Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Gretchen Morgenson Wrote:
March 16, 2008
Fair Game

Rescue Me: A Fed Bailout Crosses a Line

WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.

Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.

Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.

Recall, too, that back in 1998, when the Long Term Capital Management hedge fund required a Fed-arranged bailout, Bear Stearns refused to join the rescue effort. Jimmy Cayne, then chief executive at the firm, told the Fed to take a hike.

And so, Bear Stearns, a firm that some say is this decade’s version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop dominated by Michael Milken, is rescued. Almost two decades ago, Drexel was left to die.

Bear Stearns and Drexel have a lot in common. And yet their differing outcomes offer proof that we are in a very different and scarier place than in the late 1980s.

“Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?” asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.” “This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation.”

And so we are. After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat.

If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions, generating more margin calls and creating more failures.

As of last Nov. 30, Bear Stearns had on its books approximately $46 billion of mortgages, mortgage-backed and asset-backed securities. Jettisoning such a portfolio onto a mortgage market that is not operative would, it is plain to see, be a disaster.

But, who knows what those mortgages are really worth? According to Bear Stearns’s annual report, $29 billion of them were valued using computer models “derived from” or “supported by” some kind of observable market data. The value of the remaining $17 billion is an estimate based on “internally developed models or methodologies utilizing significant inputs that are generally less readily observable.”

In other words, your guess is as good as mine.

To some degree, what happened at Bear, of course, was a classic run on the bank — the kind immortalized in Frank Capra’s homage to financial responsibility, “It’s a Wonderful Life.” As fears about Bear’s financial position heightened, its customers began demanding their cash and big hedge funds that were using the firm as an administrative back office or lender moved their accounts elsewhere.

In addition, institutions that had bought credit default swaps from Bear Stearns, insurance policies that protect against corporate bond defaults, were scrambling to undo those trades as the firm’s ability to pay the claims looked dicier.

“For the government to print money at the expense of taxpayers as opposed to requiring or going about a receivership and wind-down of any insolvent institutions should be troubling to taxpayers and regulators alike,” said Josh Rosner, an analyst at Graham Fisher & Company and an expert on mortgage securities. “The Fed has now crossed the line in a very clear way on ‘moral hazard,’ because they have opened the door to the view that they are required to save almost any institution through non-recourse loans — except the government doesn’t have the money and it destroys the U.S.’s reputation as the broadest, deepest, most transparent and properly regulated capital market in the world.”

And here is the unfortunate refrain. Investors, already mistrusting many corporate and government leaders, were once again assured that nothing was wrong — right up until the very end. So is it any wonder investors react to every market rumor of an impending failure with the certainty that it’s true? In too many cases, the rumors turned out to be true, notwithstanding the attempts at reassurance by executives and policy makers.

Only last Monday, for example, Bear put out a press release saying, “there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.” The next day, Christopher Cox, the chairman of the Securities and Exchange Commission, said he was comfortable that the major Wall Street firms were resting on satisfactory “capital cushions.”

Three days later, it was bailout time for Bear.

HERE is the bind the Fed is in: Like the boy who puts his finger in the dike to keep sea water from pouring in, the Fed finds that new leaks keep emerging.

Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s — current problems, overseers like the Fed undermine a little bit more of that confidence.

Another worry? How many well-capitalized institutions remain at the ready to take over those firms that may encounter turbulence in the future? Banks just do not have the capital that is needed to rescue troubled firms.

That will leave the taxpayer, alas. As usual.

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Not Funny

Bear Stearns Gets Emergency Bailout From JP Morgan and Fed

by markjabo on March 14th, 2008

Firm Will Continue to Do Business Under Name of JP Morgan, Bear Stearns and Bernanke

One of Wall Street’s top investment banks, Bear Stearns, was forced to go begging to rival J.P. Morgan Chase and the Federal Reserve Bank in an effort to stay in business.

Clutching a hand-lettered sign that read, “Will Do Leveraged Buy-Out for Food,” the long-time financial powerhouse finally admitted that it was in serious financial straits after a week of denials.

The Fed-assisted bailout was the last option for Bear Stearns after investment bankers worked tirelessly for three days straight begging for change on the Wall Street subway platform.

One Bear Stearns executive confided, “I collected $23.75 over the course of two days but, in the end, it just wasn’t enough.”  The investment banker went on to say, “I’m not proud of what I had to do for that last 75 cents, either.”

Treasury secretary Paulson praised the Fed for its quick action and urged stiffer penalties for traders at other firms who took advantage of Bear Stearn’s inexperienced staff of MBAs and PhDs.


“Buddy, can you spare $200 billion in a low-interest capital infusion with an option to refinance?”
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First, JPMC is not a rival, but a complicit business parter with the dying Bear... If they were a rival, they would have laughed with glee as the Big Bear died and then had the Bear skinned; eaten it's meat; placed the Bear rug oh Jamie Dimon's office floor; and mounted Bear's head (and maybe Ace's too) in family room at his home.

No, JMPC did not do what they did to help Bear, they did it to help themselves and others in this complicit OPAQUE marketplace which as been note laundering and selling worthless "digital paper" for over a decade now. JPMC is just there to "lend" a helping hand to conceal and mask it's own culpability and protect its ASSets!

You see, Bear Stearns, with the help of BankOne/JPMC (who was trustee on much of its paper MBS products in the beginning) built it's fixed income business on the backs of EMC Mortgage (and subprime b/c paper borrowers) which was formed in the early 90s to service scratch and dent loans from the RTC and then others. Bear's model was to buy back loans from Savings and Loans in the early 90s such as Home Savings of America and package them into securitizations via conduits it created to fulfill the market demand it created. Bear was one of the leading forces, along with Lehman, in buying these distressed assets then keeping the servicing at it's EMC unit in Dallas where very aggressive special servicing techniques would extract "net liquidation proceeds" (i.e. equity stripping by foreclosure of homes) and EMC and Bear would then pay investors high returns on their MBS/CDO products.

However, as the courts and regulators began to catch up on the schemes and home values fell, rather than rose, Bear's very aggressive predatory servicing model could no longer rob Peter (borrower) to pay Paul (investors) and the ponzi-like scheme dried up since there was no more cash flow to extract from it's servicing portfolio since borrowers were upside down on their mortgages and EMC could not hold onto the distressed servicing portfolios and after Bear's Hedge Funds Imploded and the market reality realized that they had been sold a bag of goods and no one knew who owned what [borrowers not told who the real holder of their notes were and investors didn't know what notes and mortgages they did own] caused wide-scale panic and foreign investments and pension funds quickly realized that there is no such thing as the goose that laid the golden egg, just the Bear that took several "dumps" along the way in the woods of securitization on the way to leaving a trail for all investors and borrowers to untangle and unravel in courts in the days, weeks, months, and years to come.

No one questioned how a stock in the low teens in the early 90s (except a few of us) managed to give almost 100% annual returns until this past summer. Now, all that is left is a wounded and soon to be dead bear in the woods with the vultures circling to split apart the carcass left.
Do a search for a report called "PredBear.pdf" for more details!
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Bear Stearns: Headed For Extinction, Acquisition or Capital Injection?

We're going to open up this forum in the Community area of DealBreaker for any comments or speculation about Bear Stearns. Let's see whether we can beat the market and the mainstream financial press with our communal intelligence

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