"Massive Fraud" At Center of Bank of America Trial

The trial against Bank of America Corp's Countrywide unit has begun and the prosecutor has stated that the company placed profits over quality in a "massive fraud" selling shoddy mortgages to Fannie Mae and Freddie Mac.

The claim came at the start of the first case by the government to go to trial against a major bank over defective mortgage practices leading up to the 2008 financial crisis. Pierre Armand, a lawyer in the civil division of the U.S. Attorney's Office in Manhattan, said Countrywide made $165 million selling loans that it promised were investment quality to Fannie and Freddie. "What documents and witnesses will show is that the promise of quality was largely a joke," Armand said.

We will post any important or interesting pieces of information that are reported from the trial. For more information, see 'Massive fraud' at center of trial against BofA over U.S. mortgages 

JP Morgan Facing Criminal and Civil Charges For Mortgage Security Fraud

On the heels of the announcement of charges against Bank of America for fraudulently selling investors mortgage backed securities, JPMorgan Chase disclosed on Wednesday that it faced a criminal and civil investigation into whether it sold shoddy mortgage securities to investors in the run-up to the financial crisis,

According to the New York Times, JPMorgan has acknowledged fthe existence of the investigation — one of several mortgage-related problems looming for the bank — in a quarterly regulatory filing. It said that the civil division of the United States attorney’s office for the Eastern District of California, has “preliminarily concluded” that JPMorgan flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage.

Adding to scrutiny of the bank, the NYT is also reporting that federal prosecutors in Philadelphia are examining whether JPMorgan duped investors into buying troubled mortgage securities that later imploded, The prosecutors are investigating whether JPMorgan churned out the mortgage-backed securities without ensuring that the investments met underwriting standards,

Representatives for the bank and the federal prosecutors declined to comment.

For more information - JPMorgan Reveals It Faces Criminal and Civil Inquiries
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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

The Credit Crisis Visualized

Very well done explanation of the credit crisis. Given the medium and a running time of 10 minutes, there are some oversimplifications, and one could quibble with some of the underlying assumptions, but if you want a good overview of what happened, spend 10 minutes here. No politics, no fingerpointing, just an explanation.

Wall Street Goes To Congress

On Wednesday, eight chief executives of big banks will make their
way to Washington to appear at a Congressional hearing in front of the House Financial Services Committee.

Tthe guest list will be interesting. The chief executives scheduled to appear are Lloyd Blankfein (Goldman Sachs), Jamie Dimon (JP Morgan Chase) John Mack (Morgan Stanley), Vikram Pandit (Citigroup) and Kenneth Lewis (Bank of America).

DealBook is calling for a public flogging. It should be interesting.

Goldman Sachs to Repay TARP Funds Early

While the President's proposal to cap executive comp at $500,000 a year is, IMHO, a seriously misguided attempt to address the financial crisis, it may have some ancillary benefits. Goldman Sachs Group Inc (GS.N) Chief Financial Officer
David Viniar said the bank is keen to avoid restrictions it agreed to
after receiving funds from the U.S. government late last year and it is
looking to pay the money back as soon as possible.

That's great. Give the American taxpayer back his money, and figure out how to get out of your financial mess on your own. Sounds good to me.

Source: Reuters: Goldman Sachs CFO Seeks to Repay TARP Funds.

Mixing Regulatory Failures is Wrong

In an effort to come up with a New Year angle, the LA Times calls 2008 the end of the Masters of the Universe era on Wall Street. Fortunately, the fact that the Bonfire went out in March of 2000, nearly 8 years ago does not undermine the real point of the article - Washington needs to fix this mess.

Blaming the Fed for the losses at the investment banks makes no sense, since there is a difference between a bank and an investment bank. A huge difference, not the least of which the identity of the regulator. Banks are regulated by the Federal Reserve. Investment banks are regulated by the SEC and FINRA.

And calling the piece Wall Street Follies when the main point of the article is subprime lending in the housing market, only demonstrates a misunderstanding of our financial system. Banks made those loans, not Wall Street.

