Pam Martens offers a couple of storylines that don’t bode well for the godfathers of finance, or at least shouldn’t. First, some judicial decisions are being made on the regional level wherein judges are basically calling bullshit on the foreclosure machinations being used by the godfathers. When the mortgage-backed securities (MBS) were invented by the Einsteins of finance as yet another deliberately confusing rent-seeking mechanism, they did a significant amount of tap-dancing to evade accounting and legal rules designed to keep them from doing just what they did. They created a bunch of middlemen called, for example, “limited purpose entities”, to formally but not substantially remove the debts represented by the mortgages from their balance sheets. If this sounds like the sort of thing that’s done to hide criminal acts, it’s only because it is, or at least should be.
When they started transferring the MBS packages from entity to entity to entity, they were faced with the problem of transferring the thousands of actual, paper-based mortgages comprising them. Since that would take time, cost money, and be the right thing to do, they instead created yet another financial tool called “blank mortgage assignments,” which allowed them to wave a magic wand and just skip the actual physical recording of the mortgage at the country registry of deeds. If the average Joe Sixpack on the street were to skip this step, he would be on the street literally as well as figuratively.
A situation thus developed wherein when the banks failed to receive their mortgage payments from a homeowner, they sent their many-times-removed proxies to foreclose. But the proxies had neither a proper paper trail or proof of legal standing to perform the foreclosures. The foreclosure laws are fairly clear about the essential need for a legally valid paper mortgage when attempting to foreclose, and grant no obvious hand-waving exceptions to the high lords of financial wizardry. Compounding the absurdity is that many of the paper mortgages are probably lost, and many others are suspected to have been used fraudulently for simultaneous inclusion in multiple MBS packages.
The czars of rent-seeking set up yet another legal entity to provide the muscle for the actual foreclosures. It’s called MERS, which is a subsidiary of MERSCORP, which is in turn owned by subsidiary units of - I hope you’re not holding your breath here - Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Assocation, and various other mortgage and title companies. At least Don Corleone had the simple decency to send his sons out to do the dirty work instead of creating a tenth-level subsidiary for the horse decapitations.
The article provides excerpts from several judicial decisions that surprisingly and refreshingly uphold the law as it is written rather than the law as wishfully interpreted by the legal subsidiaries of the financial wizards this week. This is not good news for gods of high finance, nor are some upcoming changes to financial standards.
The Financial Accounting Standards Board (FASB) - apparently in response to the growing number of people who couldn’t get past the third component of their name without collapsing in gales of laughter - have issued new rules #166 and #167. The first 165 rules can be summarized as “Do what thou wilt shall be the whole of our standards, and the kegger starts at dusk.” The new rules limit the number of kegs per party and, more importantly, collapse the telescope of subsidiaries that currently enables the financial grifters to sweep their debts under a rug six towns over. My dogs could generate record profits if they were allowed to ignore the debt side of the ledger. Hell, I’ll bet that an MBA student could even do it if daddy hired a couple of first-graders to do the math for him.
Even more fundamental questions are asked by Martens, albeit not in the cheaplaffy kind of way that I would ask them:
Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations, inadequate debate has occurred on whether securitization of home mortgages (other than those of government sponsored enterprises) should be resuscitated or allowed to die a welcome death. If we understand the true function of Wall Street, to efficiently allocate capital, the answer must be a resounding no to this racket.
Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.
Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.
To the barricades blah blah blah.