THE FINANCIAL TSUNAMI Part 1: Deutsche Bank's Painful Lesson

Financial Sense University ^ | November 24, 2007 | F. William Engdahl

[Travis McGee]

Even experienced banker friends tell me that they think the worst of the US banking troubles are over and that things are slowly getting back to normal. What is lacking in their rosy optimism is the realization of the scale of the ongoing deterioration in credit markets globally, centered in the American asset-backed securities market, and especially in the market for CDOs—Collateralized Debt Obligations and CMOs—Collateralized Mortgage Obligations. By now every serious reader has heard the term “It’s a crisis in Sub-Prime US home mortgage debt.” What almost no one I know understands is that the Sub-Prime problem is but the tip of a colossal iceberg that is in a slow meltdown. I offer one recent example to illustrate my point that the “Financial Tsunami” is only beginning.

Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments. Now this might sound like small beer for Deutsche Bank, one of the world’s largest banks with over €1.1 trillion (Billionen) in assets worldwide. As Hilmar Kopper used to say, “peanuts.” It’s not at all peanuts, however, for the Anglo-Saxon banking world and its European allies like Deutsche Bank, BNP Paribas, Barclays Bank, HSBC or others. Why?

A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland, Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB’s US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta if not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world’s largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous “sub-prime” losses.

A new unexpected factor

The Ohio ruling that dismissed DB’s claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO’s in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That’s a lot by any measure!

In the Ohio case Deutsche Bank is acting as “Trustee” for “securitization pools” or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks “seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test,” the Judge concluded, “their weak legal arguments compel the court to stop them at the gate.” Deutsche Bank has refused comment.

What next?

As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as “interest only” Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession. (I regret the plethora of abbreviations used here but it is the fault of Wall Street bankers not this author).

The peak period of the US real estate bubble which began in about 2002 when Alan Greenspan began the most aggressive series of rate cuts in Federal Reserve history was 2005-2006. Greenspan’s intent, as he admitted at the time, was to replace the Dot.com internet stock bubble with a real estate home investment and lending bubble. He argued that was the only way to keep the US economy from deep recession. In retrospect a recession in 2002 would have been far milder and less damaging than what we now face.

Of course, Greenspan has since safely retired, written his memoirs and handed the control (and blame) of the mess over to a young ex-Princeton professor, Ben Bernanke. As a Princeton graduate, I can say I would never trust monetary policy for the world’s most powerful central bank in the hands of a Princeton economics professor. Keep them in their ivy-covered towers.

Now the last phase of every speculative bubble is the one where the animal juices get the most excited. This has been the case with every major speculative bubble since the Holland Tulip speculation of the 1630’s to the South Sea Bubble of 1720 to the 1929 Wall Street crash. It was true as well with the US 2002-2007 Real Estate bubble. In the last two years of the boom in selling real estate loans, banks were convinced they could resell the mortgage loans to a Wall Street financial house who would bundle it with thousands of good better and worse quality mortgage loans and resell them as Collateralized Mortgage Obligation bonds. In the flush of greed, banks became increasingly reckless of the credit worthiness of the prospective home owners. In many cases they did not even bother to check if the person was employed. Who cares? It will be resold and securitized and the risk of mortgage default was historically low.

That was in 2005. The most Sub-prime mortgages written with Adjustable Rate Mortgage contracts were written between 2005-2006, the last and most furious phase of the US bubble. Now a whole new wave of mortgage defaults is about to explode onto the scene beginning January 2008. Between December 2007 and July 1, 2008 more than $690 Billion in mortgages will face an interest rate jump according to the contract terms of the ARMs written two years before. That means market interest rates for those mortgages will explode monthly payments just as recession drives incomes down. Hundreds of thousands of homeowners will be forced to do the last resort of any homeowner: stop monthly mortgage payments.

Here is where the Ohio court decision guarantees that the next phase of the US mortgage crisis will assume Tsunami dimension. If the Ohio Deutsche Bank precedent holds in the appeal to the Supreme Court, millions of homes will be in default but the banks prevented from seizing them as collateral assets to resell. Robert Shiller of Yale, the controversial and often correct author of the book, Irrational Exuberance, predicting the 2001-2 Dot.com stock crash, estimates US housing prices could fall as much as 50% in some areas given how home prices have diverged relative to rents.

The $690 billion worth of “interest only” ARMs due for interest rate hike between now and July 2008 are by and large not Sub-prime but a little higher quality, but only just. There are a total of $1.4 trillion in “interest only” ARMs according to the US research firm, First American Loan Performance. A recent study calculates that, as these ARMs face staggering higher interest costs in the next 9 months, more than $325 billion of the loans will default leaving 1 million property owners in technical mortgage default. But if banks are unable to reclaim the homes as assets to offset the non-performing mortgages, the US banking system and a chunk of the global banking system faces a financial gridlock that will make events to date truly “peanuts” by comparison. We will discuss the global geo-political implications of this in our next report, The Financial Tsunami: Part 2.

© 2007 F. William Engdahl

[ex-Texan]

Virtual Money Laundering Now Available on the World Wide Web

Excerpts:

Money launderers can now move illicit cash through the growing number of virtual reality role-playing games, and convert that cash into real currency before withdrawing it from ATMs worldwide. One wonders just how many laundrymen have tumbled to this cyberlaundering opportunity.

