A Citigroup Banker Dies – Along With Responsible Press Reporting

By Pam Martens and Russ Martens: November 20, 2014

Shawn D. Miller

Shawn D. Miller

Depending on where and when you got your news yesterday on the tragic death of Shawn D. Miller, a Managing Director of Wall Street mega bank, Citigroup, you were either emphatically told he died of a suicide or you were led to believe he was murdered. By late evening yesterday, the story had disintegrated into wild speculation. The New York Daily News ran this stunning headline, based on anonymous sources, at 9:22 p.m.: “Banker, 42, slashed his own throat in Manhattan bathtub during drug- and booze-filled bender: sources.”

It is becoming abundantly clear that if you work for a major Wall Street firm and die a sudden death, it will be shaped, molded, twisted and contorted until it fits with the suicide narrative – no matter how strongly the facts argue otherwise.

Building Where Shawn D. Miller Died in the Financial District of Manhattan

Building Where Shawn D. Miller Died in the Financial District of Manhattan

This is what we can reliably report this morning: Police were called to the scene at 120 Greenwich Street at 3:11 p.m. on Tuesday, November 18, a trendy, upscale area of Tribeca in Lower Manhattan. A friend of Miller’s had become concerned when he could not reach him by phone and called the doorman of the building to ask him to check on him. The doorman found Miller in the tub of his bathroom with knife lacerations to the throat and arms and called the police. EMS responders declared Miller dead at the scene.

All of this occurred on Tuesday afternoon, giving the New York Post plenty of time to check and double check their facts with the New York Police Department. In an on line post at the New York Post web site at 6:30 a.m. yesterday – Wednesday, the day after the death – the New York Post ran the following bold headline: “Banker found dead with throat slit in apparent suicide: cops.” That article reported that the police believed it was a suicide because “a knife was found under his body, sources said.”

But at 3:14 p.m. yesterday, the international wire service, Reuters, reported that “no weapon was found.”

At 4:05 p.m. yesterday, the New York Post ran a new headline: “Hunt on for man last seen with dead Citigroup exec.” This article states that “Police have not yet found the weapon used to cut Miller’s throat,” confirming what was reported by Reuters less than an hour earlier.

But then came the outrageous headline at the New York Daily News at 9:22 p.m. last evening, based on unnamed sources, suggesting that Miller had gone on a drug- and booze-filled bender and killed himself. The newspaper reported: “When crime scene investigators moved Miller’s body, they discovered a knife under him, leading them to believe he slashed his own throat and collapsed into the tub on top of the weapon, sources said.”

The wild and contradictory reporting instantly reminded us of how the London dailies had reported on the tragic death of JPMorgan Vice President, Gabriel Magee, in January of this year. Magee’s body was found in a pool of blood on a ninth floor landing of JPMorgan’s European headquarters building in London.

The London Evening Standard tweeted: “Bankers watch JP Morgan IT exec fall to his death from roof of London HQ,” which linked to their article declaring that “A man plunged to his death from a Canary Wharf tower in front of thousands of horrified commuters today.”

The London Evening Standard’s reporting was flatly contradicted by the Sunday Times, which reported that “Gabriel Magee’s body lay for several hours before it was found at 8am last Tuesday.”

No single witness was ever identified by the police to say they had observed Magee plunging from the top of the building. The ninth floor landing was accessible from an inside stairway of the building, meaning his body could have arrived there through means other than a fall.

Both Citigroup and JPMorgan have paid billions of dollars to settle fraud charges by regulators. Both are also under investigation by the U.S. Justice Department. In addition, both banks hold life insurance on many of their employees. When an employee dies, the death benefit is paid to the corporation tax free.

The practice is called Bank-Owned Life Insurance (BOLI). Just four of Wall Street’s largest banks (JPMorgan, Bank of America, Wells Fargo and Citigroup) hold a total of $68.1 billion in Bank-Owned Life Insurance assets according to their regulatory filings. According to Michael Myers, an expert on BOLI, those assets could potentially mean that just these four banks are holding $681 billion in face amount of life insurance on their workers, or possibly even more.

