Skip to comments.Did the Other Shoe Just Drop? Black Rock and PIMCO Sue Banks for $250 Billion
Posted on 07/17/2014 3:59:19 AM PDT by Neidermeyer
For years, homeowners have been battling Wall Street in an attempt to recover some portion of their massive losses from the housing Ponzi scheme. But progress has been slow, as they have been outgunned and out-spent by the banking titans.
In June, however, the banks may have met their match, as some equally powerful titans strode onto the stage. Investors led by BlackRock, the worlds largest asset manager, and PIMCO, the worlds largest bond-fund manager, have sued some of the worlds largest banks for breach of fiduciary duty as trustees of their investment funds. The investors are seeking damages for losses surpassing $250 billion. That is the equivalent of one million homeowners with $250,000 in damages suing at one time.
The defendants are the so-called trust banks that oversee payments and enforce terms on more than $2 trillion in residential mortgage securities. They include units of Deutsche Bank AG, U.S. Bank, Wells Fargo, Citigroup, HSBC Holdings PLC, and Bank of New York Mellon Corp. Six nearly identical complaints charge the trust banks with breach of their duty to force lenders and sponsors of the mortgage-backed securities to repurchase defective loans.
Why the investors are only now suing is complicated, but it involves a recent court decision on the statute of limitations. Why the trust banks failed to sue the lenders evidently involves the cozy relationship between lenders and trustees. The trustees also securitized loans in pools where they were not trustees. If they had started filing suit demanding repurchases, they might wind up suedon other deals in retaliation. Better to ignore the repurchase provisions of the pooling and servicing agreements and let the investors take the lossesbetter, at least, until they sued.
Beyond the legal issues are the implications for the solvency of the banking system itself. Can even the largest banks withstand a $250 billion iceberg? The sum is more than 40 times the $6 billion London Whale that shook JPMorganChase to its foundations.
Who Will Pay the Banks or the Depositors?
The worlds largest banks are considered too big to fail for a reason. The fractional reserve banking scheme is a form of shell game, which depends on liquidity borrowed at very low interest from other banks or the money market. When Lehman Brothers went bankrupt in 2008, triggering a run on the money market, the whole interconnected shadow banking system nearly went down with it.
Congress then came to the rescue with a taxpayer bailout, and the Federal Reserve followed with its quantitative easing fire hose. But in 2010, the Dodd Frank Act said there would be no more government bailouts. Instead, the banks were to save themselves with bail ins, meaning they were to recapitalize themselves by confiscating a portion of the funds of their creditors including not only their shareholders and bondholders but the largest class of creditor of any bank, their depositors.
Theoretically, deposits under $250,000 are protected by FDIC deposit insurance. But the FDIC fund contains only about $47 billion a mere 20% of the Black Rock/PIMCO damage claims. Before 2010, the FDIC could borrow from the Treasury if it ran short of money. But since the Dodd Frank Act eliminates government bailouts, the availability of Treasury funds for that purpose is now in doubt.
When depositors open their online accounts and see that their balances have shrunk or disappeared, a run on the banks is likely. And since banks rely on each other for liquidity, the banking system as we know it could collapse. The result could be drastic deleveraging, erasing trillions of dollars in national wealth.
Some pundits say the global economy would then come crashing down. But in a thought-provoking March 2014 article called American Delusionalism, or Why History Matters, John Michael Greer disagrees. He notes that historically, governments have responded by modifying their financial systems:
Massive credit collapses that erase very large sums of notional wealth and impact the global economy are hardly a new phenomenon . . . but one thing that has never happened as a result of any of them is the sort of self-feeding, irrevocable plunge into the abyss that current fast-crash theories require.
The reason for this is that credit is merely one way by which a society manages the distribution of goods and services. . . . A credit collapse . . . doesnt make the energy, raw materials, and labor vanish into some fiscal equivalent of a black hole; theyre all still there, in whatever quantities they were before the credit collapse, and all thats needed is some new way to allocate them to the production of goods and services.
