Defaulting banks - where will it stop?

[Jan Klimkowski]

Credit Default Swaps: the poster boy of advanced, C21st, free market capitalism.

Traded in totally corrupt monopolostic markets playing with taxpayer money.

NYT article here.

It begins:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Zero Hedge's take below:

Secret Banking Derivative Cabal Redux, And Why HFT In CDS Has So Far Been A Failure

Submitted by Tyler Durden on 12/12/2010 13:14 -0500

Today, in a 3,500 word oeuvre, the NYT's Louise Story has done an expose on some of the key development in the CDS market. For those who may not have the patience of reading the whole thing, we provide an abridged summary...

- The most profitable product for banks currently are derivatives (and CDS in particular)

- As a result, the derivatives trading cabal wants to contain its members to as few as possible, and to preserve the status quo indefinitely

- Margins on CDS can be anything as there is no central clearing or pricing mechanism; buyers and sellers rely on the broker to present an honest market

- The trading desk spread profit on a CDS contract is 0.1% of notional ($25,000 of $25,000,000)

- Spreads can be as wide as the banking cartel (Goldman, as most other banks just price at Goldman levels) deems them to be

- Banks do not want to trade CDS on exchanges as that would kill margins
Citadel tried to make CDS trading into a HFT operation. It failed (for now)

- Markit is a dominant industry-controlled player, and prevents transparency (and thus keeps margins high) in the market by not allowing broad dissemination of CDS pricing

- Regulation is powerless to break the cabal's control

That pretty much covers it.

Of course, to anyone who has read Zero Hedge over the past two years none of this is a surprise. We have long claimed that:

- Derivatives trading is and continues to be the most profitable product line for the banking cabal, but for Goldman Sachs particularly, whose FICC group would be a pale image of itself if it could not dominate CDS trading (link)
- Goldman is a virtual monopoly in client-facing synthetic trading. Furthermore, it is a pure monopoly in cap arb situations that require the combination of cash and synthetic trades, courtesy of the elimination of the Bear fixed income trading unit (the bulk of which ended up going to Goldman) and the destruction of Lehman Brothers. And as virtually everything is now a pair trade in the basis realm of some sort, Goldman likely pockets, directly and indirectly, a few nickels of every single corporate spread trade in the world
- Due to pricing opacity, it is not unheard of, and in fact happens quite often, that due to wide entry spreads, both sides of a given CDS trade can claim a profit at the same time, especially with banking facilitiation that "validated" End Of Day/Week/Month pricing tables. This leads LPs to believe that their fund investment is in much better shape than in reality, leading to a Madoff type event one day when reality catches up.
- Markit, among others, has been alleged to provide above market pricing in the past (link). It will likely recur in the future, or as long as there is no transparent trading market for derivatives.
- Donk is a joke? Really? Next up someone will tell us that the first US and European stress test were a lie...

In other words - a lot of recycling. One useful observation: contrary to claims to the contrary, High Frequency Trading in CDS is so far completely and totally DOA: Citadel's walking away with its tail between its legs proves it. To achieve that one needs a clearing market. And once HFT gets involved, margins plunge, and volume needs to make up for the margin shortfall. This means the market will need to be opened up to the general public. Zero Hedge firmly believes this will be the case... eventually. When that happens, CDS contract notionals will plunge from a minimum $1MM contract (and really $5MM) currently, down to $1K increments, and margin requirements will be impacted appropriately. Banks will be forced to open the CDS market to the greater retail fools. For that to happen, equities as an asset class will have to collapse, and the general public will want to move its trading higher in the capital structure. Which is why we are stunned that the blogosphere has not seen a broader penetration of CDS-focused sites (in addition to Zero Hedge): after all, when the enchantment with equities is over following the next major crash (and it is already well on its way followin 31 weeks of outflows), this will be the "next big thing", and the first entrant will have a tremendous advantage...

http://www.zerohedge.com/article/secret-...en-failure

[Ed Jewett]

A Secretive Banking Elite Rules Trading in Derivatives

December 12th, 2010 Via: New York Times:
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.
In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.
The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.
Posted in Covert Operations, Dictatorship, Economy, Elite

[EJ notes: The NYT article, in the Business Section, runs many pages. I have not read it.]

