Thursday, July 30, 2009

Senate Investigates Mortgage Fraud at Banks

A Senate panel has subpoenaed several financial institutions, including Goldman Sachs and Deutsche Bank, seeking evidence of fraud in last year's mortgage market meltdown. According to the WSJ, the congressional investigation is focusing on whether internal communications, such as email, show bankers had private doubts about whether MBS they were structuring were as financially sound as advertised to their clients. Unfortunately, the Senate probe is about four years too late to make a difference to the economy, but at least somebody is going to get in trouble, and maybe we'll have some interesting hearings to watch on TV.

Make no mistake, some juicy emails will be uncovered. If there's anything that Wall Streeters do well, it's revel in the idiocy of the investors that purchase their latest financial concoctions. Anyone remember the Enron tapes? Or the musings of a young Henry Blodget who publicly rated internet companies a buy, while privately marveling at their crappy business models? How about Jack Grubman, the "highly respected" telecom analyst who relentlessly told investors to buy Worldcom (in addition to around 10 other stocks that eventually went bankrupt) so he could get his kids into a good private school? As a more recent example, we have the former Bear Stearns internal hedge fund managers, Matthew Tannin and Ralph Cioffi, who await their criminal trial for expressing concerns about their funds' performance a couple of months before the funds imploded.

Something good is bound to turn up. Maybe something like this?

Email exchange between CDO structurer and his boss in late 2006:
CDO guy: Um. Have you looked at the latest batch of mortgages we received? I can't put this in something we plan to have AAA-rated.
Boss: What's the problem? You do this every day.
CDO guy: Every single one of these mortgages is going to default in like four minutes. They've probably already defaulted, we just haven't received word from the servicer yet.
Boss: Look buddy. If you're having moral issues, you better let me know now so I can give you the boot and replace you with some other guy that wants to get paid $2 million this year.
CDO guy: It's just that my grandmother's mortgage is in this pool.
Boss: Yeah so?
CDO guy: Countrywide gave her a $1.4 million cash-out refi with a 1% teaser that resets in 6 months at Libor plus 15%.
Boss: And the problem?
CDO guy: She lives in Florida and collects social security as her only income. Every one of her neighbors on the street is in this mortgage pool. They are a bunch of 80 year olds living in modest houses that sold for $150K two years ago!
Boss: Fine, I'll throw in an extra $500 grand into your bonus. If you wanted a raise, why didn't you just ask?

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