This, in turn, governments promptly provide. In 1933, for example, faced with the most severe credit collapse in American history, Franklin Roosevelt temporarily nationalized the entire US banking system, seized nearly all the privately held gold in the country, unilaterally changed the national debt from payable in gold to payable in Federal Reserve notes (which amounted to a technical default), and launched a series of other emergency measures. The credit collapse came to a screeching halt, famously, in less than a hundred days. Other nations facing the same crisis took equally drastic measures, with similar results. . . .
Faced with a severe crisis, governments can slap on wage and price controls, freeze currency exchanges, impose rationing, raise trade barriers, default on their debts, nationalize whole industries, issue new currencies, allocate goods and services by fiat, and impose martial law to make sure the new economic rules are followed to the letter, if necessary, at gunpoint. Again, these arent theoretical possibilities; every one of them has actually been used by more than one government faced by a major economic crisis in the last century and a half.
That historical review is grounds for optimism, but confiscation of assets and enforcement at gunpoint are still not the most desirable outcomes. Better would be to have an alternative system in place and ready to implement before the boom drops.
The Better Mousetrap
North Dakota has established an effective alternative model that other states might do well to emulate. In 1919, the state legislature pulled its funds out of Wall Street banks and put them into the states own publicly-owned bank, establishing financial sovereignty for the state. The Bank of North Dakota has not only protected the states financial interests but has been a moneymaker for it ever since.
On a national level, when the Wall Street credit system fails, the government can turn to the innovative model devised by our colonial forebears and start issuing its own currency and credita power now usurped by private banks but written into the US Constitution as belonging to Congress.
The chief problem with the paper scrip of the colonial governments was the tendency to print and spend too much. The Pennsylvania colonists corrected that systemic flaw by establishing a publicly-owned bank, which lent money to farmers and tradespeople at interest. To get the funds into circulation to cover the interest, some extra scrip was printed and spent on government services. The money supply thus expanded and contracted naturally, not at the whim of government officials but in response to seasonal demands for credit. The interest returned to public coffers, to be spent on the common weal.
The result was a system of money and credit that was sustainable without taxes, price inflation or government debt not to mention without credit default swaps, interest rate swaps, central bank manipulation, slicing and dicing of mortgages, rehypothecation in the repo market, and the assorted other fraudulent schemes underpinning our systemically risky banking system today.
Relief for Homeowners?
Will the BlackRock/PIMCO suit help homeowners? Not directly. But it will get some big guns on the scene, with the ability to do all sorts of discovery, and the staff to deal with the results.
Fraud is grounds for rescission, restitution and punitive damages. The homeowners may not have been parties to the pooling and servicing agreements governing the investor trusts, but if the whole business model is proven to be fraudulent, they could still make a case for damages.
In the end, however, it may be the titans themselves who take each other down, clearing the way for a new phoenix to rise from the ashes.
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://EllenBrown.com, http://PublicBankSolution.com, andhttp://PublicBankingInstitute.org.
I don’t know why the link isn’t working when embedded in the post ,,, here it is ==>
How does a bank sell a loan “repeatedly to multiple buyers?”
we do realize that banks and institutions were forced at the point of a gun to write bad loans, right? We also understand that they devised a process to package the bad loans with good loans and sell them for a minimal profit in a market controlled by the fed gov, right? In that market, the fed gov made money as well as the banks and that market was controlled by Clintonites like Rahm, Mcauliffe, Gorelick and Barney Frank’s gay lover. People with no experience at all in financial dealing were making decisions on how to best manage and facilitate a trillion dollar shell game and people blame the banks while these people live large on their bonuses. Anyone who questioned it was called racist.
This is nothing but a shakedown.
Since the middle 1990’s the banks have been playing games with your most prized possession , your home , by selling the loan repeatedly to multiple buyers and in ways that are “not possible” when viewed through a lense called “the rule of law”, they have destroyed your titled interest
Wrong on many levels.No ones title interest has been destroyed for starters.
He he not exactly what happens... a bit biased.
Different _parts_ of a mortgage can be sold to different people.
The rights to “service” a loan [collect mortgage payments and administer ancillary customer services] is valuable. The future interest payments can be purchased. The future principal payments can be purchased.