Compliance officers at financial institutions please note that their banks may be guilty of money laundering if it facilitates deposits or payments in these virtual worlds, for there is no functional due diligence on players or recipients. * * *

Unfortunately, some of these games allow one to convert real dollar deposits to virtual dollars, and back to real dollars at a fixed exchange rate of, for example, ten to one, and to withdraw those funds, using many of the automated teller machine services available globally. Players are given an ATM card,(in essence a re loadable debit card) by the game manager and pay regular service charges on the same to the operator of the virtual reality website. * * *

Just though you would all like to know. The truth is hard to take most of the time. More often than not, it is also very painful to learn, deal with sensibly and endure with dignity. The truth is not pretty. It is ugly and mean spirited and very angry and eats morons like candy.

Gobble, Gobble . . . . .

[stephenjohnbanker]

“The scam is called “theft by deception,” a felony in virtually every state. It is also called mail fraud which is federal felony. The scam is very well organized. The practice was aimed primarily a people who already have glitches on their credit. Recently, with the subprime crisis expaning, even people with perfect credit have become targets. “

Bingo!

[stephenjohnbanker]

It’s good news week.!

[stephenjohnbanker]

“DAMN!!! Man, that would be a pisser, for someone with perfect credit who has never missed a payment on anything, and always has a zero credit card balance every month”

Yep

[Travis McGee]

“Got ammo?”

[stephenjohnbanker]

““Got ammo?”

Yeah, and I might need it. My brother got a late notice(and a 39.00 late charge) after he mailed his payment back 12 days before it was 1 day late. He had his friend, an atty call them. They relented.

[M. Espinola]

"For those of you who doubt the veracity of ex-texan....I have been in high finance all of my life, and ex-texan is telling the gospel truth. Believe what you want, but he and I predicted this mtg downfall almost 2 years ago. We were flamed! Not anymore!

Recession Fears Weigh Heavily On the Markets

Province warned of housing price crash

How Wall Street whizzes went so wrong on the housing market

"We thought after Enron that we had put an end to off-balance-sheet financing," said Jack Coffee, a law professor at Columbia University. "Just six years after Enron, we're seeing some of the same problems surface."

Recent mortgage-bond write-downs

Citigroup:CEO Charles Prince resigned Nov. 4. Nation's largest bank expected to write down $8 billion to $11 billion this quarter. Rival Goldman Sachs suggests Citigroup may be forced to write down $15 billion over the next two quarters.

Merrill Lynch: CEO Stanley O'Neal forced out on Oct. 30. Bank announced $8 billion write-down for the third quarter; analysts warn of a $10 billion write-down this quarter.

UBS:Swiss banking giant wrote down $3.4 billion in the third quarter, but reports suggest another $7 billion write-down may come in the fourth quarter.

Bank of America:Warned of a $3 billion write-down in the fourth quarter.

Bear Stearns: Will write down $1.2 billion in the fourth quarter; several funds tied to mortgage loans now closed or bankrupt.

Wachovia: Warns of fourth-quarter writedown of $1.1 billion.

The proof is in the housing downfall headlines, (banks are next) yet there still lurks a few agenda driven shills, promoting their the same worn out lies. This was the element which was deeply involved in those multi-attacks against ex-Texan. These slithering cowards refuse to admit ex-Texan was right all along - and they were, and are, always wrong.

2007 was a preview for 2008

[M. Espinola]

On sale at a real bargain! :)

[BoringGuy]

It’s like trying to prove which farmer owns which pig, in a million packages of sausage that came from cows and pigs on a thousand farms.

There is a difference...the original mortgage holder of this pig recorded their interest at the courthouse of the county where the pig was domiciled. Since the original mortgage holder is a matter of public record, it should be possible to trace the actual mortgage paperwork without TOO much hassle.

[Rutles4Ever]

My wife went to an area mall on Sunday - the largest in the area in which I live, and the fifth largest mall in the country - and it was absolutely DEAD as a doornail. Went to Target yesterday afternoon, and that too was dead. Went to Home Depot yesterday - no waiting in line!

About the only places doing business are the ones selling merchandise at cost. I expect to see some major price slashing in about two weeks.

[Travis McGee]

Given enough time, lawyers and judges, perhaps.

But in the meantime, the velocity of money goes to zero as credit freezes.

[Travis McGee]

It’ll be an intersting shopping season. The biggest wave of ARM resets is due first quarter of 2008. There will not be many big spenders in that group!

[Comstock1]

How about the judge’s decision saying just that.

[ex-Texan]

PBS Video on Credit Crisis That Wall Street Does Not Want You to See

$2 trillion in housing wealth going away forever

Foreclosure neighborhoods
Toxic mortgage bombs going off
Unethical, greedy mortgage brokers
Stupid, corrupt ratings agencies
Wall Street out of control greed
Corporate Fraud, Dirty Tricks and More Fraud
Ameriquest insider spills the beans
Political corruption and collusion

How Morgage Companies Steal Your House . . .

And more revelations are coming about corruption on Wall Street !

The FBI was useless and is still useless today. And what about illegal wire tapping of lawyers, death threats made to lawyers and mortgage company witnesses . . . ?

HUH! ? ? ? . . . DUH!

[stephenjohnbanker]

BUMP