[Jan Klimkowski]

Bank liability to the PIIGs (Greece, Ireland, Portugal, Spain) - with charts per bank at the url:

http://www.zerohedge.com/article/easter-...50-billion

And now that it is pro forma common knowledge that should the PIGS fails, that at least a few domestic banks would be wiped out, it also should be appreciated why the ECB will do everything to prevent an impairment to bondholders: with just under $2.3 trillion in potential partial or full losses on total exposure, the domino effect would blow up Europe overnight, then promptly wipe out the US and the rest of the world with it.

The country with biggest exposure to the PIGS is not surprisingly Germany with $513 billion, followed by France at $410 billion, Great Britain at $370 billion, and... the US at $353 billion. As for the next two dominoes to drop, Portugal and Spain, the countries whose banks are most at risk are Spain, France and Germany for Portugal and Germany, France and the US for Spain. Which explains why the Fed is now collaborating fully with the ECB from preventing the Portugues rout from hitting Spain, and makes us wonder just how many Spanish bonds the Fed may have been buying in recent weeks. As we disclosed previously, it is certainly under the Fed's current mandate to buy Greek bonds if it chose to do so. But, as above, who really cares: everyone now knows the banker cartel is merely doing everything to delay the inevitable, day by day, with absolutely no follow through plans on what happens later. Unfortunately for the middle class it will be them, and not Ken Langone, bailing out these very same banks when the shit hits the fan once again, which it absolutely will as neither has anything changed, nor has the Fed's response of fixing bubbles with more bubbles been modified.

[Jan Klimkowski]

Ooh - fear of a tiny interest rate rise sends panic through the markets.

Interest rates between 0-0.5% are clearly neither viable, nor sustainable. Such a low interest rate is clearly an extreme, short term, measure.

So much for the "recovery" and "growth" figures being real and meaningful.

But then the "assets" held by at "market value" by the big banks are mostly junk - as are their balance sheets:

Interest rate rise could wreck recovery, economists warn

Analysts warn that an increase from 0.5% could spell a mortgage bill disaster if made too soon

Phillip Inman and Toby Helm The Observer, Sunday 16 January 2011

Leading economists and politicians are warning the Bank of England that it could wreck the economic recovery if it raises interest rates too soon in a bid to reduce inflation and help savers.

A rise in base rates could severely undermine the confidence of UK manufacturers just as they are getting back on their feet, the Ernst & Young Item Club will say this week.

Senior figures in the Tory-Lib Dem coalition are also concerned about the public's reaction to rising mortgage costs if they coincide with a period of savage public sector cuts and job losses. Last night Liberal Democrat Treasury spokesman Lord Oakeshott said rates had been kept "artificially low" by theflood of money being pumped into the economy through quantitative easing.

He added that the Bank now faces a difficult balancing act as it tries to tame inflation while continuing to encourage growth: "With economic recovery picking up pace throughout the world, there will be upward interest rate pressure. It is vital we do not let that damage the economic recovery here."

Bank of England governor Mervyn King and his nine-strong monetary policy committee held interest rates at 0.5% last week, but many analysts expect them to come under pressure in the next few months to raise rates to above 1% in order to keep inflation in check. A rise in interest rates could spell financial disaster for many of the estimated eight million households with tracker mortgages. Without low interest rates, mortgage bills could rise to crippling levels and lead to a rise in repossessions.

David Cameron said last week he was concerned at the pressure on savers from rising inflation, which he described as extremely harmful. He added: "We don't want to go back to having an inflation problem as we had in the past." He emphasised that interest rate policy was the Bank of England's domain, but his comments were widely seen as a signal that No 10 wants inflation under control to protect older people's savings.

However, other prominent figures in the coalition are taking the view that mortgage rate rises could turn middle England which so far has been broadly supportive of the cuts agenda against the government after a lengthy period in which it has benefited from low borrowing costs.

