10 Million Foreclosures: No Saving Pvt. Ryan This Time

10 MILLION FORECLOSURES: NO SAVING PVT. RYAN THIS TIME

January 31, 2011

Dear Citizens and Elected Officials:

Preface

Having conceived of this essay in mid-October, and having worked on it now for nearly four months, it almost goes without saying that we were very curious to see what President Obama would have to say about its subject - Foreclosures - in his State of the Union address on January 25th. We had just finished quoting, in our draft essay, Howard Glazer, a former housing policy official under the Clinton Administration, who now advises, among others, the National Association of Realtors. In a September, 2010 front page New York Times story on “housing woes,” he had this to say about the administration’s policies: “ ‘The administration made a bet that a rising economy would solve the housing problem and now they are out of chips…they are deeply worried and don’t really know what to do.’” The Times itself ran no less than five editorials about foreclosures between their initial October 15th one and the end of November. In that October 15th lead editorial, they were very critical of the President’s handling of the growing fiasco: “Throughout this crisis, the Obama administration has been far more worried about protecting the banks than protecting homeowners…the banks that got us into this mess can’t be trusted to get us out of it.”

So with this story building throughout the fall, and with the New York Times leading the charge, what did the President and the Times have to say about it during the big address, and the immediate follow-up commentary? Nothing - exactly nothing: not about the scope of it; not about the nationwide legal morass which was turning into a Hobbesian nightmare threatening to boomerang on the banks and investors alike and trigger yet another phase of the financial crisis; and not a word about the failure to send a single senior official from the mortgage originators or the major Wall Street banks (and company) to jail, which is a crisis of trust and accountability for the entire society; and not a word about those 10 million already, or about to be, foreclosed upon, homeowners.

So what might explain this sudden silence in January of 2011? Certainly the appointment of William M. Daley, a senior executive at none-other-than J.P. Morgan Chase, and who supervised their lobbying efforts, as President Obama’s new Chief of Staff, is part of the answer. It has been bolstered by the fact that JP Morgan’s Chief, Jamie Dimon was in Davos, Switzerland, complaining that he’s sick and tired of the “‘constant refrain – bankers, bankers, bankers.’” (The reporters and analysts we quote in our essay have a chant of their own to answer Mr. Dimon about the foreclosures: “fraud, fraud, fraud.”) And certainly the Times lead editorial from the same Friday (January 28, 2010) edition which quotes the unhappy Mr. Dimon in the business section, fills in another part of the answer with its opening sentence reading that “President Obama is smart to extend an olive branch to American businesses.”

But to get a more complete explanation of the sudden silence on foreclosures, and a fairer description of the nation than that presented in the President’s speech, we need to turn to two other “State of the Union” addresses, ones very different in content and direction than the President’s. The first was William Greider’s, appropriately entitled “The End of New Deal Liberalism, and it appeared in the January 24, 2011 print edition of The Nation, although the online addition appeared weeks earlier, so we had it very much in mind as we were in the home stretch of our Foreclosure essay. Of Obama’s overt stance astride the center-right, Greider says it now confirms that “the corporate sector has its arms around both political parties” – and around much else as well. Instead of “pragmatism,” Greider calls it “surrender.” Compromise? “This is capitulation posing as moderation.” Although he never uses the term “social contract,” there is no doubt that what was left of ours from the New Deal is gone, and what isn’t gone is overtly threatened: “A lot of Americans…sense that the structural reality of government and politics is not on their side.” Yet despite the still reigning Right-corporate-center framework, “people want government to be more aggressive in many areas – like sending some of the financial malefactors to prison.”

The second alternative “State of the Union” address was delivered by the President of the AFL-CIO, Richard Trumka, at the National Press Club on January 19th, a week before the President’s. We had the pleasure of hearing it in person, thanks to invitations from the AFL-CIO and one of our attentive readers, Rick Sullivan. Trumka’s speech, like Greider’s essay, was about a disappearing social contract, although he too never used the term. Trumka was introduced, in fact, by someone representing those who are being left out of the current social contract, such as it is, by a firefighter named Stan Trojanowski, who was there, when needed, on 9/11/2001, but who, like other first-responders, was kept waiting seven years by the “Alice-in-Wonderland” political climate in Washington to be made whole for their fateful, day-of-days’ inflicted medical problems.

As you consider the fate of the foreclosed upon in this essay, and the escape from accountability by those responsible for the financial system failures that led to the crisis, we would like you to keep in mind this brief passage from Trumka’s speech, which we thought was the most powerful moment of it, and which resonates, not entirely by coincidence, with the title and theme of the essay which follows:

It’s a funny thing, when the firefighters arrived at the World Trade Center on September 11th and started that long climb up the stairs to rescue the bond traders trapped on the upper floors, it didn’t occur to any of them to call up and ask, ‘What’s it worth to you for us to come and get you?’ So how did we come to the point where our country’s ruling class thinks that firefighters like Stan and teachers and nurses are the problem, and people like Lloyd Blankfein and Rupert Murdoch are the solution?

Here are the links to the two “other” State of the Union addresses: http://www.aflcio.org/mediacenter/prsptm/sp01192011.cfm [1]

http://www.thenation.com/article/157511/end-new-deal-liberalism [2]

For our readers’ convenience, we have broken the essay in two parts, with Part II following in about 3-5 days, under the same title. As always, we have included the entire essay as one MS-Word attachment, and we’ll send it out with each part.

When you finish with them, we hope that you will agree with us that in the “Great American Moral Dialectic” – the question of who gets responsibility, or blame, when things go bad, especially in the economy – the “sinning” individual or the “systemically dangerous institutions” - the balance held in those great scales of justice, and the burdens, will have shifted from the borrowers, the foreclosed upon, to those designing the lending programs, including the mysterious “MERS” operation.

MERS stand for the Mortgage Electronic Registry Systems, Inc., conceived of by some of our favorite Wall Street banks, and others, like former Countrywide CEO Angelo Mozilo. It has not only managed to drain some $30 billion of revenue from county governments since being set up in 1997, but has done so while evading any serious, sustained public debate, or legislative vote, whether by state governments or Congress. MERS now claims to “manage” (an ironic phrase in light of the reality) the paperwork for more than 60% of the outstanding mortgages in the country.

So when President Obama reminded our nation, at the very end of his State of the Union speech, that we still are capable of “big things,” we wonder if he was aware of what a really big thing MERS had become, unbeknown to 99.9% of our citizens, and what a perfect symbol it would be for the corporate domination of both political parties. We also wonder what our “Constitutional Conservatives” make out of its rise, since we present to them, and the rest of our readers, powerful testimony which declares that MERS has turned long-standing legal precedents of state real property registration and law on their heads - in some cases nearly 400 years worth of precedents.

This is just one of the many surprises in store for our readers, to be matched in Part II by accounts of a significant train of legal troubles for J.P. Morgan Chase, starting in Jefferson County, Alabama, but also involving Philadelphia, Pennsylvania and many Italian municipalities, and eventually culminating with the participation of eight of its bankers in “the biggest criminal conspiracy in the history of the 198-year-old municipal finance market.” And now on to Part I.

Bill Neil
Rockville, MD
w.neil@att.net [3]

PART I

Introduction
All through the fall of 2010, as a backdrop to the catastrophic election of November 2nd, newspapers were filled with stories about foreclosures and, once again, a faltering real estate market. Many of these accounts were genuine horror stories, no way around it: banks or their stand-ins foreclosing on the wrong house, foreclosing even on some up-to-date with their payments, or who had been deliberately urged to fall behind in order to qualify for federal rescue programs. And then, perhaps the ultimate outrage, told on the front page of the New York Times on December 22: one of breaking into a California woman’s vacation home, removing all manner of her cherished possessions, including the wooden box holding the ashes of her deceased husband, and barring her future entry by installing new locks. That was the tale of Mimi Ash, a particularly sad, brutal and tangled one, yet ending on a note of resignation, with her giving up on saving a house with violated memories, but not on legal claims for damages for the way her situation was handled.

Reading that story by Andrew Martin, “In a Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks,” and many others with a similar flavor, it’s easy to get lost in the myriad details of the foreclosure process, and what the legal rights and wrongs actually are. Many of the stories involved lost paperwork, the “note,” the mortgage itself, and the file folder which should shed light on the original underwriting and documentation for the mortgage loan. At minimum, the note and the mortgage should be part of the “luggage train” as the ownership of a mortgage is passed from party to party. Instead, the paperwork seems to have become, from the banking side, so much disposable “baggage.” Or, as we will later see, from another perspective, crucial evidence from financial crime scenes. And then there’s worse: robo signings for rapid processing of foreclosures, re-creations and outright forgery of documents, with the implications only coming home to roost when a judge in a courtroom clamps down and states that the law has been violated. The initial millions of foreclosures are still intimately tied to the world of subprime mortgage originations, but now as we write, and for a good part of 2010, the tale of home owners just entering the whirlpool is a more prosaic one of ordinary mortgages going under because of lost jobs, the end of 99 weeks of unemployment compensation, and the more “traditional” American health care horror stories. We’re going to help you make sense of some of these details, but try not to get you lost in them

For the important narrative behind 10,000,000 (or more) foreclosures is one with much broader ramifications. It’s the one concerned with moral and social obligations, how we as a nation either do or don’t care for one another, and who we blame for the colossal scale of this economic and social calamity – individual borrowers or the economic institutions that were the lenders. We hope to demonstrate that the moral balance scales have shifted, as the story has unfolded, from one which initially blamed those taking out the mortgage loans, to one heavily tilting against those originating them, passing them on, and building a financial house of cards upon the mortgage debt securities constructed by bundling together the faulty, very likely fraudulent individual loans. This is not to paint the initial loan recipients as entirely innocent parties; a minority certainly were not, but most likely, as we read the evidence, the majority had no idea of what would befall them when the terms of the loans suddenly shifted in two-to-three years. During 2006-2007, the mortgage-backed securities operations of Wall Street became a veritable casino, one taking bets via credit default swaps on whether and when it all, or a part of it, would collapse. At its core, this calamitous compilation rests upon the accountability, fairness and trust levels in our society – or their absence. We also read this at times outrageously complex storyline with a parallel guiding theme: the breakdown of countervailing powers - government and civic institutions – which failed to check the accumulated power of 30 years of aggrandizement by Wall Street and other complicit and compliant portions of the FIRE sector – and which at times issued it a virtually blank check.