Shawn D. Miller Headline at the New York Daily News

Shawn D. Miller Headline at the New York Daily News

See Related Articles:

Profiteering on Banker Deaths: Regulator Says Public Has No Right to Details

Banking Deaths: Why JPMorgan Stands Out 

Three New JPMorgan IT Deaths Include Alleged Murder-Suicide

Suspicious Deaths of Bankers Are Now Classified as “Trade Secrets” by Federal Regulator 

JPMorgan Vice President’s Death in London Shines a Light on the Bank’s Close Ties to the CIA   

Suspicious Death of JPMorgan Vice President, Gabriel Magee, Under Investigation in London      

As Bank Deaths Continue to Shock, Documents Reveal JPMorgan Has Been Patenting Death Derivatives   


Wiseguys: Drawing Parallels Between the Mafia and Wall Street Persists

By Pam Martens: November 19, 2014

Helen Davis Chaitman

Helen Davis Chaitman

Every now and then, someone raises the question of Mafia infiltration on Wall Street or suggests that Wall Street has become an Ivy-league educated, better tailored version of the mob. Now, two lawyers, Helen Davis Chaitman and Lance Gotthoffer have dramatically ratcheted up the debate, suggesting boldly in the latest chapter of their free on-line book that there are stark parallels between the Gambino crime family and JPMorgan Chase – the nation’s largest bank.

Writer Matt Taibbi had a similar epiphany back in 2012 in an article for Rolling Stone titled The Scam Wall Street Learned from the Mafiathe story of how major Wall Street firms conspired together to rig bidding in the municipal bond market. Taibbi writes: “In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia, which has long made manipulation of public bids for things like garbage collection and construction contracts a cornerstone of its business.”

In 2009, the book, Nothing but Money by New York Daily News reporter Greg B. Smith was released, detailing actual Mafia infiltration in stock pump and dump schemes on Wall Street, albeit at small firms. That was preceded in 2003 by Born to Steal: When the Mafia Hit Wall Street by long-time business writer and author, Gary Weiss.  The Weiss book took an in-depth look at Mob-run stock brokerage firms selling phantom stocks by following the career of one of the stock swindlers, Louis Pasciuto, who eventually turned state witness.

But what attorneys Chaitman and Gotthoffer are doing is extraordinary and unprecedented. They are asking the public to seriously look at the parallels between the Mafia and JPMorgan Chase, a bank holding over $1.7 trillion in Federal Reserve assets and more than $1.3 trillion in deposits, the bulk of which are insured by the FDIC and ultimately backstopped by the U.S. taxpayer.

Lance Gotthoffer

Lance Gotthoffer

Chaitman is a nationally recognized litigator and author of The Law of Lender Liability. She is also a Bernie Madoff victim who lost a large part of her life savings to his Ponzi scheme and then tenaciously represented other victims of his fraud in district and appellate courts. Chaitman has teamed up with fellow attorney, Lance Gotthoffer, to conduct an exhaustive investigation of the intersection of the Madoff fraud with the bank that was criminally charged by the U.S. Justice Department in the matter – JPMorgan Chase. (The bank signed a deferred prosecution agreement and paid $1.7 billion to the Madoff victims’ fund to avoid prosecution.)

The book is titled JPMadoff: The Unholy Alliance Between America’s Biggest Bank and America’s Biggest Crook. The authors are releasing a new chapter of the book each month as well as a quick means of contacting your legislator in Washington to urge Congress toact in the interests of the American people, not in the interests of the financial institutions that are rich enough to make significant contributions.”

The latest chapter looks at the culture inside JPMorgan and provides a detailed portrait of some of the main insiders: among them, Chairman and CEO Jamie Dimon; General Counsel Stephen M. Cutler; and Lee R. Raymond, the Lead Independent Director on the JPMorgan Chase board. The public will be further shocked to learn that the members of JPMorgan’s board who have kept Dimon as the Chairman and CEO through an endless series of government charges of law breaking by the firm are paid the enormous sum of $245,000.

But the most damning parallel to a Mafia crime family are the crimes themselves: they are unconscionable and they just don’t stop. Outside of the more than $3 billion that JPMorgan paid to settle both criminal and civil charges related to Madoff, below is the additional JPMorgan rap sheet Chaitman and Gotthoffer include in the book, spanning just the last four years.