The cost of living has risen in the past year following a rise in oil prices and many raw materials used in manufacturing and food production. The price of Brent crude has jumped from $72 a barrel in the summer to $98 (£62) yesterday. Copper and other vital metals have also jumped in price, while coffee has increased by 25% and cotton by 30% in the past three months.

Food prices, which make up a large part of the basket of goods used to measure inflation, have also risen following a jump in the cost of wheat and soya over the last six months.

Several rightwing economists have warned that inflation is a "ticking timebomb" and would spark a wage spiral as workers seek to protect their incomes from being eroded by rising prices.

However, the Item Club said inflation would drop back to the MPC's 2% target in 2012 once temporary pressures fell out of the economy. Peter Spencer, chief economic adviser to the Item Club, said: "It's going to be a tense start to 2011. The fiscal retrenchment will keep GDP subdued, while commodity price rises and the VAT hike will push inflation close to 4%."

"However it's vital that the MPC stands firm. These are temporary pressures; domestic cost inflation remains low and CPI inflation will come back to heel in 2012 once the VAT increase falls out of the figures next January. A premature rate rise would boost the pound, weakening the UK's ability to increase its exports particularly into the emerging markets which we have long maintained hold the key to the UK's economic recovery."

http://www.guardian.co.uk/business/2011/...-inflation

[Jan Klimkowski]

Time for the crooks to start a bonfire of the evidence (via Zero Hedge):

Mortgage Lenders Seeking Court Permission To Destroy 22,100 Boxes Of Original Loan Documents

Submitted by Tyler Durden on 01/24/2011 14:03 -0500

The solution to the ongoing fraudclosure fiasco is so simply and yet so brilliant (in a way that benefits the banks naturally) is so brilliant, that it has to date evaded most... but not all. The solution: just shred it all. That is what insolvent mortgage lenders Mortgage Lenders Network USA and American Home Mortgage are pushing hard to get permission from their respectively bankruptcy judges in their chapter 7 liquidation cases. Says Reuters: "Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes of original loan documents. The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost." With servicer banks increasingly unable and unwilling to provide the original lender docs (since they don't have access to them) to parties curious in seeing if there is a legal case to continue paying their mortgage, what better solution than to have the banks retort that the original document was sadly destroyed in a court-appointed shredding. In that way all the fraud canaries are killed with one stone, and the party responsible is none other than some bankruptcy judge who had given the go ahead for the wholesale destruction. And since we are not talking peanuts, in the case of MLN it comes to 18,000 boxes of records, while in the AHOM case it is just over 4,000 boxes, we wonder just how many other originators have gotten a comparable idea from the banks, and are currently busy shredding every last detail of an original mortgage note. Good luck trying to convince anyone that the bank is not in possession of a mortgage that was "purposefully" destroyed as part of a company's liquidation proceedings. Soon to follow: the burning of all books and the banning of all websites that dare to claim this is nothing but pure, grade-A criminal destruction of evidence.

More from Reuters on this stunning development:

In the Mortgage Lenders case, the U.S. Attorney in Delaware has formally objected to the requested destruction because loss of the records "threatens to impair federal law enforcement efforts."

The former subprime lender shut down in February 2007. In a January 6, 2010, motion, Neil Luria, the liquidating trustee, asked Bankruptcy Judge Peter J. Walsh for permission to destroy nearly 18,000 boxes of records now warehoused by document storage company Iron Mountain Inc.

In the American Home Mortgage case, the liquidating trustee, Steven Sass, has asked Bankruptcy Judge Christopher Sontchi to approve destruction of 4,100 boxes of loan documents stored in a dank parking garage beneath the company's former headquarters in Melville, Long Island.

AHM had been one of the biggest originators of subprime loans until it abruptly collapsed and closed in August 2007. The boxes are the last still held by AHM. Sass stated that the local fire marshal wants the documents removed as a fire hazard, and he said the cost of moving them would be prohibitive.

