WILL THE BIG BANKS NOW START PAYING FOR THEIR CRIMES?

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October 2, 2012 at 22:14:36

 Promoted to Headline (H3) on 10/2/12:     Permalink
 

About time! New York Charges JPMorgan with Mortgage Fraud

By Michael Collins (about the author)

opednews.com

Michael Collins

(New York Times, Oct 1)  "The federal mortgage task force that was formed in January by the Justice Department filed its first complaint against a big bank on Monday, citing a broad pattern of misconduct in the packaging and sale of mortgage securities during the housing boom. The civil suit against Bear Stearns & Company, now a unit of JPMorgan Chase, was brought in New York State court by Eric T. Schneiderman, the state attorney general."

Schneiderman charged Bear Sterns and JPMorgan, which acquired Bear, with fraud under the state's Martin Act.  Unique to New York, the act allows prosecutors the ability to vigorously pursue financial fraud with both civil and criminal charges. The investigative powers provided are broader than those found in any state or among regulators (e.g., the Securities and Exchange Commission).

EMC Mortgage, Bear's lending unit, "made material misrepresentations about the quality of the loans in the securities " and ignored evidence of broad defects among the loans that they pooled and sold to investors." EMC identified bad loans then demanded and received payments from originating lenders (firms they'd purchased the loans from). According to the indictment, the deception and fraud came when EMC failed to share any of the recovered fund with investors.

"Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans." Eric T. Schneiderman, Attorney General, New York, October 1

The New York Times described this indictment is a shift away from specific cases of fraud to indictment for a general pattern of fraud on the part of big finance. Given the man behind the charges, this spells trouble for the big banks and Wall Street.

The Peoples Attorney General

Schneiderman was elected New York Attorney General in 2010 as his predecessor, Mario Cuomo, was elected governor. The AG has been a strong advocate for citizen protection from the corruptions of the big banks. Mortgage fraud has been a major focus. While many admired Schneiderman's goals at the outset of his term, Robert Sheer noted the risks: "Eric Schneiderman will probably fail, as did his predecessors in that job; the honest sheriff doesn't last long in a town that houses the Wall Street casino."

Schneiderman didn't falter. He was a hold out on the 50 state big bank-Wall Street fraud settlement which held perpetrators responsible for the financial crisis of 2008. Along with California Attorney General Kamala D. Harris , Schneiderman refused to sign the settlement deal until guarantees were added that allowed states to prosecute mortgage and securities fraud on their own despite the settlement. He now co-chairs the Residential Mortgage-Backed Securities Working Group "to continue investigating the foreclosure crisis." The crimes that can be investigated and prosecuted include robo-signing, the Mortgage Electronic Reporting System (MERS), mortgage fraud, rigging the municipal bond market, and the continuation of MERS-Wall Street mortgage packaging despite the obvious risks.

The Attorney General also has a record of actively assisting those in foreclosure, allowing many New Yorkers to save their homes.

JPMorgan developing a well-deserved reputation

This isn't JP Morgan's first trip to the rodeo. Federal Judge Jed Rakoff issued a devastating opinion on the business practices by the firm: "According to Judge Rakoff, 'by its actions JP Morgan thereby violated, at a minimum, the covenant of good faith and fair dealing by attempting to turn participation into what was really a disguised assignment of the loan that would cause irreparable harm to Cablevisión.'" (Author's emphasis) Judge Rakoff Nails JP Morgan Feb 22, 2010 (Also see, How JP Morgan treats its clients: scandalously and in bad faith by Felix Salmon)

Earlier this year, JPMorgan's reckless trading strategy cost investors $5.8 billion. The embarrassment from investor losses was compounded by Morgan's vast understatement of the original amount of the losses.. Chairman Dimon commented, "We learned a lot. I can tell you this has shaken our company to the core." Apparently, there's a prosecutor learning curve in place regarding the broad pattern of civil and potentially criminal violations by JPMorgan and the other made men of The Money Party.

A recent survey of trust in financial institutions showed just 23% of the public trusted the big banks like Morgan and only 15% had any trust in the stock market. Schneiderman should have a favorable audience with just about any jury he chooses. The low opinion of big banks and the latent anger at the lack of prosecutions for those who caused the financial collapse will explode given the slightest opportunity.

Even before this indictment, Janet Novack of Forbes characterized the most recent culprit in the title of her Forbes article, America's Trust in Banks Falling: Thank You, JPMorgan." JPMorgan's record and reputation precede the firm into any court.

Another distinct advantage for the AG is the law used to prosecute Morgan.

The Martin Act - Broad authority to prosecute financial fraud

The Martin Act was passed in the 1930's to facilitate the prosecution of financial crimes against the general public. Specifically, "the only elements needed to establish a Martin Act violation are a misrepresentation or omission of material fact when engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase of securities."

The act is a prosecutors dream. Schneiderman can "subpoena any document he wants from anyone doing business in the state; to keep an investigation totally secret or to make it totally public; and to choose between filing civil or criminal charges whenever he wants." (Nicholas Thompson, Legal Affairs, May/June 2004) Those under investigation "do not have a right to counsel or a right against self-incrimination," Thompson pointed out.

Schneiderman is serious. He has demonstrated his commitment to equity and justice since assuming his current office.

In May 2011, I asked, Will the NY Attorney General Bring Doomsday Charges Against Wall Street? If So, How Long Will He Survive? 

Schneiderman's predecessor as Attorney General, Mario Cuomo, moved up from AG to governor even after indicting Bank of America on similar charges.  There is hope for Schneiderman's survival and elevation should he get some convictions.  Of greater significance, Schneiderman's actions can be replicated around the country.  Mortgage fraud was and is a national problem.

END

This article may be reposted with attribution of authorship and a link to this article.

Also see, Cuomo Takes on The Money Party Feb 8, 2010

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Michael Collins is a writer in the DC area who researches and comments on the corruptions of the new millennium. His articles focus on the financial manipulations of The Money Party, the abuse of power by government, and features on elections and election fraud. His articles can be found here. His website is The Money Party RSS

http://themoneyparty.org

A FORMER ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY AND A FORMER MANAGING DIRECTOR OF GOLDMAN SACHS JOINTLY PERCEIVE A "DEEPER, DARKER" REASON FOR THE BIG BANKS TO HAVE MANIPULATED THE INTERBANK BORROWING RATE (LIBOR) DOWNWARD.

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The Real Libor Scandal ~Paul Craig Roberts and Nomi Prins

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July 14, 2012 | Original here

According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost. The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal.

Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other “securities.” The end result is that the banks’ balance sheets look healthier than they really are.

On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

Why isn’t this happening?

PCR’s June 5 column, “Collapse at Hand,” explained that despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower.

What was pushing the interest rates lower?

The answer is even clearer now. First, as PCR noted, Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise.

Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.

In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

How long can the government bond bubble be sustained? How negative can interest rates be driven?

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.

Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

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Nomi Prins is author of It Takes A Pillage and a former managing director of Goldman Sachs.