Posted tagged ‘Mortgage Crisis’

Too Busy To Post, Too Enraged Not To Note The Latest Bit of Fraud/Nonsense–Mortgage Backed Securities/Foreclosure disaster edition

October 13, 2010

On multiple deadlines today, but I couldn’t resist this juxtaposition.

First, this, from two weeks ago (h/t LegalForesicAuditors.com):

NEW YORK — JPMorgan Chase has temporarily stopped foreclosing on more than 50,000 homes so it can review documents that might contain errors.

JPMorgan’s move Wednesday makes it the second major company to take such action this month, underscoring a growing legal problem. The issue could stall an already overloaded foreclosure process.

…..

JPMorgan acknowledged Wednesday that its employees signed some affidavits about loan documents without personally verifying the files. These affidavits verifies the accuracy of the loan information, including who owns the mortgage.

….

In some states, lenders can foreclose quickly on delinquent mortgage borrowers. But 20 states use a lengthy court process for foreclosures. They require documents to verify information on the mortgage, including who owns it. Florida, New York, New Jersey and Illinois are the biggest states with this process. 

Christopher Immel, a Florida lawyer who represents homeowners, said people who already have lost homes could sue their lender, alleging errors in documents.

In August, a judge in Duval County, Fla., ruled that JPMorgan could not foreclose on two homeowners. The reasoning was that Fannie Mae carried the mortgage on its books and JPMorgan Chase only collected payments on the loan. JPMorgan Chase had identified itself as the owner of the loan.

….

More lawsuits could come soon.

In May, JPMorgan employee Beth Ann Cottrell said in a deposition that she and her staff of eight signed about 18,000 legal documents a month without reviewing every file. In a similar testimony, GMAC employee Jeffrey Stephan said he signed 10,000 documents a month without personally verifying the mortgage information.

And then there’s this, hot of the intertubes via NYTimes.com:

JPMorgan Chase kicked off what was expected to be a mixed quarterly earnings season for big banks on Wednesday with a 23 percent increase in third-quarter income.

After powering ahead for the last year on the strength of its trading operations, JPMorgan topped investor expectations with the help of improvement in its credit card business and a gain from money it had previously set aside to cover possible losses from bad loans.

Net income rose to $4.42 billion, from $3.58 billion a year earlier. Earnings were a $1.01 a share, handily topping analyst forecasts for 88 cents. Earnings were 82 cents a share in the period a year ago.

The Times piece does note the fact that the bank faces significant costs and potential liability as it confronts the failure of its foreclosure process, and it quotes JPMorgan’s new CFO trying to discount the implications of this issue, saying “The whole mortgage issue costs us so much money now, to me it [the foreclosure SNAFU] is incremental.”

Just two quick thoughts:

1:  Given the different avenues through which JPMorgan is exposed to potential liability (as holder of delinquent loans, and through its role in the making of the market in mortgage backed securities affected by flawed documentaton — see this excellent series for more), the confidence expressed by the CFO in question, Mr. Douglas Braunstein, reminds me of this moment of assurance:

2:  What justification can anyone provide for the ongoing employment and wealth of the management of the major US banks/investment houses?

And to add just one more query in the spirit of honest curiousity:  what rationale is left for avoiding a modernized version of Glass-Seagall?  Commercial lending is a public utility, and needs to be both regulated and guaranteed as such.  Everything else can be at one’s own risk — but the two activities have to be kept separate, not just by alleged Chinese Walls, but institutionally, at the level of holding of capital and the existence of public insurance/guarantees.

Tell me, anyone, why this is wrong.

All of which is to say that before the Obama adminstration or Congress starts immunizing the big Wall St. firms from the consequences of what appears to be a decade of profiteering on real estate fraud, we gotta take the current structure down to the foundations.

Carthago Delenda Est.

Image:  Vincent van Gogh, “The Cottage,” 1885.

Friday (Isaac) Newton blogging (Monday edition): Isaac solves the subprime mess.

March 24, 2008

We are in a mess. How bad is it? I don’t know — but when the Fed et al. race to make sure that the most significant housing lenders in this country are less fiscally sound than they were last week, all to pump some extra dollars into the mortgage market, you know it ain’t good.

What to do? Why, suggests Tim over at Balloon Juice, let’s get the right man for the job:

Isaac Newton, of course.

Tim was joking, I think, but in fact Newton would be a more appropriate choice than just about any other physicist I could name. England in the late seventeenth century experienced a financial revolution as well as its more famous scientific one. Newton took part in both.

For example — he was among the great and the good whose advice was sought on what to do about the disappearance of England’s silver coinage in 1695 — along with such luminaries as John Locke, Charles Davenant and Christopher Wren.

Then, beginning the next year, first as Warden and then Master of the Royal Mint, he became a significant, if not the dominant player in the transformation of England’s money system from a silver to a de-facto gold denominated pound.

More to Tim’s point, Isaac Newton took up his role in England’s nascent financial bureaucracy at a time of wild, uncontrolled, truly exuberant financial engineering. This was a time when the English government’s attempts to fund a wildly expensive overseas military adventure (the Nine Years War) stretched to include licensing the issue of tickets that were at once (a) high-interest bonds (what might later be known as junk), backed by a stream of government tax revenue on malt, the key raw ingredient in making beer;* (b) entries in a lottery, offering chances to win up to a 1,000 pounds against a ten pound ticket; and (c) paper money.

As another excessively premature plug — I cover all this in my book on Newton as a currency cop, coming out early next year. But for now the point is that Newton was not only present while all this happened. He was in fact a fairly senior civil servant working for a government struggling to figure out how to fund and foster a transforming economy. He was a pretty smart guy too, I hear, and he thought in some detail about questions of credit, government control, and probity in financial dealings.