Of course, Wall Street repackaged those loans into securities, and this may all be a distinction without a difference. However, pushing the blame onto the wrong entities clouds the enormous nature of our current problem - it was a failure of Treasury, the Fed and the SEC that leads us to where we are, and a failure that lasted for many years.

We find ourselves where we are because of the Four Horsemen of the Apocalypse - Paulson, Bernanke, Cox and Bush, so the distinctions probably don't matter. They all failed at their mission.

The End of the Financial World as We Know It

Great roundup of the current financial crisis by Michael Lewis in the NYT. I have minor disagreements with minor portions of this op-ed piece, but overall a great summary of what went wrong, and why. Madoff, Freddie and Fannie, Lehman, the SEC, and more.

The End of the Financial World as We Know It

Fund Blames US Regulators for Losses

You gotta love the Madoff Middlemen. Now they are blaming the regulators for their own failures, even from overseas. A British investment fund, which apparently lost something like 30 million dollars, is screaming about the "systemic failures" in the US regulatory system.

The SEC and FINRA certainly blew this. (Why does no one talk about FINRA's culpability here? They are the primary regulator for Madoff's broker-dealer, not the SEC). However, the SEC was not created to protect 300 million dollar hedge funds, and is certainly not in the business of protecting hedge funds that are located in foreign countries.

Those investment institutions are considered to be experienced enought, and financially educated enough to protect themselves, to conduct their own due diligence and to make their own investment decisions. The US securities statutes recognize the ability of investment professionals to make their own decisions, as do the investors who give these managers their money to invest.

The SEC blew this, but that does not excuse, or even address, the failure of these well paid "investment managers" to recognize a Ponzi Scheme when it was staring them in the face. And, it is comments like this, and the fact that other professionals did spot the fraud, that leads to the question

"What the heck did you do for your 2% plus 20%?"

If the fraud was so easy to spot that the SEC should have stopped it, let's take a look at the fund's due diligence file when it investigated, recommended, and maintained its investment in Madoff.

That is where the blame lies.

Investment fund slams US regulators

The Start of the Mortgage Meltdown

With landscapers claiming $150,000 a year incomes, WaMu built a home mortgage business that eventually collapsed in a sea of bad mortgages. The NYT has a story today that provides an intense insight into the home mortgage business, and the collapse of Washington Mutual.

By Saying Yes, WaMu Built Emplire on Shaky Loans

Reserve Primary Fund Threat Ices Shareholder Claims

You remember the Reserve Fund, it broke the buck last month, and everyone sued. Now it has told its shareholders, take 98.5 cents on the dollar (the broken buck price) or we will defend ourselves, using your money - the assets in the fund.

Yup, the trustees of the fund entered into an agreement with the fund manager to pay legal expenses, so the shareholders' own money will be used to defend the shareholders' suit.

The provision is actually not at all unusual. Its application is bizzare.

The Financial Crisis: What Went Wrong?

I am just linking to this, because I am not a tax expert by any stretch of the imagination, and Profession Caron, from the University of Cincinnati College of Law, is one.

Take a couple of minutes and read it. No spin, no blaming Jimmy Carter or any other nonsense, just an analysis.

Then decide who screwed this up.

TaxProf Blog: Seto: The Financial Crisis: What Went Wrong?

Mushroom Cloud over Wall Street as US Constitution Burns

Mushroom Cloud over Wall Street as US Constitution Burns:

These are dark times. While you were sleeping the cockroaches were busy about their work, rummaging through the US Constitution, and putting the finishing touches on a scheme to assert absolute power over the nation's financial markets and the country's economic future. Industry representative Henry Paulson has submitted legislation to congress that will finally end the pretense that Bush controls anything more than reading the lines from a 4' by 6' teleprompter situated just inches from his lifeless pupils. Paulson is in charge now, and the coronation is set for sometime early next week. He rose to power in a stealthily-executed Bankster's Coup in which he, and his coterie of dodgy friends, declared martial law on the US economy while elevating himself to supreme leader.

Wall Street Bailouts

There is, of course, much talk about the past, pending and proposed "bailouts" of Wall Street and AIG, and I have consistently taken the position that these bailouts are not actually bailouts, they are in effect, guarantees by the government. Not one taxpayer dime has been spent in these "bailouts."

