It's All About the Fraud: The Silence of the Buy Side

rcwhalen's picture

Over the weekend, I met with John Titus, Executive Producer of the new documentary film "Bailout: The Dukes of Moral Hazard," which tells the story of individual Americans affected by the financial bust.  Myself, Yves Smith and other members of the blogerati are featured in the film.

We talked about why the film seems to connect with people at a viseral level.  Our conclusion is that the clarity and hilarity comes from the choice of our late friend John Fox as narrator.

The next screening of "Bailout" will be in Philadelphia later this month:

The subject matter of "Bailout" had to pass through the keen, irreverant perspective that John Fox, a veteran television writer and later stand up commedian, brought to all of his work.  When the man who opened for Rodney Dangerfield for eight years tells you about the subprime crisis, it somehow makes sense.

But even though Bailout Director Sean Patrick Fahey vividly presents the impact of the crisis on home owners, there is another part of the story that remains untold, namely the hundreds of billions of dollars in losses borne by investors.  Incredibly, the vast majority of the losses on residential mortgage backed securities (RMBS) and toxic derivatives like collateralized debt obligations (CDO) have been left on the table. 

Consumer and legal advocates, and politicians, focus most of their attention on the impact of the crisis on home owners and communities.  No surprise since this is where the heat is politically.  Likewise for the media, back to the point about John Fox in the role of interlocutor, the most easily understood and conveyed part of the crisis is found in the world of consumer real estate and foreclosures.  Talking about the role of a trustee in an RMBS trust quickly causes the eyes to glaze, but that same complexity and unattractiveness creates vast opportunities for fraud. 

I had an interesting conversation last week with a several consumer advocates who also understand the world of loan servicing in an intimate fashion.  These advocates have been successfully defeating foreclosure petitions in states such as New Jersey because the servicers lack the ability to prove their right to proceed to foreclosure.  That is, the party attempting to foreclose does not have the mortgage note and often cannot even document precisely who is supposed to own the note.

What many consumer advocates and politicians don't seem to want to understand is that the chaos in the courts with respect to the robo signing mess is a big hint about a whole other area of criminality: securities fraud.  The same systemic inefficiency that makes it difficult for servicers to foreclose on a mortgage with defects in the chain of possesion of the note also enables fraud.  Wall Street firms such as Countrywide, Lehman Brothers and Bear Stearns reportedly double-pledged tens of billions of dollars worth of real and ficticious mortgages. And there has been zero interest from the Obama Administration or state attorneys general in pursuing these claims.

Back in February I wrote a comment for Housing Wire, "Eric Schneiderman delves into housing," outlining some of the areas where the NY AG could act to address systemic fraud on Wall Street.

But the trouble is that Scheiderman has done nothing.  It seems that the entire system of government in the US has been compromised by the TBTF banks.  From the Federal Reserve Board in Washington to the office of the US Attorney to the various state AGs to the world of Buy Side managers, nobody has any interest in asking difficult questions about the provenance of the collateral underlying a significant -- as in double digit -- percentages of some RMBS and CDOs.

Based upon my discussions with managers and also Sell Side firms involved in the liquidation of asset classes like CDOs, for example, loss rates are running close to 60% on the total $700 billion plus in securities issued.  And something like 2/3rds or more of the principal amount of loss to investors remains on the table, with no claims filed in the courts.  We are talking about tens of billions of dollars in losses, mostly to Buy Side end investors like pension funds, insurers and funds.  Mad now?

The claims here have effectively been abandoned by the supposed managers and advisors.  These orphan claims could be pursued by either public sector or private parties, yet nothing is done.  Why?  Let's go through the casual chain of complicity and inaction.

First we start with the Fed, OCC, FDIC and other regulators.  From the acquisition of Countrywide Financial by Bank of America, to the acquisition of Bear Stearns and Washington Mutual by JPMorgan, the objective has always been to preserve primary dealers at all cost.  This means the Fed must keep the lid on disclosure of the true asset quality of these TBTF originator/servicr banks, both on balance sheet and in the trillions of dollars in off-balance sheet RMBS securitizations and CDOs sponsored by these banks.  This also means that my friends at the FDIC are sometimes unknowingly on the wrong side of disputes involving the chain of title on collateral.  

