bubbleinfo.com

By Matt Taibbi:

Got a chance to meet Josh Rosner (co-author, with Times reporter Gretchen Morgenson, of the new book Reckless Endangerment) last night during an appearance on Eliot Spitzer’s In the Arena.

We were brought in to talk about the new investigation of the banks that apparently is being launched by New York State Attorney General Eric Schneiderman, which looks like it might be the first for-real attempt at a prosecution of the systemic corruption that led to the financial crisis.

Schneiderman’s probe reportedly targets the banks’ mortgage securitization process during the bubble years. Morgenson reported that Schneiderman is focused on at least three companies: Morgan Stanley, Bank of America, and old friend Goldman, Sachs.

This investigation has the potential to be a Mother of All Nightmares situation for the banks for a couple of reasons.

For one thing, the decision to go after the securitization process is a total prosecutorial bullseye. This is the ugly heart of the wide-scale fraud scheme of the bubble era.

The business model during this time was a giant bait-and-switch scam. Sleazy lenders like Countrywide and New Century first created huge masses of bad loans, committing every conceivable kind of fraud to get people into loans (from doctoring income statements with white-out to phonying FICO scores to engineering fake appraisals). They then moved the bad loans quickly to the big banks, which pooled them and chopped them up (this is the “securitization” process), sprinkled hocus-pocus math on them, and them sold them to suckers around the world as AAA-rated securities.

The questions Schneiderman will seek to answer are these: did the banks securitize loans they knew were fraudulent, throwing the rotten mortgages into the stew before serving them to customers?

Did they also commit insurance fraud by duping the bond insurers (known as “monoline” insurers) into thinking the mortgages were not as risky as they really were?

And did they participate in the fraud scheme on a more basic level by lending huge amounts of money to the Countrywides of the world, knowing that they in turn would immediately use that money to create the bad loans?

In other words, did the banks finance the fraud in addition to brokering it?  The reason this is such a potentially deadly investigation for the banks is that they seemed to be so close to getting away scot free.

There is another investigation into the banks’ mortgage abuses by the states’ Attorneys General, led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement, despite the fact that nothing like a complete investigation has been done.

The expectation for some time has been that the banks would eventually have to pay a significant, but eminently survivable, settlement for abuses during the bubble era. Although the Miller probe was focused on practices like robo-signing and other such documentation abuses, it could theoretically have covered securitization as well.

But if the AGs were to sign off on a friendly global settlement for mortgage abuses prematurely, it would be like a DA offering a millionaire murderer a 2-year plea bargain before the cops even had a chance to interview all the eyewitnesses. It would be a blatantly political arrangement.

Such a desire to get some kind of deal done and sweep the mortgage mess under the rug once and for all seems almost universal among high-ranking politicians, and particularly in the Obama administration, which has acted throughout like it wants more than anything to simply get all of this over with and put in the past.

Schneiderman’s investigation throws a monkey wrench into all of this.

The banks cannot enter into a settlement with 49 states. They need all 50 at the table. But if Schneiderman breaks ranks and goes off on an end-run investigation that plunges right into the rotten core of the fraud era, then the whole pipe dream of an easy settlement vanishes in an instant. This is particularly true since Schneiderman is the most important AG, being from the state of New York, where most of the crime was probably committed.

The amount of money investors lost in this fraud scheme is probably gigantic.

The ill-gotten money the banks made off that same fraud is probably similarly huge. And the damage to society, in the form of mass foreclosures and other losses, is incalculable. If the banks end up being found liable for all of these offenses, they could face truly crippling fines and penalties. This goes far beyond the question of whether one bank like Goldman defrauded a client or two or lied to investigators. This probe could be asking whether the banks’ entire revenue model during the crisis years was based on fraud.

Everything I’ve heard so far indicates that Schneiderman’s investigation is not a publicity stunt and is an in-earnest attempt to get to the bottom of things.

