy and more than 800 people were serving prison terms when the dust cleared. Of course Bankers saw prison terms as an invasion of their business practices and regulation as unnecessary.

But the simple reason for bipartisan support is that the public is enraged that the mega banks (too big to fail) have GROWN 30% SINCE THE 2007-2008 while the people on Main Street are losing jobs, homes, businesses, families (divorce), thus stifling an already grievously injured economy because credit and cash are now scarce — unless you are a mega bank that made hundreds of billions or even trillions of dollars because they were able to create an illusion (securitization) and at the same time, knowing it was an illusion, they bet heavily using extreme leverage on the illusion being popped.

They made it so complex as to be intimidating to even bank regulators. So no wonder borrowers could not realize or even contemplate that their mortgage was not a perfected lien, so they admitted it. Foreclosure defense attorneys made the same mistake and added to it by admitting the default without knowing who had paid what money that should have been allocated to the loan receivable account of the borrower that was supposedly converted for a note receivable from the borrower to a bond receivable from an asset pool that supposedly owned the note receivable account.

The complexity made it challenging to enforce regulations and laws. The complexity was hidden behind curtains for reasons of “privacy”. The real reason is that as long as bankers know they are acting behind a curtain, they are subject to moral hazard. In this case it erupted into the largest PONZI scheme in human history.

And the proof of that just beginning to come out in the courts as judges are confronted with an absurd position — where the banks “foreclosing” on homes and businesses want delays and the borrower wants to move the case alone; and where those same banks want a resolution (FORECLOSURE OR BUST) that ALWAYS yields the least possible mitigation damages, the least coverage for the alleged loss on the note because they would be liable for all the money they made on the bond. Just yesterday I was in Court asking for expedited discovery and the Judge’s demeanor changed visibly when the Plaintiff seeking Foreclosure refused to agree to such terms. The Judge wanted to know why the defendant borrower wanted to speed the case up while the Plaintiff bank wanted to slow it down.

And because of all the multiple sales, the insurance funds, the proceeds of credit default swaps, because the initial money funding mortgages came from depositors (“investors”), and all the money from the Federal Reserve who is still paying off these bond receivables 100 cents to the dollar — all that money amounting to far more than the loans to borrowers — because it related to the bond receivable, the banks think they can withhold allocation of that money to the receivable until after foreclosure and avoid refunding all the excess payments to the borrower the investor and everyone else who paid money in this scheme. And the system is letting them because it is difficult to distinguish between the note receivable and the bond receivable and the asset pool that issued the bond to the actual lender/depositor.

Senators Warren and McCain and others want to put an end to even the illusion that such an argument would even be entertained. Support them now if not for yourselves then for your children and grandchildren.

The Goal is Foreclosures and the Public, the Government and the Courts Be Damned

13 Questions Before You Can Foreclose

foreclosure_standards_42013 — this one works for sure

If you are seeking legal representation or other services call our South Florida customer service number at 954-495-9867 and for the West coast the number remains 520-405-1688. In Northern Florida and the Panhandle call 850-765-1236. Customer service for the livinglies store with workbooks, services and analysis remains the same at 520-405-1688. The people who answer the phone are NOT attorneys and NOT permitted to provide any legal advice, but they can guide you toward some of our products and services.

SEE ALSO: http://WWW.LIVINGLIES-STORE.COM

The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available TO PROVIDE ACTIVE LITIGATION SUPPORT to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.

Danielle Kelley, Esq. is a partner in the firm of Garfield, Gwaltney, Kelley and White (GGKW) in Tallahassee, Florida 850-765-1236

EDITOR’S NOTE: SOMETIMES IT PAYS TO SHOW YOUR EXASPERATION. Danielle was at a hearing recently where all she wanted was to enforce a permanent modification for which her client had already been approved by Bank of America and BOA was trying to get out of it and pursue foreclosure even though the deal was done and there was no good or valid business reason why they would oppose a modification they already approved — except that they want to lure people into defaults and foreclosure to avoid liability for buy-backs, insurance, and credit default swap proceeds they received.