And the story isn’t over by any means. The shifting values of the securities created from the millions of individual mortgages once totaled in the trillions of dollars, and their final resting places - at the Federal Reserve, with private investors and public pension funds, with the banks themselves, or in murky special purpose vehicles and other off-balance sheet hiding places – is dependent on the ultimate scope of the foreclosure calamity and the four trillion dollar gap in value between the mortgages on the books – and their current real estate appraisal value - which is expected to be down another 5-10% in 2011.

Following this logic, it’s a question of whether, in a nation which is the world’s leader in locking up what it judges to be its least consequential citizens – locking them up by the millions - a process which some have called “The Great Incarceration,” anyone with white collar criminal inclinations is going to do jail time for what not only was the biggest financial bubble in world history, but also what some have consistently claimed is also the biggest financial fraud ever recorded. We invite the historians of such matters to add or subtract their qualifiers and inflation adjustments from centuries long gone by so that the claims can be fairly adjudicated.

Laying Down the Marker on Fraud
Now fraud is a powerful word to use, and we don’t employ it lightly. But there was no way around the word as it kept turning up, time and time again, in the reading we were doing over the past four months. Authors of editorials, magazine articles and books about subprime and foreclosures couldn’t stop employing the word. In fact, it’s been on our mind too for some time now, going back almost two years, to February of 2009, when William K. Black, the law professor who is most closely following the “control fraud” evidence trail, first alerted us to the potential significance of the “paperwork” problems - and the mortgage files themselves. Just as forensic anthropologists and pathologists often proceed from the smallest scraps of physical evidence or subtle disturbances at a crime scene, so too our “white collar criminologists” have become very interested in these allegedly prosaic yet seemingly very hard to locate mortgage notes and files. And protruding into the stories of missing notes and folders comes an even stranger tale, that of an economic “coup de main” that threatens to transform nearly four centuries of established property law and its county based recording and registration system, all without having obtained any formal Congressional or state political sanction – the Mortgage Electronic Registration Systems, Inc., aka as MERS. But we don’t want to get ahead of the story here.

We first wrote about Professor Black’s worries in our March 29, 2009 essay entitled A Fireside Chat on the Cusp of History. The context for his concerns was set out on page five, where we noted that “rumors of citizen anger over the lack of indictments related to the financial crisis have reached House Financial Services Committee Chairman Barney Frank.” Here’s how we framed up the issue for Chairman Frank, on the next page:

Confused as to where to start, Chairman Frank? William K. Black, who teaches law and who has a background as a “white-collar criminologist and former financial regulator,” has some suggestions in his article “The Two Documents Everyone Should Read to Better Understand the Crisis,” which appeared on the Huffingtonpost.com on Feb. 25th, 2009. He starts off by stating that the “FBI has been warning of an ‘epidemic’ of mortgage fraud since September of 2004.” Yes, that’s right, 2004. The agencies named by Mr. Frank above might want to check with the FBI on that. Just trying to be helpful, here. The first document to look at ought to be the Email which a senior manager of S&P, the ratings firm, sends to one of his credit raters who apparently has had the temerity to ask to examine the actual mortgage loan files behind the derivatives he is supposed to grade. Manager to curious rater: “‘Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don’t have it and can’t provide it…’” Second document: the Fitch rating service conducted a close examination “of a small sample of subprime loan files” after the disaster was apparent. Black quotes from Fitch’s findings: “‘The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.’” Should we mention, as a “passing by this way” comment, that Black points out that the major banks still don’t have the actual loan files and that therefore the upcoming “stress test” so talked about will not be an accurate reading of how their mortgage-backed-securities will behave – a crucial factor in determining their solvency, we might add? And what are the implications for Sec. Geithner’s new plan, which is going to put these shaky things back on the market (he hopes)?

The Early Origins of Subprime Fraud
Fraud. There it is again; the word appears on the very first page of the Prologue of Michael Lewis’ spellbinding book, The Big Short: Inside the Doomsday Machine (2010). Lewis, to be fair, is speaking about himself and others like him, and far too modestly, we might add. Why, he asks, rhetorically, would “The Street” turn over the handling of billions of dollars of other people’s money (as well as its own proprietary funds), to clueless neophytes like himself, being a trainee at Salomon Brothers in 1985? Looking back from the wreckage of 2007-2009, he writes that “I confess some part of me thought, If only I’d stuck around, this is the sort of catastrophe I might have created.” In reality, Wall Street was very interested in smart, socially adapt Ivy Leaguers like himself (Princeton), generalists who could be taught the very basics of finance and mixed, in just the right proportions, with the nerdier mathematical modelers and econometricians, both to be led by the brash trading floor types who direct the major firms in the 1990’s and on into the new century and their rendezvous with the “Doomsday Machine.”

It doesn’t take Lewis long to sketch out for us the first foreshadowing of what is to come, as he tells us about the two pioneer analysts of subprime mortgage lending in the early 1990’s, Sy Jacobs of the small investment bank Alex Brown, and Steven Eisman at the better known, but still comparatively sleepy firm of Oppenheimer and Co. We will hear a lot more about Steve Eisman later on, but in the very first chapter it’s Sy Jacobs who senses the proclivities of the firms bringing new forms of credit to the poorer reaches of American society. It is a pass-along industry already selling its mortgage bonds to others as quickly as it can, and therefore it is already “fraught with moral hazard: ‘It was a fast-buck business…Any business where you can sell a product and make money without having to worry about how the product performs is going to attract sleazy people.’”

Now readers, it’s time that you, with Michael Lewis’s help, meet fraud’s oldest brother - shifty accounting - which also goes by the alias “opacity.” And trying to shine a light through that opacity, we learn about one Vincent Daniel. “Vinny” is a lower middle class sidekick to the upper middle class Eisman, who comes to share a distrust of The Street’s conventional wisdom, but still, like Eisman, wants to make a lot of money from the dissenting views. Although Lewis doesn’t quite say it this way, they are unconventional, but still good capitalists, who, along with another quirky hedge fund protestant, Michael Burry, and another slightly more conventional figure, Gregg Lippman, who works for Deutsche Bank, supply the very human side to the fantastic tale of history’s greatest financial abstractions, and resulting calamity – or is that crime - as some would have it?
In Lewis’ hands, Lippman also takes on the role as the living metaphor for Wall Street’s “trust” problem, a pervasive one that we also saw throughout his book Liar’s Poker, which was published back in 1989.

Before Vinny joins Eisman at Oppenheimer, Lewis tells us about Vinny’s first job, as a “junior accountant” with Arthur Andersen auditing Salomon Brothers. It seems like a minor detail, but it’s a theme that will run through Lewis’ book, and our essay, and indeed, it’s one that runs throughout the financial history of the past thirty years: Vinny “was instantly struck by the opacity of an investment bank’s books…He concluded that there was effectively no way for an accountant assigned to audit a giant Wall Street firm to figure out whether it was making money or losing money.” Now Vinny’s problem is that a couple of his virtues – curiosity and honesty – don’t always quite fit with the reality of the accountant’s role in our system, or perhaps the current system itself, so his boss at Arthur Andersen tells him, after one too many questions: “‘Vinny, it’s not your job. I hired you to do XYZ, do XYZ and shut your mouth.’” (And we wonder, dear readers, whether that brief glimpse of dialogue has as familiar a ring to it for you as it does for us?).

But those virtues make him a good fit with Eisman, who tells him to take an early data dump about subprime mortgages and lock himself up in a room with it, and not come out until he understands what in the world is going on in that sector. And that’s how Vinny Daniel comes to take that very first close look at the subprime world’s data, emerging with the sense that the field “had the essential feature of a Ponzi scheme.” Eisman releases a report on the subprime industry in September of 1997 and Lewis explains that it “trashed all of the subprime originators; one by one, he exposed the deceptions of a dozen companies.” They are outraged of course, but even though they are operating in the flushest of economic times, the great boom of the late 1990’s, they all end up going bust in the wake of the Russian bond default and the collapse of the uber hedge fund Long Term Capital Management in 1998. Lewis’ epitaph is that “their failure was interpreted as an indictment of their accounting practices…No one but Vinny, so far as Vinny could tell, ever really understood the crappiness of the loans they had made.” Our readers should note, for future reference, that Vinny wasn’t working yet from the individual mortgage loan files themselves, but the best “pooled” data available from the ratings agencies in the 1990’s. Later we’ll see how this theme resonates right up to the present moment in 2010 with disputed testimony given to the Financial Crisis Inquiry Commission on September 23rd, 2010, about similar, but more detailed data offered to the ratings agencies, from a mortgage loan “due diligence” firm, Clayton Holdings, said to be “Wall Street’s foremost.”