“In April 2011, JPMorgan Chase agreed to pay $35 million to settle claims that it over-charged members of the military service on their mortgages in violation of the Service Members Civil Relief Act and the Housing and Economic Recovery Act of 2008.

“In March 2012, JPMorgan Chase paid the government $659 million to settle charges that it charged veterans hidden fees in mortgage refinancing transactions.

“In October 2012, JPMorgan Chase paid $1.2 billion to settle claims that it, along with other banks, conspired to set the price of credit and debit card interchange fees.

“On January 7, 2013, JPMorgan Chase announced that it had agreed to a settlement with the Office of the Controller of the Currency (OCC) and the Federal Reserve Bank of charges that it had engaged in improper foreclosure practices.

“In September 2013, JPMorgan Chase agreed to pay $80 million in fines and $309 million in refunds to customers whom the Bank billed for credit monitoring services that the Bank never provided.

“On November 15, 2013, JPMorgan Chase announced that it had agreed to pay $4.5 billion to settle claims that it defrauded investors in mortgage-backed securities in the time period between 2005—2008.

“On December 13, 2013, JPMorgan Chase agreed to pay 79.9 million Euros to settle claims of the European Commission relating to illegal rigging of benchmark interest rates.

“In February 2012, JPMorgan Chase agreed to pay $110 million to settle claims that it over-charged customers for overdraft fees.

“In July 2013, JPMorgan Chase paid $410 million to the Federal Energy Regulatory Commission to settle claims of bidding manipulation of California and Midwest electricity markets.

“On November 19, 2013, JPMorgan Chase agreed to pay $13 billion to settle claims by the Department of Justice, the FDIC, the Federal Housing Finance Agency, the States of California, Delaware, Illinois, Massachusetts and New York, and to consumers, relating to fraudulent practices with respect to mortgage-backed securities.

“In November 2012, JPMorgan Chase paid $296,900,000 to the SEC to settle claims that it mis-stated information about the delinquency status of its mortgage portfolio.

“In December 2013, JPMorgan Chase paid $22.1 million to settle claims that the Bank imposed expensive and unnecessary flood insurance on homeowners whose mortgages the Bank serviced.”

GAO Report: SEC Is Bungling Collection and Accounting of Billions in Fines

By Pam Martens: November 18, 2014

SEC Headquarters, Washington, D.C.

SEC Headquarters, Washington, D.C.

For at least the past 20 years, the Government Accountability Office (GAO) has been telling the Securities and Exchange Commission to clean up its act when it comes to the proper handling, collection, disbursement and financial reporting of penalties and disgorgements it is supposed to be collecting from violators of securities laws.

Yesterday, the GAO filed yet another report on the subject, this time finding that “during our fiscal year 2014 audit, we identified continuing and new deficiencies in SEC’s internal control over disgorgement and penalty transactions that constituted a significant deficiency in SEC’s internal control over financial reporting.” Unfortunately, the GAO’s own opaque presentation on this subject leaves the public in the dark about just how bad the situation is at the SEC.

As part of the SEC’s enforcement responsibilities, ostensibly to catch and punish securities law violators, it is also frequently assigned the job of collecting and administering the penalties and disgorgements of the guilty parties. Once there is a final judgment naming the SEC as the designated party to collect the disgorgement or penalty, the SEC is supposed to promptly record an accounts receivable item for the amount the violator owes. Because the collected amounts are earmarked for either harmed investors or the general fund of the U.S. Treasury, the SEC is required to simultaneously record an equal and offsetting liability for those amounts on its balance sheet.

The GAO dropped the following bomb in its report yesterday and then walked away, leaving the reader completely in the dark as to what conclusion to draw from it:

“In fiscal year 2014, SEC recorded approximately $3.7 billion of new disgorgement and penalty accounts receivables. As of September 30, 2014, SEC’s disgorgement and penalties accounts receivable balance, net of an allowance for uncollectible amounts, was $381 million. SEC’s custodial revenue collected from disgorgement and penalties and transferred to the general fund of the Treasury during fiscal year 2014 was $825 million.”