The reason cited for this scandalous request: warehousing costs:

Luria stated that destruction is necessary to eliminate $16,000 per month in storage costs as he disposes of the last assets of the bankrupt company.

This is akin to the Fed terminated the reporting of the M3 due to the exorbitant costs associated with keeping track of a few data series...

And, not surprisingly, we find that some have already been going through with document shreeding for a long time already:

In accordance with a 2009 court order, the bankrupt company earlier had destroyed the contents of thousands of other boxes after banks and other loan servicers had been given a chance to request and pick up particular files.

Gee, we wonder why the banks opted out of picking up files confirming they are not the proper servicer on thousands of mortgages.

http://www.zerohedge.com/article/mortgag...-documents

[Jan Klimkowski]

Ah - keep that zippo in your pocket for a few hours more (from Karl Denninger's Market Ticker)

Defunct Lenders Told No - For Right Now

In a stunning development a number of mortgage companies tried to get a judge to allow them to shred original files related to their loan originations....

WILMINGTON, Del., Jan 24 (Reuters) - A U.S. bankruptcy judge temporarily blocked bankrupt subprime lender Mortgage Lenders Network USA from destroying 18,000 boxes of original loan files after federal prosecutors said documents in them may be needed as evidence in more than 50 criminal investigations.

No, really?

There wasn't any sort of fraud in the origination of those loans, was there? And these documents wouldn't actually prove that, would they?

You know, one of the disturbing parts of this entire mess is that due to the obstruction and political game-playing, these clowns may actually get away with running the clock on the Statute of Limitations. I'm not sure what it is when it comes to these sorts of crimes, but it's not indefinite - and if you can keep from being indicted for long enough, you can get away with it legally - even if you're guilty as sin.

Yeah.

(Of course destroying all the evidence with a Judge's permission might make getting away with it easier too, no?)

http://market-ticker.org/akcs-www?post=178125

[Magda Hassan]

hock::vomit:

[Jan Klimkowski]

I reported on precisely the same "you must buy it" to investors, "it's a sack of shit" to trusted colleagues scam during the Great DotCon of the internet bubble.

Same players. Same gasps of amazement and feeble promises of regulation. Same Wall Street looting and plundering.

ZeroHedge's summary is succinct:
In a nutshell: JPM committed fraud through misrepresentation, then wilfully and maliciously traded against the entities it had sold misrepresented securities to, and lastly, when even all this failed to rescue the failed bank, it was rescued, courtesy of the US taxpayers. Only in America will this lead to absolutely no jail time whatsoever.

I would simply add: only in America, Britain, France, Germany, Italy, Japan.....


(Via ZeroHedge):

JP Morgan Sold Investors MBS Covered By "SACK OF SHIT" Loans... Then Shorted All Those With Exposure: A Goldman-AIG Redux

Submitted by Tyler Durden on 01/25/2011 10:51 -0500

Today's mortgage fraud stunner comes from Bloomberg's Jody Shenn who reports on the ongoing lawsuit between Ambac and former Bear Stearns mortgage unit EMC, now part of JP Morgan. In what can only be classified as fraud-cum-double dipping-cum-AIG/Goldman, "JPMorgan Chase & Co. demanded that a lender repurchase bad mortgages even as it resisted calls to buy back the loans from bonds created by Bear Stearns. "That would be pretty bad" if true, said Joshua Rosner, an analyst at New York-based research firm Graham Fisher & Co. He said such allegations show why "investors and consumers have a right to be distrustful of the banks' statements." The bottom line is that JPM, which has so far been able to escape largely unscathed from the fraudclosure scandal, is about to take front and center. The reason: the very first line of the just released Exhibit 1 to the Ambac lawsuit: "In mid-2006, Bear Stearns induced investors to purchase, and Ambac as a financial guarantor to insure, securities that were backed by a pool of mortgage loans that - in the words of the Bear Stearns deal manager - was a "SACK OF SHIT." But the stunner, and nothing short of a full-blown scandal if proven true, is that Bear Stearns (aka JPM) after funneling misrepresented loans with Ambac's insurance, "implemented a trading strategy to profit from Ambac's potential demise by "shorting" banks with large exposure to Ambac-insured securities." This needs its own congressional hearing right now, followed by a few wristslaps. After all such wholesale fraud can never possibly be prosecuted in the world's most advanced country.

