Yet Further Financial Crisis Round-Ups

Cause the news just keeps pouring in.

First: US banks are probably a lot less solid than they'd like you to think.

Secondly: the US Fed appears to have been bailing out the world.

First:

Our centerpiece:

The more we learn about the mortgage industry’s documentation snafus, the more troubling hints we get that the financial statements of some of our biggest banks may be less reliable than anyone imagined.

Here’s the latest: Thanks to a Nov. 16 court ruling in Camden, New Jersey, we now know that a Bank of America Corp. employee, Linda DeMartini, testified last year that the lender routinely retained possession of mortgage promissory notes and related documents, even after loans were packaged into bonds that were sold to investors. If we’re to believe what she said, it raises the prospect that some of those loans still should be on Bank of America’s balance sheet today.

Contracts for such securitizations usually require the documents to be transferred to the trustee for mortgage bondholders, as Bloomberg News noted in a Nov. 30 article on DeMartini’s testimony. If the papers weren’t delivered properly, that tees up the question of whether any loan transfers were improperly treated as sales for accounting purposes, and whether the bank’s assets and liabilities may be understated.

DeMartini’s statements also place Bank of America’s outside auditor, PricewaterhouseCoopers LLP, in a tough spot. The firm has no choice now under U.S. auditing standards but to find out definitively if what DeMartini said is correct, and whether the answer would affect any of its prior audit conclusions...

As for the New Jersey case, Judge Wizmur rejected a claim on Kemp’s home, ruling that Countrywide, which serviced his mortgage, failed to transfer the note to the trustee, as required by the Countrywide securitization contract covering his loan. DeMartini, who joined Countrywide about 10 years ago, testified that Kemp’s note never left the company’s possession.

If all this really was some kind of a mistake, it’s a doozy. This much is clear: The judge believed her.

Fascinating commentary on the case:

...The original case began with a claim that the mortgage was owned and all in the good, as is always the case.

The problem was that the documentation thereof was legally insufficient.

There began the trouble.

There was allegedly an "allonge" (that is, another sheet of additional assignments) that is supposed to be "permanently attached" (e.g. riveted, etc) to the original so as to prevent someone from detaching it and replacing it later. This, incidentally, is required by the UCC. If my information is correct it was presented to the court as a loose sheet of paper - that is, not attached at all. Examination of the so-called transfers showed that the note was assigned to the trust after the default and just before foreclosure was initiated.

And the pooling and servicing agreement, which the borrower's counsel asked to have produced (to prove that all of the other things done were on the "up and up" was allegedly produced in court unexecuted and with the word "DRAFT" emblazoned over the top of it, after an attempt to find it on the SEC's EDGAR website proved fruitless...

How you can possibly argue that an audit opinion has merit after the disclosure of The Fed haircuts on the so-called "assets" pledged for TAF and similar programs at this point is beyond the pale. That is, we now know that banks came to these programs and pledged assets with ten times or more the face value of what they "borrowed" - but then when these loans were repaid those worthless assets (in the opinion of the NY Fed desk) were never recognized at that valuation by anyone ever again. In fact, they're probably still sitting on bank balance sheets - at 95 or even 100 cents on the dollar...

This much I can tell you with certainty - whatever collateral was pledged on 1/21/2009 in the "face" amount of $185 billion for a $15 billion loan was never exposed in a 10K or 10Q as having taken a loss of more than 90%...

Such a loss would have resulted in in the instantaneous detonation of Bank of America. Indeed, that loss is more than half of the firm's enterprise value as of today and exceeds the company's market cap.

That is, it was more than enough to blow them to Mars - and that was one transaction.

While some of those loans were clearly rollovers of earlier ones, and thus the "9 trillion" bandied about is a histrionic distortion (typical of many people in the media and Congress) the fact remains that these programs disclose monstrous hidden losses in the form of worthless collateral that was posted by these institutions and which then disappeared once again into their bowels and has not been seen since...

Also of interest (links in the original):

It appears that "Robosigning" is not just a matter of affidavits and witness signatures. Now it comes out that perhaps Pennsylvania processed thousands of foreclosures where the person who signed and prosecuted the foreclosures may not have been an attorney!

But Loughren is suing because all three named partners of GMM, Joseph Goldbeck, Gary McCafferty and Michael McKeever, have admitted under oath — during depositions last September and in a separate case in December 2009 — that no attorney ever read the filings. The partners made clear that the practice has gone on for the past several years.

The past several years?

Not only does this call into question whether these foreclosures are legal (and might be void) it also implicates criminal statutes...

Second:

Who's getting bail-out money?

Federal Reserve data showing UBS AG and Barclays Plc ranked among the top users of $3.3 trillion from emergency programs is stoking debate on whether U.S. regulators bear responsibility for aiding other nations’ banks.

UBS was the biggest borrower under the Commercial Paper Funding Facility, with $74.5 billion overall, more than twice as much as Citigroup Inc., the top U.S. bank recipient, according to the data released yesterday.

London-based Barclays Plc took the biggest single amount under another program that made overnight loans, when it got $47.9 billion on Sept. 18, 2008.

“We’re talking about huge sums of money going to bail out large foreign banks,” said Senator Bernard Sanders, the Vermont independent who wrote the provision in the Dodd-Frank Act that required the Fed disclosures. “Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined.”

The first detailed accounting of U.S. efforts to spare European banks may add to scrutiny of the central bank, already at its most intense in three decades...

Charmant. Yet further:

The financial crisis stretched even farther across the economy than many had realized, as new disclosures show the Federal Reserve rushed trillions of dollars in emergency aid not just to Wall Street but also to motorcycle makers, telecom firms and foreign-owned banks in 2008 and 2009.

The Fed's efforts to prop up the financial sector reached across a broad spectrum of the economy, benefiting stalwarts of American industry including General Electric and Caterpillar and household-name companies such as Verizon, Harley-Davidson and Toyota. The central bank's aid programs also supported U.S. subsidiaries of banks based in East Asia, Europe and Canada while rescuing money-market mutual funds held by millions of Americans.

The biggest users of the Fed lending programs were some of the world's largest banks, including Citigroup, Bank of America, Goldman Sachs, Swiss-based UBS and Britain's Barclays, according to more than 21,000 loan records released Wednesday under new financial regulatory legislation.

The data reveal banks turning to the Fed for help almost daily in the fall of 2008 as the central bank lowered lending standards and extended relief to all kinds of institutions it had never assisted before...