US Gone Bad: Ugly Battle – TBTF Banks v Insurance Cos re NEITHER’S Due Diligence
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6 October 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
For a long time, we have argued that the US has been in a sustained crisis since the beginning of the year 2000.
Put simply, the US has been enmeshed in simultaneous crises in six major areas of public life: financial / economic / ideological / political / academic-intellectual / and media.
6 October 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.
For a long time, we have argued that the US has been in a sustained crisis since the beginning of the year 2000.
Put simply, the US has been enmeshed in simultaneous crises in six major areas of public life: financial / economic / ideological / political / academic-intellectual / and media.
This disaster can be dated from the crash in tech stocks in high-tech stocks in the spring of 2000,
continuing through the blatant Republican judicial coup in Bush v Gore
The mess went on with outrages like the opening of the Guantanomo Bay “black prison”, the completely anti-American Patriot Act – which the Obama regime has yet to dismantle, despite its election promises –
and capped off by the unspeakably cynical invasion of Iraq,
was nevertheless undertaken basically to award unprecedently huge no-bid government contracts for work that, as we have shown, was usually never done,
to past and future employers of Cheney, Bush and the now practically forgotten Donald Rumsfeld,
above all construction giant Halliburton and the vicious mercenaries Blackwater,
both of which fled the US for the Middle East before the end of the Cheney / Bush nightmare,
in fear of prosecution by future Democratic administrations.
Sadly, they could have saved themselves the moving expenses.
They clearly had little to fear from the Obama regime, which has, to all intents and purposes,
whose carelessness and indifference brought not just the US but the entire world to the brink of disaster,
and has now enmeshed the rich world – the US and EU – in a brutal stagnation of joblessness and human suffering that shows no sign of ending any time soon.
In this context, it comes as no surprise to see how two of the chief beneficiaries of these deeply misguided policies – supported, it must be admitted, by a significant and active minority of the American people –
over who’s going to pay for the disastrous situation they co-created in the US housing market during the years up to Black September 2008,
when the failure of Repo 105 Lehman Bros created a global financial crisis unseen since the stock market crash of 1929 and the ensuing Great Depression.
The story we are about to relate is simultaneously pathetic and enraging:
pathetic, because it’s clear that supposedly “responsible” institutions were anything BUT that for decades;
enraging, because it’s equally obvious that neither sector, even now, is willing to take responsibility for their outrageous actions.
Put bluntly, it has become clear that the US mortgage industry was in a state of lawless anarchy for years.
Many billions of dollars in home loans were sold, guaranteed and rated as safe
without anyone bothering to examine whether the loans were made with due regard for the rules.
Already the four big commercial banks — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup —
have taken losses of $9.8 billion on loans they have repurchased or expect to be forced to repurchase.
Moshe Orenbuch, an analyst at Credit Suisse, says he thinks that figure will rise to $20 billion or $30 billion before the wave is over.
Other analysts think the number could be significantly higher.
You can make a case — call it the caveat emptor case — that no one should be able to recover any losses they suffered from loans that went bad.
If they had performed even rudimentary checks before the loans were made, sold, rated, insured or securitized – that is, made into DERIVATIVES –
it’s very likely that big problems would have been visible before disaster hit.
There would have been fewer bad loans and many fewer foreclosures.
That case is not, however, showing any sign of prevailing as legal battles between the TBTF banks and insurance companies, amazingly, continue to proliferate.
Indeed, much to their shock, it appears that big banks will be compelled to pay for their own sins – as well as, possibly, the sins of others.
Even now, long after we learned just how bad the underwriting standards were, it is unbelievable and disturbing to see how bad many of these loans were.
In the second quarter, Wells Fargo repurchased $530 million of mortgage loans.
It concluded those loans were worth, on average, a little less than half their face value.
Wells says it has the right to recover some of that from the companies that sold it the loans.
Unfortunately, “due primarily to the financial difficulties of some correspondent lenders,
we typically recover on average approximately 50 percent from these lenders,”
Wells added in a filing with the Securities and Exchange Commission.
Don’t you feel bad for Wells ???
So far, most of the money the banks have paid has gone to Fannie Mae and Freddie Mac,
which used to be government-sponsored enterprises and now, after the bailouts, are government-controlled.
But even though they have collected billions, Fannie and Freddie are getting increasingly frustrated with the banks for what they see as foot-dragging.
Remember, they are now owned by the same government that SAVED these banks WITHOUT requiring any major changes in the US financial system.
Freddie, in its quarterly report filed this month, said it was now requiring banks
“to commit to plans for completing repurchases, with financial consequences or with stated remedies for noncompliance,
as part of the annual renewals of our contracts with them.”
A spokesman for Freddie would not say just what those remedies or financial consequences might be.
But any bank that wants to keep offering mortgages MUST have contracts with Fannie and Freddie.
We’ll repeat that:
Any bank that wants to keep offering mortgages MUST have contracts with Fannie and Freddie.
Tying the repurchases to contract renewals could be a strong bargaining chip.
“Could” being the operative word – after all, we see how easily the Obama group can be bullied
by any group that has either sufficient numbers or money into doing what those groups want them to do.
The mortgages sold to Fannie and Freddie were supposed to conform to specified requirements.
Those requirements did get weaker as the credit bubble intensified —
a fact some bankers privately mutter the government now wants to forget,
but which, in fact, makes no difference whatsoever, given what these bankers were doing.