More from the lawsuit:

Within the walls of its sparkling new office tower, Bear Stearns executives knew this derogatory and distasteful characterization aptly described the transaction. Indeed, Bear Stearns had deliberately and secretly altered its policies and neglected its controls to increase the volume of mortgage loans available for its "securitizations" made in patent disregard for the borrowers' ability to repay these loans. After the market collapse exposed its scheme to sell defective loans to investors through these transactions, Bear Stearns implemented an across-the-board strategy to disregard its contractual promises to disclose and repurchase defective loans. In what amounts to flagrant accounting fraud, Bear Stearns' improper strategy was designed to avoid and has avoided recognition of its vast off-balance sheet exposure relating to its contractualfollowing the taxpayer-financed acquisition by JP Morgan repurchase obligations - thereby enabling its senior executives to reap tens of millions of dollars in compensation." Surely in non-banana republics heads would roll. What happens, however, when the heads are the same ones that rule said banana republic?

Maybe it is time to increase JPM's very modest $1.5 billion in litigation reserves?

EMC's lawyers on Jan. 14 argued against letting Ambac file the proposed amended complaint. EMC has also asked Katz to reconsider his ruling.

JPMorgan last quarter set aside $1.5 billion in litigation reserves to cover costs related to buying back faulty mortgages. Chief Executive Officer Jamie Dimon said it will take years to resolve the disputes and to determine the ultimate cost to his bank.

"It's going to be a long ugly mess, but it won't be life- threatening to JPMorgan," he told analysts on a Jan. 14 conference call.

The bank also ignored the findings of mortgage-review firm Clayton Holdings LLC in abandoning mortgage repurchases that Bear Stearns had been considering in early 2008 stemming from a pool of 596 of loans in bonds guaranteed by Ambac, according to the insurer's amended complaint.

Clayton found that 56 percent of the loans involved "material" breaches of Bear Stearns's contractual promises, according to the filing, which cited a copy of a November 2007 document from the review firm to the company.

Some beg to differ with Dimon's assessment of the situation:

Proof that the bank ignored a third-party review is "major, that's hugely newsworthy," said Isaac Gradman, a San Francisco-based consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin.

And the stunner: this is nothing short of the AIG-Goldman parasitic relationship (from the amended Ambac vs EMC filing presented below):

Knowing that its fraudulent and breaching conduct was resulting and would result in grave harm to Ambac, Bear Stearns then implemented a trading strategy to profit from Ambac's potential demise by "shorting" banks with large exposure to Ambac-insured securities. (The "shorts" were bets the banks' shares or holdings would decrease in value as Ambac incurred additional harm.) In late 2007, Bear Stearns Senior Managing Director Jeffrey Verschleiser boasted that "[a]t the end of October, while presenting to the risk committee on our business I told them that a few financial guarantors were vulnerable to potential write downs in the CDO and MBS market and we should be short a multiple of 10 of the shorts I had put on ... In less than three weeks we made approximately $55 million on just these two trades."

And more unbelievable disclosures from the Ambac filing. We apologize for the length, but this will be the story of the next few weeks:

"As discovery of Bear Stearns' files and depositions of its employees have revealed, Bear Stearns secretly adopted certain practices and policies, and abandoned others, to (i.) increase its transaction volume by quickly securitizing defective loans before they defaulted, (ii). Conceal from Ambac and others the defective loans so it could keep churning out securitizations, (iii.) obtain a double-recovery on the defective loans it securitized, (iv.) disregard its obligations to repurchase defective loans, and (v). profit on Ambac's harm."