From msn.com

Local governments have been complaining for years that foreclosed homes are a blight on cities and counties, and that banks that take back homes often fail to maintain them. 

The California General Assembly is even considering a bill that would fine lenders $20,000 for each foreclosure to help cities pay the associated costs.

The city of Los Angeles filed suit Wednesday against Deutsche Bank, accusing the lender of being one of the city’s largest slumlords and seeking hundreds of millions of dollars in restitution.  “It’s time to recognize that the fraud committed on Wall Street turns into blight on Main Street,” City Attorney Carmen Trutanich said at a news conference announcing the lawsuit.

 ”We must fight blight by holding banks accountable when they create vacant nuisance properties that pose threats to our residents and destroy the quality of life in our neighborhoods,” Trutanich said.

 The lawsuit accuses the bank of failing to maintain 166 properties and illegally evicting tenants from some of them. The suit lists the addresses of the properties and includes photos of the substandard conditions. You can read the lawsuit here and here.

(the lawsuit indicates that the majority of the properties were foreclosed in 2008 and 2009)

Deutsche Bank responded that the lawsuit was “against the wrong” party and that loan servicers, not Deutsche Bank, were responsible for maintaining foreclosed properties.

Hat tip to SM for sending this along from the nytimes.com:

Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?

No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn’t until three years later that his troubles began.

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of the best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. Mr. Engle received $30,000 for his participation.

The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.)

Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.

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From the nytimes.com:

WHAT does it take to hold your powerful bosses accountable if they try to bully you out the door?

Documents, e-mails, a former deputy district attorney as your lawyer — and a never-say-die approach.

Such was the lesson learned by Michael G. Winston, a former executive at the Countrywide Financial Corporation. Mr. Winston spent three years in a legal battle against Countrywide, the once-mighty mortgage giant, and its current owner, Bank of America, contending that he was punished and pushed out for not toeing the company line. On Feb. 4, he won: a jury in California awarded him $3.8 million in damages.

Mr. Winston’s story provides a glimpse into how business was done at Countrywide at the height of the subprime craziness — and how assiduously Angelo R. Mozilo, the company’s fallen leader, worked to quash dissent in the ranks. Mr. Winston had the audacity to question Countrywide practices. Mr. Mozilo was not pleased and, before long, Mr. Winston was marginalized and later dismissed.

Mr. Winston, a prominent executive in the field of organization management, is a rarity among corporate whistle-blowers. Most of them get run over by their former companies. A fascinating detail in his case: after providing to the opposition his list of witnesses, which included former colleagues who had also been let go by Bank of America, the bank hired several of them back. Then they testified against him.

It wasn’t long after he joined Countrywide that Mr. Winston began to worry about its business strategy, he said. He still recalls an episode from late 2005 that raised red flags for him. He found himself parked next to a man in the Countrywide lot whose car had vanity plates that read, “Fund’Em.” “I said: ‘I’m not familiar with that expression. What is this about?’ ” Mr. Winston recalled. The man replied that the term described the company’s growth strategy for 2006 — to fund all loans.

“I was brand new and I said, ‘What if the person has no job?’ ” Mr. Winston said.

The answer: “Fund ’em.”

“What if the person has no assets?”

Again: “Fund ’em.”

Mr. Winston said he immediately relayed his fears about what he saw as an anything-goes strategy to Drew Gissinger, chief production officer of Countrywide Home Loans. “I told him that you need to focus on customer satisfaction, on the quality of the loan portfolio and on building leaders who would focus their people on that,” Mr. Winston said. “I wrote him a very comprehensive proposal on how to reward people properly.”

On Jan. 24, 2007, Mr. Mozilo wrote an e-mail to Ms. Goren, the head of human resources whom Mr. Winston had told about hiring a lawyer for himself.

“As I expressed to you, I am concerned about the motivations and overall attitude and demeanor of Michael Winston,” Mr. Mozilo wrote. “I want him terminated effective immediately.”