Likewise in the case of Lehman Brothers, the bankruptcy process served to obscure the issue with respect to fraud.  As I noted in earlier posts, the trustee in a bankruptcy does not have the power to pursue fraud by third parties.  Only a receiver appointed by a federal district court a la The Stanford Group fraud has this power.  See the evergreen copy of  The IRA Institutional Risk Analyst comment on ZH: "The IRA | It's All About the Fraud: Madoff, MF Global & Antonin Scalia.

Thus when a financial institution files for bankruptcy, unless the creditors understand their right to ask to the appropriate federal district court for the appointment of a receiver, the chances of recoveries and equity fall dramatically.  In a bankruptcy, the officers and directors will almost always walk away scott free -- unless a loss to an insured depository allows the FDIC to sue under US banking laws.  FDIC has power to protect the Deposit Insurance Fund (DIF) from loss and, more important, to be advocate for uninsured depositors and other bank creditors as well. 

Note that the payout waterfall in an FDIC insured bank in liquidation is different because the uninsured depositors are next in line after the insured deposits covered by the DIF.  Note too that in the case of a bank failure the FDIC is not merely trustee of the dead bank, but rather receiver with quasi judicial, Article I powers to protect the interests of third party creditors, including depositors, vendors, etc.  FDIC also has expedited access to the federal, Article III courts to compell obedience with its findings as receiver. 

Think of the appointment of an equitable reciever in a bankrtupcy like MF Global as a more general way to apply the same power weilded by FDIC as receiver to all types of fraud.  The unfortunate situation with MF Global illustrates the dilema facing the trustee in that case.  I will write a more detailed post on ZH regarding MF Global to discuss the actions of the trustee. If anybody out there can get me on the phone withe the counsel for the MF Global Bankruptcy Trustee I will put them in touch with my mentors on this issue.

Ask yourself a question:  Just why did BAC have to buy Countrywide?  Was the driver of that transaction merely that BAC was the warehouse lender to Countrywide?  Or was the issue more complex, namely that the target had billions of dollars in ficiticious assets on its balance sheet, bogus securities that were in some cases used as collateral in repurchase transactions.  It can be argued that BAC's warehouse for Countrywide was the engine for vast fraud.  

Likewise with Lehman Brothers, nobody could buy the firm in its totality because nobody could or would attest to the assets, on or off balance sheet.  There was literally nobody who could or would sign off on representations and warranties needed to sell the company.  And the proverbial bodies were then burried in bankruptcy without the benefit of a receiver, allowing former CEO Dick Fuld and his cohorts to walk away without any criminal sanctions for what seem like obvious, dliberate acts of accounting and securities fraud.

With Bear Stearns and Washington Mutual, JPM CEO Jamie Dimin likewise provided the cover to keep these two rancid situtations under wraps and away from close scrutiny.  Recall when during the last US presidential campaign, Senator John McCain (R-AZ) famously said that we would go through the subprime mess "loan by loan?"  That was the end of John McCain's presidential run as far as Wall Street was concerned, says one industry insider.

President Obama, by comparison, has been very accommodating to the TBTF banks and their agenda to hide the ball when it comes to systemic securities fraud on Wall Street.  Remember we are talking about loss rates about 50% for production from Bear Stearns, for example, yet none of the responsible parties in the creation of these toxic securities have been indicted. 

Now you will notice there has been no discussion fo the SEC in this tirade.  The SEC has done nothing, squat, buptkus with respect to systemic fraud on Wall Street.  And as we have noted afore this, the Fed and other regulators are complicit in allowing these hideous zombies to merge to avoid resolution and bankruptcy.  The Merrill transaction with BAC, for example, brings along $30 billion in existing litigation due to CDOs.  But this number is still a fraction of the totality of the losses on this asset class.

So if the politicians and supposed officers of the federal and state courts have been bought off when it comes to pursuing criminal and even civil claims related to various flavors of fraud involved with the origination and sale of mortgages, what about the managers, trustees and custodians of RMBS trusts?  Sadly, there are no advocates real or imagine in this group either, except in those rare exceptions where managers have been willing to go to war with some of the biggest firms on Wall Street. 

The simple fact is that the nominee trust of today's financial markets is a sham.  The trustee appointed by the sponsor of the deal is essentially ministerial in function, with neither the funding nor the mandate to act as an advocate for investor interests. The custodians of these trusts have likewise not historically acted as advocates for investors, although there are some notable exceptions. 

