TRUSTEE BANKS SUED FOR $250 BILLION

By L. Randall Wray

Here’s another story in the continuing saga of Bankster fraud.

As I’ve argued since 2008, it is likely that all—or nearly all–of the residential mortgage backed securities (RMBSs) are fraudulent. The Banksters engaged in fraud at every link in the RMBS food chain.

They defrauded the borrowers. They forced the appraisers to commit fraud (pressured them to overvalue property). They conspired with ratings agencies to overvalue the RMBSs. They created MERS to destroy property records and to cheat local governments out of recording fees. They separated the promissory notes from the deed of trust, invalidating the lien. They hired BurgerKing Robo-signers to create forged documents. They lie in court, committing perjury. They steal homes from owners who don’t even have mortgages. And on, and on, and on. Their depravity knows no bounds.

But here’s an entertaining story. Bear with me, it is a bit complicated.

The mortgages were originated by specialized mortgage brokers, thrifts, and banks. They would be bought and sold among banks maybe ten times before going through securitization (this was one of the reasons MERS was created—to reduce the costs of the buying&selling by avoiding recording fees; it was also a source of confusion because a bank would sometimes sell the same mortgage to several different buyers).

In the securitization process, a Trustee bank would be appointed. Almost all of these securitizations were done in New York because it had strict laws—this provided a patina of respectability. The Trustee would certify that it actually had all the docs related to the mortgages. In fact, it looks like they usually had none of them.

In turn, the selling bank would certify that the mortgages met the “reps and warranties” regarding quality. In fact, as I reported last time, whistle-blower Richard Bowen at Citi discovered that 60% of the mortgages did not.

Trustees are supposed to ensure the bank’s certification is valid; they are also responsible for monitoring servicing rights and enforcing servicing obligations. In short, they protect the investors in the RMBSs.

By 2006, insiders knew that the whole RMBS market was going to hell in a hand-basket. Things were so bad that even the Fed (usually clueless) discussed the exploding numbers of defaults. (We know that because transcripts from that period have now been released. See here.)  As I reported before, the transcripts reveal the following extraordinary statement by Gov Bies:

Part of what’s amazing in all of this is that in 2004 and 2006, particularly toward the end of that period, purchase money seconds, by which people borrowed the downpayments for homes, were a big part of mortgage financing… The one sector that has had a jump in delinquencies is subprime ARMs, and clearly the jump is related to rates that have already reset. We’ve got more to come. One thing I’m hearing more from some folks who have been investing in mortgage-backed securities and maybe in some CDOs (collateralized debt obligations), where they’ve been tranched into riskier positions through economic leverage, is the realization that a lot of the private mortgages that have been securitized during the past few years really do have much more risk than the investors have been focusing on… We’re seeing that some of the private-label mortgage-backed securities are having very high early default rates or delinquencies in the mortgages, which usually means that the originator has to buy them back out of the pools. There isn’t a whole lot of transparency in the disclosures around some of these bonds, and some of the brokers are underwriting products that have very high early default rates, which is something that investors are starting to focus on. As more products are generated outside the banking sector, they get funneled to pools through broker-dealers as opposed to the banks. I think that we’re missing a level of due diligence regarding brokers, who may not be doing a good job. As you all know, the fraud rate on mortgages has tripled in the past two years. So I think we could see noise in some of the mortgage-backed private deals and some of the riskier CDO economic leverage positions….” 

Yep. As we all know, buyers are borrowing their downpayments, risks are higher than investors thought, early defaults are rising, and the fraud rate has tripled! This is 2006.

The investors in RMBSs began to demand that their Trustee banks look into mortgage quality, suspecting the mortgages did not meet the Reps&Warranties. The Trustee banks, however, were “conflicted”. They needed the goodwill of the banks that were originating and selling trashy mortgages.

All the banksters—originators, securitizers, trustees—were making so much money hand-over-fist by originating and selling and securitizing trash assets that no one wanted to stop.

Sure, they knew the whole thing would blow up, but meantime, they had to make as much money as possible “while the music was playing”. They hoped to be retired, having sold all the trash to clueless investors before the music stopped.

So the Trustee banks ignored the pleading of the investors in the RMBSs. They had a choice: sue or be sued, and chose to wait it out, dancing to the music.

They’ve been ignoring their investors ever since—as the investors lost money on the securities.

