Spitzer: "What Clayton Knew" (about the toxic mortgage securities)

[Warpy]

Since the early days of the current economic cataclysm, I have believed that we would, with some investigation, find the Rosetta stone that would demonstrate that the banks knew that the toxic mortgages they were packaging were, in fact, not viable financial instruments.

This belief stemmed from my experience as New York state's attorney general. The AG's office had investigated enough subprime lenders to recognize the magnitude of fraud and the ubiquity of bogus credit analysis. Our efforts to expand our inquiry were stymied by the banks—and the Bush administration—which claimed we didn't have jurisdiction to pursue the inquiry into many of the major national banks. (We finally won, in June 2009, in a 5-4 ruling from the U.S. Supreme Court. The ruling was a bit late.)

I saw enough to know that any investigator doing even a minimal amount of work would reach the same conclusion we had. And I knew that the credit departments of the major banks would have documented this shoddy analysis. This is why I encouraged all the investigators with whom I spoke to begin by demanding access to the documents that the credit departments of the banks examined.

Much more at: http://www.slate.com/toolbar.aspx?action=print&id=2271647

This could be the smoking gun if we could get anyone to follow it up.

Some of these documents have emerged, and they tell quite a fascinating and appalling tale: These documents, from Clayton Holdings, a due diligence company retained by the banks, reveal that Clayton, after analyzing more than 900,000 mortgages, told the banks that about 30 percent of the loans being packaged into securitized products did not satisfy the banks' own underwriting standards. This meant that the securitized products were almost bound to blow up.

[jtuck004]

1. There is a huge problem in the creation of the loans which

is what Spitzer is talking about. One could read Bailout Nation or It Takes A Pillage to realize that AIG and the big investment banks knew as early as 2005 and before that there were real issues.

But its far worse than that. These folks knew that the entire pyramid of lending was built on the notion that the housing market would continue to increase, and being too early to stop would cost them billions of dollars, and might leave them holding "the bag", as it were. The internal conversations discussed in those books and others make it clear that they knew darn good and well what was going on. Oneal at Merrill, was having trouble getting mortgage underwriters to create enough crappy loans, so they purchased a mortgage broker, even after Lehman cratered and while others were going under for cryin' out loud, for $1.3 billion to continue the game.

They had convinced themselves, and their models were based on the fact that because U.S. real estate had never gone down in value nationwide, it never would. It never occurred to them that their actions would actually CAUSE the entire market to crater.

But the real point is that one should be aware that Spitzer is only talking about the bottom of the pyramid. The entire mortgage market at its height was only about $13 trillion or so, with subprime a reasonably small chunk of that. What he is leaving out is what caused our current depression, the $140 trillion or so (guesstimate by the above authors of leveraged credit default swaps and structured investment vehicles. Because some of this stuff was created by borrowing as much as 30 or 40 dollars to every one of real value, when it cratered many millions of jobs, and trillions in perceived value, simply went up in smoke. I emailed Nomi Prins and she said her best guess (because a lot of this is still hidden behind the curtain of the Fed and the Commodity Futures Modernization Act) is that there is still about $100 trillion of these "toxic assets" out there.

The real tragedy, and what most people don't understand, I think, is that what Spitzer and the the current AG's are doing is going after the street-level dealers while the cartel members are still paying themselves billions in bonuses, still living in their nice homes (and second and third homes) and taking their sunny vacations. Not only are we letting them get by in not putting pressure on the current administration, (maybe because no one wants to deal with the almost certain calamity that would result?), we are continuing to facilitate their gleaning of billions of dollars of taxpayer money by paying the criminals that brought us this mess to continue their enterprises.

Even if they bust the mortgage brokers and banks for their reckless handling of the mortgage transfers, it still doesn't touch the toxic assets, which are going to drag on our economy potentially for decades.

[Warpy]

2. Correct on all counts, but

knowing something and proving something are two different things. We all know that they had to know there was something very wrong with so many people in "hot" markets putting themselves into debt no ordinary working person had any hope of repaying. It made no sense at all, not even on the most basic gut level.

The Clayton Holdings documents might just provide that degree of proof needed to put these people behind bars if only our supine justice department will follow the lead.

[jtuck004]

3. Sure, and I hope they do.

But they are not addressing the repeal of Glass-Steagall, which allows the banks to use FDIC insured funds to speculate with, and the Commodities Futures Modernization Act, which allows them to keep all this off the books and unregulated under the guise of completion. Virtually none of that has been addressed by our current FINREG legislation.

When one looks at the numbers the AG's and others are talking about, they are in the billions, or hundreds of billions, or $1 trillion. They are talking about fixing the mortgage mess. None of this is addressing the toxic assets that are still sitting on the books, and will continue to exist as debt for many years even after the mortgages are settled. These clowns set up a process which put 10 years of our gross domestic output of about $14 trillion on the hook, and we built a life around it. Now much of that has turned into smoke, and while the mortgage mess is a small part, fixing that is a separate issue, and much of it will still exist even after all mortgages are brought back into compliance. That issue is being actively avoided, like the plague.

