HERE COME DA JUDGE
by Bill Bonner
Mr. C.A. Boyko recently fired a shot that was heard âround the world. At
least âround the world of structured finance. Or, at least, âround the
world of Deutsche Bank, who got a bullet in the head.
Poor Deutsche Bank is the victim of its own avarice...its own
stupidity...and the cycles of nature. Nothing to be ashamed of. In war,
even the best soldiers get their brains blown out. In finance, they blow
them out themselves.
Before pulling the trigger, the judge was curious...a curiosity shared by
millions, no doubt. He wanted to crack open a sophisticated derivative
product â a mortgage backed security â and find out what was in it. In the
event, he discovered that something was missing; structured finance was
not structured quite as well as it pretended to be.
Here unfolding is the story of a credit contraction. Its protagonist is
neither a financier nor an economist. He is a U.S. federal judge. And at
issue in his courtroom was whether Deutsche Bank National Trust Company
could repossess 14 houses in the Cleveland area.
The first part of courtroom proceedings always begins with a âwhereasâ:
Whereas the homeowners were living in houses with mortgages, said the
lawyers. And whereas said homeowners hadnât made their payments. And
whereas Deutsche Bank was the de facto mortgage holder, the pleadings went
on...said bank wished to foreclose on the 14 properties.
Here, we add some whereases of our own. Whereas there is about $6.5
trillion worth of securitized mortgage debt in the United States alone.
And whereas the value of the collateral â the houses themselves â is going
down. And whereas the hotshots who securitized this debt operated so fast
and loose they might have been undertakers in a plague year. And whereas
standards of creditworthiness...and details of the mortgages
themselves...were permitted to slip. And whereas the whole idea was to
earn high fees for loading people down with debt, while pushing the risk
of loss onto the naïve, the slow-witted and the unborn. And whereas the
losses are now expected to tote to somewhere between $150 billion and $400
billion...and as much as $2 trillion, according to Goldman Sachs, in lost
credit... And whereas every half-wit knew there would be hell to pay when
the credit cycle turned down...
...this case might be a bigger deal than people realized.
For his part, Judge Boyko showed little interest in the macro-economic
whereases. What he wanted to know was: Where are the mortgage documents?
It may be true that these people owe you money, he suggested, but we donât
take a manâs house away from him without a valid mortgage contract. Not in
the sovereign state of Ohio anyway.
Deutsche Bankâs legal team looked at each other. Then, they looked in
their briefcases. The lawyers had plenty of documents, including some
clearly showing an âintent to convey the rights in the mortgages.â But as
for the mortgages themselves, they had none. Again, Deutsche Bank is
hardly exceptional.
***When a law professor studied foreclosure proceedings
recently, she found that in 40% of cases, the creditors either did not or
could not produce the vital documents, giving them the right to retake the houses.***
Apparently, the financial intermediaries who had bundled these 14
mortgages together with thousands of others to create the Structured
Investment Vehicle (SIV) bought by Deutsche Bank had neglected to bundle
in the actual mortgage documents. Searching high and searching low, they
could not be located.
by Bill Bonner
Mr. C.A. Boyko recently fired a shot that was heard âround the world. At
least âround the world of structured finance. Or, at least, âround the
world of Deutsche Bank, who got a bullet in the head.
Poor Deutsche Bank is the victim of its own avarice...its own
stupidity...and the cycles of nature. Nothing to be ashamed of. In war,
even the best soldiers get their brains blown out. In finance, they blow
them out themselves.
Before pulling the trigger, the judge was curious...a curiosity shared by
millions, no doubt. He wanted to crack open a sophisticated derivative
product â a mortgage backed security â and find out what was in it. In the
event, he discovered that something was missing; structured finance was
not structured quite as well as it pretended to be.
Here unfolding is the story of a credit contraction. Its protagonist is
neither a financier nor an economist. He is a U.S. federal judge. And at
issue in his courtroom was whether Deutsche Bank National Trust Company
could repossess 14 houses in the Cleveland area.
The first part of courtroom proceedings always begins with a âwhereasâ:
Whereas the homeowners were living in houses with mortgages, said the
lawyers. And whereas said homeowners hadnât made their payments. And
whereas Deutsche Bank was the de facto mortgage holder, the pleadings went
on...said bank wished to foreclose on the 14 properties.
Here, we add some whereases of our own. Whereas there is about $6.5
trillion worth of securitized mortgage debt in the United States alone.
And whereas the value of the collateral â the houses themselves â is going
down. And whereas the hotshots who securitized this debt operated so fast
and loose they might have been undertakers in a plague year. And whereas
standards of creditworthiness...and details of the mortgages
themselves...were permitted to slip. And whereas the whole idea was to
earn high fees for loading people down with debt, while pushing the risk
of loss onto the naïve, the slow-witted and the unborn. And whereas the
losses are now expected to tote to somewhere between $150 billion and $400
billion...and as much as $2 trillion, according to Goldman Sachs, in lost
credit... And whereas every half-wit knew there would be hell to pay when
the credit cycle turned down...
...this case might be a bigger deal than people realized.
For his part, Judge Boyko showed little interest in the macro-economic
whereases. What he wanted to know was: Where are the mortgage documents?
It may be true that these people owe you money, he suggested, but we donât
take a manâs house away from him without a valid mortgage contract. Not in
the sovereign state of Ohio anyway.
Deutsche Bankâs legal team looked at each other. Then, they looked in
their briefcases. The lawyers had plenty of documents, including some
clearly showing an âintent to convey the rights in the mortgages.â But as
for the mortgages themselves, they had none. Again, Deutsche Bank is
hardly exceptional.
***When a law professor studied foreclosure proceedings
recently, she found that in 40% of cases, the creditors either did not or
could not produce the vital documents, giving them the right to retake the houses.***
Apparently, the financial intermediaries who had bundled these 14
mortgages together with thousands of others to create the Structured
Investment Vehicle (SIV) bought by Deutsche Bank had neglected to bundle
in the actual mortgage documents. Searching high and searching low, they
could not be located.