With the recent realization that virtually the entire residential mortgage securitization system in America is hinging on fraud, as few if any of the recent structured finance packages actually were in possession of the necessary mortgage promissory notes (which were often improperly retained by seller banks as has been made all too clear after rounds of sworn and recorded servicer testimonies) we have seen a veritable explosion in the discussions, papers, essays and op-eds that claim that the existing housing system in America is based on a legal lie. Yet despite what has become glaringly obvious, the administration and the banks simply refuse to deal with the issue: that is to be expected as the damaging discoveries would result in a collapse in trillions of structured finance products leading to a fall out far worse than anything in the post-Lehman days. Furthermore, since banks now have recourse to trillions in fungible excess reserves the backdoor schemes to fill capital deficiencies will allow banks to pad the funding holes for the indefinite future. Additionally, rumors that the banks are pushing hard for a class settlement with the various attorneys general who have not yet been co-opted, bribed and otherwise converted to the fold indicates that it may only be a matter of time before this topic, which has lead so many in the blogosphere to the edge of hysteria will soon be buried. So is this merely another open and shut case which will disappear soon, and banks will continue with life and record bonuses as they know? Perhaps not. Bloomberg's Jonathan Weil suggests that instead of going after the banks and the legal system, which is now obviously beyond repair, those who seek justice should instead go after what could be the weakest link in the entire fraudclosure chain: the (well paid) auditors of these banks who may have committed fraud by signing off on their financial statements.
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.
Yet if they are, and are not being represented as such, is BofA to blame? Surely, after such fiascoes as Repo 105 and countless other cases where banks have been caught red handed fudging their numbers openly, there is little we can expect from the banks in terms of voluntary disclosure.
But what about Bank of America's outside auditor PricewaterhouseCoopers? Aha...
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. PwC billed Bank of America $128 million for its audit and other services last year. The mortgage at issue in the court ruling was originated in 2006 by Countrywide Financial, which Bank of America bought in 2008.
And here is where it gets interesting: while it is clear that the banks will lie without remorse to preserve the status quo, will accountants, whose business is at least on paper based on transparency and honest, be willing to take the fall for the Ken Lewises and Agent Oranges of the world?
The last thing investors need now, of course, is a new reason to worry about a too-big-to-fail bank’s accounting. The company’s regulators would have every incentive to keep any serious problems from coming to public light, for fear of destabilizing the financial markets. PwC and the other major accounting firms haven’t exactly covered themselves in glory, either, since the financial crisis began in 2007.
Indeed, as Weil makes all too obvious, it may be naive to believe that someone, somehere in this completely corrupt financial system will do the right thing. But at least there is a paper record...more so at the accountants, apparently, than anywhere else. And here is the kicker:
Generally speaking, for the transfer of a financial asset to qualify as a sale for accounting purposes, there must be a true sale at law. Otherwise, the transaction may have to be treated as a secured borrowing. One condition for sale treatment is that the party receiving the asset must have the right to pledge or exchange it. If the purchaser never received all the necessary paperwork, it might not have gained those rights or the ability to control the asset.
Which is why, we believe the focus should be not on the banks: they know any disclosure short of a government subpoena (which will not come - our politicians are more corrupt than anyone out there), it will have to be from such auditors as PwC.
Which is why Zero Hedge kindly requests any and all Big 4 (and all other) accounting firm whistleblowers to please stand up and let us know of any and every case of improper accounting they are aware of (preferably with supporting documentation). Zero Hedge will promptly process such data and present it to the world. While it is imperative to fix the US economy, doing so while the biggest American asset resides on fraudulent terms will be impossible, and more and more foreclosure sales will never take place as prospective buyers continue to refuse to transact in a system which is based on lies and fraud, and in which nobody knows what they are selling or buying (unless of course it is with a NINJA loan issued by the very bank in question in which case nobody cares).
We are confident at least one or two good men or women will stand up within the anonymous ocean of wholesale accounting gimmickry. We await your feedback.