They need the foreclosure because that is the stamp of approval that the loans were valid and the securitization wasn’t a sham. Without the foreclosure, they stand to lose not only a lot of money in paybacks, but their very existence. Right now they are carrying assets that are fictitious and they are not reporting liabilities that are very real. At the end of the day, the public will see and even government officials whose “Services” have been purchased by the banks will not be able to deny that the nation’s top banks are broke and are neither too big to fail nor too big to jail. When that happens, our economy will start to recover ans the flow of credit and funds resumes and the banks’ stranglehold on government and on our society will end, at least until the next time.

THIS IS WHAT DANIELLE KELLEY WROTE TO ME AFTER THE HEARING:

 At the hearing against BOA on an old case of mine and Bill’s [William GWALTNEY, partner in GGKW] today I moved to enforce settlement. They actually agreed to a trial payment with my client in writing at mediation 2 years ago. The Judge granted the motion and wants a hearing in 60 days on the arrears (which he agreed my client isn’t liable for), sanctions and fees. She made her payment post-mediation and they sent the checks back. I gave him the Massachusetts affidavits from the BOA employees.  The Judge looked shocked. Opposing Counsel argued the Massachusetts case had nothing to do with our case.
Judge said “Mrs. Kelley how about I enter an order telling Plaintiff they have so many days to resolve this?”  I said “with all due respect your Honor BOA hasn’t listened to the OCC and followed the consent order, they haven’t listened to DOJ on the consent judgement and they are violating the AG settlement. I can assure you 100% they won’t listen to this Court either. Once we leave this room we are at the mercy of BOA actually working with us and their own attorney nor this court can get them to.  Their own attorney couldn’t reach them yesterday or today.  My client was to send in one utility bill two years ago. She sent it the day after mediation and they’ve sat and racked up two years of arrears and fees. This court has the power to sanction that behavior under rule 1.730 and should because this was orchestrated. The Massachusetts case is a federal class action which includes Florida homeowners like my client. It says Florida on the Motion for class certification so it does matter in this case. This was a scheme and a fraud.  It was planned and deliberate”.
Opposing counsel wanted to start the modification process over because the mediation agreement said “Upon completion of the trial payments Defendant will be eligible for a permanent modification”. Opposing counsel said “just because they meet the trial payments doesn’t mean they get a permanent mod.”  I said “under the consent judgment they better” and told the judge we were not going through the modification again, my client had already been approved. He agreed and said that the trial would become permanent and ordered BOA to provide an address for payment. He told opposing counsel that the argument that a trial period wouldn’t become permanent wasn’t going to work for him.
I love the 14th circuit. There is a great need from here to Pensacola and in the smaller counties like I was in today you can actually get somewhere.
Now the banks won’t even say impasse at mediation. It’s always “no agreement”.   But they’ll tell you to send in documents the next week only to say they didn’t get them. Now after those affidavits I see why.

Danielle Kelley, Esq.

Garfield, Gwaltney, Kelley & White
4832 Kerry Forest Parkway, Suite B
Tallahassee, Florida 32309
(850) 765-1236

 FOLLOW DANIELLE KELLEY, ESQ. ON HER BLOG

Big Banks Headed For Break-Up

“What policy makers are starting to realize is that the absence of prosecutions and regulatory action against these banks has produced a profound loss of confidence not only in the financial markets but in the leader of the financial markets (the United States) to control itself and its own participants in finance. It’s not just fair to enforce existing laws and regulations against the banks who so flagrantly violated them and nearly destroyed all the economies of the world, it’s the only practical thing to do.” — Neil F Garfield, livinglies.me
If you are seeking legal representation or other services call our Florida customer service number at 954-495-9867 (East Coast) and for the West coast the number remains 520-405-1688. Customer service for the livinglies store with workbooks, services and analysis remains the same at 520-405-1688. The people who answer the phone are NOT attorneys and NOT permitted to provide any legal advice, but they can guide you toward some of our products and services.
The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.

Editor’s Comment: There is an old expression that says “At the end of the day, everybody knows everything.” The question of course is how long is the “day.” In this case the day for the bank appears to be about 10-12 years. The foibles of their masters, the conduct of their policies, and the arrogance of their behavior has led them into the position where the once unthinkable break-up of the bank oligopoly and their control, over our government is coming to a close.