The value of these is obviously a topic of great disagreement. Entire departments of dozens do nothing but analyze data and current environmental factors that affect such prices - so it really is a casino.
But loans aren’t ‘sold repeatedly to multiple buyers”. i’m sure there have been cases where a mortgage broker tried to sell loans to more than one entity to get paid more than once before absconding to Lithuania or Papa New Guinea... but that’s it.
But different _parts_ of loans are sold individually to different entities.
If they want to sue someone, they should start with Bill Clinton and the democrats who repealed Glass - Steagal.
Banks are painted as villains while the real culprit is the government. Who forced banks to make bad loans under the premiss of fair credit? Who set the down payment requirements and other guidelines? Who accepted fraudulent documents (Fannie and Freddie)? Banks don’t have sufficient funds to make and hold mortgages so they pass them upstream to government agencies. The bank holds servicing rights, which means they basically get some deposits and a small fee for administrative duties. Settlements to date have been a sham and ignored the real cause of the collapse-easy credit without proper due diligence. I think this suit is more about getting a settlement to avoid ongoing and expensive legal fees.
if it’s the govs fault, and we all know it is, then why sue banks? What will be uncovered when we all know that the banks were forced to give money to people they knew couldn’t pay it back. Then they had to make loans more attractive for people (HELOCs for one) so as to make the portfolio more marketable. The only thing the banks were doing was trying to make something out of a pile of crap fed to them by democrats and the government.
I don’t get the rush to sue anyone but the government..
It was the Community Reinvestment Act.
Even small town banks were blackmailed by the government.
Let me tell you a story.
My friend was current on his mortgage. Always paid it, often over paid.
One day his Mom called and said that his house was up for auction on the courthouse steps for “non payment of loan”. My friend had the check stubs.
Seems that the title was sold to three (3) different firms. All thought they had bought the loan, two of which were not getting paid and tried to foreclose.
Oh, and the company my friend was paying the loan to? Didn’t
Have the loan. Hadn’t for three years by that point.
It took him 18 months and thousands of dollars to get sorted out, and he is still worried that the title is clouded. During the court case, no one was able to actual figure out who had the actual loan.
” We also understand that they devised a process to package the bad loans with good loans and sell them for a minimal profit in a market controlled by the fed gov, right? “
Since that’s not at all true I hope we don’t understand this.
Collateralizing loans into CDOs and CMOs was extremely profitable and the government didn’t control it in any fashion. The Commodity Futures Modernization Act of 2000 saw to that.
You’re confusing the OTC derivatives market with Fannie and Freddie. Fannie and Freddie dealt in low risk, low yield conforming paper and had done so for decades.
The private OTC derivatives market peddled high risk, high yield paper and they were eating F&F’s lunch during the bubble. They were in this market in a huge way, and in it entirely because they wanted to be. It was very lucrative.
Investors gobbled up all the high yield paper that they could get. When the underlying securities collapsed they learned the meaning of ‘high risk’.
“we do realize that banks and institutions were forced at the point of a gun to write bad loans, right?”
This also is untrue or at least very misleading.
The Community Reinvestment Act applied only to retail banks and S&Ls, deposit taking financial firms. It did not apply to investment banks, to hedge funds, to pure mortgage lenders, and to other shadow banking firms that raise their money from investors.
The CRA mandated that deposit takers write a percentage of their loans in neighborhoods where they take in deposits. Ergo “community reinvestment”. There was no requirement that the loans be mortgages and certainly not that they be risky.
Banks holding bad mortgage paper did so either because their own lending practices were bad or because they were purchasing mortgage paper on the secondary market and didn’t vet it themselves.
Retail banks usually have good lending practices. They got in trouble when they trusted the rating agencies and bought AAA rated paper on the secondary market. A lot of that paper turned out to be junk at best and a time bomb at worst.
Whatever the lack of merits of the CRA if it hadn’t existed it wouldn’t have made a difference. If every CRA loan written had failed it wouldn’t have created the financial crisis. There simply weren’t enough of them.