“It Was Blatant Fraud.”
Before we leave the first chapter of Lewis’ The Big Short, we wanted to give you some further flavorings from his coverage of Steve Eisman’s descents into the consumer finance sector, this time homed in on one of the pioneers of home equity loans, the now “engulfed” old-line firm called Household Finance Corporation. It’s 2002, and Eisman has left Oppenheimer and is now working as an analyst for a large hedge fund called Chilton Investment, but he’s still looking more closely than his peers into the murky shadows that seem to be thrown up by this sector. He’s wondering how HFC is growing by leaps and bounds in the wake of the dot.com bust and the struggling economy of the new century. So he looks at an accounting sleight of hand contained in the company’s sales document for its home equity loans and finds that by spreading the length of a 15 year fixed interest loan over 30 “hypothetical” years, an actual interest rate of 12.5% is being portrayed to the consumer as 7%. “‘It was blatant fraud,’ said Eisman. ‘They were tricking their customers.’” Stepping out of his formal hedge fund role as analyst, Eisman turns into a consumer protection pit-bull, launching a “single-minded crusade against the Household Finance Corporation.” He grabs the trouser leg of the attorney general of Washington state, where a local newspaper expose has turned up hundreds of fleeced second mortgage customers who have now learned the true interest rate they are being charged. Eisman demands to know why the AG isn’t “‘arresting people,’” but instead is greeted with a legal shrug on the grounds of not disturbing a “powerful company.”

In an outcome that will sound all-too-familiar by 2010, the CEO doesn’t get jail time; instead, consumers in 12 states who brought a class action suit get an out-of-court settlement for $484 million dollars. Lewis writes that “Eisman was genuinely shocked. ‘It never entered my mind that this could possibly happen…this wasn’t just another company – this was the biggest company by far making subprime loans. And it was engaged in just blatant fraud. They should have taken the CEO out (Bill Aldinger) and hung him up by his…Instead they sold the company and the CEO made a hundred million dollars.’”

(Editor’s note: When we read this tale from Lewis about his chief protagonist, Steve Eisman, a certain mental image popped up from our New Jersey days in the 1980’s and 1990’s. Were we confusing Finn Caspersen’s Beneficial Corporation with Household, both having strong emphasis on consumer financing? As it turns out we were only slightly off track. Wikipedia reports that Beneficial was purchased by Household International, Inc. in 1998 for $8.25 billion in stock; then, as author Lewis has noted, Household “sold itself and its giant portfolio of subprime loans, for $15.5 billion to the British financial conglomerate the HSBC Group.” Going a bit further using Wikipedia, we learned that on March 2, 2009, “it was announced that HSBC would no longer accept new business from HFC/Beneficial, and would eliminate 6,500 jobs.” However, as is sometimes the case with Wikipedia’s style, it was also noted, without much of a logical transition, that “children of former full-time Beneficial employees are considered for scholarships to four Maryland institutions of higher learning: Hood College, Johns Hopkins University, St. John’s College and Washington College.” Yet the story doesn’t end there; under the HSBC piece at Wikipedia, we learn that it was “formed from the legal entity that had been known as Household International” and that “it is now expanding its consumer finance model to Brazil, India and Argentina, and elsewhere.” We have no idea what HSBC’s current “consumer finance model” is, but we hope it’s not the same one from Bill Aldinger’s days; maybe author Lewis could give these lucky nations’ consumer protection agencies Steve Eisman’s contact numbers so he can do some further “due diligence” – just in case.)

Due Diligence Firm Clayton Holdings Spills the Beans
“‘Fraud, plain and simple’” – that was the comment of Eliot Spitzer on his talk show in the immediate wake of the September 23, 2010 revelations from testimony in front of the Financial Crisis Inquiry Commission (FCIC) , held in Sacramento, California. We might have missed the entire blow-up were it not for an article which appeared online in the New York Times several weeks later, William D. Cohan’s “How Wall Street Hid Its Mortgage Mess,” from October 14th. The revelations came from the testimony of current and former officials of an important “due diligence” firm, Clayton Holdings, which was given the task by Wall Street banks to “review the loan files” which their mortgage backed-securities would grow out of, and to see whether they were up to the original lenders “underwriting standards, regardless of how stringent or weak they were,” an important qualification in this saga, pointed out in another article, by Gretchen Morgenson, “Raters Ignored Proof of Unsafe Loans in Securities, Panel is told,” which appeared on September 27th, also in the NYTimes. It’s important because a good portion of what Clayton was looking at in their sample of 911,000 mortgage loans – just 10% of the total issued between January 2006 and June 2007, were loans issued by the very problematic “originator” industry, most of which have gone bankrupt or had their remnants purchased in the wake of the great crisis. And these originator firms had hardly developed a reputation for their own “due diligence” and underwriting standards. Indeed, as law professor William Black has pointed out, the line between “subprime loans” and “liars loans” and “stated income loans” is a very blurry one, and much of his work over the past few months has been to help the public understand that the bulk of the lying was by the lenders, rather than the borrowers, although there was certainly fraud being committed by some borrowers as well. A little later on, we will see Professor Black rise to eloquent sarcastic heights as he ridicules the notion that “millions of working class Americans managed to defraud financially sophisticated lenders.” (From “Lenders Put the Lies in Liar’s Loans, Part 2, at Huffington Post.com, November 10, 2010.)

But here’s what really caught our attention about the coverage of the testimony of D. Keith Johnson, a former president, and Vicki Beal, a current senior vice president at Clayton Holdings. It wasn’t so much that only 54% of loans examined in that just under a million sample met the underwriting standards, such as they were, or that this appalling figure didn’t deter the banks from including substantial percentages of the 46% of the substandard ones into the packages of mortgage securities they sold to investors. And it wasn’t so much that Clayton Holdings attempted to interest the major ratings firms – Moody’s Investors Service, Standard and Poor’s, and Fitch – in their important data and service offerings – but failed. These revelations, that the major Wall Street Banks didn’t weed out enough of the substandard loans – or pass adequate information along to the investors that bought them - and that the ratings firms themselves didn’t seem to want to look very closely at data that might have called into question their “AAA” ratings for many of the securities built out of such loans – formed the basis for much of the reaction of the financial press. For example, Cohan quotes the FCIC hearing testimony of law professor Kurt Eggert of Chapman University in Orange County, California: the investors “‘should have been given loan-level detail for every pool for which securities were issued…Instead, they got vague, boilerplate language about ‘underwriting,’ and that there were ‘substantial exceptions,’ whatever that means. They should have gotten the due diligence reports that we just heard described…Why weren’t they given the underwriting reports by the originators who knew what exceptions were given and why?’” (Readers should hang onto to this question, because we’ll later see some very damning answers as to “why” so many in what L. Randall Wray calls the “home finance food chain” were, and still are, so file phobic in the foreclosure fiasco). And Cohan also quotes the reaction of Felix Salmon, who writes a business column for Reuters: “‘if I was one of the investors in one of these pools, I’d be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can’t imagine they’ll like what they find.’” In laying his article out the way he did, Cohan can’t help but be led to one of the questions troubling so many, and which we asked in the begging of this essay: why, “so far, not a soul on Wall Street has been found to be criminally liable for the practices that led to the financial crisis?” Here’s the article at
http://opinionator.blogs.nytimes.com/2010/10/14/how-wall-street-hid-its-... [4]

Trying to Put the Beans Back In
These were important revelations and questions flowing out of the hearing, to be sure, and ones that many citizens might have missed, given the poor coverage of the Commission hearings, the fact that this one was held in California, and that there also was a major election dominating the fall news. But what really caught our attention was an “Update from October 15” tacked on at the very end of Cohan’s article: “In a surprising turn of events, Paul Bossidy, Clayton’s chief executive, wrote this letter to the F.C.I.C. on September 30th, a week after the hearing, disavowing Beal’s sworn testimony.” It was more than a hint that very sensitive and important issues to Wall Street had been given attention they didn’t like, and Clayton’s pushback was a sign of just how much the stakes were growing. And that led us to Shahien Nasiripour’s (business reporter at the Huffington Post) coverage of the implications of the pushback in his article from October 5th, “Pandering to Clients, Firm Distances Itself From Wall Street Whistleblower’s Testimony,” which supplies even greater detail than Cohan’s.

Now it’s not so easy to impugn the testimony of a former president whom a company’s own SEC filing from 2007 described as “‘difficult to replace’ and whom the firm depended on ‘in large part’ for its ‘future success,’” according to Nasiripour’s account. But that’s what Clayton attempted to do in its push back efforts, claiming that Clayton was never actually offering the reports and data in question, just it’s overall services, and then going a step further to indicate that these were very preliminary and contingent data sets that hadn’t been properly vetted - you get the idea. Reporter Nasiripour had his own pushback against Clayton’s revisionism: “But even if those reports were bogus, Clayton never indicated that during public testimony, despite ample opportunities. During the hearing, Johnson testified alongside Beal in an almost conversational format …Beal was flanked by legal counsel for Clayton. At no point did Beal or a Clayton attorney interject and try to rebut Johnson or challenge his claims.”