Recently, a funny thing happened. The NY Supreme Court ruled that a six year statute of limitations holds—the Banksters who lied about the quality of the trash they securitized cannot be sued after six years.

A group of the biggest investors, including PIMCO and BlackRock, filed a $250 Billion lawsuit against the biggest Trustee banks: Bank of NY-Mellon, USBank, Wells Fargo, Citibank, Deutsche Bank, and HSBC.

Two-hundred and fifty BILLION smackaroos dwarfs Eric Holder’s tiny little $7B settlement against Citi.

It gets funnier. The Trustee banks are now quickly filing lawsuits against their brethren banks for the false reps and warranties.

So now the Trustee banks are suing and being sued!

The Trustees might be able to get off if they can prove the issuing banks breached the reps & warranties, but cannot evade their own gross negligence, bad faith, and misconduct. We know, for example, that they lied about having the mortgage docs. MERS broke the chain of title and destroyed most docs—even recommending that the paper docs should be shredded—so there is no way that the Trustees had them.

See an excellent article on the lawsuit here. According to Isaac Gradman, typical judgments in such cases run at about 75% of losses. The investors have claimed $250 Billion in losses, so a judgment could be $200 Billion. That might be big enough to take a bite out of crime. (However, Gradman notes that PIMCO and BlackRock might settle for much less.)

Others have joined suit, including banks, credit unions, insurance companies and the FHLB of Topeka.

This is just the tip of the iceberg.

MERS recorded 65 million mortgages. There is $10 Trillion (with a T) of mortgage debt of which $7 Trillion (another T) were securitized. The whole sector is riddled with fraud.

The fun will continue for years.

Meanwhile, US property records are in disarray. Banksters continue to steal homes. Real estate markets are turning down. And it looks like the economy is beginning to slow.

Looks like déjà vu all over again.

10 Responses to TRUSTEE BANKS SUED FOR $250 BILLION

  1. Randall I first heard you on Tom Hartman and found your site. The fact that you have earned the title “Professor” is important. Your message is more likely to be accepted by “main stream.” So many actual homeowners who have lost or especially those in the process of losing their home to fraudulent banks need to hear from clear voices like yours. On May 27th of this year the Bank of America, Freddie Mac and co-conspirators David Trott, owner of the Michigan foreclosure mill stole our home representing our life savings. BTW… David Trott is running for a seat in Congress who by his own count foreclosed on more than 80,000 homeowners in one year! We entered into a HAMP modification under Obama’s program with a perfect payment history, tons down, great credit, dotted the “i’s” crossed the “t’s” and to our amazement… in spite of a forensic mortgage audit that proved we were NEVER IN DEFAULT plus issues with “chain of title” and more—they swooped in and helped themselves to another heaping scoop of criminal activity. It’s not over for us as we are gearing up for legal action during the 6-month redemption period. Because of this loan mod fiasco I now work with a company helping other home owners to defend themselves. I’ve had well over a thousand discussions in the last couple of years from homeowners all across America who have tried to do the right thing with banks and get nothing but the run around and then if they don’t stand up and build a defense lose their home. It’s a modern tragedy and it seems so many of societies authority figures are in on it. I asked my AG Bill Schuette for help. Found out foreclosure king pin David Trott donated to his campaign and Kappy Trott, his wife now works with Michigan’s AG. When it comes to real foreclosure oversight this seems like a conflict of interest. Ok, probably babbled on too much but want to say I appreciate your insights and urge you to find your way deeper into main stream media so more American’s can hear the truth. Guys like me sound like “conspiracy nuts.” They don’t know what you or I know about what’s really happening to our country.

    • Eyes on You, thanks for sharing this info. That’s great that you now work with a company helping home owners to defend themselves.

      Sounds like money in politics in your state has legally bribed public officials to act in corrupt ways once again, as it so often does.

      I definitely agree with you that the info on this site needs to be brought more into the mainstream media so that more Americans can hear the truth. Anyone readers here who can think of ways to do this that haven’t been tried yet, please let us all know what you’ve come up with.

      Randall, that’s great that you and Stephanie Kelton have been on Thom Hartmann’s show recently. I hope that both of you, and others from MMT, can keep going on lots of shows to keep spreading information and ideas. Many people are woefully ignorant about what is going on in the economy.