The financial crisis developed in the multi trillion dollar derivatives market which was driving the demand for subprime paper. Bundlers wanted all the subprime paper that they could get and they had an army of loan brokers writing it for them.
Seriously, wow thanks for the education.. this really helps.
It is called fraud. My sister had 5 different banks own her mortgage during 3 years time. Wells Fargo was the last and they foreclosed on her. She did not pay her mortgage for 3 years while her paper was sold to all those banks.
The lenders would sell packages of mortgages with the bad ones mixed in. The next bank would resell. Hot potato.
We the taxpayers got burned.
Goldman Sachs execs and others got immensely rich with zero punishment.
FDIC's great insurance if fewer than 5 banks go under...
Nice overview ... thanks
“If they want to sue someone, they should start with Bill Clinton and the democrats who repealed Glass - Steagal”
Killing Glass-Steagall, aka the Banking Act of 1933, was a bipartisan effort.
The final nail in Glass-Steagall was the Gramm-Leach-Bliley Act, aka the Financial Services Modernization Act of 1999.
It was signed by Clinton, but Gramm, Leach, and Bliley are all Republicans.
The Republicans are the stupid party. The Democrats are the evil party. Sometimes they get together and produce something that is both stupid and evil, and they call it ‘bipartisanship’.
How does a bank sell a loan repeatedly to multiple buyers?
You don’t actually sell the loans into the trusts ,, you just give them a spreadsheet with the property and loan information ,, THERE WERE NO TRUE SALES ... if you’re getting close to a deadline and need a few hundred loans to close out an issue you simply cut and paste from another CDO ...
we do realize that banks and institutions were forced at the point of a gun to write bad loans, right?
Make the CRA argument all you want , it doesn’t hold water ,, the CRA areas largely were skipped in the ponzi meltup , the desirable areas were pumped up, not the slums..
The truth is that deregulation coupled with the banks discovering that they could game the system and profit from KNOWN BAD LOANS drove the scam. Creating a bubble , insured many times over in their favor , was something they all took part in.
That happens more than you might think...
Thanks for all your explanations. Interesting racket.
To expand on that just a little bit ...
The “loans” were usually paid for initially from a credit line NOT from the bank or lending company that is named as the lender on the consumers paperwork.
Not only is shelf funding completely illegal as it “de facto” predatory lending , breaking all the federal consumer protection laws but it breaks the chain of title right at the start as the seller of the loan isn’t who is listed on the paperwork.
The loan paperwork was never surrendered (as is legally required for a trust) to the trusts , instead they got spreadsheets ... the trust never paid for the loans (another failure) , they were just given various duties and a comission.
The banks that actually funded the loans insured them and they WANTED bad loans that would FAIL ,, it was a “The Producers” scheme from the beginning , however they found a way to insure the loans a minimum of 3x face value (title ins. , fannie / freddie , private mortgage ins. , portfolio ins. (AIG etc.) ...
It’s past time to get mad .. the banksters are getting $85B a month from us , that’s $1T a year because they’re too big and important to fail... when it was their plan to fail and collect.
We , even those of us not caught up in the initial crisis , are victims of the banks massive fraud ,, because the policies meant to help the banks are gutting the land title system (by encouraging and allowing the filing of known blatantly false documents to show ownership) and devaluing our money ...
“The Republicans are the stupid party. The Democrats are the evil party. Sometimes they get together and produce something that is both stupid and evil, and they call it bipartisanship.”
Boy that really sums it up.
Here’s a case where BOA forclosed on a house that was bought with cash and never had a mortgage:
Reverse Foreclosure: Man Seizes Bank of Americas Assets -
Glad he had the money for lawyers.
After what happened to my friend, I am very curious about the title industry.
Is there anything even like a clean title anymore?
MERS (Mortgage Electronic Registration System) seems to been designed to faciliate mortgage title fraud
It speaks to the loss of one fundamental necessary for a free society - property rights.
Just going to “second” the MERS is evil response .. by making transfers anonymous and undocumented your title is worth NOTHING.
There is a VERY GOOD reason why all the properties sold post-foreclosure are given a “special” warranty deed that basically leaves you with no protection... The title industry knows that nothing is provable anymore.