The Federal fiscal years ends on September 30, thus, according to the above, the SEC believed it was owed $3.7 billion from disgorgements and penalties and logged that amount in as accounts receivables. It handed $825 million of that amount over to the general fund of the U.S. Treasury, wrote off unspecified uncollectible amounts and had a net balance of $381 million in accounts receivable.

If we add the only two concrete sums ($825 million and $381 million) provided to us by the GAO, we can account for $1.206 billion of the $3.7 billion the SEC reported it was owed from disgorgements and penalties. Where is the specific dollar amount that went to harmed investors? Where is the specific dollar amount that was written off as uncollectible.

The GAO provides no answers to these troubling questions but does shares more troubling information. According to the report, the GAO “tested a statistical sample of 72 disgorgement and penalty accounts receivable amounts and found that 4 of the sample items were not recorded in the general ledger in the proper accounting period. These errors were caused by ineffective procedures for tracking, analyzing, and recording civil court judgments and resulted in understatements to gross accounts receivables of about $42 million.”

The public would rightfully expect that if a sample among 72 cases turns up a missing $42 million in accounts receivables, the GAO would check every account or, at the very least, a much broader sample, especially given that this Federal agency has received 20 years of negative GAO reviews on how it’s handling the money it’s supposed to be receiving from wrongdoers. But the GAO does not indicate that it looked further after finding the $42 million problem.

It does, however, report yet another problem in properly accounting for disgorgements and penalties, writing: “…we found that SEC recorded certain disgorgement and penalty transactions to incorrect customer numbers in the general ledger. This was caused by ineffective implementation of existing SEC policies.”

The fact that the SEC has been criticized by the GAO for a solid 20 years for inadequate policies in the handling of funds owed to plundered investors (in many cases because it failed to properly police securities markets) would suggest to most rational persons that the job should be moved out of the SEC to a more competently managed Federal agency. Instead, the taxpayer is tapped year after year with paying for these expensive investigations by the GAO to come up with the same findings: the SEC does not measure up to the job of collecting, disbursing and providing proper financial accounting for these harmed investor funds.

It would almost be comical were it not such a national disgrace. GAO’s 20-year old, August 23, 1994 report was actually titled: Improvements Needed in SEC Controls Over Disgorgement Cases. That report found that the “SEC does not provide its attorneys formal written policies or procedures to guide them in assisting the federal courts to select individuals as receivers and ensure adequate oversight of receivers’ activities and requests for compensation.” The GAO added that “without formalizing its policies and procedures, SEC cannot adequately ensure that any appearance of favoritism in its receiver recommendations is precluded or that funds managed by receivers are safeguarded until disbursed.”

In 2002, the GAO issued an astonishingly damning report titled: More Actions Needed to Improve Oversight of Disgorgement Collections, writing that “SEC data showed a collection rate of 14 percent for the $3.1 billion in disgorgement ordered in 1995-2001– compared with the 50 percent collection rate GAO reported in its 1994 report.”

The 2002 report noted further that “To deprive securities law violators of illegally obtained funds, SEC needs an effective collection program with clearly defined objectives and measurable goals, specific policies and procedures for its staff, and systems to allow management to monitor performance. However, SEC’s strategic and annual performance plans do not address disgorgement collection or clarify its priority relative to other activities.”

In new reports in 2005, 2007, 2011, 2013, the GAO continued to flag inadequacies in the SEC’s internal controls and accounting procedures. This is the Federal agency, mind you, that is designated by Congress to monitor the internal controls and accounting procedures of the nation’s publicly traded companies.

There is an extremely important takeaway from all this. The steady drumbeat of hubris about the SEC’s lack of concern for collecting the plunder from the securities law violators is matched by a steady drumbeat of SEC Enforcement Division attorneys producing evidence that the SEC protects the privileged on Wall Street by sidelining enforcement actions against them.

That Congress takes no action to rein in either of these outrageous abuses is the real outrage.

Is JPMorgan’s $9 Billion Witness Letter Under Seal in the Dracula Fraud Case?