Bank of New York's DE chancelery court  litigation against BAC behalf of Countrywide bond holders is one rare example.  And the moves by US Bancorp and Deutsche Bank to sue sponsors of deals where they acted as custodian to ingratiate themselves with NY AG Schneiderman is another example.  But of course the two biggest players in the market, BAC and BK, have yet to sue themselves for the deals in which they were involved together.        

Unlike an FDIC bank resolution where the receivership can pursue officers and directors for acts of fraud, in cases such as Maddoff and MF Global, the trustee is hamstrung in pursuing third party claims.  Likewise the investors in an RMBS trust or CDO must organize themselves to pursue claims. They must pay and indemnify the trustee, who then hires counsel and sues the sponsor.  But only in a small minority of deals has a claim been filed.

Aside from the legal and operational issues facing investors who want to sue deal sponsors for fraud, the fact is that managers don't want to sue because, during discovery, it will be shown that they made bad investmnt choices.  That is a generous description.  Less generous is to say that the manager does to want admit publicly buying a "bag of shells" in terms of diligence on deals. 

Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade.  Buy Side asset managers who sue the largest Sell Side sponsors become pariah, excluded from the flow of deals and information.  But you have to wonder if the damage these passive managers are doing to investors and the US markets by not zealously pursuing legal claims against the sponsors of RMBS and CDOs is not a worse outcome at the end of the day.

If we take Schneiderman's statement that nothing is "off the table" in terms of prosecuting acts of fraud, an ideal outcome here, IMHO, would be the following:

1)  NY AG Schneiderman goes into federal court next week and files a motion removing BK as custodian with respect to all RMBS trusts governed by NY law.  Schneiderman should ask the court to appoint a receiver with respect to all of the trusts where BK was custodian and immediately investigate whether fraud and professional malfeasance occurred.

2)  Schneiderman asks the court to appoint a receiver with respect to BAC because of ongoing acts of fraud and the recalcitrance shown to the court. Several federal courts have already found BAC to be engaging in "deliberate delay," discovery abuse and other acts of bad faith in the various lawsuits now underway.  These acts of contempt of court alone are sufficient reason to apppoint a receiver with respect to BAC.    

3)  And come to think of it, while Schneiderman is in the court house, he can file an emergency motion to intervene in the MF Global bankruptcy and ask the court to appoint James W. Giddens as receiver in that matter.  Schneiderman has standing to bring this motion and could ask the IL AG and US attorney to join him in making the representations to the court.  Then we wipe that grin off Jon Corzine's face and start to make some real progress on MF Global.  More tomorrow.

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Peter Pan's picture

A reset of the world economy might have been easy enough had it not been for the fact that governments have misappropriated pension monies and squandered those funds on vote buying, wasteful activities and enrichment of buddies. People realise this but the bigger problem is that governments want to CONTINUE doing this.

ebworthen's picture

Fraud - the new Wall Street mantra and ethos.

The Alarmist's picture

So who gets to wear the Daisy Dukes in this remake?  

max2205's picture

Never forget. Never

Random_Robert's picture

The reason no public or elected officials seem to want to prosecute financial fraud is simple-


The penal and correctional system is too bogged down with pot smokers and jay walkers... you know, real criminals that are a living threat to civil society... unlike these poor misunderstood corrupt bankers who were simply struggling to make sure that their beemers did not get repossessed...

q99x2's picture

Nobody knows who owns anything. I'm filing my petitions to take ownership first thing Monday morning.

Waterfallsparkles's picture

Really, follow the Money folks.  If the majority of the Money by the TBTF Banks is bet on a World Financial collapse thru CDS's.  Then were do you really think this will all end?

Bringin It's picture

WFS - I hear what you're saying, but how does CDS on world financial collapse pay off?  What currency units?  What denominations?  Is there a nominal value?

Zero Govt's picture

"Bailout: The Dukes of Moral Hazard"

10/10 for the film title... chuckle :)

And excellent article Mr Whelan, i hope the NY AG puts your 3 points on his 'to-do' list on Monday morning though knowing NY administrations, he'll sit on it and whistle Dixie 

chunga's picture

John Titus is awesome and I can't wait for his Film to be released.

