Yeah, so was fabricating FICO scores at Argent Mortgage.
Posted on 11/02/2009 3:57:39 PM PST by FromLori
Hmmm.... maybe late, but not never!
WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Right. On October 31st of 2007 I said:
Realize this folks - some of these "boys" on Wall Street have gone so far with their hubris that they have, effectively, shorted your house! That'd be Goldman, who actually shorted subprime mortgage bonds (so they said) to make their quarter. The amazing part of this of course is that Goldman (along with all the other investment banks) are the very people who set up these structured finance vehicles in the first place.
That's kind of like repping out your company for an IPO and then shorting into the IPO! Oh, and it has another parallel - like an IPO underwriter they have more information than you do - CDOs and such are exempt from "Reg FD", or "Fair Disclosure." So if an investor wanted to buy a CDO, they'd not have access to the same information that the guys who put it together (and the guys who rated it) do - that'd be Goldman, Moody's, etc.
Isn't it nice that the guys who put this stuff together thought it was of such high quality that while they were selling it to you with one hand they were shorting it with the other?
Arrogance knows no boundaries on Wall Street, and I wouldn't have a problem with it (after all, I short stocks too you know!) if it wasn't for the fact that Goldman was doing it while in possession of information that nobody else in the marketplace had, except perhaps for other investment banks who had done similar deals and the ratings agencies.
This sort of thing smells and is why Reg-FD was passed after the 2000 tech wreck - of course it doesn't apply to this part of the market. Isn't it amazing how the "Wall Street Boyz" found a loophole in the rules and exploited it for a big fat wad of cash - at the expense of their customers?
Two years ago folks, literally almost to the day.
McClatchy continued:
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws. No, really?
A five month investigation eh? You're more than 18 months late on this one sir, but I will give you credit for the reporting - even if late.
I've been saying what Mr. Kotlikoff said in McClatchy's piece now for more than two years:
"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."
No kidding? You mean packaging up something you get an "AAA" rating on (after shopping and massaging it like mad) but which some other portion of your firm opines is worth far less, in fact may be worth zero, and thus goes short that same instrument, creates a problem if you don't disclose that to the buyers?
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."
Actually, that may not be quite true, and, indeed, that's the rub.
See, "AAA" has an actual definition in credit land. It means "about as likely to default as is an asteroid impact on your house."
Here's the problem, when you get down to it - at least some parts of Goldman's operation had every reason to believe these loans would blow up - that is, there was no reasonable expectation that the "AAA" rating was correct and the issues would perform in accordance with it. This, indeed, was the entirety of the premise behind shorting those instruments.
But what did they know and when?
Did they know, for instance, as I did in April of 2007 that:
According to a small study done by HUD, half of all those "stated" loans have incomes overstated by 50% or more!
And was that disclosed in their offering documents?
When did Goldman become aware of this, and did they tell the buyers of these securities that the "qualification" of the borrowers that underlay those securities was in doubt - and might have even been fraudulent?
Further, what did the ratings agencies know and when? Did their (and Goldman's) opinions reflect that HUD study? And did it reflect the findings in this study, also done by HUD?
More than half of the borrowers referred for File Review could not afford the loan they were being given by their mortgage broker/loan originator. 9% of the File Reviews showed indicia of fraud.
More than 60% of the borrowers who received File Review were obtaining loans with adjustable rates. It was evident during the File Reviews that in the majority of cases borrowers were being approved for financing solely on the basis of the initial or ‘teaser’ rate, without regard to the borrower’s ability to afford the loan when the rate adjusted.
The kicker in that report is the following - indeed, this is the truly damning piece:
Only 12% of all the File Reviews resulted in the recommendation that there were ‘No Issues’ with the loan. ‘No Issues’ meant that the information entered by the Loan Originator matched the information verified by the HUD-certified Counseling Agency; there were no indicia of fraud; that the borrower appeared to understand the transaction; that the loan had a ‘market rate’; and that it was ‘affordable’.
Twelve percent. The rest of the loans either had one or more indicia of fraud, the information the loan originator claimed for the borrower matched the actual borrower's information (income, assets and debt), the borrower understood the transaction, it was made at a "market rate" and it was affordable.
88% of the loans reviewed under this program, in short, were likely to default - a fact that was known to and published by HUD in April of 2007.
The question, when it comes to fraud and other games, is nearly always one of "what did you know and when did you know it?"
In this specific instance, when did the investment banks and ratings agencies know that:
A mere 12% of the files (in this sample, and it is reasonably presumed in others) were "clean" - with the others either showing signs of fraud, being blatantly unaffordable, not understood by the borrowers or that the information in the file did not match the borrower's actual income, debt and expense profile?
Nine percent of the files had indications of fraud in them that were not followed-up upon by the issuers and prosecuted.
More than half of the loans were not affordable under any reasonably-objective criteria - that is, they were likely to default but for continued asset-price appreciation. This is in fact the key to whether these institutions (and ratings agencies) should be held culpable for securities fraud (and perhaps racketeering); if they had actual or constructive knowledge of these facts prior to selling these securities and did not disclose it, and in particular if they were shorting them on that basis, then I believe a reasonable argument can be made that the law was broken, and no esoteric securities legalese language need be applied. Simply put there is no reasonable argument to be made that securities generated from a loan pool that has these characteristics could ever meet the criteria of an "AAA" issue, irrespective of whatever "credit enhancement" or similar shenanigans one might employ. Indeed, such a debt issue is the very essence of a "highly-speculative" instrument, if not outright trash with true value very near recovery at the time of issue!
And by the way, lest anyone think that policy has actually been changed, let me point out two points from the same study:
“Cannot afford the loan” – The agencies agreed that any loan that resulted in a total ‘Debt to Income’ ratio (‘DTI’) of more than 45% would be considered ‘unaffordable’. DTI is calculated by dividing the total gross household income (on either an annual or a monthly basis) by the sum of the total payments due (monthly or annually) for housing expense (principal, interest, taxes, insurance, mortgage insurance, condo fees) plus other obligations (minimum payments on revolving credit, installment payments, child care expenses, tuition).
“Precipitously close to not being able to afford the loan” – The agencies agreed that any loan that resulted in a total DTI ratio (as calculated above) of 40% to 45% would be deemed ‘precipitously close’ to being unaffordable. Shall we go back to RECENT FHA disclosures that I wrote about in September of this year?
Like, for example, this recent loan the FHA funded that was submitted to FHA on 9/21/2009?
41.59% HOUSING expense ratio .vs. gross income. 53.40% TOTAL DEBT TO INCOME.
A loan that according to HUD's own HB 4050 Predatory Lending Database pilot program was unable to be afforded, BUT THE FHA APPROVED AND FUNDED IT ANYWAY MORE THAN TWO YEARS LATER.
The bottom line is that they're still doing that which they said was absolutely over the line and unsustainable, with the full sanction and approval of our government and its agencies!
Anyone that thinks that the "issues" in the mortgage lending system that led to the credit and housing mess beginning in 2007 have "gone away" has rocks in their head.
In fact what has happened is that the very same dangerous and loss-producing practices have instead migrated to the FHA's products with the full knowledge and complicity of everyone involved in HUD and the FHA itself, and with the explicit consent and guidance of Barney Frank, among others in Congress:
Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.
“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”
Intentionally screwing homeowners - knowingly and willingly violating the limits in a more than two-year-old study by HUD is "a policy".
What was it when Goldman and the other big banks were doing the same thing to investors?
Was that "a policy" too?
Everything seems rotted; creaking and groaning while they mix up the next coat of paint.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.