While I am still undecided about whether these guarantees are the right thing to do, the new, and true, bailout is coming down the pike. The Bush Administration is working on a $700 BILLION dollar bailout...a true bailout. There are about a trillion things wrong with the proposed bailout, including the fact that Wall Street executives are going to be hired as consultants to decide which of them get the money, but the most outrageous part of the package is the soon-to-be-infamous, Section 8.

Bush's proposed bailout will be administered by Secretary of the Treasury Paulson. Nevermind the fact that he shares some of the blame for the current mess we are in, the proposal contains the following statement, labeled Section 8:

Decisions by the Secretary pursuant to the authority of this Act are
non-reviewable and committed to agency discretion, and may not be reviewed
by any court of law or any administrative agency

Over the past 8 years we have seen constant attacks on the Constitution,
but this one is the mother of all attacks, and is a flagrent, unabashed and outrageous attempt to re-write the Constitution. There was a time when certain factions in the government was embarrased about trashing the Constitution, and it did so in private, behind closed doors, in secret whispers. No more.

Now they have given up all pretenses - the decisions by the Secretary are non-reviewable by any court of law.

Nevermind that the first court to decide this issue will strike that provision in a heartbeat, are our Republican and Democratic Senators and Congressmen going to pass a bill that totally violates the doctrine of separation of powers and judicial review?

My hair is standing on end. We are going to use 700 BILLION DOLLARS to bail out Wall Street (it will actually be much more than 700 billion, as the power of the Secretary is only limited to 700 billion at any one point in time. He can buy 700 billion in assets from a failed bank, sell those assets for 200 billion, and do it all over again). Forget that for the moment, forget whether the bailout is a good idea or not (just for a moment), the Secretary of the Treasury, who is partly responsible for the crisis, is going to hire Wall Street executives to distribut the funds, to other Wall Street executives, and his actions are not reviewable by anyone in the government?

And even if you think Paulson is the greatest financial genius of the modern age - we are going to have a new Secretary of the Treasury in a few months. There is nothing that says that McCain will keep him, and surely Obama will not.

I am sorry to say it, but this is yet another example of the "politics before country" doctrine that has become so prevalent in Washington. Screw everyone, lets make sure we stay in power (or get the power), control the government and turn billions over to our supporters and cohorts.

This bill needs to be quashed, and quashed fast. There is no excuse, no justification, no reason, for this disregard of the Constitution; even assuming that the bailout is a great idea.

Update: We are not the only one outraged by this in-your-face attack on the Constitution:

The National Review: The Bailout

The National Review - Newt Gingrich: Before D.C. Gets Our Money, It Owes Us Some Answers

The Conservative Voice: The Mother Of All Frauds

Huffington Post: Dirty Secret Of The Bailout: Thirty-Two Words That None Dare Utter

The Nation: Is Paulson's Bailout Proposal Constitutional? No

Global Economic Analysis Blog: Weep For The Unites States of America

OpEdNews.com: The Bailout Bamboozle

McCain says he would fire SEC head Christopher Cox

This is what we are going to get for President? McCain loses it, goes off message and threatens to fire one of the best heads of the SEC (at least from a Republican standpoint.

McCain says he would fire SEC head Christopher Cox -- Newsday.com: "McCain says he would fire SEC head Christopher Cox"
Check out google on this. He is way off base, and way off message for his campaign..again.

Money Market Fund Halts Sales

During the auction rate securities crisis, when investors were complaining that no one told them that the auctions could fail, or that their investment might be illiquid, I often commented that the reason no one told them that was that auctions hadn't failed in decades, and the possibility was remote. I would then ask, "has anyone told you that your money market funds might not be liquid? Has anyone told you that your money market funds might go below a dollar a share?" The answer is always "No."

Well, both events can happen. We treat money market funds as cash - a completely liquid investment that you can cash in at any time, write a check against any time you want, just like cash in your checkbook. But it just ain't so. Read a prospectus for a money market fund. Those funds are not federally insured, and they could go below $1 per share, and there could be a freeze on liquidations.