This is total fraud folks...all of it.

I wrote this Open Letter that I have sent to the RI Superior Court Presiding Justice Alice P. Gibney, ths Senate President and Majority Leader. Rhode Island is going to be a "Bunker Hill" for this fraud fight.

An Open Letter to the State of Rhode Island Superior Court June 9 2012 Regarding Foreclosure Fraud

The State of Rhode Island is going to be a major battleground because there is a standing Federal Stay Order in place on all foreclosures.

A "Special Master" has been appointed with vast subpoena powers. The PTB are flipping right out over this.

I have no problem putting my own name on this because, like it or not, they are coming.

Here is a quote from the electronic petition I set up.

     Foreclosure Fraud is rampant in the State of Rhode Island and must not continue.


     If Justice’s Rubine and Silverstein insist on welcoming bankers and lawyers with open arms into the Rhode Island Superior Court adopting a rubbery theory of “indebtedness” as opposed to long standing state statutes that indenture the process in which foreclosures shall be conducted, they simply must be removed from the bench.


     It is impossible to know what guides their thinking, but if they are justifying their quixotic endeavor to protect the banks based on a cock-eyed and economically pragmatic concept of equity they are unwittingly defeating their own ill-conceived objective.


     The practice of using Rhode Islanders as economic pinballs by the financial Leviathans that now stride this earth must come to an end. The excuses made for enterprises that are “Too Big To Fail” have become “Too Big To Believe”. It must come to an end.


     This Judicial pandemonium must stop.


     If the Court is incapable of marshaling itself, it then becomes the duty of the State General Assembly to step in and fix this problem. We do not require new laws here, but it must be affirmed our present laws are not recommendations or suggestions that can be ignored based on flimsy moral hazard assumptions.


     Nor would it be helpful, as stated above, to alter the laws in favor of these banks. It is certain the General Assembly will be pressured and lobbied by these moneyed interests. It therefore becomes the duty of the citizens of the state to remove from office those who would do their bidding.


      I do not believe, and further assert, that a logical argument can be made as to why Justice Allen P. Rubine and Justice Michael A. Silverstein are suitably competent to hear foreclosure cases because quite simply there is none.


If you are so inclined my Zero Hedge friends...please consider signing this takes about thirty seconds.

The Honorable Presiding Justice Alice P. Gibney: Recuse Justice's Allen P. Rubine and Michael A. Silverstein.

If I get a response from the General Assembly; I will fly up there as an Amicus and do my best to set them straight.

My personal email is in the Open Letter. If anyone wants to do this in their own state; I humbly offer my help.

The whole fraud based economy is not working very well and it never will.

Sign this petition and I will fight this to my final breath.

Thank you John and thank you Chris. This will be a very hard fight.

United We Will Stand, Divided We Will Surely Fall.

Lumberjack's picture

Right the Fuck on Chunga and a big thanks to Chris for writing this article. Last fall I missed a chance to meet with John Titus when he was filming in Boston due to a complication my step daughter had early on with her pregnancy. A few days ago my grand daughter was born healthy and without any complications, with the exception of what the fucking bankers and politicians have done (including some judges) who have burdened her with all this debt from the fraud Chris, John Titus and cast and crew of BAILOUT (and so many others) have worked so hard to bring to everyone's attention, including you Chunga. We know who is giving whom the reach around and it should not be tolerated by ANYONE.




Careless Whisper's picture

admit publicly buying a "bag of shells"

I don't think anyone around here would be offended if you used the official financial verbiage, as per the Goldman Sachs emails; "Boy that Timberwolf was one shitty deal."




lynnybee's picture

wow.    someone actually came out & said the truth !   i'm shocked.    now, what the hell we gonna do about it !     i'm sick of this whole scenario, a hyperinflationary depression & elderly starving to death is baked in the cake.    Or, we could all get free houses & get rid of these SCUM, CRIMINAL, PARASIDIC GLOBAL BANKING ELITE who actually think that we have to do what they say !    never in my life have i seen such things.     i told one of my friends that this country & europe were being run by a gang of criminal bankers & i was laughed out of the room.    

Bringin It's picture

My hope is that people come to understand what RCWhalen has put out here so well, sooner rather than later.

