According to two EMC analysts,
they were encouraged to just make up data like FICO scores if the
lenders they purchased loans in bulk from wouldn’t get back to them
Editors’ Note: With Bear Stearns “underwater” it is
difficult to come up with scenario where there won’t be criminal charges
brought against the bankers and traders who worked there. They are
low-hanging fruit, easily made the scape goat and easily subject to
inquiry since nobody has any allegiance to them. They have no reason to
stay silent except for self-incrimination. If some are offered immunity
they will sing like birds in the meadow.
On the other hand Cuomo is aiming for the wrong target and
could end up losing his cases unless he aims right. If this report is
correct, then Cuomo is looking for the the real criminal culprit in the
ratings fraud. What is wrong with that approach is that he is attempting
to single out ONE defendant out of a group. They ALL knew, as the
article goes on to say, what they were doing with ratings, just as they
all knew what was going on with property appraisals just as they all
knew that there was no underwriting of the loans.
Underwriting, which was the process of verifying the loan
data from soup to nuts was abandoned because the party initiating the
loan had no dog in the race. They were using investor dollars to fund
the loan. Their income was based upon closing the loan without regard to
risk. In fact, as has now been acknowledged after three years of me
harping on the subject, the more likely it was that the loan would fail,
the higher the profit and fees to everyone.
In the world of securities, underwriting was once the product
of verifying the facts and risks of an investment through “due
diligence”. Like the home loans there was no due diligence underwriting.
The object was to sell something that LOOKED good even though they knew
the loss was a sure thing — something the investment bankers needed and
They wanted the investments to fail because they were selling
it (securitizing specific loans, parts of loan pools and entire loan
pools) into multiple SPV packages, effectively selling the same loans
over and over again.
They were taking the yield spread caused by the lower rate
the investors were willing to accept because they perceived the
investment as being little or no risk. The loan interest charged to
borrowers was much higher, sometimes by multiples. This causes a SPREAD,
which means that in order to give the investors the dollar income they
we re expecting, they could promise, based upon exhibits that were
fabricated in part, that the investor would get the desired revenue.
But the income was coming from loans to borrowers at much higher
“nominal” rates. In plain language they were able to invest only a
portion of the investors money into funding mortgages that were
guaranteed to fail. The rest of the money they kept for themselves. Each
time they re-sold the security as described above, the entire proceeds
were kept by the ivnestment banking house. As long as the pools failed,
nobody would demand an accounting.
The investors might make claims for the losses but they were
stuck with being tagged as qualified investors who should have known
better, even if they were some small credit union who had no person on
staff capable of performing verification or due diligence on the
investment in mortgage-backed securities.
But fund managers (especially those who received bonuses due
to the higher returns they reported) were highly unlikely candidates to
demand an accounting since they either had no clue or cared less as to
what was REALLY done with the proceeds of their investment. AND then of
course there are the fund managers who may or may not have overlooked,
through negligence of intentionally, the quality of these investments.
They may have received some sort of perks or kickback for investing in
these dog-eared securities. Since the manager is in charge, he or she
would be required to ask for things that they really don’t want to hear
The ratings companies were put in the exact same position as
the the appraisers of the homes subject to mortgage. Play or die. Here
is what we assisted you in coming up with a human and computer algorithm
to arrive at the value of this investment. In securities, the value was
expressed as AAA down to BBB and below. Here are the securities which
we reverse engineered to fit that algorithm. Now give us the triple
ratings as we agreed, take our fees which are higher now for your
cooperation and don’t ask any questions. If someone did ask questions or
raised alarms at the ratings agency or appraisal companies they were
So you tell me — is it one of them or is it all of them? Mr.
Cuomo, are you listening? Contrary
to the report below, this is no grey area. It is really very simple.
Just because you have a pile of documentation doesn’t make it theft.
Look at the result to determine the intent. That’s what you are supposed
to do in Court.
More Corruption: Bear Stearns Falsified Information as Raters
MAY 14 2010, 2:25 PM ET |
Made up FICO scores? Twenty-minute speed ratings to AAA? If
government prosecutors like New York Attorney General Andrew Cuomo want
answers to why the mortgage-backed securities market was so screwed up,
they should talk to Matt Van Leeuwen from Bear Stearn’s servicing arm
Reports indicated on Thursday that Cuomo is
pursuing a criminal investigation surrounding banks supplying bad
information to rating agencies about the quality of the mortgages they
signed off on. But so far he hasn’t been able to prove where in the
chain of blame the due diligence for the ratings broke down.