How damaging was former president Johnson’s testimony on the flawed mortgage loans the Wall Street banks would later process and sell as mortgage-backed bond/derivatives to its clients? Joshua Rosner, managing director at Graham Fisher & Co., and a commentator who shows up in quite a few business press articles, weighs in this way in the Huffington Post piece: Johnson’s testimony “‘should have a phenomenal effect legally, both in terms of the ability of investors to force put-backs and to sue for fraud…’” Oops, there’s that word again, fraud. Here’s the posting at
http://www.huffingtonpost.com/2010/10/05/clayton-holdings-financial-cris... [5]

But not everyone would agree about the investors’ chances, or whether D. Keith Johnson, the former head of Clayton, was the hero/whistle-blower Nasiripour defends in this article. We are referring to Yves Smith, over at the nation’s most popular financial blog site, Naked Capitalism, which we have recommended to our readers and which we visit regularly. On September 28th, 2010, Yves had a post suggesting that Mr. Johnson was trying to shift the blame off his employers, the investment banks, and onto the ratings agencies who weren’t interested in his data. She also wondered why, given the information Clayton obtained in these reports, Mr. Johnson didn’t go to the SEC or the media, and apparently waited until 2010, when she says the three year statute of limitations on securities underwritings would have run out. She also claims that Clayton didn’t surface in the saga of mortgage troubles until “January of 2008, when the New York Attorney General’s office announced that Clayton had been granted immunity and would be providing information to the prosecutors on Wall Street’s bad practices in subprime land. Why on earth did Clayton need immunity? And what from?” She also reminds us that we haven’t heard back from AG Andrew Cuomo (now NY Governor) on the outcome of his investigations, and that seems still to be the case in early January of 2011. But, as we said above, we’re intrigued by the pushback against Clayton, and we were curious too about Clayton’s role in a $102 million dollar settlement with the Attorney General of Massachusetts in June of 2010, a settlement against one of the surviving Wall Street banks, Morgan Stanley, a role mentioned both in Yves Smith’s posting and Gretchen Morgenson’s NY Times article from September 27th. Here is Yves’ posting at
http://www.nakedcapitalism.com/2010/09/rating-agencies-the-subprime-blam... [6] . . (And yes readers, that AG would be none other than Martha Coakley, who lost that painful special election for the US Senate to Scott Brown on January 19th, 2010.)

Morgan’s Morass in Massachusetts, 2005-2007
Now Yves Smith’s spin on the Massachusetts’ settlement is that Morgan Stanley was heeding Clayton’s due diligence findings and weeding out a substantial number of poor quality loans from the notorious and failed subprime lender New Century, whose bankruptcy “in March of 2007 marked the real trigger point for the financial crisis.” But with New Century running into trouble with other Wall Street funders on the same poor loan quality grounds, Morgan Stanley plays the seemingly gallant rescuer and buys more loans “in an attempt to keep the lender afloat,” according to Ms. Smith. So with these institutional heavies in the foreclosure/subprime saga seemingly converging here in yet another settlement matter, we thought we would take a closer look and downloaded the unusually detailed three page press release from the Massachusetts’ AG’s office, and the 37 page Assurance of Discontinuance,” both dated June 24, 2010. Based on what we found in this longer document, we’re going to have to respectfully disagree with Yves on this one, but we’ll give you the grounds so you can make up your own mind. It seems to us that based on this Assurance document, that Morgan Stanley, rather than aiding and abetting New Century, given Clayton’s findings of so many dubious loans, ought to have, just as Ms. Smith suggests that D. Keith Johnson should have done, gone to the SEC, the Federal Reserve or other pertinent regulators to blow the whistle on New Century. We quote now from pages 9 and 10 of the legal settlement document:

#24. In late 2005 and early 2006, Morgan Stanley began rejecting greater numbers of New Century loans as a result of these findings. By March 2006, New Century complained about these rejections and pressured Morgan Stanley to increase the percentage of New Century’s offered loans it purchased, suggesting that it would begin shifting its business to other buyers.

#25. In April of 2006, as Morgan Stanley wrestled with the possibility of losing New Century’s business, Morgan Stanley’s subprime mortgage team discussed a number of possible responses to this situation. As a result of these discussions, one of Morgan Stanley’s senior bankers purchased loans that Morgan Stanley’s diligence team had initially rejected. According to Morgan Stanley’s records, 228 loans were purchased in this way. Morgan Stanley’s diligence team began to be more responsive to New Century’s desire to include additional loans in the purchase pools.

#26. In Morgan Stanley’s 2006-2007 New Century pools, the large majority of loans reviewed by Clayton were identified by Clayton as having some types of exception. Most loans had multiple exceptions…

#28. During 2006 and 2007, Morgan Stanley waived exceptions on and purchased a large number of loans found by Clayton to violate guidelines…and purchased a substantial number of New Century loans found by Clayton to violate guidelines without sufficient compensating factors. (Our Emphasis.)

Here’s the link at:
http://www.mass.gov/Cago/docs/press/2010_06_24_ms_settlement_attachment3... [7]

The press release is here at: http://www.mass.gov/?pageID=cagopressrelease&L=1&L0=Home&sid=Cago&b=pres... [8]

(Editor’s Note: Unlike some other legal settlement documents, these are actually quite readable and can serve as a primer for the more generic relationships between Wall Street banks and the mortgage originators, especially the Assurance document here, in PDF format. And it has pretty straightforward definitions of terms used as standards for judging the quality of loans made by the originators, getting into matters of appraisal quality, proof of income (the “Stated Loan” category of lending) and measures (stated as ratios) which show just how catastrophic the variable interest loans were when the rates reset after the initial “teaser” period – details to be sure, but part of the evidence trail needed to build a case for successful legal actions against the major players in this system. And system it certainly was: mortgage originators, due diligence firms, ratings agencies, Wall Street banks, and the “servicers,” the four largest of which are banks themselves. We are by no means singling out Morgan Stanley here. They just happen to be the bank caught up in this particular settlement and the cross references stemming from Clayton’s unfolding role as it surfaced via testimony in front of the Financial Crisis Inquiry Commission.)

But it turns out that the pushback by the due diligence firm Clayton against its own former president wasn’t the only instance of sworn public testimony being challenged this fall. Another symbolically, and perhaps substantively very important instance surfaced in late November. In this case, the refuted testimony came from an actual court proceeding, a personal bankruptcy one in New Jersey, as reported by Bloomberg News on November 30, 2010. Once again, it is the paperwork trail concerning mortgages and their notes, important for, among other things, foreclosure proceedings, which is at the center of the controversy. Before saying more about this case, however, it is time to introduce a couple of mortgage/foreclosure vocabulary terms which will continue to surface in whatever you read about these matters over the next few months. And trust us, there is going to be a lot written about the legal proceedings on foreclosures.

A Primer on the Foreign Language of Foreclosure
In writing about one such case from Massachusetts, the Ibanez case in early January, 2011 Yves Smith at Naked Capitalism reminds us that “what we call a mortgage consists of two parts: the promissory note (the borrower IOU) and the lien (confusingly called the mortgage or in some states, a deed of trust.)” In other writings, she compares this note to a blank check, one for hundreds of thousands of dollars, which must legally be signed in “wet ink” by each new holder, no matter how many the links in the great chain of securitization that may be. Then comes University of Utah law Professor Christopher L. Peterson’s brilliant written testimony to the House Judiciary Committee on December 2, 2010 on the topic “Foreclosed Justice: Causes and Effects of the Foreclosure Crisis.” Peterson’s testimony is centered on the emergence of the MERS – the Mortgage Electronic Registration Systems, Inc. in the 1990’s, created by the large banks and other mortgage lenders, and all the trouble it is causing homeowners and the courts today. Because MERS has also become the near universal stand-in for all the investors and the managing trusts interwoven with the mortgage backed-securities derivatives, the legal troubles of MERS are sending shock waves throughout the entire mortgage-investment infrastructure, including the Wall Street banks themselves. We will take a closer look at what Peterson says (and provide you with a link to his testimony later in this essay), but for now it’s his command of the legal vocabulary surrounding foreclosures and mortgages that merits our attention. MERS, Peterson asserts, is claiming to be a “separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns” but also that “MERS is the mortgagee under this Security instrument,” and says lenders distributed this language in “boilerplate security agreements included in mortgages around the country.”

One problem causing the confusion, Peterson writes, is that “MERS purports to be acting as a nominee – a form of agent. On the other hand, it also is claiming to be an actual mortgagee, which is to say an owner of the real property right to foreclose upon the security interest. It is axiomatic that a company cannot be both an agent and a principal with respect to the same right.” So if MERS is the mortgagee, then it can record mortgages “in its own name,” but “both MERS and financial institutions investing in MERS-recorded mortgages run afoul of longstanding precedent” from “a still vital line of cases” from the 19th century which have held that “mortgages and deeds of trust may not be separated from the promissory notes that create the underlying obligation triggering foreclosure rights.”