    • Please, anyone that wants to know what really happened and wish to seek recourse
      allowed by law: READ, “Bull By The Horns” by Sheila Bair (former FDIC Chairman.
      “The truth shall set you free”

  2. Again, this would be another civil penalty slap on the wrist where the shareholders pay and the employees lose their jobs because of criminal, not civil, actions by executive managers

    Maybe we should pass laws to make it a capital offense, like when someone is premediatively murdered, on executive level bank managers who are suspected of committing control fraud. That way we don’t have a statute of limitations for their crimes, essentially allowing them to get away with robbery and murder. By murder, I mean people have probably died at their own hand since the Global Financial Crisis (GFC) due to the financial ruin those bank executives have caused for so many.

  3. Free Speech

    And, to this day, for whatever reason, these subjects/issues are NOT being taught in appraisal classes. One of the last live classes I took on USPAP, the instructor stated that it was OK for a lender to “plead his case” for a high (fraudulent) value opinion, but that it wasn’t OK for appraisers to appease him. Well, they said that it was a “business decision” we had to make; thus, making it the appraiser’s fault and not the lenders. Of course, the appraiser knew that if he didn’t raise the value opinion, that he’d be black listed and orders would stop. They’re doing the same thing today, but they turn the appraiser in to the State instead. So, again, they are creating a pool of appraisers who are scared of their own shadows, afraid of losing business and their livelihood, scared of being turned in to the State for not dotting an “i” because they didn’t “make value”. Thus, they have their “Silly Putty” appraisers who will twist, bend, tear themselves in half and bounce to do whatever is demanded of them.

    • neil fabricant

      The role of appraisers often is overlooked. There is a long history of bankers, real estate developers, garden variety gangster capitalists, and mafia types using appraisers for various pump and dump schemes. The S&L fiasco was one. The 1974 fiscal crisis was another NYC went bust, almost taking down the financial system as well. The public was told that John Lindsay’s profligate poverty program spending, greedy unions and tricky mayoral accounting were the root causes. But Wall St. banks, underwriters of municipal bonds, and appraisers who wanted the work and inflated real estate values to justify massive borrowing for affordable housing ( the politicians and developers ripped off those programs as well) were at the heart of that crisis. The bankers and the rest of Wall St made out like the bandits they are by creating the “moral obligation” bonds that defaulted, and NYC changed forever. Free tuition at CUNY was eliminated, bridges, subways and roads rotted, etc. etc.

  4. TARP was designed to allow ALL banks, time to deal with the systemic insolvency caused by their Trading worthless investments, called Derivative$! A Ponzi Scheme designed to defraud consumers worldwide!
    None of them were and are worth the paper they are written on, as the global financial stands as prof that All should be unwound!
    Everyone knows that can’t happen because the money has ALL been laundered into the private hands of their creators!
    A fool and his money are soon parted, that Maxim was taken to a whole new level when Derivatives were created to defraud trusting investors!

  5. I think the MERS fiasco was simply incompetence. The original system was an electronic document tracking system that became a poor substitute for a document management system. An electronic document tracking system is very convenient as long as a parallel paper document management and storage system is maintained. Paper management and storage is expensive, requiring many feedback loops to make sure the paper is transmitted to the proper recipients and filed. MERS tracking simply assumed this was taking place. Because paper requires physical storage, a filing and retrieval system plus human resources, this was an expense that was avoided by mis-using MERS which tracked the existence but not the location of a document. The paper itself did not budge from it’s collection point, and then the originators went out of business.

    A proper document management system tracks and manages electronic images of documents which allows one to verify the documents exist, are located in an electronic folder and copies are at your fingertips.

    The same problems are appearing in the conversion to electronic medical records. A patient’s past paper medical records are transferred to a physician or hospital with an electronic system. Handling paper is an expense, so they “disappear”.

    The modern equivalent when paper-meets-electronic happens when two proprietary electronic systems will not “talk” to one another, making it difficult or impossible to merge electronic records. Fraud is not necessary to botch everything up.

  6. Pingback: Links 7/20/14 | naked capitalism

  7. Ben Johannson

    @Ransome

    Fraud is necessary for actors to systematically become wealrhy from the botching. Everyone in MBS wasn’t tripping over exactly the same spot of carpet, they hacked the carpet up and ran with it.