What Cuomo needs to establish is: whose shoulders does it fall on to
verify the information lenders were selling to investment banks about
the quality of their loans? And who was ultimately responsible for the
due diligence on the loans that created toxic mortgage securities that
were at heart of our financial crisis?
False Information and the Grey Area
Employed during the go-go years of 2004-2006, and speaking in an
interview taped by BlueChip Films for a documentary in final production
called Confidence Game, Van Leeuwen sheds some light onto the
shenanigans going on during the mortgage boom that might surprise even
Cuomo. As a former mortgage analyst at Dallas-based EMC mortgage, which
was wholly owned by Bear Stearns, he had first-hand experience working
with Bear’s mortgage-backed securitization factory. EMC was the
“third-party” firm Bear was using to vet the quality of loans that would
purchase from banks like Countrywide and Wells Fargo.
Van Leeuwen says Bear traders pushed EMC analysts to get loan
analysis done in only one to three days. That way, Bear could sell them
off fast to eager investors and didn’t have carry the cost of holding
these loans on their books.
According to two EMC analysts, they were encouraged to just
make up data like FICO scores if the lenders they purchased loans in
bulk from wouldn’t get back to them promptly. Every mortgage
security Bear Stearns sold emanated out of EMC. The EMC analysts had the
nitty-gritty loan-level data and knew better than anyone that the
quality of loans began falling off a cliff in 2006. But as the cracks in
lending standards were coming more evident the Bear traders in New York
were pushing them to just get the data ready for the raters by any
In another case, as more exotic loans were being created by lenders,
the EMC analyst didn’t even know how to classify the documentation
associated with the loan. This was a data point really important to the
bonds ratings. When Bear would buy individual loans from lenders the EMC
analyst said they couldn’t tell if it should be labeled a no-doc or
full doc loan. Van Leeuwen explains, “I wasn’t allowed to make
the decision for how to classify the documentation level of the loans.
We’d call analysts in Bear’s New York office to get guidance.”
Time was of the essence here. “So, a snap decision would be made up
there (in NY) to code a documentation type without in-depth research of
the lender’s documentation standards,” says Van Leeuwen.
Two EMC analysts said instead of spending time to go back to the
lender and demand clarification, like if verification of income actually
backed these loans, the executives at Bear would just make the loan
type fit. Why? One EMC analyst explains, “from Bear’s perspective, we
didn’t want to overpay for the loans, but we don’t want to waste the
resources on deep investigation: that’s not how the company makes money.
That’s not our competitive advantage — it eats into profits.”
Twenty Minutes for AAA
It’s easy to paint Bear as the only villain here — but what were the
rating agencies thinking?
Susan Barnes of Standards and Poor’s testified before Congress last
month saying banks like Bear were responsible for due diligence in the
transactions described above: “For the system to function properly, the
market must rely on participants to fulfill their roles and obligations
to verify and validate information before they pass it on to others,
Yet, was it reasonable for agencies to stand behind ratings when due
diligence was done by an affiliate of Bear? That’s like buying a car
from a guy whose mechanic brother said it was great, and then finding
out it was a lemon.
Equally amazing was how responsive the raters were even on the big
deals. Van Leeuwen says, “The raters would provide a rating on a $1
billion security in 20-30 minutes.” Describing it as “a rubber stamp,”
Van Leeuwen said that the ratings agencies slavish devotion to their
computer models “was vital” because it allowed Bear to “cram mortgages
through the process.”
The greatest asset Bear had in its quest to squeeze every ounce of
profit from the mortgage-backed securities market was the methodology of
the big ratings agencies. The bankers knew what kind of loan detail was
needed to get that coveted AAA rating. After they prepped the rating
agencies for what they ‘thought’ they loans would look like, they would
buy loans in bulk, and then spend a day scrubbing them.
Bear’s decision to cut corners and to fail to take the time to make
sure the raters got correct information about the quality of loans was
big no-no. But rating bonds based on fast reactions, instead of
thoughtful analysis and reliable due diligence, also might place some
responsibility on the agencies’ shoulders.