By Pam Martens: November 17, 2014

U.S. District Court Judge, Jed Rakoff, of the Southern District of New York

U.S. District Court Judge, Jed Rakoff, of the Southern District of New York

It’s called the Dracula fraud case against JPMorgan because no matter how many times JPMorgan’s lawyers try to kill it, the case rises up from the dead to find new life. Now, with former JPMorgan insider Alayne Fleischmann revealed by Matt Taibbi in Rolling Stone as someone who has critical firsthand evidence that a jury needs to hear in this case, a potential $1.6 billion jury award against JPMorgan is looking winnable – if the case can ever get in front of a jury.

The lawsuit was filed by affiliates of the Belgian-French bank Dexia, which received multiple bailouts by the two governments during the financial crisis. Dexia’s original complaint that was filed on January 19, 2012 in New York State Supreme Court, alleged widespread fraud in the sale of Residential Mortgage Backed Securities (RMBS) by JPMorgan, its direct affiliates and two firms it purchased during the financial crisis in 2008 – Bear Stearns and Washington Mutual.

Dexia had purchased $1.6 billion of the securities, which were assigned AAA ratings by Moody’s and Standard and Poor’s. Almost all of the securities, according to the lawsuit, are now rated junk and have suffered significant losses. Notably, 13 of the RMBS alleged to be fraudulently sold to Dexia affiliates were sponsored by JPMorgan, not Bear Stearns or Washington Mutual. JPMorgan has launched a major public relations offensive to try to shift the blame to the firms it acquired while portraying itself as the conservative mortgage underwriter.

After extensive discovery and depositions, two sealed documents have been filed in the case along with 242 exhibits from plaintiffs that are not under seal. That raises the question as to whether one of the sealed documents is Alayne Fleischmann’s potentially jury-shocking internal letter that was revealed in Taibbi’s article. Fleischmann, an attorney who worked as a Transaction Manager at JPMorgan, has alleged “massive criminal securities fraud” in her department at JPMorgan, which was assigned with assuring that only good mortgage loans were securitized but, instead, under pressure from bosses, waived in the drek that was likely to default during the same time period that the Dexia plaintiffs’ lawsuit covers. After failing to stop the fraudulent process with verbal warnings, Fleishmann memorialized the details in a long letter to a superior.

The U.S. financial system, the economy, and the nation’s housing market suffered the greatest collapse since the Great Depression in 2008 to 2010 – in no small part because of “massive criminal securities fraud” in the underwriting of toxic mortgage pools sold off as AAA-rated credits. Millions of Americans are still underwater on their mortgages because of fraudulent appraisals that were part of that securitization machinery. Economic growth and job creation are still subpar and the nation’s debt has mushroomed as a result of fiscal stimulus attempts to resuscitate the economy. Given that backdrop, one has to ask why Americans should tolerate any documents being filed under seal in lawsuits that go to the heart of this matter.

Also at stake is the reputation of the United States as a credible financial center supported by a credible justice system to right wrongs.

The Dexia case was filed almost three years ago, on January 19, 2012 in New York State Supreme Court. The powerhouse Wall Street law firm representing JPMorgan, Cravath, Swaine & Moore LLP, didn’t like the venue and succeeded in having the case remanded to Federal Court where it was assigned to Judge Jed Rakoff, the man who has positioned himself as the upholder of all that is pure and noble when it comes to Wall Street.

Rakoff reduced Dexia’s claims from $1.6 billion to about $5.7 million with a two-page order that said virtually nothing on April 3, 2013, promising a reasoned opinion would follow. Instead of a reasoned opinion, a month and half later Rakoff bounced the case from his Federal courtroom back to New York State Supreme Court where it had originally started, on the premise that he never had jurisdiction to hear the case in the first place based on a recent Appellate court ruling.

Rakoff also ruled that since he never had jurisdiction, his ruling to reduce the claims was null and void, meaning that Dexia’s lawyers would have to refile all of their opposition papers again in New York State Supreme Court and engage in oral arguments all over again on the Summary Judgment motion, a complete duplication of what had happened over many months in Federal court.

The insult to Dexia’s law firm, Bernstein Litowitz Berger & Grossmann LLP (BLB&G) is equally matched by the insult to the public interest. Few private actions have come as close as this one to building a documented case that fraud occurred in almost every aspect of the securitization pipeline at JPMorgan Chase – not just at the firms it purchased in the crisis, Bear Stearns and Washington Mutual.