"...Bear Stearns utilized due diligence firms to re-undewrite loans for its securitizations that it knew were not screening out loans that were defective and likely to default. As Bear, Stearns & Co. Managing Director Jeffrey Verschleiser stated in no uncertain terms to fellow Senior Managing Director Michael Nirenberg in March 2006, "[we] are wasting way too much money on Bad Due Diligence." Almost exactly one year later nothing had changed, and in March 2007, Verschleiser reiterated with respect to the same due diligence firm that "[we] are just burning money on hiring them." Despite this recognition, Bear Stearns did not change firms or enhance the diligence protocols. Thus, as one of its due diligence consultants frankly admitted, "[a]bout 75 percent of the time, loans that should have been rejected were still put into the pool and sold."

"Moreover, even while criticizing its due diligence firms for failing to adequately detect defective loans, Bear Stearns routinely overrode their conclusions that loans should not be purchased for securitizations, and went ahead and purchased and securitized those loans (up to 65% of the time in the third quarter of 2006 according to one firm's report). Bear Stearns ignored the proposals made by the head of its due diligence department in May 2005 to track the override decisions, and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete the communications with its due diligence firms leading to its final loan purchase decisions, thereby eliminating the audit trail." Source: Deposition

"Bear Stearns disregarded loan quality to appease its trading desk's ever-increasing demand for loans to securitize. In fact, Bear, Stearns & Co. Senior Managing Director Mary Haggerty issued a directive in early 2005 to reduce the due diligence "in order to make us more competitive on bids with larger sub-prime sellers." Source: Emails

"In full recognition that its due diligence protocols did not screen out defective loans and were merely a façade maintained for marketing purposes, Bear Stearns' trading desk needed to quickly transfer the toxic loans from its inventory and into securitizations befor the loans defaulted. So as early as 2005, Bear Stearns quietly revised its protocols to allow it to securitize loans before the expiration fo the thirty- to ninety-day period following the acquisitions of the loans by EMC, referred to as the "early payment default" or "EPD" period. Bear Stearns previously held loans in inventory during the EPD period because, as Bear Stearns' Managing Director Baron Silverstein recently acknowledged, loans that miss a payment shortly after the loan origination (i.e., within the EPD period) raise "red flags" that the loans never should have been issued in the first instance. The revised policy enhanced Bear Stearns' earnings by increasing the volume of loans it sold into the securitizatoins but materially increased the riskiness of loans sold to the securitizations. Nonetheless, as its executives uniformly conceded, Bear Stearns never once disclosed the changes in its due diligence and securization policies to investors..."

"And it gets worse. Not satisfied with the increased fees from the securitizations, Bear Stearns executed a scheme to double its recovery on the defective loans. Thus, when the defective loans it purchased and then sold into securitizations stopped performing during the EPD period, Bear Stearns confidentiality (i) made claims against the suppliers from which it purchased the loans (i.e., the "originators" of these loans) for the amount due on the loans, (ii) settled the claims at deep discounts, (iii) pocketed the recoveries and (iv) left the defective loans in the securitizations. Bear Stearns did not tell the securitization participates that it made and settled claims against the suppliers. Nor did it review the loans for breaches of EMC's representations and warranties in response to the "red flags" raised by the EPDs. Bear Stearns thus profited doubly on defective loans it sold into securitizations. Indeed, the increase in loan volume from the securitization of defective loans proved to substantial, and the recovered secured on those defective loans proved so lucrative that, by the end of 2005, the Bear Stearns' trading desk mandated ahat all loans were to be securitized before the EPD period expired."

"The secret settlement of the claims on the securitized loans was a win-win for Bear Stearn and its suppliers, but a loss for the securitizations. It was a win for the suppliers in that they settled in confidence all claims with respect to the defective loans at a fraction fo the full amount that would have been due had the loans been repurchased from the securitization. Conversely, if they did not comply with Bear Stearn's repurchase demands, Bear Stearns cut off the financing it extended for the origination of additional defective loans. The secret settlement was a win for Bear Stearns, which (i) reinforced its relations with the suppliers that it depended on to provide the precious fodder for future securitizations by settling at the discounted amount, and (ii) pocketed the recovery from the suppliers. It was a loss to the securitization participants, which were not notified of the defective loans in the securitizations and did not receive the benefit from the repurchase of defective loans from the securitizations." Source: Email traffic, which includes the co-head of fixed income