At the same time, these government requirements were STILL of higher quality than many mortgages sold into private securitizations –
that is, DERIVATIVES, whose grisly role in this whole drama refuses to go away,
and never will until it is actually dealt with in a straightforward way,
which, of course, means NEVER – at least for the foreseeable future.
Those securitizations – that is, DERIVATIVES – are the subject of demands for mortgage repurchases made by insurance companies specializing in mortgage re-packaging.
Among these are MBIA and Ambac, which promised at the time to make the payments
if the securitizations – that is, the DERIVATIVES – did not have enough money from payments by borrowers,
which, of course, they didn’t then and usually don’t know, as we read every day on the news sites.
When MBIA began making claims last year that it didn’t have to make those payments, it seemed a little presumptuous.
And this is where this whole sick story not only gets more bizarre,
but also makes clear how multi-dimensional the current US crisis is,
seeping into every aspect of the society.
In its suits, MBIA admitted it did virtually no due diligence to assess the quality of the loans it was insuring.
Instead, it said it had relied on the representations and warranties made by banks and brokerage firms that bought the insurance.
“It would be enormously expensive, even if it were logistically feasible, for a credit insurer to investigate the health of these ground-level loans,”
MBIA argued in a court filing, adding that if it had done such research, it would have been forced to charge much higher premiums.
Wow, that makes me feel almost as bad for them as I do for Wells – which is NOT AT ALL.
And the reason is, ALMOST EVERY BANK AND INSURANCE COMPANY INVOLVED IN THIS MESS COULD MAKE THE EXACT SAME ARGUMENT.
To cite one example, Credit Suisse, which was sued by MBIA after it guaranteed a securitization – DERIVATIVE – of second-mortgage loans
that may have been among the worst such loan collections ever,
said it had not reviewed the loans either.
Instead, it relied on assurances from the firms that made the loans.
Nor did the bond rating agencies do reviews of individual loans before they assigned AAA ratings to securities that in no way deserved them.
Conveniently, everyone assumed that the others were telling the truth.
The industry motto could have been, “Since we trust, why verify?”
High moral standards, those American banks and insurance companies.
But this is where it gets even weirder.
Somehow, even admitting it did NO DUE DILIGENCE AT ALL, MBIA has managed to persuade judges in three cases that it has a strong enough argument to avoid dismissal at an early stage.
Not surprisingly, this result has been met with total shock by all the banks who THOUGHT they were buying insurance precisely AGAINST having to assume these burdens.
In a decision on Credit Suisse earlier this month, a New York judge rejected the bank’s claim
that MBIA was a sophisticated party that failed to perform due diligence and thus had only itself to blame.
Now tell me the US political / judicial system isn’t in a structural crisis when a judge could actually make a decision like this.
Especially since the prospectus for the deal MBIA insured had PLENTY of warnings.
There were “Nina” loans (no income, no assets), for which the borrower did not even have to claim having income or assets to get the loan.
Some of the loans were made by New Century, a subprime lender that had already gone bankrupt.
Many of the loans left the borrower owing 100 percent of the appraised value of the property, including the first mortgages sold to others.
The prospectus even said that the underwriting standards varied and that in some cases even those standards had not been met.
But the judge said that all those warnings, and MBIA’s failure to do due diligence, were not enough
to let Credit Suisse avoid charges that it made representations and warranties about the loans that were not accurate.
MBIA has persuaded its auditors to let it book $2.1 billion in receivables from banks,
although only one small bank has reached a settlement with the insurer.
Other insurers are making similar claims.
So are some institutions that purchased bad paper, like some Federal Home Loan Banks.
Of course, some banks are no longer liable for any of the decisions their former – and, who knows, current – executives made.
One of them is IndyMac, which was seized by the Federal Deposit Insurance Corporation.
Unable to get money from the bank, MBIA has now filed suit against its officers, who may still have some insurance,
and the underwriters of the securitizations – DERIVATIVES – that MBIA guaranteed.
Those underwriters, of course, include some of the big banks that did not fail, like Credit Suisse and JPMorgan Chase.
They may have to pay for the sins of their former competitors.
The banks are fighting many repurchase demands, and say they are winning some arguments.
The issue is not whether a given loan went bad, of course,
but whether it was properly documented and underwritten by the standards that were promised.
The result is that Freddie and Fannie and MBIA and Ambac and the banks are all now going over loans one by one.
Now that’s a productive use of taxpayer monies that are paying for all this re-examination – NOT.
Had any of them bothered to do that in 2006, 2007 and 2008 — when most of the disastrous loans were made —
this tragedy could have been avoided.
But they all thought such care would cost too much and take too long.
After all, MBIA charged as little as $77,500 for each $100 million of insurance,
and you can’t hire many financial analysts for that kind of money.
Fannie and Freddie were competing with each other and with the private securitization companies for business, and speed mattered.
Banks richly deserve to suffer for their role in creating this mess, argues this column in the New York Times.
But so do a lot of other players who may well end up being compensated for losses
that, to a significant extent, they brought on themselves by not doing the work they should have done.
And what that says about America in the Cheney / Bush / Obama years
is how pathetically a once great country has deteriorated practically beyond recognition.
But, of course, we’ve been saying that for years.
David Caploe PhD
Editor-in-Chief
EconomyWatch.com
President / acalaha.com