Testifying before the jury, Mr. Mozilo said he wanted Mr. Winston gone “because I concluded that he was not the type of individual that I wanted at a senior level at the company.”

From the latimes.com:

Federal prosecutors have shelved a criminal investigation of Angelo R. Mozilo after determining that his actions in the mortgage meltdown — which led to $67.5-million settlement against him — did not amount to criminal wrongdoing.

As the former chairman of Countrywide Financial Corp., Mozilo helped fuel the boom in risky subprime loans that led to the crippling of the banking industry and the near-collapse of the financial system.

A federal grand jury in Los Angeles began probing Mozilo in 2008, and four months ago he agreed to pay a $22.5-million fine and to repay $45 million in what the government said were ill-gotten gains to former Countrywide shareholders. The payments settled a civil action by the Securities and Exchange Commission.

But the criminal investigation has wound down without indictments of Mozilo or others at his Calabasas company, according to people familiar with both the prosecution and the defense teams, all of whom spoke on condition of anonymity because they were not authorized to discuss the matter.

“Sometimes the public thinks all you have to do is to indict someone and that’s it,” one of the federal sources said. “But you have to be able to prove your case, and it can be worse losing a case than not bringing one at all.”

The 72-year-old Mozilo hung up the phone when contacted for comment at his home in the Lake Sherwood golf community of Ventura County.

The criminal investigation into Mozilo was never announced publicly, and as a rule federal prosecutors make no formal announcement when such cases are closed.

One defense attorney, however, said the government would probably keep a close watch on civil litigation by Countrywide shareholders against Mozilo and could still decide to bring charges depending on what develops in those cases.

“He may have to testify, and you never know what may come up,” the attorney said.

Read the rest of this entry »

Hat tip to MB for sending this along, from the pressdemocrat.com:

LOS ANGELES (AP) — The state of California has reached a settlement in a predatory lending lawsuit against former executives at Countrywide Financial Corp. that will pour $6.5 million into a fund to help foreclosed homeowners.

The state had sued Countrywide, CEO Angelo Mozilo and President David Sambol under former Attorney General Jerry Brown. The 2008 lawsuit alleged that the company lured borrowers with low “teaser” rates on adjustable rate loans. Loan officers didn’t tell borrowers that the rates would jump, that prepayments would be penalized, and the total loan costs would skyrocket, even if they made additional payments, the state alleged.

The settlement filed Wednesday in Los Angeles Superior Court says Countrywide agreed to pay $6.5 million to a Foreclosure Crisis Relief Fund. It will provide restitution, loan modification services and relocation assistance for foreclosed homeowners, plus money for state and local agencies to prosecute mortgage fraud, Attorney General Kamala Harris said.

The lawsuit claimed that Countrywide engaged in unfair business practices and false advertising laws with just about every action it took to market and originate some of the most popular — and potentially risky — types of home loans.

Countrywide allegedly loosened its mortgage standards and verification procedures and agents overrode warnings from a computerized underwriting system that analyzed the ability of applicants to repay.

The company paid higher commissions to agents who put borrowers into loans with higher rates and fees than they qualified for based on their credit scores.

In one case described in the lawsuit, the company provided a mortgage for an 85-year-old disabled veteran with such a low credit score and high debt that he defaulted on an adjustable rate mortgage in less than six months.

The state claimed that these practices led to tens of thousands of homeowners with Countrywide loans defaulting and losing their homes to foreclosure. The attorney general’s lawsuit alleged that Mozilo and Sambol knew of these practices and allowed them to continue.

The state settled with Countrywide in October 2008, with the company agreeing to provide loan modifications and other foreclosure relief worth $8.68 billion nationwide, with $3.5 billion for California borrowers.

The executives left the company when Bank of America Corp. bought it in July 2008.

Bank of America assumed responsibility for loan modifications for Countrywide borrowers and for paying restitution to those who qualify under the terms of the settlement.