The titans of Wall Street have thus far avoided criminal prosecution because of the misguided assumption — promulgated by Wall Street itself — that such prosecutions would destroy the economic systems all over the world (remember when Detroit arrogance reached its peak with “what’s good for GM is good for the country?”). But the Dallas Fed are joining the ranks of of once lone voices like Simon Johnson stating that Too Big to Fail is not a sustainable model and that it distorts the markets, the marketplace and our society.

It is virtually certain now that the mega banks are going to literally be cut down to size and that some form of Glass-Steagel will be revived. As that day nears, the images and facts pouring out onto the public and the danger to the American taxpayer facing deficits caused by the banks in part because they siphoned out the life-blood of liquidity from the American marketplace will overwhelm the last vestiges of resistance and the same lobbyists who were the king makers will be the kiss of death for re-election of any public official.

As they are cut down, the accounting and auditing will start and it will take years to complete. What will emerge is a pattern of theft, deceit, fraud, forgery, perjury and other crimes that are most easily seen in the residential foreclosures that now appear to be mostly illusions that have caused nightmare scenarios for millions of Americans and people in other countries. Those illusions though are still with us and they are still taken as real by many in all branches of government. The thought that the borrower should never have been foreclosed and that the amount demanded of them was wrong is not accepted yet. But it will be because of arithmetic.

Investment banks sold worthless bonds issued by empty creatures that existed only on paper without any assets, money or value of any kind. The banks then funded mortgages of increasingly obvious toxicity to people who might have been able to afford a normal mortgage or who couldn’t afford a mortgage at all but were assured by the banks that the deal was solid. Both investors and homeowners were taken to the cleaners. Neither of them has been addressed in any bailout or restitution.

It is the bailout or restitution to the investors and homeowners that is the key to rejuvenating our economy. Trust in the system and wealth in the middle class is the only historical reference point for a successful society. All the rest crumbled. As the banks are taken apart, the privilege of using “off-balance sheet” transactions will be revealed as a free pass to steal money from investors. The banks took the money from investors and used a large part of it to gamble. Then they covered their tracks with lies about the quality of loans whose nominal rates of interest were skyrocketing through previous laws against usury.

For those who worry about the deficit while at the same time remain loyal to their largest banking contributors, they are standing with one foot upon the other. They can’t move and eventually they will fall. The American public may not be filled with PhD economists, but they know theft when it is revealed and they know what should happen to the thief and the compatriots of the thief.

For the moment we are still rocketing along the path of assuming the home loans, student loans, credit cards, auto loans, furniture loans et al were valid loans wherein the lenders had a risk of loss and actually suffered a loss resulting from the non payment by the borrower. As the information spreads about what really happened with all consumer debt, housing included, the people will understand that their debts were paid off by the investment banks, the insurance, companies and the counterparties on hedge products like credit default swaps.

A creditor is entitled to be repaid the money loaned. But if they have been repaid, the fact that the borrower didn’t pay it does not create a fact pattern under which the current law allows the creditor to seek additional payment from the borrower when their receivable account is zero. Yet it is possible that the parties who paid off the debt might be entitled to contribution from the borrower — if they didn’t waive that right when they entered into the insurance or hedge contract with the investment banks. Even so, the mortgage lien would be eviscerated. And the debt open to discussion because the insurers and counterparties did in fact agree not to pursue any remedies against the borrowers. It’s all part of the cover-up so the transactions look like civil matters instead of criminal matters.

Thus far, we have allowed windfall after windfall to the banks who never had any risk of loss and who received federal bailouts, insurance, and proceeds of credit default swaps and multiple sales of the same loan — all without crediting the investors who advanced all the money that was used in the mortgage maelstrom.

The practical significance of this is simple: the money given to the banks went into a black hole and may never be seen again. The money given BACK to (restitution) investors will result in fixing at least partly the imbalance caused by the bank theft. It will also decrease the loss suffered by the lenders in the loans marked as home loans, auto loans, student loans etc. This in turn reduces the amount owed by the borrower. Their is no “reduction” of principal there is merely a “deduction” or “correction” to reflect payments received by the investors or their agents.

The practical significance of this is that money, wealth and income will be  channeled back to the those who are in the middle class or who belong there but for the trickery of the banks and the economy starts to hum a little better than before.