Bank Pushing Back Against Damaging Court Room Testimony
And that’s exactly why the personal bankruptcy case from New Jersey looms as so important, and why testimony from a Bank of America employee was brusquely refuted by an attorney’s from a Washington, DC law firm speaking for the bank. According to the Bloomberg article of November 30th by Prashant Gopal and Jody Shenn, witness Linda DeMartini, who came to Bank of America when it acquired Countrywide, and who had a decade of experience with that loan originator in management and training positions, testified in 2009 “that it was routine for the lender to keep mortgage promissory notes even after loans were bundled by the thousands into bonds and sold to investors…” The U.S. Bankruptcy Judge, Judith H. Wizmur, apparently believed DeMartini, because she ruled that the homeowner’s mortgage company, “now owned by the Bank of America, had failed to deliver the note to the trustee.” The attorney for Bank of America said that “it was the policy of Countrywide Financial Corp…to deliver notes as called for in its securitization contracts…‘This particular employee was mistaken in what she said,’” the attorney asserted. Not only was De Martini mistaken, but so too, apparently, was the local attorney for Bank of American, when he “argued in court that notes weren’t moved in part because of the risk of losing them,” said Larry Platt, a Washington attorney “designated by the bank (Bank of America) to answer questions about the case,” according to the Bloomberg article. This case, called the Kemp case because of the claim on the home of John T. Kemp, is drawing a lot of attention. Adam S. Levitin, a Georgetown law professor who testifies frequently on the foreclosure crisis, is quoted in the article as saying that “‘If the notes weren’t properly transferred to the trusts, then investors have the mother of all put-back claims…’” Yves Smith also weighed in on November 30 at her Naked Capitalism blog: “We have been told separately that a senior industry executive also said no one in the industry transferred the notes.” Here’s the Bloomberg article at http://www.bloomberg.com/news/2010-11-30/bofa-mortgage-morass-deepens-af... [9]

Taibbi Visits the “Rocket Docket” Foreclosure Court in Florida
It was also in November of 2010 that we came across two articles which, in none-too-subtle ways, again called our attention to the possibility that much of what happened in the subprime lending system from 2005-2007 was out-and-out fraud. The first was by the now well-known journalist Matt Taibbi of Rolling Stone magazine, who had the “visionary” idea to actually spend some time in a foreclosure court, listening to the proceedings and calling in the necessary specialists to translate for him – and us. His findings reminded us of Vinny Daniel’s reaction to that first accounting assignment of his – to audit Wall Street’s Salomon Brothers’ books – in The Big Short: “opacity.” Here’s Taibbi’s take, early in the article: “Like everything else related to the modern economy, these foreclosure hearings are conducted in what is essentially a foreign language…It took days of interviews with experts before and after this hearing to make sense of this single hour of courtroom drama.” It’s a measure of what Taibbi came up with that we counted about 21 uses of the term “fraud,” or its near equivalents, in his 12 page article.

We need to point out that Taibbi ended up sitting not in a regular court room, but in a special housing court that was set up by the Florida legislature in July of 2010 with a specific mandate to clear out at least 62% of the backlog of foreclosures that were jamming up the regular Florida court system. It’s presided over by retired judges, and it’s pretty clear that Taibbi is none-too-impressed by the one presiding when he visits, and, as we’ll see, the judge later has a chance to exchange professional evaluations with Taibbi, so to speak. We, in turn, “judge” this article to be one of the best we’ve read to enable readers take a quick introductory course in the foreclosure fiasco. One of the things that recommends it most is the fact that Taibbi found a way to ground himself in actual case realities, so that he ends up tempering his white-hot accusations – and generalizations - about the causes of our financial crisis – with the facts that are – or aren’t - in actual physical folders sitting on a table in front of a judge. These folders and their missing facts also stand in for legal and economic justice for US citizens about to lose their homes.

Let’s look at two cases that came to the court’s attention, in just that one hour of court time. The first is about a couple from Jacksonville who have fallen behind in their payments – and their case is in court for the second time. They’re lucky enough to be represented by an attorney, James Kowalski, one with a growing national reputation. Most of the cases that come before this court have no defense counsel, and in most instances the defendants don’t show up, and Taibbi makes it clear that at least this judge is ready to stamp “foreclosed” on these without looking too closely at the details of the files. Florida is one of 23 states, “judicial foreclosure states,” that require a judge’s approval before eviction. The first time through the case was a wash because in just three contradictory paragraphs, the plaintiff, Bank of New York, claimed that it “ ‘owns and holds the note,’” that the note also was “ ‘lost or destroyed,’” and finally that “‘plaintiff cannot reasonably obtain possession of the promissory note because its whereabouts cannot be determined.’” But low and behold, Taibbi writes, they’re back in court, several months after the first case was dismissed, this time with the note and one that appears to be properly stamped. Only now the dates for the chain of possession of the notes don’t make sense (Taibbi, as he is known to do from time to time, states this much less formally than we have), and JP Morgan and a “new” firm called Novastar now appear to complicate the chain and the timing of the alleged possession of the note. Then there is a added problem about that newly found and stamped promissory note; Bank of New York is going to do a little legal “hedging”: “ ‘Plaintiff owns and holds the note,’” it claims, “ ‘or is a person entitled to enforce the note,’” Taibbi writes. In other words, we’re back to what law professor Peterson taught us in his testimony just a few pages ago: “a company cannot be both an agent and a principal with respect to the same right,” or, put another way, can’t be both mortgagee and nominee - “a form of agent.” The judge doesn’t, however, dismiss the case and make a ruling; the bank in question will get yet another shot, 25 days later, “to come up with better paperwork,” in Taibbi’s skeptical words.

In the last case Taibbi brings to our attention, the defendant, “a recent divorcee delinquent in her payments,” is in court representing herself, what is called a “pro se defendant.” She catches an unexpected break when it turns out that the lawyer working for the firm standing in for the banks turns out not to have the legal folder at all – so the judge has no paperwork in front of him. The case will come back for a hearing at a later date though. But Taibbi decides, spontaneously, apparently, that he wants to talk to the woman facing foreclosure. So he leaves the court room to follow her. The judge has other ideas, very different ones. He apparently has heard of Taibbi’s work: “‘This young man…is a reporter for Rolling Stone. It is your privilege to talk to him if you want…It is also your privilege to not talk to him if you want.’” Please note the language, if we may, for moment, get “legal” with a judge: privilege is it, and not a right, to talk to a reporter? Apparently it is a privilege in the eyes of this judge. Taibbi writes that the attorney who has helped bring him into the court “receives an e-mail from the judge actually threatening her with contempt for bringing a stranger to his court,” and going further, that “‘we ask that anyone other than a lawyer remain in the lobby.’”

But that’s after the fact. Taibbi does manage to catch up with the woman facing foreclosure, Shawnetta Cooper, who does manage to have her own file with some interesting paperwork. And Taibbi is quick to pounce: “It’s not hard to find the fraud in the case. For starters, the assignment of mortgage is autographed by a notorious robo-signer – John Kennerty, who gave a deposition this summer admitting that he signed as many as 150 documents a day for Wells Fargo.” According to Kennerty, Wells Fargo got the mortgage on May 5, 2010 but Cooper’s file has a document which shows that Wells Fargo sued Cooper on February 22nd, 2010; “In other words, the bank foreclosed on Cooper three months before it obtained her mortgage from a nonexistent company.” (Wachovia, that is.)

It’s instances like these that lead Taibbi to proclaim that “virtually every case of foreclosure in this country involves some form of screwed-up paperwork. “‘ I would say it’s pretty close to 100 percent,’ says Kowalski.” Attorney James A. Kowalksi of Jacksonville, Florida, should know a bit about it; he was the attorney who blew the whistle on the robo-signing practices of GMAC (General Motors Acceptance Corporation), in a case in Pennsylvania in 2006 (our eyes widened when we read that date and thought about the implications) where he wasn’t looking for trouble – he was just taking “what he thought would be a routine deposition.” Now he’s been asked to testify in front of the House Judiciary Committee (in Panel II, along with our University. of Utah law professor), and has done so on December 2nd with a compact and powerful five page statement (which can be found at the link for Professor Peterson.) A Legal Aide attorney who Taibbi quotes in his article right after Kowalski takes it a bit further than “screwed-up paperwork”: “‘The fraud is the norm,’ she says.”

There’s an interesting tension that runs throughout Taibbi’s description of what he found from his visit to Florida’s special housing court – what is called by locals the “rocket docket.” It’s one that should be familiar now to our readers, because it’s one we’ve repeatedly called your attention to, what Brown University political scientist James A. Morone has named the “Great American Moral Dialectic”: who do we blame when things go badly wrong - individuals or “society?” (See his book, Hellfire Nation:The Politics of Sin in American History.) We called your attention to this dialectic during the health care debate. Now it runs right down the center of the still growing, and already massive foreclosure crisis.

Taibbi begins by making clear where he stands on the new Florida special courts: “Their stated mission isn’t to decide right or wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000’s, perhaps the most complex Ponzi scheme in human history…” But the average citizen isn’t following this story closely: they understand that many people are losing their homes, and “that some of the banks doing the foreclosing seem to have misplaced their paperwork.” The personal sin side of this equation is about “homeowners not paying their damn bills.” As one bartender in Jacksonville tells Taibbi they “‘had it coming to them.’” But throughout the essay Taibbi chips away at the sin side, by spelling out in detail the three cases that pass before him – all of which involve borrowers falling behind in their payments – yet presenting the readers with the overwhelming impression that the entire mortgage-banking-foreclosure system has broken down, and worse: it is deeply involved in a many-faceted program of outright fraud. And that represents the corrupt economic system side of the dialectic. He doesn’t condone those borrowers who knew better and tried to take advantage of a system that was at the same time clearly trying to take advantage of them – after all, there is such a thing as American culture, “the culture of take-for-yourself now, let someone else pay later wasn’t completely restricted to Wall Street…

But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones. Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions.

Indeed, our law professor Peterson, who is a bit more cautious in his judgements than Taibbi, states in his congressional testimony that “one former mortgage lender has estimated that in the mid-2000’s approximately 70% of brokered loan applications submitted to mortgage lenders involved some form of broker encouraged fraud.” (That would be, we learn in a footnote, Richard Bittner, from his book Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud and Ignorance, 2008)

Taibbi is busily at work, tugging on those moral scales that hang just above the dialectic, however, tipping them over, bit by bit, case by case, from the self-sin side to the societal-economic side: “in reality, it’s the unpaid bills that are incidental and the lost paperwork that matters. It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders…”

Taibbi keeps working those scales, part crusader, part detective, until he reaches the conclusion that all the little paperwork problems are pointing him towards a devastating conclusion:

Why don’t the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued.