However, as reality bites, ... like this

   the sheeples have to snap out of denial.  I believe that's coming.  So, I'm focusing on what that's going to look like, how that's going to go ... because otherwise we're kickin' a dead horse.

The mid to late 60's saw a lot of civil strife in the Homeland.

I think I should go ahead and buy the buffalo.

BTW, Did Rand Paul endorse Romney?

malek's picture

Fully agree.

And Chris Whalen is the last one I know of that is incredibly well informed, tells the truth and pulls no punches. (Even Yves Smith and Bill W. Black can't stand up to him - they kind of have become players themselves IMO.)

I really wonder in what way I could support/help Chris' cause.

TrustWho's picture

I thought NY AG Schneiderman was going to be a hero of the people however time has proven him to be a coward. This well founded article suggest hope--hope the NY AG Schneiderman will do the people's work. Is this hope founded on factual deeds?

I am tired of hope. HOPE CAN GO TO HELL!

Waterfallsparkles's picture

Well, if you put your Tin Foil Hat on and believe that this was done intentionally to bring down the World, then there would be no arrests as they were just participating in the Conspiracy.

The higher powers need a financial collapse to take over Countries and their Sovereignty.  All you have to do is to look at all of the Credit Default Swaps owned by the major Banks.  They are like 10 times the amount of assets of the Countries of the World. 

The goal?  Well it could be a one World Government and a one World Bank with no County having any Sovernty.  To make all of the people in the World Debt Slaves and control what they make and what they can "have".

Yes, I know a little far fetched.  Maybe?

forward ho's picture

10 times, are you kidding, 10 times? They hold derivatives in EXCESS of 1200 time all global equity and soveriegn value. We are so well and truly F---ed. I don't need a film to show me what my mind figured out 6 yrs ago.  Wake the hell up WE ARE SCREWED

WillyGroper's picture

Can't remember the guy's name, but in "Inside Job" he stated this whole thing was engineered by GS for TOTAL global banking dominance.

Kinda lookin that way.

Bringin It's picture

Let's see if the Germans stand up to the bankers or fold and fund the ESM.

SwingForce's picture

Schneiderman turned out to be a pussy. I had high hopes for him, but I guess he wants to get reelected.

Bringin It's picture

And did rand paul just endorse?  Did that really happen?

They must be very convincing.  [Cue horse's head.]

I want my money back.

bozzy's picture

Absolute hole shot. Awesome piece. Both sides of the Atlantic the law exists only to "keep the peace" - control the natives - PREVENT the robbed from attacking the robbers.

SEC? CFTC? FSA? Exist only to provide jobs for the round tablers. There is no recourse, and it can be only a matter of time before those whose lives have been ruined begin to contemplate a bit of "Greek" redress. 

I am Jobe's picture

Pussfication of Amerika began back in the 60's and continues. Now it is masked with pussy whipped and hen peck and lack of accoutnability. Fuck this

Silver Alert's picture

reposted comment under the intended place.

Bones265's picture

Ok so all the banks having been screwing everyone like a drunk sailor in a whore house with a roll of hundred dollar bills. Bottom line what else is knew? How about they get off their asses and start hiring people for their sins?

verum quod lies's picture

I think the last line is key: "Finally, the concept of fraud, as simple as the man on the street knows it is, has been hopelessly convoluted and obfuscated by the lawmakers and the courts."

Fraud is fraud, and the bubble years saw plenty of it, yet the average person still mouths the words that: "sure it's unethical but not illegal." No matter how the talking head bought off idiots try to obfuscate, protest, and make the term as opaque as possible, fraud is still illegal and desperately needs to be pushed and punished before statutes of limitations run out.


Ned Zeppelin's picture

This is the story of our times - the looting of America, and it will never see the light of day as long as the TBTFs can prevent it The Wall Street banks have lined up behind Mitt Romney as their next candidate to ensure it stays that way - why? because they already have Obama.  He's been in their camp since day #1, the day he proposed that crook Timmah to be Treasury Secretary. Bunch of crooks, the rule of law is broken in this country at the highest level.

Obama - The Janitorial Presidency. Romney is no better and no different. A shame.