We don't think about it, because it never happens. In my 25+ years working with the securities industry, I vaguely recall one money market fund going under a buck, and I also recall that the firm that ran the fund put additional money in to bring the NAV back to a dollar.

Liquidation freezes on money market funds just don't happen. Money market funds with an NAV of less than a dollar just don't exist.

Oh yes they do on both counts. MarketWatch is reporting that one of the largest money market funds has put a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1, a rare event known as "breaking the buck."

According to MarketWatch, Primary Fund, a $64 billion fund managed by money market fund inventor The Reserve, said late Tuesday that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero.

As of 4 p.m., the value of the fund's share was 97 cents.

This is a very significant event, and perhaps it will correct itself if Lehman's assets get sold, and its debt instruments regain their value, but the fact that it happened is going to cause tremors throughout the investing community.

One has to question why a money market fund is holding debt of a public company, rather than government bonds, and that in and of itself may lead to some significant lawsuits, depending on the disclosures made in the prospectus. And it also raises questions of where the heck is the SEC on this. They have been asleep at the wheel through all of this, and are apparently still sleeping.

Still, it is still not time to panic. It seems that The Reserve is a pure money market house, without sufficient cash to pump into a failing fund. Not so everywhere else.

According to the article, the large fund families are not having this issue. The article says that Fidelity Investments said that it was not having problems with its money market funds, and quotes a Fidelity spokesperson - "[w]e can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments," and "[w]e have been proactive in keeping our money market funds safe and in protecting the $1 net asset value, which has always been our number one objective in managing these funds."

Hopefully that is a true statement, but in the interim, anyone have a prospectus for Primary Fund?

UBS General Counsel Implicated in Auction Rate Securities Party

It seems that UBS just can't keep themselves out of the news. First the tax fraud investigation, then the Auction Rate Securities lawsuits, then the Massacheuttes Attorney General's suit, and the New York AG's suit.

Now this revelation from the Wall Street Journal -

Today, the WSJ’s Liz Rappaport reports that David Aufhauser, the former general counsel to the Treasury Department and the current GC for UBS’s investment-banking arm is at the center of the complaint that New York AG Andrew Cuomo recently filed against the Swiss bank for fraud in the ARS market.

Aufhauser (Wesleyan, Penn Law, Harvard MBA) is the individual described in Cuomo’s case against UBS as “Executive A,” the WSJ reports. The complaint, filed last week, alleges that he and six other UBS executives sold $21 million of their personal holdings in auction-rate securities in the months leading up to the market’s collapse, based on unique inside knowledge of the problems in the market. Aufhauser’s lawyer didn’t respond to requests for comment.

According to the article, UBS is denying any wrongful conduct:

A spokeswoman for UBS said: “As we have said previously, after an internal review assisted by independent external counsel, UBS does not believe there was any unlawful conduct by any employee in this matter.”

However, having your chief legal counsel identified as a participant in a fraud cannot be good for any brokerage firm; and in particular for one with as many black eyes as UBS.


Law Blog - WSJ.com : UBS General Counsel, Merrill, Implicated in Auction Rate Securities Party: "UBS General Counsel, Merrill, Implicated in Auction Rate Securities Party"

NY AG sues UBS for Securities Fraud

I have not seen the complaint yet, but according to the AP story, the complaint is similar to the one brought last month by the AG's office in Massachusetts.

The interesting part of this story is that the the NY AG - Andrew Cuomo is quoted as saying " UBS is not alone in this scheme." "We are looking at a number of other banks."

The AP is also reporting that investigators said they had identified several UBS employees who sold $21 million of their personal stakes in the market in the months leading up to its collapse, the lawsuit does not target individual executives. The story implies, but does not say, that the employees were selling their own auction rate securities, which if true, would be a severe blow to UBS.

The original UBS - Massachusetts post is here.

NY AG sues banking giant UBS for securities fraud:

Brokers Target of Criminal Investigation in ARS Scandal

First the State of Mass. went after UBS. Now Federal prosecutors are investigating whether two former Credit Suisse Group brokers lied to investors about how they placed their money into short-term securities.

