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Lanny Breuer on Frontline defending the Obama Get Out of Jail Free Card for banksters
Despite the best efforts of Lanny Breuer to hide it, the complaint filed against Standard and Poor’s by Los Angeles US Attorney André Birotte, Jr. proves that the Department of Justice is fully aware of the corruption on Wall Street in the run-up to the Great Crash. The alleged facts point directly at the issuers of real estate mortgage-backed securities and collateralized debt obligations as the leading cause of the losses of the victims of S&P’s alleged frauds.
In a nutshell, the issuers, a term which deal underwriters, played a major role in creating the software and techniques used to rate RMBSs and CDOs. They used that role to delay and water down changes to the ratings systems. They played the ratings agencies against each other, and they got much higher ratings than were justified by the mortgage loans that underlay the securities. The issuers had mountains of these bad loans, and were desperate to get them off their baoks to protect their balance sheets. Those issuers include Too Big To Fail Banks, and some others as well.
The complaint explains the role played by issuers in developing the RMBS ratings systems at S&P, beginning at ¶ 123. In April 2004 S&P executives met to discuss changes to the process for creating and implementing changes to its ratings criteria. The new policy
… required consideration of “market insight” and “rating implications” and the polling of both “3 to 5 investors in the product” and “and appropriate number of issuers and investment bankers for a full 360-market perspective.”
¶ 125. That policy was implemented on July 1, 2004. The complaint says that issuer feedback led S&P to limit, adjust and delay updates to ratings criteria in order to preserve profits and market share. I described this in more detail here. The impact was dramatic. One internal S&P document says that “Competition among ratings agencies has helped drive down support levels in deals”, meaning that RMBS securities became more risky. ¶ 131.
S&P also invited input from issuers into its CDO ratings process. The discussion begins at ¶ 158. In response to one group of changes, Bear Stearns allegedly said Bear Stearns would quit using S&P. The changes were not implemented. Issuer input resulted in weakened ratings criteria and delays in implementation in this and other cases^.
Issuers were trying to get that garbage off their books. In 2006, it was becoming clear to S&P that RMBSs and CDOs were not performing as predicted by their ratings. Line-level personnel at S&P wanted to change a policy that permitted analysts to rate CDOs based in part on the initial ratings of RMBS tranches included in the CDO, even when S&P knew downgrades were likely. ¶ 207. S&P executives discussed the actions of issuers:
Issuers were shtting down and liquidating their warehouses i.e., stores of RMBS temporarily held by issuers as they assembled assets for future CDOs), in part to enable the issuers to avoid being required to mark their positions to market — and being stuck with collateral that had suffered losses.
¶ 233(b). What this means is that issuers were taking advantage of the lag time they actively created in adjusting ratings criteria to shovel more of their garbage off their books and onto actively misled investors.
Who were these issuers? The complaint doesn’t name any specific issuers, but it names a large number of securities. Here are some names:
Gemstone CDO VII: $1.1 billion, sold by Deutsche Bank, relationship of managers unclear; litigation pending; March 2007.
Sorin CDO VI: $550 million, Bear Stearns (now owned by JPMorgan), March 2007
Cairn Mezzanine ABS CDO III Limited: $1.78 billion, RBS Greenwich Capital Markets (the securities trading arm of Royal Bank of Scotland), March 2007.
Stack 2007-1: $1.5 billion, Citigroup, April 2007
Octonion I CDO: $1 billion, Citigroup, April 2007
Corona Borealis CDO Ltd.: $1.5 billion, underwritten by Lehman Brothers, other relationships unclear, April 2007.
Vertical Capital LLC, distributed by UBS: Vertical ABS-CDO 2007-1, $1.5 billion April 2007.
And these are just some of the issues rated or for which final ratings were issued. The complaint says S&P rated more than $135 billion in securities from March to June 2007, long after it was obvious that the housing market had collapsed.
The Department of Justice knows this, but it refuses to indict anyone. This complaint makes it clear that it wasn’t just an accident or a matter of greed, as the President and his henchmen claim. With the departure of Tim Geithner and Lanny Breuer, the most offensive proponents of the get out of jail free card, there is an opening for change.
We have this Progressive Caucus in the legislature. Why haven’t some of them taken on the task of learning about this stuff and asking out loud why there are no indictments? Once you know the Obama Administration is making crap up, it’s easy to get past their false explanations. This is one area of bipartisan agreement: every single American hates these cheats.