ATG's picture

We may need new representatives, Senators, Ron Paul President and a few SCOTUS impeachments to get any prosecutions or regulatory enforcements. Too easy to go along to get along with the current crowd:

MaHatma Coatma's picture

Very informative post Chris, thanks.  But I seem to remember you a few months back on CNBC pounding the table on how undervalued BAC stock was when it was about $5/share.  Is my memory faulty or has new information come to you that caused you to change your mind?  TIA

update to my original post above...after doing some research on the CNBC video website I was very badly mistaken.  You never 'pounded the table" to buy BAC.  Your comments were quite consistent to what you wrote here in your most recent post.  I offer my humble apology.  I think I mixed you up with Dick Bove.

Cortez the Killer's picture

Mabe they are all out lying on their loan docs and buying more home than they can afford

dizzyfingers's picture

Not much interest in Corzine's and MF Global's rehypothecation either.

Investments in US toast? Also elsewhere?

williambanzai7's picture



Look at what happened to Spitzer.

That was a warning.

Secondly, the only law firms that are capable of handling litigations of this kind are on the payroll.

Finally, the concept of fraud, as simple as the man on the street knows it is, has been hopelessly convoluted and obfuscated by the lawmakers and the courts. The only cases that the Porn Patrol can bring confidently are two bit penny stock hustlers and Martha Stewart.

I rest my case

Peter Pan's picture

WB7, the only reason they allow sites such as this is to allow the plebs a bit of a release valve for our frustrations but also to monitor us from am to p.m.

In the years ahead whatever we have written will be used against us in a court of law because legislation with retrospective effect will have been passed making our words a crime because they are deemed to be subversive or inciting hate against government.

As for you WB7, you will be given a choice between serving the masters or accidentally disappearing.

If you had the opportunity of one last free post what would it be?

HD's picture

"Finally, the concept of fraud, as simple as the man on the street knows it is, has been hopelessly convoluted and obfuscated by the lawmakers and the courts."

Very well stated.

bankruptcylawyer's picture

I worked on the bear stearns case--- that settled this past week for somewhere along 200 million dollars.

and the fact is bonzai is entirely correct, but he also overlooks one other point.

the plaintiffs bar needs to have a continuous stream of defendants to sue. if you could succeed in suing the banks to the fullest extent of their culpability for financial losses------- then you would wind up causing another financial crisis when the banks were called up to payout these enormous awards. 

what we are seeing instead mirrors the asbestos cases and the big tobacco case model---it is about vampire litigation that sucks blood from the victim ( the banks ) --- but only enough to continually feed oneself without destroying the victim entirely. 


the plaintiffs bar is a business and they have not interest in justice , just money. 

you can't bring justice to the banks by suing them for MONEY. you must sue them for the purpose of breaking them up and getting injunctive relief against their secrecy and their parasitic decieptful behavior. ordinarily, LEGISTLATION and executive authority are wielded to do this. asking the courts to succeed in controlling the banks might be the only legal option left, but that's hardly likely to succeed. 

when you make it impossible to use legal methods to break up the banks and get justice, you force people to resort to illegal methods. namely, everyon---and the banks themselves---- will start cheating and engaging in more private financial activity that will , intentionally, or in passing, cause another massive financial panic at some point which will not be saved as easily with a massive wave of money printing. 


remember the next time we print our way out of a crisis---if we go the way of the printing press---the u.s. will be well above 20 trillion dollars in debt. i don't think that americans are going to be ttoo happy with gasoline at five dollars per gallon---that or the persians will be pretty upset when they see drones above their heads in the sky because the military , with political help, convinces the u.s. public to go to war because gas prices are too high because the banks keep gorging on the treasury's debt load.

shovelhead's picture


Surely you felt safer while you slept knowing that Martha was no longer a threat to Western Civilization.

Don't let those cleverly folded dinner napkins fool you...

She was a menace.

Silver Alert's picture

What's with the "NOPE" poster hanging in the back? 

Imminent Crucible's picture

"NOPE, I'm not going to prosecute because no crimes were committed."

And then: "we wipe that grin off Jon Corzine's face and start to make some real progress on MF Global."

Gee, I don't know, Chris. Seems like a huge amount of trouble to accomplish what a round or two of .380 HP could do in a moment.

narnia's picture

Map out the fiduciaries of those taking losses & start cracking the whip. It's not that hard, provided you track the transactions & subpoena the information.