"By mid-2006, Bear Stearns' repurchase claims agains the suppliers of the loans had risen to alarming levels, prompting warnings from its external auditors and counsel. In a report dated August 31, 2006, the audit firm PriceWaterhouseCoopers advised Bear Stearns that its failure to promptly evaluate whether the defaulting loans breached EMC's representations and warranties to the securization particpants was contrary to "common industry practices, the expectation of investors and ... the provisions in the [deal documents]." Shortly thereafter, Bear Stearns' internal counsel advised Bear Stearns' management that it was breaching its contractual oblications by failing to contribute to the securitizations the proceeds it recovered pertaining to the loans in the securitizations. Bear Stearns did not disclose to Ambac either of the findings."

"By January 2007, the Bear Stearns internal audit department reported in 2006 it had resoled "$1.7 billion of claims, an increase of over 227% from the previous year," and that "$2.5 billion in claims were filed, reflecting an increase of 78% from the prior year." The "majority" of the claims pertained to loans with EPDs..."

"...the Bear Stearns analyst working on the deal more accurately described the deal in internal correspondence as a "going out of business sale." Another called it a "DOG"."

"By late 2007, Ambac began observing initial sings of performance deterioration in the Transactions, and requested from Bear Stearns the loan files for 695 non-performing loans, which were drawn from each of the SACO Transactions. Ambac reviewed the loan files for compliance with EMC's representaitons and warranties and discovered widespread breaches of representation and warranties in almost 80% of the loans examined, with an aggregate principal balance of approximately $40.8 million across all the Transactions. Ambac provided EMC with its findings and asked EMC to comply with its contractual obligations to cure or repurchase the non-compliant loans. In disregard of its contractual obligations, EMC refused and continues to refuse to do so, even though Bear Stearns itself had identified widespread breaches in the very same loans sample."

"Indeed, unbeknownst to Ambac until the discovery in this case, Bear Stearns engaged a consultant to preemptively review the same loan files Ambac requested in late 2007. After an iterative review process between Bear Stearns and its consluting firm to whittle down the breach rate, they still concluded that 56% of the loans were defective. In breach of its clear contractual obligations, Bear Stearns did not advise Ambac of its conclusions or provide Ambac or any other securitization participant with "prompt notice" of the breaches identified as was required to do so. Bear Stearns instead adopted a strategy to reject as a matter of course Ambac and other insurers' repurchase demands, regardless of Bear Stearns' own findings."

"Knowing that its fraudulent and breaching conduct was resulting and would result in grave harm to Ambac, Bear Stearns then implemented a trading strategy to profit from Ambac's potential demise by "shorting" banks with large exposure to Ambac-insured securities. (The "shorts" were bets the banks' shares or holdings would decrease in value as Ambac incurred additional harm.) In late 2007, Bear Stearns Senior Managing Director Jeffrey Verschleiser boasted that "[a]t the end of October, while presenting to the risk committee on our business I told them that a few financial guarantors were vulnerable to potential write downs in the CDO and MBS market and we should be short a multiple of 10 of the shorts I had put on ... In less than three weeks we made approximately $55 million on just these two trades." Bolstered by this success, Bear Stearns carried this trading strategy into 2008. On February 17, 2008, a Bear Stearns trader told colleagues and Defendant Verschleiser, "I am positive fgic is done and ambac is not far behind." The next day, in the same emal chain, the trader again wrote to Defendant Verschleiser to clarify which banks had large exposures to Ambac, asking "who else has big fgic or abk [Ambac] exposures besides sog gen?" As it was "shorting" the banks holding Ambac insured securities, Bear Stearns continued to conceal the defects it discovered and deny Ambac's requests repurchase demands relating to collateral that back the securities in the Transaction."