Here’s the link to Taibbi’s article at http://www.rollingstone.com/politics/news/matt-taibbi-courts-helping-ban... [10]

(Editors Note: It would seem that Taibbi is once again on target and ahead of the curve here, having written this in November (we downloaded it November 10; it appeared in the November 25th newsstand edition of Rolling Stone). On Monday, January 3, 2011, Bank of America announced it had reached a settlement with Fannie Mae and Freddie Mac to buy back some of those “troubled” Countrywide loans that these much maligned quasi-public lenders, aka GSEs, originally bought - $2.5 billion worth in this case. The New York Times article which reported the settlement put the banking industry’s potential collective buy back from Fannie and Freddie, insurance companies and other private investors at somewhere between $20-$150 billion – quite a bit of a projected “markdown” from the estimated total of $2 trillion dollars of bad loans that were originally pedaled. Here’s the Times’ article at http://dealbook.nytimes.com/2011/01/03/fannie-and-freddie-continue-to-co... [11] . Please take notice as well that the article reports that “Fannie and Freddie are also looking to collect from other large lenders, including Wells Fargo, Citigroup, and Washington Mutual, now owned by JP Morgan Chase.”

Everywhere You Look in Foreclosure Land: Fraud, Fraud, Fraud
It isn’t just red-hot Rolling Stone reporter Taibbi who is on the fraud trail. Purely by chance, we were steered to a Florida paper, The Palm Beach Post, where reporter Kimberly Miller writes on January 9th that a “comprehensive presentation given last month by investigators in the Florida attorney general’s economic crimes division meticulously outlines problems in how banks went about taking back those homes. The report includes pages of allegedly forged signatures, false notarizations, bogus witnesses and improper mortgage assignments. It implicates the banks, their servicers and law firms for contributing to the foreclosure conundrum.” Florida is such a documented mess that the New Jersey court system is citing “flaws in six Florida foreclosure cases,” on its way to a possible shutdown of ongoing foreclosures in the Garden State, and “where six of the nation’s largest lenders are expected at a Jan. 19th hearing to show proof why the courts should not stop their foreclosures.” (Editors note: We thank reporter Miller for filling us in on further Florida findings and proceedings, but, as we observed on January 10th, with an online posting to her story, we were curious as to why she didn’t mention the special court system that the Florida legislature had set up in July, the one Taibbi mentions, because the thrust of her article is that Florida itself is in “the docket,” the title of her newspaper article being “State Guilty of ‘delusional behavior’ in slow response to foreclosure chaos, critics say.” But hey, that’s part of our job, to make connections and help fill in some of the missing pieces from the fragmented nature of journalism today.)

If Matt Taibbi takes his time and grounds his conclusions of massive fraud based on a close look at cases from one day in Florida’s special “housing court,” economist L. Randall Wray’s (Professor of Economics at the University of Missouri-Kansas City) article, which appeared on the New Economic Perspectives blog site on November 23rd, is an all-out polemic against the mortgage lending “finance food chain…every link” of which “was designed to promote fraud.” That’s what Wray says in his opening sentence and he doesn’t let up for four pages. On page two he cuts right to the chase on all those lost and then contradictory foreclosure documents: “The truth is that the banks purposely destroyed the documents and created a superficially sloppy system because that made it easier to perpetrate fraud – accounting fraud, tax fraud, and document fraud – in order to enrich management. Fraud, Fraud, Fraud.” We learn from his article that “The Florida Mortgage Bankers Association admits that its members purposely destroyed the notes on the belief that electronic registry was sufficient, more modern, and carried no paper trail…Most notes were probably never transferred from the brokers – many of whom went bankrupt – putting mortgages and securities into a hellish limbo.”

MERS Mimics for REMICs
A good portion of Wray’s polemic is devoted to the wonders of MERS, that electronic registry system for mortgages that we introduced earlier in this essay, and that we will return to very shortly when we take a closer look at Professor Peterson’s congressional testimony about it. Wray wants to introduce us, however, to yet another possible fraud angle involving MERS. This one centered upon tax fraud, which means that once again, just as Peterson maintained, MERS is caught up in at best, contradictory claims, and at worst, fraudulent ones, involving the IRS rules governing REMICS – Real Estate Mortgage Investment Conduits. REMICS are supposed to be the resting places for mortgages “that were typically securitized and pooled,” and under detailed IRS regulations, the paperwork must show that the REMICS hold the mortgages in trust, and Wray adds that “there must be a clear paper chain of title through the securitization and sales. Without the paperwork, the securitizations may not be legal, and could subject investors to back taxes and penalties. And in 45 states the notes are require for foreclosure.” And remember too, that as a matter of established law, according to Professor Peterson, the notes and the mortgages cannot be separated. So what’s the problem here? Well, according to Wray, MERS claims to physically have possession of the mortgages (or remember the hedge, be an agent for the mortgagee!) so that it can avoid paying the repeated fees to the county registry offices, as the mortgage loans continually change hands, but the IRS law (and NY Trust law) require that the REMICS must have them to get the tax break. We suppose that next MERS and REMICS will get together and claim that because of electronic transmission at the speed of light – the actual mortgages and their notes can be in two places at once, virtually, at least. Unfortunately, the law still seems to require physical possession of the documents. Oops. Wray doubts they can pull it off: “So MERS wants it both ways at once: for the purpose of the REMIC tax advantage, MERS is only a database; but for the purpose of the securitizations and avoidance of county fees, MERS is the owner of the mortgages. Nice work if you can get it – tax evasion and fee avoidance.”

Now there was an additional point to Wray’s yelling “FRAUD, FRAUD, FRAUD” in the already fraud-wrought mortgage-foreclosure-housing “marketplace.” He wanted us to support Representative Marcy Kaptur’s (D, Ohio) bill, H.R. 6460 (in the old 111th Congress, 2009-2010) that would forbid Fannie and Freddie from purchasing any new mortgage that is registered with MERS, (a big step, because no one else is buying them) and that would get HUD to study “the creation of a federal land title system to replace MERS while protecting the rights of state and local governments.” This bill came in response to the mortgage industry attempts to fully legalize MERS and the current mess of the status quo with the Congressional passage of the “Interstate Recognition of Notarizations Act of 2009,” (that should have been of 2010) which President Obama pocket vetoed on October 8th, 2010. According to the New York Times article from Oct. 10th, this bill “had sponsors from both parties and was so uncontroversial in Congress that it passed without roll-call votes – in the House by a voice vote in April and in the Senate by unanimous consent last week.” The House was unsuccessful in attempting a veto over-ride on November 17th, failing to get the 2/3 majority needed by a 185-235 vote. The bill may have been “uncontroversial,” but when we checked the Congressional record at “Thomas,” the bill, H.R. 3808, had only three house sponsors and two senate ones – usually not an indicator of an uncontroversial bill – more a hint that many didn’t want to be on record for supporting a bill that doesn’t exactly have the “saints marching in” behind it. So was it stealth or lack of controversy? Well, based on what we’re about to cover on MERS, perhaps it’s just as well that it was stealth, because the idea that so sweeping a transformation of four centuries (in some cases) of real property law, rooted in public county recording systems and authorized by each state’s land title statutes could change without a sustained congressional debate – or one in statehouses – and without controversy, doesn’t leave we citizens with much reassurance about a fair and equal process. Here’s the link to Wray’s article at http://neweconomicperspectives.blogspot.com/2010/11/support-representati... [12] . But now it’s time for an even closer look at MERS and what may have been going on in that sweeping congressional vote.

MERS: “…a deceptive and anti-democratic institution…”
We’ll take that closer look starting with that startling testimony presented to the House Judiciary Committee by Professor Peterson of the University of Utah on December 2nd, 2010. It’s remarkable as much for its boldness as its clarity – and clarity about MERS and the foreclosure process is not easy to come by. We’re hoping that those members of Congress who were voting by “acclamation” to ratify MERS just a few months earlier sat up and noticed what he said in the very beginning of his statement: “…that MERS is a deceptive and anti-democratic institution designed to deprive county governments of revenue…undermining mortgage loan and land title record keeping.”

His testimony should also have an ironic ring to it for American conservatives and Tea Party members. We don’t know what Professor Peterson’s political sympathies are, but in this testimony he’s a defender of a state and county based law and land/mortgage recording system (real property lien system, in contrast to the personal property lien recording system usually maintained by Secretaries of State, which includes corporate registries) that, depending on the state, has been around since the 17th century in some cases, and one that if it is going to be dramatically altered by the private banking/mortgage “system,” ought to at least have a full public debate in the statehouses, and the Congress, if it comes to that. Here’s how he goes about structuring his criticism of what actually unfolded with the creation of MERS, Inc., the Mortgage Electronic Registration Systems, Inc., based in Reston, Virginia and whose parent company goes by the name MERSCORP, Inc. The rough outline is this:

In the mid-1990’s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization – a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street… to avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country…Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system…Now about 60% of the nation’s residential mortgages are recorded in the name of MERS…For the first time in the nation’s history there is no longer an authoritative, public record of who owns land in each county…County real property records that hold only a reference to the MERS system now have a systemic break in chains of title.

