Thursday, January 31, 2013

Causes of the 2008 Crisis

A resource to deal with the underlying causes of the 2008 collapse.
  • Issue #1 Fraudulent Loans - The banks fraudulently loaned money to parties they knew could not repay. (Sub-prime crisis) 
    • Not verifying income, FICO scores and payment history. (No legislation passed caused the banks to do this, specifically the Community Reinvestment Act (CRA) of 1977)
    • Standard & Poors, Moody's, and Fitch Rating rated much of the junk paper as AAA.
    • Corrupt appraisers - Always come in at exactly the purchase price. They asked Congress to do something.
    • The banks  recklessly loaned money to parties they knew could not repay.
      • Citifinancial knew that 80% of its loan origination did not meet quality guidelines
      • Bad loan "products"
        • “No Money Down” Mortgages (0% down payments) Countrywide CEO Angelo Mozlilo
        • "No doc" loans
        • "Teaser Rate" loans (2/28)
        • Interest only loans
        • Neg Am loans
        • "Piggy back" loans -Lent 1st mortgage and HELOCs for the down payment.
        • Mortgage equity withdrawals(HELOC)
"It appears as though many loans and other mortgage-related assets have been double and even triple-pledged to various constituencies."
- Bank of America, U.S. Bankruptcy Court, Jacksonville, CASE NO. 3:09-bk-07047-JAF
Wachovia -
The SEC’s order found that Wachovia Capital Markets violated the securities laws in two respects. First, Wachovia Capital Markets charged undisclosed excessive markups in the sale of certain preferred shares or equity of a CDO called Grand Avenue II to the Zuni Indian Tribe and an individual investor. As detailed in the order, Wachovia Capital Markets marked down $5.5 million of equity to 52.7 cents on the dollar after the deal closed and it was unable to find a buyer. Months later, the Zuni Indian Tribe and the individual investor paid 90 and 95 cents on the dollar. Unbeknownst to them, these prices were over 70 percent higher than the price at which the equity had been marked for accounting purposes.
Wachovia Capital Markets misrepresented to investors in a CDO called Longshore 3 that it acquired assets from affiliates “on an arm’s-length basis” and “at fair market prices” when, in fact, 40 residential mortgage-backed securities were transferred from an affiliate at above-market prices. Wachovia Capital Markets transferred these assets at stale prices in order to avoid losses on its own books. 
JP Morgan Chase & Co.
JPMorgan Chase & Co. took procedural shortcuts and used faulty account records in suing tens of thousands of delinquent credit card borrowers for at least two years, current and former employees say.

"We did not verify a single one" of the affidavits attesting to the amounts Chase was seeking to collect, says Howard Hardin, who oversaw a team handling tens of thousands of Chase debt files in San Antonio. "We were told [by superiors] 'We're in a hurry. Go ahead and sign them.'"
It’s no wonder that the Wall Street MBS scheme collapsed. Last night, together with Lisa Epstein, we ran a random audit on WaMu Mortgage Pass-Through Certificates, Mortgage Loan Trusts. One loan was found in 6 different trusts, another loan was found in FIVE trusts’ original SEC loan level data, 39 were listed in 3 trusts, and 503 were listed in two separate trusts.

The winner so far is a NEW YORK condo, loan number WaMu loan # 714934858, appeared in 6 DIFFERENT trusts from May through November 2006…

Bank of America Corp.

Bankers that call for the big banks to be disbanded -
  • Former Citi CEO Sandy Weill
  • Former Citi CEO John Reed
  • Former Citi chairman Richard Parsons
  • Former Merrill Lynch chairman and CEO David Komansky
  • Former Morgan Stanley CEO Philip Purcell
  • Former managing director of Goldman Sachs – and head of the international analytics group at Bear Stearns in London- Nomi Prins
  • Numerous other bankers within the mega-banks (see this, for example)
  • Former Natwest and Schroders investment banker, Philip Augar
  • The President of the Independent Community Bankers of America, Camden Fine

2000 Commodities Futures Modernization Act
1%, ZIRP - Federal Reserve (FOMC) , they set the table.
Mortgage Backed Securities (MBS)
Fannie Mae (FNM)

Note: This is a resource and will be updated as needed.

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