Kenneth Lay, CEO of Enron is lead in handcuffs after Lay was found guilty on all six counts of conspiracy and fraud by a jury of eight women and four men. In a separate bench trial, Judge Lake ruled Lay was guilty of four counts of fraud and false statements. Will we see similar indictments clouding the major investment banks and lenders anytime soon?
The top 5 investment banks will pay out a record $38 billion in bonuses in 2008 as the housing and mortgage crisis spirals out of control. Only in America will you see corporate executives that are rewarded with millions of dollars for making bad calls, bad deals and then when their employment is discontinued (either by force or by will), they are sent off into a cozy retirement with plush packages and bonus spiffs to last them forever.
Last year, CEOs at the big five investment banks took home the following bonuses:
• Goldman Sachs CEO Lloyd Blankfein: $53.4 million
• Morgan Stanley CEO John Mack: $40 million
• Merrill Lynch CEO Stanley O’Neal: $47.3 million
• Lehman Brothers CEO Richard Fuld: $10.9 million
• Bear Stearns CEO James Cayne: $14.8 million
Only in America will you see billions of dollars dished out on Wall Street when we should be seeing indictments and arrests. The corporate culpability and off balance sheet accounting has been compared to that of the Enron scandal with comical mentions of “Lendron” that have been circulating around the internet.
Wall Street and the Making of a Subprime Disaster:
Murky accounting methods similar to those that inflated the value of the energy-trading Goliath – and eventually spelled its end – have been employed by the banking giants in the area of subprime mortgage-backed securities. Over the past few months, several forms of complex off-balance sheet structures and transactions have come to light, adding to concerns that the banks are more exposed to subprime risk than previously thought.
April Charney, a consumer lawyer with Jacksonville Area Legal Aid that advocates against all manner of predatory consumer practices had this to say about the report and these “Enron Style” accounting practices.
Liquidity Puts:
Citigroup, in particular, forged these agreements with investors purchasing CDOs backed in part by subprime mortgage assets. The agreements granted investors the option to sell the CDOs back to the bank in the event of financial difficulty. Citigroup moved the CDOs off its balance sheet without accounting for the fact that it could be required to re-purchase the assets at some point in the future…
Although this report suggests that investors were duped or that information about how bogus these loans were was concealed/not disclosed and that due diligence reports were not accessible, I beg to differ as many of us consumer advocates (Center for Responsible Lending and Max Gardner leading the charge) were screaming about this economic train wreck since before 2004.
One doesn’t have to look further than the clever little names and products that Wall Street invented to transport this mortgage snake oil/fools gold around the world. Names like “Structured Investment Vehicles”, “Special Purpose Vehicles” and the famous “Mortgage Backed Security” seem to be where they concealed and packaged their toxic loans.
The not so wonderful inventions on Wall Street: (from Wikipedia)
• Pass-through mortgage-backed security is the simplest MBS, as described in the sections above. Essentially, a securitization of the mortgage payments to the mortgage originators. These can be subdivided into:
o Residential mortgage-backed security (RMBS) – a pass-through MBS backed by mortgages on residential property o Commercial mortgage-backed security (CMBS) – a pass-through MBS backed by mortgages on commercial property
• Collateralized mortgage obligation (CMO) – a more complex MBS in which the mortgages are ordered into tranches by some quality (such as repayment time), with each tranche sold as a separate security.
• Stripped mortgage-backed securities (SMBS): Each mortgage payment is partly used to pay down the loan’s principal and partly used to pay the interest on it. These two components can be separated to create SMBS’s, of which there are two subtypes: o Interest-only stripped mortgage-backed securities (IO) – a bond with cash flows backed by the interest component of property owner’s mortgage payments.
o Principal-only stripped mortgage-backed securities (PO) – a bond with cash flows backed by the principal repayment component of property owner’s mortgage payments
Are you confused yet? LOL. That’s the whole point!
The facts are that yes, it is confusing, but this isn’t rocket science. It doesn’t take Barney Fife or Inspector Gadget to figure out who, what and where things went wrong.
Let’s take a look underneath the hood of one of these “inventions” or as the guys on Wall Street like to call them, “Special Purpose Vehicles.”
In the securitization process, the originator of a home loan transfers the mortgage into what is known as a “Special Purpose Vehicle”, usually in the name of a trust, this nameless vehicle is used to drive the toxic loan anononomously to a new getaway vehicle in exchange for securities that will be backed by proceeds from the mortgages. AKA, mortgage backed securities.
Confused again?
April Charney has fought these apparent “illegal” transfers and has challenged many foreclosure cases based on the missing note and illegal transfer defense. She had this to say about these alleged assignments and her experience in a court of “law.”
As we know these “transfers” did not happen across the country and that there exists a pattern and practice of fabrication of assignments of mortgages allegedly from originating lenders (often involving Mortgage Electronic Registration Systems or MERS) that post date mortgage defaults and often post date the filing of foreclosures to the trusts.
These “assignments (and affidavits in support of motions for summary judgment and in filed with sheriffs and in courthouses across the land , signed by “assignment” signors who sign thousands of defective and illegal and deceptive “assignments” of mortgages each day (and some sign for many entities on the same day out of hub offices and these assignments are not actually being witnessed by notaries – check out Judge Schack’s opinions in NY or my cases, each and every one)
This is when it is helpful to go back and read “Yertle the Turtle” by Dr. Seus and relearn what happens when the turtle on the bottom (the small detail of a legal transfer of a mortgage to a REMIC mortgage backed securitized trust) is no longer a reliable part of the plan of greed and deceit. You don’t have to look far to see the signs of greed and deceit.
More from Wall Street and Making of a Subprime Disaster:
Christopher Ricciardi (Formerly Managing Director of Lehman Brothers) said about his CDO trades in late 2007, prior to the mortgage meltdown, “These are the trades that make people famous.”
Ricciardi, one of the stars of subprime-related finance (quoted above), who liked to be called “the grandfather of CDOs,” according to The Wall Street Journal. He reportedly earned $8 million annually as a managing director at Merrill Lynch – apparently because his subprime-related trades were making him “famous” – before leaving in 2006.
Through their relationships with subprime mortgage lenders, investment banks essentially set the underwriting criteria in the subprime market: they tell the lenders what types of mortgages they want to securitize, how much they will pay for them, and how many they want.
During the subprime boom, the investment banks oversaw a loosening of underwriting standards and pressured lenders to originate excessive amounts of subprime mortgages so that the investment banks could create lucrative subprime-related bonds. The firms’ demands trumped the needs of American homeowners in determining the types of mortgages made available on the market. The result was a significant spike in predatory and abusive lending.
Closing thoughts by April Charney:
I recall right after Katrina saying in public that we were witnessing the perfect economic storm and that we would all have to deal with the acid rain caused by the storm when it fell across the country and infected everyone, every business and government with economic aids. I referred to subprime loans sold as so much toxic waste to America’s families as economic crack and the creators, producers, sellers and financers of these deceptive, unfair and unconscionable consumer products as the economic cartel.
Unfortunately, these statements were no match for greed and deceit and close participation schemes.
The article left me with a grim outlook for the economic future of this country and a strong disappointment in the shameful acts of the leaders that we all trust and put our collective faith in.
But, what I really want to know is: what now?
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