“…a corporate structure so unorthodox as to arguably be considered fraudulent.”
Although he doesn’t get into the tax fraud charges that we have just seen L. Randall Wray make over the IRS rules pertaining to the securitization trusts, the REMICS, which also claim to hold legal title to the mortgages, Peterson notes the irony that they are “the same mortgages that MERS claims to own,” and has a blunt legal observation to add to the irony: “Anglo-American law includes no tradition that supposes two different simultaneous legal titles for the same interest in land.” Peterson maintains that MERS legal position at several crucial points is “incoherent”; but so too is its corporate structure, one that is “so unorthodox as to arguably be considered fraudulent.” That’s the strongest charge in the testimony, aside from the political one that MERS is a “deceptive and anti-democratic institution,” and the fiscal one that it has been deliberately “designed to deprive county governments of revenue.” Given the normal run of congressional testimony, we’re wondering why these accusations haven’t been splashed across the front pages of newspapers, and Peterson celebrated all across the political spectrum for sounding the alarm over such troubling and unsanctioned alterations in long-standing legal structures.

So what is it about MERS corporate structure that is arguably fraudulent? Could it be that despite taking on the responsibility for tens of millions of mortgages (60% of some 47 million) and the perhaps even greater challenge of tracking their many changes of ownership under the pooling, servicing and transferring arrangements demanded by “securitization,” MERS does it all with around 45 employees of its own (according to a Washington Post article from January 2, 2011)? So how could they possibly do that – they must be the world’s most efficient corporation; just shows you
what the private sector can do when turned loose, run rings around all those county recording clerks…Except that’s not what is going on: “MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors and foreclosure law firms. MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate ‘corporate resolutions’ that purport to name the employees of other companies as ‘certifying officers’ of MERS.” So that’s how MERS manages to “grow the business” (as the business press would have it) into “twenty thousand assistant secretaries and vice presidents…even though neither MERSCORP, Inc. nor MERS, Inc pays any compensation or provides benefits to them.”

Now we aren’t attorneys, although we were accused of practicing law without a license in land-use matters in New Jersey (jokingly, we like to remember), but this sure sounds like more than “arguably fraudulent” to us, especially when Peterson chimes in that “MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each…(That comment left us wondering about the first case Matt Taibbi described for us in his visit to the rocket-docket housing court in Florida, where attorney Kowalski is looking at documents in their second round of court hearings: “ ‘There’s a stamp that did not appear on the note that was originally filed,’ Kowalski tells the Judge. (This business about the stamps is hilarious. ‘You can get them very cheap online,’ says Chip Parker, an attorney who defends homeowners in Jacksonville.”)

A corporate structure that is “arguably fraudulent.” But MERS also has an elusive, yet seemingly very useful “dual” legal identity that pushes hard against homeowners when it is in “foreclosure” mode, but then, when homeowners are lucky enough to get their own legal representation to push back with “counterclaims challenging the legality of mortgage brokers, lenders, trusts, or servicers, MERS hides behind its claim of nominee status.” Now Professor Peterson has some very interesting and complex things to say, at this point of his testimony (Page 13) about how MERS has facilitated keeping “predatory lending litigation” separate from “foreclosure litigation,”and how MERS serves as a legal shield, and then proxy, for the subsequent owners of the mortgage interest of the first lenders - firms like Countrywide - which attracted lots of “predatory lending litigation.” To be blunt, Peterson says “that MERS abetted a fly-by-night, pump-and-dump, no-accountability model of structured mortgage finance.”

Peterson does not stop at this accusation, however. He reaches perhaps his finest powers of “jury persuasion” when he issues two magisterial summations that further illustrate powerful and troubling economic trends that we have been writing about for almost three years now. The first is that “MERS represents the mortgage finance industry’s best effort to create a single, national foreclosure plaintiff that always has foreclosure standing, but never has foreclosure accountability.” The second, which had occurred a few pages earlier, also advances the one, “universal market” theme,” but adds yet another dimension: usurpation of public functions: “MERS’ attempt to ‘capture every mortgage loan in the country’ is an effort to supplant the public land title recording systems’ lien records, many of which predate the Constitution itself, with a purely private system.” (Our emphasis in both quotes.)

So perhaps John Grey, writing in False Dawn: The Delusions of Global Capitalism (1998), which we recommended for our summer reading list in August of 2010 (See Summer Reading for When Markets Rule), was not so far off base when he stated that the United States’ pursuit of the world’s purest brand of “free markets” was the last Utopian project bequeathed to us by the Enlightenment of the 18th century. Already by 1998 Gray was dubious that the American push for “a single global market,” one driven in part by the Enlightenment ideals of efficiency and reason (and the pursuit of lusher markets and higher profits in the distant geography of “emerging markets”) was going to succeed; the world was pushing back with many different types of capitalism, and a good part of it was not anxious to build their financial sectors around Wall Street’s preferences. There was another major strand of thought in his book, though: “democracy and the free market are competitors rather than partners.” Of course, as so much in Grey’s book, that notion ran against the conventional wisdom of center-right thinkers like Francis Fukuyama and his book The End of History and the Last Man (1992), but writing as social democratic observers of the past 30 years, we couldn’t fail to notice the implied higher sovereignty of financial markets, especially the bond markets, over the range of economic policy choices available to candidates, wherever they might wish to appear on the political spectrum. And as we’ve written numerous times over 2009-2010, the threat of the bond “vigilantes” ride has come back to dominate economic policy discussion, in Europe, directly, and in the U.S., by putting debt and deficit reduction plans ahead of directly dealing with the appalling unemployment rate and the reality of 10-13 million foreclosures. Despite all the damage caused by the Wall Street “doomsday machine” financial model, it certainly looks as if those close to the Street are still in charge of policy, confirmed by President Obama’s choice of William M. Daley as his new Chief of Staff and Gene Sperling as head of his economic team.

With these thoughts in mind, we have to admit that we were still struck with amazement, if not complete surprise, to discover the story of MERS and foreclosures. As Professor Peterson tells the story of its creation in his testimony, it is a clear tale of concentrated financial power executing an end run around long standing legal precedents and political traditions. Furthermore, and this adds to our sense of amazement, MERS was doing it on the sacred playing field of land-ownership property and recording traditions, and the clear prerogatives of local and state government in this area, going well back, in some cases, before the adoption of the U.S. Constitution. Not only that, but the counties were losing a substantial source of revenue (just how much we’ll see in a moment). How was this possible to pull off, without so much as ever reaching our ears and eyes until the past three months? What force of man, or nature, could divest counties of a substantial source of revenue without even so much as a political murmur? MERS was organized in 1995 and actually up and running by 1997, and this story is just breaking now, fifteen years later. Should we take Professor Peterson’s testimony at complete face value?

How did MERS pull it off?
The Washington Post had an interesting article on January 2, 2011, entitled “First, the electronic mortgage superhighway. Then, the pileup.” Matt Taibbi’s second Rolling Stone article on foreclosures (posted on January 1: “An Extremely Long Metaphor to Explain Mortgage Chaos.”) called our attention to it, and we were curious to see who turned up in the account, and how MERS was handled.

First, there is a quote from Professor Peterson, the one about MERS structure being “arguably fraudulent.” That was a bit of a surprise, being strong stuff. But what about the important issue of MERS avoiding political authorization for what it has created, either in Congress or the states (after it was created, it did get Minnesota to ratify what it was doing, the only state to bring its land recording act in line with MERS’ wishes.) Well, there it was on the very first page, a sort of oblique answer to Peterson’s accusations, without every mentioning what we quoted. MERS, in the organizational form of the Mortgage Bankers Association (MBA) apparently went to the “county recorders” to “unveil” its plans on March 4, 1994. There were critics, and their reservations are noted at several places in this article by Arian Eunjung Cha and Steven Mufson, but it is not clear if it was put before “the county recorders” for a formal vote, and if it was, what the results were. We do learn that Mark Monacelli, “a county recorder in Duluth, Minnesota, who was the lead negotiator for the association representing recorders from most of the nation’s 3,600 counties,” didn’t like the way it came out: “‘MERS turned out to be something completely different than what we originally thought.’” We do learn, later in the article that “in the mid-1990’s, some of the recorders lobbied states and Congress for legislation to block the creation of MERS but failed.”

This is fascinating stuff to us, because the term “negotiator” for the “association” implies some form of semi-formal rule making process between the MERS promoters and a category of county employees – which does a very good job of evading the question Peterson poses: why wasn’t state legislative authorization sought, or county by county approval by freeholders, or by Congress, if indeed that body has the constitutional authority to override long traditions of state law practice in this area? The article doesn’t make it clear: who in government authorized Mr. Monacelli to be “lead negotiator” and what legal and political “standing” did the results obtain?

Now taken as a whole, this was not a terribly favorable article for the idea of MERS, or its current state of functioning and standing before the increasing number, and variety, of legal eyes scrutinizing it. But two other aspects of the article trouble us. The first is the loss of revenue to the counties, which Professor Peterson gives emphasis too, without putting a magnitude on it. However, in this Post article, it is not a “lost revenue” issue for government at all, it is a cost and savings issue, and efficiency issue, for the mortgage bankers. A Merscorp spokesperson is quoted as saying “‘that it helps borrowers…has kept costs low….’” A bit later, MERS is touting that “it had saved the banking business $1 billion in recording fees and other costs.”(Transferring paperwork, for example).
Contrast this with Professor Peterson’s assertion, on page two of his testimony, that “in the mid-1990’s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore.” It is footnoted, and in the footnote (number 10) he refers to an article by Phyllis K. Slesinger & Daniel McLaughlin, from 1995, “describing an Ernst & Young study commissioned by mortgage bankers to study how much money they could avoid paying to county governments through the MERS system.”

