Turn On The Lights, Watch The Roaches Scatter, Part 26

While Bank of America is acting like this is nothing more than a small paperwork problem, the reality of the Foreclosure Mess is that banks committed institutionalized fraud across the board on thousands, if not millions of mortgages.  The paperwork was "lost" because the loans were bogus, and nobody was asking because the banks were taken at their word.  When it was discovered that subprime mortgages were built on lies and worth squat, our economy unraveled.

Now what's left is threatening to collapse totally.  A whisteblower over at Zero Hedge explains the legerdemain of the ledger domain:

Then, we worked with underwriters of the deal to perform due diligence.  That is where this process breaks down.  They use sampling to verify the makeup of the pools.  There is a lot of pressure to get the deals done in a timely manner so they don’t have time to check every asset.  The most I’ve ever checked on a deal is 30%.   We’ve done some pools that came back very different from what the trader originally told us.  I’ll give a personal example and show how  it relates to the foreclosure crisis. 

I put together a large subprime deal where we said that the percentage of Stated income assets was 10%.  Out of a pool of over 500 assets, we ran our due diligence and pulled a sample of 50 assets, we had over 25% of the assets come back as stated income.  Well, we got another 50 assets and still came back with 22% stated.  It was obvious to me and the underwriter that the stated income levels were higher than originally reported. 

How did we handle this issue?  We threw all the stated income assets out of the deal.  In this case we threw out 22 assets and packaged the deal as 10%.  In fact that is how we would typically handle issues where we had discrepancies.  I told my boss on several occasions that it was a real fishy way of doing things, but as everyone was also doing it, my coworkers, the guys from Goldman, the agencies, I just kind of went along with it.  

We securitized that deal and put 10% stated on the dealbook.  S&P put their name on the package.  Goldman underwrote that deal and sent it out to hedge funds and pension funds.  What the hell? 

That deal was one of the worse deals that we did.  Many other deals did come in as reported. Some might have been only 15%, or 12%  instead of 10% stated.  In most of those cases, we might have only thrown out a couple of assets.  And, it may have mathematically worked out assuming that the sample is representative of the population, but it still leads me to my big problem, that there were far too many instances of incorrectly labelled loans, incorrect documentation such that the pool information which went on the dealbook could be very different from the actual makeup of the pool. 

Everyone else was doing it, nobody was going to check, just sign off on the bucket of fresh mortgage cole slaw and sell it to the hedge fund, and shut up about it.  The mortgage mills made money on the sale, the investment banks that approved the cole slaw made money, the hedge funds bet against the cole slaw and made money, the insurance underwriters got paid off and made money, the investor class who put money on the banks and hedge funds made money, the institutional investors who ran with the hedge funds made money, and everyone was happy.

You know, except the poor saps who lost their homes and the rest of the economy going belly up due to widespread unemployment and plummeting home prices.

Oops.  And now, because two years ago we refused to nationalize the banks and clean out the toxic sludge then, well now it's all caught up to us a second time.  And this time the damage could be catastrophic, like hitting an already weakened heart attack victim with a Humvee.

But it's just a paperwork problem, the banks say.

Sure it is.  Remember that when the banks are blaming you for this. After all, they have a hell of a lot to lose when people start asking if the cole slaw process was even legal in the first place.