Obviously the ARS issue is a hot topic, but I am concerned at the attempt to criminalize the conduct of individual brokers, when it appears that the ARS marketplace was as close to a fraud as one could imagine. Just read the emails that are attached to the UBS Complaint annd it becomes clear, assuming of course that the emails are accurate, that 1)the firms knew that the ARS market was collapsing in late 2007, and 2) they pushed brokers to move the securities out of the firm's inventory to its retail customers.

It is quite a stretch to hold the retail broker liable for the ARS debacle, as brokers are relying on their firms for the details of the securities that they sell. The rumors are that the brokers told their customers that the underlying securities were student loans, when in fact they were CDOs. The WSJ is making a big deal about that distinction, but IMHO, that is insignificant. Granted, CDOs carry more risk than student loans, but if that is the fraud, then prosecutors are going to walk away without a conviction, since the underlying securiteis are not in default, it is the auctions that failed, and those auctions failed regardless of the nature of the underlying paper.

OTOH, depending on how savvy the investor is, that distinction might just be material. I have a hard time believing that the average Joe, parking cash in an ARS knew or was concerned about the underlying paper, and therefore the elements of materiality and reliance would be missing from the criminal case.

Are we again going to see brokers taking the heat for a firm's fraud? Too many brokers were destroyed in the research scandal, and many fear the outlash against brokers for this debacle....even though most brokers who were involved with these securities knew as much about the underlying problems as their customers knew.

Of course, at issue is the $330 billion market for "auction rate" securities, which have now become illiquid.

UBS Charged With Fraud in Auction Rate Securities

Last week, the Massachusetts Securities Commission filed administrative proceedings against UBS Financial alleging that it defrauded its investors (and its own brokers) in connection with its sales of auction rate securities.

Of course, the Commission's complaint are only allegations, thus far unproven, and UBS has not yet responded to the compliant. However, if true, the allegations are serious, and provide significant insight into a corporate mindset at UBS which put its profits ahead of the well being of its customers, and its own employees.

At the same time, a brokerage firm is a business, and one of its businesses is buying and selling securities, often from its own inventory. However, the allegations of the complaint, and a reading of the emails, is a cause for concern.

Again, these are only allegations, and nothing has been proven, but the Commission alleges that UBS made material misrepresentations to its customers, and its brokers, regarding auction rate securities, and the viability of the entire concept. According to the Complaint, UBS senior management knew that the auctions were in trouble in late 2007, and embarked on a campaign to decrease its position in the securities, by selling those securities to their own customers, without disclosure of any of these issues to those customers.

These allegations will have a huge impact on the pending arbitrations that have been brought over auction rate securities, and on the untold number of cases that are being contemplated by law firms across the country. The allegations will have a significant impact for any customer who purchased the securities from UBS in 2008, as well as for the brokers who sold those securities.

The complaint is 110 pages long, and contains numerous attachments, of internal emails, is worth the time to review. The Commission has the complaint online, along with the exhibits.

Cox Blames Other Regulators For Sub Prime Mess

The SEC has been taking a bit of heat for the subprime disaster. That heat is a bit unfair, since the SEC has nothing to do with the oversight of banks and mortgage lenders, and very little to do with the credit markets.

Certainly the SEC takes part of the blame, at least so far as the valuation of those assets fell into the capital computations of brokerage firms, but even then, they are not the regulator that fell down on the job.

Well, Chairman Cox has finally come out and defended his organization. He points out that other regulators were involved, and asleep, well before this mess reached the broker dealers and the SEC's jurisdiction.

From Financial Times:

The regulatory lessons here extend far beyond the SEC,” said Christopher Cox, the SEC chairman, in an interview with the Financial Times. “Subprime only leached into the securities markets after it was already a horrible problem. There was complete breakdown in lending standards, a complete breakdown, one can infer from that fact, in supervisory standards for lending or at least the application of those standards.

“We’ve also found other regulatory gaps, not just statutory regulatory gaps for investment banks, but also for mortgage brokers, and we have discovered a host of perverse incentives in the securitisation process, only a small portion of which are the responsibility of securities regulators.

Politicians who are looking to create more regulations to address a problem that was caused by lack of enforcement of existing regulations should take heed.