Dexia’s exhibits include emails and internal documents, which suggest a practice and pattern of fraud on the part of JPMorgan. While the case is a civil action, Dexia has effectively built a ready-made criminal case for the Justice Department to bring against the individuals implicated in the exhibits.

Back in February 2013, when news of Dexia’s filing of the damning documents appeared in press reports, former Senator Ted Kaufman said: “It is just hard to believe that if the Department of Justice had made Wall Street fraud a major priority, with the resources they have, they could not have found these same emails and brought these cases.”

Dexia’s 145-page amended complaint (see Dexia v Bear Stearns, et al Amended Complaint) indicated that “JPMorgan’s 2006 Annual Report had reassured investors that JPMorgan had ‘materially tightened’ its underwriting standards and would be ‘even more conservative’ in originating mortgages.” Instead, according to the complaint, “by October 2006, JPMorgan had itself become alarmed by the increasing number of late payments in its own subprime portfolio, causing JPMorgan to sell its own investments in subprime mortgages” while dramatically ramping up the toxic brew it was securitizing and selling to the public. The complaint reads:

“From 2006 to 2007, JPMorgan nearly doubled its securitizations of residential mortgages — from $16.8 billion in 2006 to $28.9 billion in 2007.  To generate these enormous amounts of securities, JPMorgan incentivized its Chase Home Finance employees to originate high-risk mortgages, loosened underwriting standards, pressured appraisers, and included the resulting poor-quality mortgages into JPMorgan securitizations, including those in the RMBS at issue here.”

The lawyers also indicated they have numerous confidential witnesses (CWs) available to testify, such as CW 19, a senior mortgage underwriter at Chase Home Finance from 2002 through 2008.  CW 19 stated that “for subprime mortgages, underwriters were compensated based on the number of mortgages that they approved, whereas prime mortgages underwriters were compensated based on the number of loans reviewed, regardless of whether the loan was approved  — thus skewing the system in favor of approving subprime loans, regardless of quality.”

Another confidential witness, CW 21, a senior mortgage processor and junior underwriter at Chase Home Finance said that underwriters were “ ‘discouraged [from] checking out [the borrower’s] place of employment’ and other critical information reflecting mortgage quality.  As an example, CW 21 recalled one instance where an underwriter wanted to confirm a borrower’s employment and based on the result, denied the loan. CW 21 stated that the loan officer and branch manager came to the underwriter and said, ‘Can’t you just pretend like you didn’t check the job?’ ”

The lawsuit also references an internal memo at JPMorgan, titled “Zippy Cheats & Tricks,” calling it was a primer on how to get risky mortgage loans approved by Zippy, Chase’s in-house automated loan underwriting system by inflating borrowers’ income or otherwise falsifying their loan application.

The amended complaint references evidence provided to the Financial Crisis Inquiry Commission by Clayton Holdings, the outside vendor used by JPMorgan to check the quality of mortgage loans it was considering for securitization. Dexia’s complaint notes: “Clayton stated that JPMorgan had waived in 51% of the loans that Clayton had marked as fatally defective into mortgage pools that JPMorgan securitized between January 2006 and June 2007 — higher than any other financial institution during the same period.”

Dexia makes even more powerful arguments in its Memorandum of Law in opposition to the Cravath Motion for Summary Judgment. Lawyers for Dexia write:

“Here, Defendants intentionally designed and implemented policies aimed at maximizing deal volume while concealing the critical defects in the mortgages they securitized. Independent, experienced loan underwriters re-underwrote a 10-30% sample of loans to verify they were underwritten in accordance with the loan sellers’ guidelines. The underwriters sent Defendants [JPMorgan, et al] reports scoring each loan in the sample on the following scale: EV1 (meets guidelines), EV2 (does not meet guidelines but compensating factors justify an exception), or EV3 (does not meet guidelines, materially defective).