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* The complaint doesn’t say why, so it may or may not have been requested by issuers; but one change S&P made was to change to zero the correlation assumption “…between ‘a CDO of ABS asset” and ‘an RMBS asset in a CDO/ABS transaction.” Correlation in this sense refers to the statistical relation between the failure of two assets: if one fails, what is the probability that the other will. Readers may recall that one of the tools that made RMBSs seem plausible was the Gaussian Copula, which theoretically is a way to measuring the likelihood of correlation of defaults in a large group of mortgage loans. Intuitively, if the portfolio of loans is spread geographically and by other criteria of separation, there should be low likelihood that if a loan in Boston fails, so will a loan in Las Vegas. The model had a number of weaknesses.
There is a close relationship between two tranches of the same RMBS. If one fails, it raises the likelihood that another will fail. Calling it zero removes that relationship, and gives the CDO a higher rating than it should have.
Image screenshot from The Investigators
14 Comments
Offhand it seems like it would be a valid point, masaccio; thanks for filling in the details.
So S&P pays a few bucks out of petty cash, and “promises” never to do it again. Let me know when real criminal charges are brought to the CEO’s of Wall Street, until then it’s just some prosecutor trying to score political points.
I said in another thread on this topic that Holder screwed up allowing even this little suit but maybe we can just file it in the Modified Limited Hangout drawer.
Why S&P? Well they are the smallest of small fry and they did do the downgrade of Treasury debt, in itself a Kabuki exercise, so consider it payback.
Again as well, a manifesto of sorts. Absolutely no intent to otherwise endorse this blogger in all ways. At any rate ‘recovery’ is absolutely impossible under these circumstances, but with a twist. ‘Recovery’ is impossible anyway. To the extent it is based upon building up suburbia and car culture ever again or otherwise mindless superficial consumption of stuff. Those days are done. See JH Kuntsler and The Automatic Earth. These political/legal battles are just a way to hide/deny/avoid the truth that the cheap energy unlimited credit world is dying.
“A CREDIBILITY TRAP IS A CONDITION WHEREIN THE FINANCIAL, POLITICAL AND INFORMATIONAL FUNCTIONS OF A SOCIETY HAVE BEEN COMPROMISED BY CORRUPTION AND FRAUD, SO THAT THE LEADERSHIP CANNOT EFFECTIVELY REFORM, OR EVEN HONESTLY ADDRESS, THE PROBLEMS OF THAT SYSTEM WITHOUT IMPAIRING AND IMPLICATING, AT LEAST INCIDENTALLY, A BROAD SWATH OF THE POWER STRUCTURE, INCLUDING THEMSELVES.
THE STATUS QUO TOLERATES THE CORRUPTION AND THE FRAUD BECAUSE THEY HAVE PROFITED AT LEAST INDIRECTLY FROM IT, AND WOULD LIKE TO CONTINUE TO DO SO. EVEN THE IMPULSE TO REFORM WITHIN THE POWER STRUCTURE IS SUSCEPTIBLE TO VARIOUS FORMS OF SOFT BLACKMAIL AND COERCION BY THE SYSTEM THAT MAINTAINS AND REWARDS.
AND SO A FAILED POLICY AND ITS SUPPORT SYSTEM BECOME SELF-SUSTAINING, LONG AFTER IT IS SEEN BY OBJECTIVE OBSERVERS TO HAVE FAILED. IN ITS FAILURE IT IS COUNTERPRODUCTIVE, AND AN IMPEDIMENT TO RECOVERY IN THE REAL ECONOMY. ADMITTING FAILURE IS NOT AN OPTION FOR THE THOUGHT LEADERS WHO RECEIVE THEIR POWER FROM THAT SYSTEM.
THE CONTINUITY OF THE STRUCTURAL HIERARCHY MUST THEREFORE BE MAINTAINED AT ALL COSTS, EVEN TO THE POINT OF BECOMING A PAINFULLY OBVIOUS HYPOCRISY.
THE BANKS MUST BE RESTRAINED, AND THE FINANCIAL SYSTEM REFORMED, WITH BALANCE RESTORED TO THE ECONOMY, BEFORE THERE CAN BE ANY SUSTAINABLE RECOVERY.
Not bad and you actually dance around the shadows pretty well. At the heart of this ticking bomb is the fact the primary fault is with centralization/globalization.
The evidence is overwhelming and irrefutable that the entire ponzi is corrupt to the very core, which is precisely the true motive behind collectivism anyway.
The Liberty movement is the solution. Disperse power to the many rather than allow for it to be stolen and abused by the few.
Progressivism has failed. We only await the coroners report.
Time to get real.
Join the cause of humanity and individual dignity/Freedom/empowerment OFF the plantation of centalized/inevitably corrupt slave management.