It all starts with abandoning the Too Big To Fail hypothesis. What policy makers are starting to realize is that the absence of prosecutions and regulatory action against these banks has produced a profound loss of confidence not only in the financial markets but in the leader of the financial markets to control itself and its own participants in finance. It’s not just fair to enforce existing laws and regulations against the banks who so flagrantly violated them and nearly destroyed all the economies of the world, it’s the only practical thing to do.

Big Banks Have a Big Problem
http://economix.blogs.nytimes.com/2013/03/14/big-banks-have-a-big-problem/

We The Taxpayers Are On The Hook For Mortgages, Student Loans, Banks
http://lonelyconservative.com/2013/03/we-the-taxpayers-are-on-the-hook-for-mortgages-student-loans-banks/

Documentary Co-Produced by Broker Exposes Foreclosure Devastation, Housing System Flaws, in Low-Income Hispanic Neighborhood of Phoenix
http://rismedia.com/2013-03-13/documentary-co-produced-by-broker-exposes-foreclosure-devastation-housing-system-flaws-in-low-income-hispanic-neighborhood-of-phoenix/

Housing advocates accuse Wells Fargo of damaging communities through foreclosures
http://www.scpr.org/blogs/economy/2013/03/13/12908/housing-advocates-accuse-well-fargo-damaging-commu/

 

U.S. Attorney Continues to Prosecute Despite Settlements

CHECK OUT OUR DECEMBER SPECIAL!

What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Note: Preet Bharara, the U.S. Attorney for the Southern District of New York. He is unfazed by the tangle of “settlements” and will not let up on prosecuting Bank of America for fraud. He gets it and is methodically working his way through the maze set up by the mega banks.

BofA settled a civil claim that it had lied when they “sold” mortgages advertised as meeting government standards. We all know by now that the loans “lacked documentation and underwriting.” But what is still to come out is WHY they lacked documentation and WHY the loans lacked underwriting.

The documentation was absent simply to hide the fact that the bank was pretending to have ownership or an insurable interest in the loans and mortgage bonds. The true transaction was between the investor/lenders and the homeowner/borrowers. BofA stole or misused the identities of both the lender and the borrowers so that it could sell the loans many times under guise of exotic derivative instruments called mortgage backed bonds.

If fully documented, the lender would have shown up as the investors, which is as it should have been. BofA never put up a dime for the funding or acquisition of any of the loans. Its claim of ownership and an insurable interest was a blatant lie, inasmuch as they actually had no risk of loss, which is why there was no underwriting standards applied either.

I would suggest you track the pleadings of this U.S. Attorney and pick up some pointers along the way. He is definitely on the right track. As for now, the focus is on the bad mortgage bonds, bad loans, and lack of documentation up at the lender level.

Once that veil is penetrated it will be revealed that the borrower was defrauded using the same misdirected documentation using appraisal fraud as the principal leverage point.

But the real stuff is going to hit the fan as more and more people realize that this standard practice in the industry allegedly to “protect” the investors, invalidated the chain of title and there has been no effort to correct the problem. When it is revealed that the investors were cheated out of their money by a use of proceeds that crosses the borders of fraud, and that the terms of the bonds were never intended to be satisfied, just as the terms of the loan were never meant to be satisfied or secured, then we will have justice peeking its head out over the mess.

In the end, legally, there will be privity or a relationship only between the investor/lenders and the borrowers and that there transaction was supposed to be documented and recorded. Instead the banks documented and recorded a different transaction in which the intermediaries looked like the principals and were therefore able to do “proprietary trading” in which they took investor money from one pocket and put it into another.

That is what opened the door to huge “profits” (actually theft proceeds) on the way up and on the way down. These banks are now buying the same houses from themselves (using another affiliate entity) and then reporting the results to the investors so they can write off the loss. They are going to be the largest landowners in history as a result of this PONZI scheme.

The investors were duped into thinking that all the intermediary entities were being used to protect them from liability from claims of deceptive and predatory lending practices. In actuality the investors were already protected because their agents committed intentional acts of malfeasance and crimes that were specifically prohibited in the documents and other representations the investors received.

Just like the Too Big to Fail Myth, the investors are operating under the myth that if they assert themselves as lenders, they are going to get sued. That too is untrue. If they assert themselves as lenders, then they are going to show proof of payment, something the megabanks can’t do because they used investor money instead of their own.