"Bear Stearns' derogatory characterization of the loan pools it securitized is consistent with Ambac's on-going analyses of the loans in the Transactions. After conducting the initial review noted above, Ambac reviewed a random sample of 1482 loans, with an aggregate principal balance of approximately $88.2 million, selected across all four Transactions. The results of that review are remarkable. Of these 1,482 loans, 1,351, or over 91%, breached one or more of the representations and warranties that EMC had made to Ambac. As of June 2010, Ambac's loan-level review consisted of 6,309 loans, of which it identified 5,724 loans across the Transactions that breached one or more of EMC's representations and warranties. Bear Stearns (now JP Morgan) acting with authority to perform EMC's obligations under Transactions has to date "agreed" to repurchase only 52 loans, or less than 1%, of those breaching loans, but has in fact not repurchased a single one."

In a nutshell: JPM committed fraud through misrepresentation, then wilfully and maliciously traded against the entities it had sold misrepresented securities to, and lastly, when even all this failed to rescue the failed bank, it was rescued, courtesy of the US taxpayers. Only in America will this lead to absolutely no jail time whatsoever.

http://www.zerohedge.com/article/jp-morg...-aig-redux

[Jan Klimkowski]

Provocative articles from Zero Hedge, and Market Ticker, based on US Federal Reserve documents which strongly suggest that the Fed has taken out derivatives on interest rate movements and bonds.

Zero Hedge's view is that:

Stunningly, today we learn that to keep long rates low, the Fed may have resorted to nothing short of the same suicidal trade that destroyed AIG FP and brought the entire system to its knees. Namely, Ben Bernanke is now quite possibly the second coming of Joe Cassano, since in order to keep rates low, Bernanke is forced to a last resort action of selling billions upon billions of Treasury puts to "pin" rates low contrary to natural supply-demand mechanics. If so, the Fed is now basically AIG Financial Products, although instead of being synthetically long mortgages (and thus betting on a rate decline) and selling hundreds of billions in CDS to amplify its bet, Bernanke has done the same thing, only this time with Treasurys. Of course, Ben has the printing press on his side apologists will claim. Alas, that will have no impact whatsoever, if indeed the Fed has been reduced to finding ever fewer counterparties to a synthetic bet to keep long-term rates low, as very soon, with inflation ticking up, all hell may break loose in an identical replay of what happened to AIG once the Fed's put is called against it. Only this time there will be nobody to bail out the ultimate backstopper, resulting in the long overdue end of the current failed monetary system experiment.

Market Ticker's judgement:

There's a problem with this, of course: The Fed had, and has today, no authority whatsoever to buy or sell derivatives on interest rates or bonds. Why? Because every instrument The Fed actually takes ownership positions in (as opposed to lending against) must be something that has the full faith and credit of the Federal Government. Derivatives inherently cannot, because the writer (or buyer) is taking a position that, when the party on the other side is not the government, is their risk.

Therefore, such an action appears to be black-letter illegal under The Federal Reserve Act without express Congressional authorization.

(snip)

People often have wondered why I continue to holler about apparent lawlessness and continue to ask why anyone in this country bothers with obeying the law when our government agencies refuse to do so, and also refuse to stomp on those agencies that violate the law. Well, here's another example.

Incidentally, selling options or swaps (e.g. credit default swaps) on your own debt is easily argued to be an intentionally-fraudulent act. Either you won't have to pay (you win and the buyer loses) or you can't pay because you go under even though you would otherwise be obligated to pay. That is, the buyer is in fact buying nothing, but thinks he is buying a valuable protection policy. Does that constitute black-letter fraud? I'd argue it does.

[Peter Lemkin]

Seems like it is time to walk around barefoot in a sack with a sign that says 'The end of the World (as you know it) is near!' If the above is true, the end of the Empire should be short and not so very sweet!....and soon. They are betting on and insuring themselves for a total collapse....which would leave the few who own the Fed to profit and everyone/everything else collapse. Well, a cute and quick way to transfer what is left of money not in the hands of the 1% into the hands of the .01% once and for all time..... A 'house of cards' built with old 100 dollar bills, not stiff playing cards.... say bye-bye! It's been a comin' long tme now...and there is likely no way to stop it now....