Humans have outgrown your Marxist bullshit and no longer require a ruling class.
GET REAL.
Like duh. I’ve been screaming at the top of m,y lungs since 2008, break up the banks and throw the banksters in jail. That’s how our economy recovers, that’s how we get our government back.
And here’s the rub, Republicans may do it before Obama and Holder pull their heads out of their collectives asses on this one:
http://baselinescenario.com/2013/02/07/a-growing-split-within-republicans-on-too-big-to-fail-banks/
If the Republicans start acting on this, I will vote Republican, and that’s coming from a lifetime Democratic party voter that finally gave up in 2012 and voted Green party for President.
Let’s face it, Obama wants to bust up the last of the New Deal and is in so deep with the crooks on Wall St that the national level, the Democratic party of our fathers is DEAD. So that’s Obama’s legacy, flushing FDR down the toilet. Well, count me OUT, OUT of the Democratic party if it come down to that bullshit.
good summary of one of the many games played with FIRE around 2003-07 that lead to the economic meltdown. recommended.
during the bush years, i kept reading weekly: “bankruptcies break record,” “forclosures break record,” “corp exceeds profit forecast; stock falls,” etc.; and at the same time, “investors” buying/flipping condos as prices rise, my new neighbor happily reporting that the 2/1 he bought was appraised at the purchase price, corps reporting 25-30% profits while banks were paying 1.58% on 5 year CDs, and my mother’s mortgage moved to different “lender names” 3 times. just with that information, it was easy for me to see the similarity to the savings and loan fiasco. adding in the mergers, layoffs of thousands of workers while corps’ stock soars, it was extremely obvious that financial “games” were being played with our economy knowingly and willfully.
unfortunately for us, I don’t see any change in the near future.
re S & P: they were paid by the banksters to “rate” CDOs and RMBSs, it is laughable that any rational being would believe they would act against their clients.
agree fully and voted for Jill Stein 2012; as far as future “vote,” I don’t have much confidence in blackbox voting as a means toward meaningful change in the future.
DOJ Knows About Wall Street Corruption
Don’t we all?
The Tea Party to the extent it is good old fashioned populism hates The Street, as such is the practically genetic disposition of American populism both left and right. The tamping down of this Tea Party urge has been pretty successful and that is what the little dust up between the establishment and the TP now is all about. Keeping the populists in their place in regards to The Street and that will work too. For the tribal aspect is well managed and the typical TP’er would rather shoot up an Occupy Wall Street crowd than join them because the OWS’rs are hippies.
Sure the GOP might pick some symbolic victim on The Street to attack, as this S&P thing is by the Administration, but they aren’t going to do a thing for reform either. It goes beyond party. The political economy as we know it is totally dependent upon financial power and that includes, especially, foreign relations. The elites, political, intellegence/military, corporate would fall if The Street falls.
“I don’t have much confidence in blackbox voting …”
Me neither. Jill Stein was the best of the Green Party candidates I’ve voted for over the last few election cycles, but even she could only come in 4th, behind the Libertarian guy.
We have a government that has turned on its people with systemic ,bipartisan ,treason being waged by the enemy within .Wall St. internationalists have destroyed America in an orchestrated financial coup with their political toadies and corporate owned media .
Ironically ,if traitor-elite banksters didn’t pursue an austerity pillage via a classic LBO strategy after collapsing the economy ,the giant sleeping dolt would still be in the political ether .The austerity scheme reveals a pattern of intent to pillage ,plunder and enslave developed nations to a point at which it would trigger a nuclear event if done by a national enemy as opposed to Wall St.
Great work mas ,yet another invaluable contribution to show this isn’t about rogues or political parties or other convenient scapegoats, the system has been stolen by a virulent kleptocracy and we intend to take it back .
With you every step of the way. Again, there are a few-fed up Republicans who are willing to break up the banks. So to counter this, you’ll notice among the Democratic leadership, a new meme being fostered on such sites as Daily Kos is that the economy is in bad shape because of so many states having governors who were Republicans.
(totally overlooking how Rahm Emanuel and Barack Obama both supported Blanche Lincoln over a progressive Dem running against her, and overlooking how Diane Feinstein stacked the political deck, not during one gubernatorial race, BUT TWICE – so that little known weasels with “D”‘s after their names, ran against a Hollywood Movie Star, with the results being pretty obvious to all.
Of course D of J knows.
Everyone knows.
No one, including us, though, is willing to do much about it, except tsk tsk to each other.
Same here. What do I care if they have an “R” after their name, as long as they’re for the right policy?