Tags: Bankers | Gone | Wild

Bankers Gone Wild

By    |   Friday, 16 March 2012 08:10 AM

“I believe the reports we just released will leave the reader asking one question — how could so many people have participated in this misconduct?” David Montoya, the inspector general of the housing department, said in a statement. “The answer — simple greed.”

The aforementioned is a quote from a March 12, 2012 report, issued by The Office of the Inspector General (OIG) for the Department of Housing and Urban Development (HUD), regarding its audit of Federal Housing Administrative (FHA) mortgage service providers: Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, and Ally Financial.

According to the audit:

1. “Managers at major banks ignored widespread errors in the foreclosure process, in some cases instructing employees to adopt make-believe titles and speed documents through the system despite internal objections, according to a wide-ranging review by federal investigators.”

2. “Wells Fargo’s management quashed an independent study by a manager responsible for overseeing the affidavit process. The study had started to show that the document department was critically understaffed. “The midlevel manager was directed to stop the study and return to the practice of signing affidavits without reading or verifying data.”

3. “Wells Fargo did not establish a control environment which ensured that its notaries met their responsibilities under State laws that required them to witness affiants’ signatures of documents they notarized.13 We also interviewed 11 notaries, and they reported notarizing documents without seeing the person sign the affidavit. Some notaries told us that they let others use their notary stamp to notarize affidavits. Some notaries also told us that they notarized documents that were unsigned.”

The Department of Justice (DOJ) and the Attorneys General (USAG) recently announced a settlement with these five banks regarding their malfeasance: $25 billion.

The following graphic depicts the settlement amount versus the conveyance claims (value of ownership transferred) during the 2 year period, from October 1, 2008 through September 30, 2010.

                                                                   (US$ billions) 

Bank                           Settlement (DOJ/USAG)       Conveyance Claims

Bank of America         11.75                                          1.100

Wells Fargo                   5.35                                          1.700

JP Morgan Chase          5.35                                           0.547

Citigroup                       2.25                                           0.597

Ally Financial               0.30                                            0.161


Total                           25.00                                            4.105

The OIG report detailed the number of signatures during this period by 4 managers and 2 notaries at the Bank of America during the foreclosure process. The following table describes the number of signatures obtained during the two year period, the monthly average, and the monthly high.

Category            Total Signatures (2 years)   Monthly Average     Monthly High (Month/Year)

Manager 1          46,936                                   1,956                           6,098 (April / 2010)

Manager 2          67,908                                   2,830                           8,884 (July / 2010)

Manager 3          36,885                                   1,537                           7,938 (July / 2009)

Manager 4           42,926                                  1,789                           5,439 (August / 2009)

Notary 1              94,167                                  3,924                         11,880 (March / 2009)

Notary 2              31,236                                  1,302                           5,617 (August / 2009)

The average monthly case load for these individuals was 2,223, or 100 per business work day!

In a recent report, Corelogic indicated that total negative home equity totaled $751 billion in the 4th quarter of 2011. At the end of 2011, 11.1 million mortgages (22.8 percent of all 50 million mortgages), were underwater (negative equity, where market value is less than mortgage value).

The mortgage value of these properties was $2.8 trillion. Therefore, the market value was $751 billion less, or $2.05 trillion ($2,050 billion). This represents an average negative equity position of 36.6 percent ($2,050 billion / $751 billion).

The Milken Institute estimates annual mortgage originations grew from $500 billion in 1990 to $2.4 trillion in 2007. The Federal Reserve indicates the amount for 2003 was $4 trillion. During this time period, the total amount of mortgage debt expanded from $2.6 trillion to $11.3 trillion.

According to National Mortgage News, the top five banks controlled between 40 percent-45 percent of all mortgage originations from 2000-2008. Much of the negative equity resulted from these transactions. By 2009, their share was estimated at 63 percent of the total.

Currently, Wells Fargo is far and away the largest mortgage originator, with 30.1 percent of market share.

The nearest competitors, JP Morgan Chase and Bank of America, each trail by nearly 20 percentage points, with roughly 10 percent of market share. Combined, their market share is 10 percentage point lower than Wells Fargo.

Given the magnitude of the mortgage market, their associated market share, and the unsavory marketing methodology (in many cases: no documentation of income and assets, negative amortization), the bank settlement seems quite low.

If this report was not disturbing enough, we recently heard from a former London executive overseeing equity derivatives at Goldman Sachs.

He claimed the Goldman culture referred to clients as “muppets,” and executive meetings did not value the success and progress of their clients. Instead, the client merely functioned as a revenue source, irrespective of the value created for them.

Charles M. Elson, professor of corporate governance at the University of Delaware, claims corporate ethos metamorphosed in recent decades as partnerships became public companies, enabling them to transfer risk from the firm to clients and taxpayers.

Ariell Reshoff, economics professor at the University of Virginia, indicates average compensation (salaries and bonus) in the financial industry increased 70 percent more than the average elsewhere.

By 2005, this figure was 250 percent more.

Jerome Kohlberg Jr. of Kohlberg, Kravis, Roberts explains it this way:

While “skullduggery” within the industry was plentiful, “the trend has accelerated in recent years.”

These reports merely validate what is, and has been for some time, exceedingly apparent. Unfortunately, these views were rarely uttered publicly by those in the industry heretofore.

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Friday, 16 March 2012 08:10 AM
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