So how much revenue is MERS depriving county governments of? Matt Taibbi, in his New Year’s Day article, says “some estimates place the total at about $200 billion.” Others we’ve seen have said $30 billion. We decided to look further, and that led to an Associated Press article going all the way back to November 10, 2010, by Michelle Conlin and Curt Anderson: “Bypassing county fees may cost banks.” In it, we find a baseline figure of $2.4 billion coming from MERS CEO R. K. Arnold from testimony in 2009 which said that “assuming each mortgage it tracks had been resold, and re-recorded just once, MERS would have saved the industry $2.4 billion in recording costs.” Of course, the process of securitization means mortgages have changed hands up to twelve times, sometimes more, over their effective lives. So $30 billion over the years may be a rough ball park figure. But now the story gets even bigger, and this is the first we’ve seen this angle, so thanks to the Associated Press for it. Two lawyers in Reno, Nevada, according to Conlin and Anderson, “have filed suit in 17 states alleging that banks cheated counties out of billions of dollars…the suits were filed in California, Nevada and Tennessee and 14 undisclosed states where the case are still under court seal.” The lawyers, Robert Hager and Treva Hearne, picked these states “because their laws allow what are called false claim suits, in which citizens can take legal action against companies that may have cheated the government.” Because of the possibility of collecting substantial penalty fees, “the California suit alone could cost MERS $60 billion in damages and penalties from unpaid recording fees.” Perhaps that’s where Taibbi gets his huge figure from.

But these legal filings aren’t the only enlightenment which this Associated Press article offers. Another is to actually name what the Washington Post’s work called “the biggest players in the mortgage business – the MBA, Fannie Mae, Freddie Mae and Ginnie Mae” who set up MERS in the early 1990’s. The AP story, however, adds a few other names besides the favorite public whipping boys Fannie and Freddie, thereby clarifying things just a bit by expanding the Post’s rather truncated list: “MERS owners are all the big mortgage companies, including Bank of America, Citigroup, Wells Fargo, JP Morgan Chase and GMAC.” The CEO of JP Morgan, Jamie Dimon, we also learn, may have just caught a whiff of things to come when he stops using MERS for foreclosures in 2008.

The AP article also gives a slightly greater understanding of the missing political pieces of the puzzle: why weren’t the banks being challenged by the counties and the states when MERS was being set up, if for no other reason than loss of revenues – and there were plenty of other good reasons too:

Counties complained about the lost revenue after MERS was implemented, but they rarely tried to challenge the new way of doing business… ‘It smelled like it could be a scam from hell,’ said Gary Ott, the county recorder in Salt Lake County, Utah. From the beginning, many county officials were uneasy about the idea. But most were loath, and lacked the resources, to take on the financial industry. Those who did complain to legislators and reporters say they had a hard time getting anyone to take notice. (Our emphasis.)

One county recorder did challenge MERS. Edward Romaine from Suffolk County in New York State, saw the loss of $1 million a year of revenue – and that MERS failed “to even maintain a clear chain of title on a property.” He was supported by the Attorney General of New York, but MERS sued in 2001 and won on appeal in the highest state court. Conline and Anderson report that “the court found that a county clerk lacks the authority to refuse to record MERS transactions.” Now that’s a remarkable finding, it seems to us, because haven’t we just learned from the Washington Post article that MERS saw fit to “negotiate” with the county recorder’s association back in 1994 – all the more reason to ask where the higher ranking county, state and federal officials were back in the 1990’s when this system got rolling? But then again, that was the 1990’s, the culmination of the liberation of finance from governmental constraint.

Now let’s see: who was the President when all this was unfolding, 1992-1998? Wasn’t it the man with perhaps the most comprehensive knowledge of American politics ever to hold the office since FDR…none other than the great de-regulator himself, William Jefferson Clinton? President Clinton famously announced that the era of Big Government was over; he wasn’t as clear as philosopher John Gray has been as to what was going to replace it, but right here, as we’ve seen, out of a rear view mirror unfortunately, was the power of the financial industry, appointing themselves as the universal replacement for the old fashioned land registry system and a long-standing tradition of federalism, of state and county power in these matters. It was part and parcel of the trend towards the privatization of public functions. As the Right’s ideology demanded “no new taxes,” “smaller government” and “free markets,” old industrial towns in Pennsylvania saw their school boards try to raise revenue by swallowing the bait - and hooks - of Wall Street’s “interest rate swaps,” and other local governments swallowed too for the “variable interest rate bonds” offered in the now collapsed “auction-rate” market. Bloomberg news reporters Martin Braun and William Selway have written that “dozens of municipalities have paid banks billions to get out of swap contracts” gone bad. At least Citigroup and UBS had to give back some $7 billion in settlement costs for customers left hanging by the failure of the “auction-rate” market. Greece, struggling to make the cut-off limits for their public debt levels in order to get into the European Monetary Union in 2001, turned to Goldman Sachs for creative ways to raise cash by turning over formerly public revenue streams to private parties, including airport landing fees, lottery proceeds and highway tolls (according to the lead story in the New York Times from February 10, 2010: “Wall St. Helped to Mask Debts Shaking Europe.” The article also indicates that JP Morgan Chase was “helping” Italy in the 1990’s with currency rate swaps. Here at http://www.nytimes.com/2010/02/14/business/global/14debt.html [13].

Looking back over what we have just written, in light of President Obama’s State of the Union address from January 25, 2011, and the follow-up New York Times editorial just three days later (“Obama and Corporate America”), we are led to ask whether the still necessary yet subordinate role of the federal government outlined by him marks any significant reversal of the trends of the past 30 years, which includes his two Democratic predecessors, Jimmy Carter and Bill Clinton? One could make a better case, a decent one, for his first two years in office, on that score. Now, heading into 2011, we have his two key recent staff appointments – William Daley and Gene Sperling (plus the GE-Jeffrey Immelt honorary); his failure to even mention the bank-sensitive topic of foreclosure; his reiteration of what we thought “reinventing government” under Al Gore was all about – “merging, consolidating and reorganizing” the federal government, yet once again – we guess still not lean enough; the meekness and private sector deference with which he approaches the unemployment situation, placing the federal budget deficit and debt reduction as a clearly more important mission (with likely tragic consequences for the economy, and with the poorest citizens left as minor footnotes on the shrinking pages of the old social contract); the freeze on domestic spending, now extended for five years. Put all this together with the conservative austerity trend lines in the statehouses: attacks on public employees and their pensions, cutting spending, laying off workers, looking for ways, in many cases, to privatize public functions, all things the president did not talk about as he stressed the great race for international economic competitiveness, and a boiling down of the American Dream to the stark elements of entrepreneurship, innovation, and education – and what you have readers, is, as we said a year ago, “Everything a Moderate Republican Should Be.” This Center-Right ideological orientation, planted by Reagan in 1980 made better (but not great) sense applied to the domestic economy as it stood in the 1970’s, not as it stands today, in 2011, with our far greater maldistribution of wealth, imbalances in power between the private sector and public regulators and any countervailing civil powers, whether they be citizen movements or organized labor, references to which were also noticeably absent from the President’s speech.

If the facts surrounding the rise (and the character of) MERS are troubling to you, especially its emergence under the two terms of a Democratic president, and suggest, along with the many fraudulent features of the foreclosure crisis, more than just a few problems with this one-sided political economy sketched out for the nation by President Obama, wait until you see the role the banks played – with a leading one by J.P. Morgan Chase – in what unfolds next in Part II.

In Jefferson County, Alabama, in Philadelphia, Pennsylvania, in Milan and the Umbria region of Italy, JP Morgan bankers have been in trouble - some indicted, some convicted, some having served prison time already – because of their roles in a variety of municipal funding outrages, often involving complex interest rate swaps and other creative derivative devices, and nefarious connections with go-between financial “advisory” firms. Some of that we were already aware of, and wrote about in 2008, but what we just discovered by revisiting the Jefferson County-Birmingham, Alabama situation was that as many as eight JP Morgan bankers, along with six from Bank of America and eighteen employees from 16 other companies, including parts of General Electric and UBS AG, are in deep legal trouble for what two Bloomberg reporters are calling “the biggest criminal conspiracy in the history of the 198-year-old municipal finance market.” (involving Guaranteed Investment Contracts – GICs.)

The details will follow below, but what is most remarkable to us now, in light of the president’s State of the Union address, and the two “alternative” addresses we’ve recommended to our readers, is that JP Morgan Chase’s serious train of legal troubles were not enough to prevent the selection of William M. Daley as President Obama’s Chief of Staff (no reflection upon him personally), and what may be even worse for our republic, is that they were not even mentioned in the seven major media accounts we looked at commenting on Daley’s appointment. That’s despite the fact that one of the former JP Morgan bankers who pled guilty “to rigging investment contracts and derivatives in a federal antitrust investigation” did so at the very end of November, 2010, according to the Bloomberg account. He was the eighth person to have plead guilty in the criminal conspiracy, preceded a week earlier by a former star derivatives’ salesman for Bank of America. Even though it was happening in a federal courtroom in Manhattan (and not Kansas), and despite these two reporters’ good work in following the shadowy case, the pleas might as well have been happening on Mars, because no one else seems to be aware of them, or to be willing to “signify” them, least of all those serious “vetters” who work at the White House. But now…on to Part II of the essay.