He came to a lot of quite sensible conclusions about the new paper instruments, and the proper role of debt and credit: “If interest be not yet low enough for the advantage of trade and designs of setting the poor on work..the only proper way to lower it is more paper credit till by trading and business we can get more money.” Keynes forshadowed, anyone?

And then there is this: “Tis mere opinion that sets a value upon money; we value it because with it we can purchase all sorts of commodities and the same opinion sets a like value upon paper security….All the difference is…that the value of the former is more universal than that of the latter.”**

Interest is certainly heading low enough for the advantages of American export trade. (evanescing dollar, anyone? I’m only complaining as one who just had to wire a fee for a researcher in London). We still have a way to go to set the poor on work, but at least Newton had that as one of his priorities, which is more than I can say for some, on the evidence. And certainly, the interesting times (in the Chinese sense) we are living in confirms the truth of the observation of the relationship of opinion and value.

But even though Newton could see what many others could not about the essentially abstract nature of money, he was not entirely immune to the confusion — or perhaps to baseline human desires — triggered by half-comprehended new notions of finance. His first investment in the South Sea Company paid off, when he sold on the rise.

But even though there could have been no other man in England better placed to grasp the mathematical implications of the unfolding scheme — he still bought back into the madness of the bubble year, 1720.

He lost, by his heirs’ estimate, some 20,000 pounds — a prodigious sum, a fortune.*** It’s hard to gauge what that means across such gaps of time, but using the Parliamentary research service’s estimate of inflation across that time, a rough guesstimate leads to the conclusion that the smartest man in Europe blew the modern equivalent of better than three million pounds on a “greater fool” dynamic of what had become, in the end, a fairly straight forward pump-and-dump stock fraud.

Newton had succumbed to greed, or perhaps the simple impetus of the common mania — but which ever it was, it still overcame both his capacity to think quantitatively (Newton!) and any prudential impulse. After all, he was rich already. He didn’t need to risk much to gain much: when he died, seven years after the bubble year, he still left a fortune of 30,000 pounds, not counting his land in Lincolnshire.

The moral of the story: This is why you need to regulate financial markets. No one, not even the cleverest, is immune to all the familiar temptations of money in flux. No wise man remains wise always; one of the most reliable inducers of folly is the possibility of gains that seem to repeal financial laws of gravity. Rules that are no respecters of persons are there to save even the Isaac Newtons among us from themselves.

*More crucial than you might think given that weak beer was the staple fluid in a society where the water supply looked like this.

**Both quotes taken from Newton’s Mint papers, and published in G. Findlay Shirras and John Craig, “Sir Isaac Newton and the Currency,” in Economic History. Subscription required.

***It’s not quite clear from the record exactly what Newton lost in the bubble. The suggestion is that he lost an investment of 20,000 pounds, but this seems unlikely, given what is known about Newton’s income throughout his career. More likely, and the more popular interpretation among Newton scholars, is that Newton converted into South Sea stock debt instruments with a total, long term future value at that rather grand number. In other words, he didn’t lose tens of thousands in cold cash; rather, he gave up income that could have added up to very satisfying amounts over time. Still a lot of money, but not the stunning out-of-pocket disaster the raw number implies.

Images: Quentin Massys, “Der Goldwäger und seine Frau,” 1591. The reproduction is part of a collection of reproductions compiled by The Yorck Project. The compilation copyright is held by Zenodot Verlagsgesellschaft mbH and licensed under the GNU Free Documentation License. Source: Wikimedia Commons.

South Sea Bubble Card, 1720. Source: Wikimedia Commons.

Don’t Play Poker With…

March 16, 2008

JP Morgan.

This not so much science as natural history. Observe the behavior of the fauna in the wild.

Or perhaps this is science, or at least an illustration of the kind of observation on which scientific ideas rest. Consider this quote:

I should premise that I use the term Struggle for Existence in a large
and metaphorical sense, including dependence of one being on another,
and including (which is more important) not only the life of the
individual, but success in leaving progeny. Two canine animals in a
time of dearth, may be truly said to struggle with each other which
shall get food and live.

That Charles Darwin fella kinda had a thought or two in his head.

One Bear goes extinct, and a more lupine creature feasts on its carcase.

File this one variously: The Struggle for Existence (the title of the chapter of The Origin from which the quote above was taken); Homo hominis lupus est, (with a nod to my man Tommy Hobbes); or perhaps in the Gordon Gecko file, under the subhead, “The Rich Get Richer (even the ones that fail).”

And yes, this all pretty much an excuse to link to the ur-Darwin text one more time. It’s never a bad moment to read a little of what the Devil’s chaplain had to say.

Update: I’d temper my snark about wealth immune to risk because while it is certainly true that people like Bear Stearns chairman “Ace” Greenberg have done OK over the years, but there are a lot of folks out there less well cushioned to the blow. They’re grownups, risk is risk, and Wall Street is not for the faint of heart…but still, it’s a very bad day for a lot of folks, and I do not want too dance to hard to other folks’ dirges. (h/t Atrios)

Update 2 (March 24, 2008):  Maybe you can play poker w. JP after all.  Perhaps there was a reason Bear Stearns managed to maintain the third highest average compensation average of the big players on Wall Street as recently as 2006.  (h/t Atrios)

Image: Alfred Wierusz-Kowalski, “Wilki podczas zamieci” [AKA — your guess is as good as mine, unless you have some Polish competence handy], 1910. Source: Wikimedia Commons