If the investors assert themselves as lenders they will see that money is missing from the investment pools and that in fact the investment pools were never funded at all. They will realize that they have a legitimate claim for repayment of loans, and a legitimate claim for civil or criminal theft against the banks who intentionally diverted the documentation and the money from the investors and from the borrowers.

That will leave the investors and borrowers with (1) an obligation that is mostly undocumented and (2) unsecured. But the borrowers are more than happy to allow a mortgage if it reflects fair market value. This is what will give the investors far more than the current process in which the banks have a stranglehold on the mortgage modification process (for mortgages that are invalid from the start).

If you pierce through the veil of PR and utter nonsense flowing out of the banks and their planted articles in every periodical around the country, you will find your lender and you will find out the balance due because both of you (homeowner and investor) are going to want to know what happened to all the insurance money, credit default swaps and Federal bailouts that were promised, paid, but not delivered.

Because the mega banks were mere intermediaries pretending to be lenders the entire current scenario is going to turn upside down. Ultimately, the insurance, CDS and bailouts were in fact bailouts of the homeowners and investors. When they are applied correctly according to common sense and the contracts that were executed, practically none of the mortgages will have the balance demanded by the intermediary banks who claim but do not own the mortgages or rights to foreclose. Thus practically no foreclosure was correct by any standard, no credit bid was valid at auction, and no eviction was legal.

As these facts are revealed and accepted by a critical mass of people, the Too Big to Fail Myth will be put to the test. The nonexistent assets on their balance sheets will be reduced to zero. What will really happen is simply that the mega banks will collapse inward and the thousands of other banks that are unfairly under the thumb of the bank oligarchy will be able to pick up the pieces that are left and return to normal banking, with normal profits and normal bonuses.

Allowing the mega bank to retain the money they stole is like throwing a steak to a dog. Now that they have a taste of unlawful profits driving their profitability upward, they will only want more. Our job is to make sure they don’t get it. The Obama administration was surprised by the quick recovery by the banks. The truth, as it will be revealed in the coming months and years, is that there was no bank recovery because there were no bank losses. THAT is why the banks grew while the rest of the economy tanked.

Theoretically it is impossible for the bank profits to go up while the stock market and the economy is going down the drain. Their profits are supposed to come from being intermediaries in commerce, not principals.

Thus the higher the commercial activity, the better it is for the banks. But here, the relationship was twisted. The banks sucked the money out of the economy in “off balance sheet” transactions, secreted the money around the world, and are now able to report higher and higher profits every year simply because that is the way that they can repatriate their ill-gotten gains. By doing that they drive up the apparent value of their stocks and their stockholders are happy. What the stockholders do not realize is that this is a powder keg that will, at some point, implode. Yes, Warren Buffet is wrong.

See the story and Links Here

Despite a settlement with an alleged victim, U.S. District Attorney Preet Bharara will continue to prosecute Bank of America for selling allegedly fraudulent loans to Fannie Mae and other government-sponsored enterprises, his office told the Charlotte Business Journal.

Bharara, U.S. attorney in the Southern District of New York, charged BofA with fraud in a $1 billion federal lawsuit in October. He alleged in court documents that BofA had sold government agencies such as Fannie Mae billions of dollars in mortgages that were advertised as meeting government standards. However, the suit contends the loans actually lacked proper documentation and underwriting.

Why the Fed Can’t Get it Right

CHECK OUT OUR DECEMBER SPECIAL!

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Editor’s Analysis and Comments: Bloomberg reports this morning that “Fed Flummoxed by Mortgage Yield Gap Refusing to Shrink.” (see link below)

In normal times lowering the Fed Funds rate and providing other incentives to banks always produced more lending and more economic activity. Bernanke doesn’t seem to understand the answer: these are not normal times and the cancerous fake securitization scheme that served as the platform for the largest PONZI scheme in human history is still metastasizing.

Why wouldn’t banks take advantage of a larger spread in the Fed funds rate versus the mortgage lending rates. Under the old school times that would automatically go to the bottom line of lending banks as increased profits. If we put aside the conspiracy theories that the banks are attempting to take down the country we are left with one inevitable conclusion: in the “new financial system” (sounds like the “new economy” of the 1990’s) the banks have concluded there would be no increase in profit. In fact one would be left to the probable conclusion that somehow they would face a loss or risk of loss that wasn’t present in the good old days.