I should add this -

Borrow some money and create mortgages for 100 homes with varying credit risk and wrap them up in a big bond. Pieces of that bond go to various buyers with a varying mix of those credit ratings, paying people the interest and principle in various layers, while taking a big chunk out for yourself for being smart enough to do this.

Now, since the prices on the homes are going up, there is new value, so we can create new bonds. In some cases we might mix part of those old mortgages into the new bonds. Now mix those big bonds into even bigger bonds, or just other bonds. Then do it again. And again.

Buy a bunch of insurance (credit default swaps) on all that and the premiums become yet more income to you.

Now, without even having mortgages in hand, buy insurance on bonds that you have created without even having homes to start with, and sell these new bonds to new investors using income from the insurance.

Borrow $40 for every $1 you have in the mortgages. Use that to continue your enterprise

Repeat.

As long as all that is going up, no problem. And, btw - the ONLY part of this that is visible to the public is the original mortgage because the regulations which would have kept them public have been stripped away. So all this goes on in the dark, the "shadow banking" area.

Then housing values decrease and all this starts to come apart. But these bonds are in pension funds, investors overseas have gotten into them, whole governments have restructured their finance.

These all start to come apart - the money that was promised just evaporates. Millions of people lose their homes, jobs, money. New slogan - "Goldman Sachs. Let us do for you what we did for Greece".

Now we find out the process of recording the mortgages was fraudulent. So we get all energetic and figure out how to restore a broken mortgage system.

So we fix them and put some people in jail. Great. But that is only the mortgages, not the mortgage-backed debt at a value of 10 times of the entire productive output of our country that was laid on top. You cannot bring back all the tens of millions of jobs, the tens of trillions of dollars in this country and around the world that disappeared and are still evaporating, the structures that were all built on this pile of smoke, the homes, the lives that have been and are yet to be ruined. (There are people who have been laid off who will not get another job till they qualify for social security in 15 years). There is still much left out there, continuing to rot our systems from the inside. The Fed has sucked up some, but much of it still sits in pension funds, inside the big investment banks, in pools overseas. All the business and lives that are built on that MUST fail for us to restart again. Which is going to be really hard since we have spent the last 30+ years getting rid of the productive capacity to build wealth.

On the other hand, if one is in the group which holds 85% of wealth, he or she isn't hurting too much.

[truedelphi]

4. Any consumer attempting to purchase a home between 1999 and 2006 knew this.

Our household attempted to buy a home, near a major river known for flooding.

This took place in early 2001. When my spouse never showed up for a Real Estate appointment, both real estate agents told me I didn't need him - that on my under 15 K salary, I could easily afford the $ 175 K home. All I needed to do was to fib about how much money relatives sent me each year, how much money I received as an indie contractor and on and on.

These strategies are illegal. I refused to agree to them. Had I been desperate for a place to live, had I been swayed by the argument that the property could only go up in value, perhaps I would have.

Now newspapers covering the foreclosure stories talk about people with fairly good credit who got the hard sale about signing onto an ARM mortgage, with zero interest to start and then escalating interest some years down the line. Why get fixed term and pay five to six percent when you can get ARM with zero? And now those people are facing foreclosure.

All because of the hard sale tactics, and the total industry collusion that fraud and lies are simply part of everyday business. The bankers, mortgage people, appraisers, and real estate agents were all in this. And yes, there are always honest people in every trade, but those people were often fired or put out of business by not keeping up with the shameful tactics of the fraudulent who kept this "housing bubble" business cycle afloat for so many years.

[Warpy]

5. I got that same hard sell for an ARM in 1996

although they did do their homework when it came to my income and debt load. I had to pick up my papers and start to leave for them to stop talking tommyrot about affording more house with an ARM. They were rather graceless about writing up the paperwork for a conventional mortgage, but a commission is a commission.

That latter point is what drove the fraud. They didn't care if a migrant worker was putting nothing down on a $500,000 California bungalow. They got the commission no matter what because the banks weren't doing their jobs, either.

The Clayton documents prove that people at the top were informed that the whole thing was going to blow up, that it was inevitable. If anyone follows this up, bankers will go to prison.

[truedelphi]

6. This household is rather skeptical about any justice coming about for those in the

Big Banking circles. Those Big Financial Interests happen to run this country, and if anything threatens what they want, then events will transpire to keep their holdings in place.

I remember looking at the business section of newspapers in summer of 2001, and thinking that by late October the Bush Presidency would be thoroughly unwound - but then lo and behold, a national emergency put that Presidency back on top.

I think the same thing is in the works right now.

The Big Monied interests are not about to witness their top people being indicted and going to jail. And if they went off to prison, then Geithner would have to answer for his crimes of the Fall of 2008, when he was the head of the New York Fed. That would certainly tarnish Obama's Presidency, that he was "fooled" into having such scum serve as his right hand man. (Geithner doesn't just head the Treasury, he has an office right down the hall from the Oval Office, and routinely is referred to as "my good buddy" by Obama.)