Using conventional economic theory Bernanke is arriving at the conclusion that the spread is not large enough for banks to take on the business of lending in a dubious economic environment. But that is the point — conventional economic theory doesn’t work in the current financial environment. With housing prices at very low levels and the probability that they probably won’t decline much more, conventional risk management would provide more than enough profit for lending to be robust.

When Bernanke takes off the blinders, he will see that the markets are so interwoven with the false assumptions that the mortgage loans were securitized, that there is nothing the Fed can do in terms of fiscal policy that would even make a dent in our problems. $700 trillion+ in nominal derivatives are “out there” probably having no value at all if one were the legally trace the transactions. The real money in the U.S. (as opposed to these “cash equivalent” derivatives) is less than 5% of the total nominal value of the shadow banking system which out of sheer apparent size dwarfs the world banks including  the Fed.

As early as October of 2007 I said on these pages that this was outside the control of Fed fiscal policy because the amount of money affected by the Fed is a tiny fraction of the amount of apparent money generated by shadow banking.

Oddly the only place where this is going to be addressed is in the court system where people bear down on Deny and Discover and demand an accounting from the Master Servicer, Trustee and all related parties for all transactions affecting the loan receivable due to the investors (pension funds). The banks know full well that many or most of the assets they are reporting for reserve and capital requirements or completely false.

Just look at any investor lawsuit that says you promised us a mortgage backed bond that was triple A rated and insured. What you have given us are lies. We have no bonds that are worth anything because the bonds are not truly mortgage backed. The insurance and hedges you purchased with our money were made payable to you, Mr. Wall Street banker, instead of us. The market values and loan viability were completely false as reported, and even if you gave us the mortgages they are unenforceable.

The Banks are responding with “we are enforcing them, what are you talking about.” But the lawyers for most of the investors and some of the borrowers are beginning to see through this morass of lies. They know the notes and mortgages are not enforceable except by brute force and intimidation in and out of the courtroom.

If the deals were done straight up, the investor would have received a mortgage backed bond. The bond, issued by a pool of assets usually organized into a “trust” would have been the payee on the notes at origination and the secured party in the mortgages and deeds of trust. If the loan was acquired after origination by a real lender (not a table funded loan) then an assignment would have been immediately recorded with notice to the borrower that the pool owned his loan.

In a real securitization deal, the transaction in which the pool funded the origination or purchase of the loan would be able to to show proof of payment very easily — but in court, we find that when the Judge enters an order requiring the Banks to open up their books the cases settle “confidentially” for pennies on the dollar.

The entire TBTF (Too Big to Fail) doctrine is a false doctrine but nonetheless driving fiscal and economic policy in this country. Those banks are only too big if they are continued to be allowed to falsely report their assets as if they owned the bonds or loans.

Reinstate generally accepted accounting principles and the shadow banking assets deflate like a balloon with the air let out of it. $700 trillion becomes more like $13 trillion — and then the crap hits the fan for the big banks who are inundated with claims. 7,000 community banks, savings banks and credit union with the same access to electronic funds transfer and internet banking as any other bank, large or small, stand ready to pick up the pieces.

Homeowner relief through reduction of household debt would provide a gigantic financial stimulus to the economy bring back tax revenue that would completely alter the landscape of the deficit debate. The financial markets would return to free trading markets freed from the corner on “money” and corner on banking that the mega banks achieved only through lies, smoke and mirrors.

The fallout from the great recession will be with us for years to come no matter what we do. But the recovery will be far more robust if we dealt with the truth about the shadow banking system created out of exotic instruments based upon consumer debt that was falsified, illegally closed, deftly covered up with false assignments and endorsements.

While we wait for the shoe to drop when Bernanke and his associates can no longer ignore the short plain facts of this monster storm, we have no choice but to save homes, one home at a time, still fighting a battle in which the borrower is more often the losing party because of bad pleading, bad lawyering and bad judging. If you admit the debt, the note and the mortgage and then admit the default, no  amount of crafty arguments are going to give you the relief you need and to which you are entitled.

Fed Confused by Lack of Response from Banks on Yield Spread Offered

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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