“These independent assessments of the sample of loans backing the Certificates were devastating.  The results revealed to Defendants that large portions of the sampled loans (20% to 80%) had ‘material’ defects, including fraudulent incomes, inflated property appraisals, or missing material documents required by the guidelines to ensure credit quality and compliance. Having been informed that the sample showed so many defective loans that the term sheets and data files providing investors with aggregate pool data could not be accurate, Defendants deliberately concealed the poor quality of the overall loan pools.

“First, Defendants’ personnel (often with little to no underwriting experience) overrode the independent underwriters’ determinations and reduced the number of EV3s in the sample. For example, in connection with its securitization of a pool of loans, JPM’s third party diligence provider determined that 54% was a materially defective EV3. JPMorgan did not expand its sample set and override the EV3 determinations so that the final due diligence report reflected that only 5.8% of the sample pool were EV3s.  Defendants overrode diligence samples with 54% EV3s to create final reports reflecting 5.8% EV3s.

“Second, Defendants ignored the fact the remaining loan pool contained similar material defects, acquiring the entire pool and selling it to investors like FSAM [a Dexia affiliate] without disclosure of the true quality of the loans. Third, when the rating agencies asked for diligence results to calibrate their ratings models, Defendants provided only the final sanitized reports, without disclosing the massive critical deficiencies in the sample and the remaining non-sampled loans.”

Instead of a strong fraud case like this moving quickly in front of a jury while witnesses’ memories are still fresh, the case has been tied up for almost two years in a Motion for Summary Judgment asking to find in favor of the defendants filed by Cravath, first in Federal Court before Judge Rakoff and now in New York State Supreme Court before Judge Marcy Friedman. To give you an idea of the tenuous thread on which this two-year stall rests, this is an excerpt from the transcript of oral arguments where Cravath lawyer, Daniel Slifkin, explains one prong of his position:

“And so we are clear, we submit there is absolutely no evidence of falsity.  And aside from reliance on specific pieces of information, there is no evidence of falsity with respect to the data. We might have a debate as to some of the evidence about due diligence and I know your Honor is familiar with the EV1, EV2, EV3.  We can debate that back and forth, and we are expressly not doing that on summary judgment. But when it comes to the data, the numbers, the metrics and so forth, about the loan pools underlying the certificates, the mortgages themselves, there is no allegation of falsity. There isn’t a single mortgage that’s identified or single number where they say that number is wrong, let alone, and you knew it and we relied upon it and it caused our harm.”

Oral arguments on the Summary Judgment motion occurred before New York State Supreme Court Judge Marcy Friedman on September 9, 2014. Her decision is expected at any time.

Clayton Holdings Report on Event 3 Waivers by Banks -- From Financial Crisis Inquiry Commission Report

Clayton Holdings Report on Event 3 Waivers by Banks,                                       Showing JPMorgan Waived in 51 Percent of Event 3s (From Dexia Lawsuit)

This Fed President is Correctly Worried About a 1937-Style Slump

By Pam Martens: November 13, 2014

Charles Evans, President of the Federal Reserve Bank of Chicago

Charles Evans, President of the Federal Reserve Bank of Chicago

On November 6, Bloomberg News reporter, Matthew Boesler, set off a flurry of comments with an article headlined: “Fed Concern With Repeat of 1937 Blunder Echoed by Markets.”

The reference to 1937 relates to the fact that as the U.S. economy was showing signs of improvement from the conditions of the Great Depression of the 1930s, the Federal government and the Federal Reserve overreacted to inflationary concerns with contractive measures in 1937, sending the economy into a sharp slump in late 1937 and 1938.

The chief worrier at the Fed about it making the same mistake today is Charles Evans, President of the Federal Reserve Bank of Chicago. Evans’ background is that of a long-term researcher. Prior to becoming President of the Chicago Fed, he served as its Director of Research, and earlier, its Senior Economist in charge of the Macroeconomics Research Group.

In four speeches beginning on September 24, Evans has been effectively telling Fed Chair Janet Yellen and the Federal Open Market Committee of the Federal Reserve Board of Governors not to crash the economy again by ignoring the lessons of 1937 and 1938. Evans’ most pointed warnings came in the September 24 speech with direct references to 1937:

“Past experience with the zero lower bound also counsels patience. History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap. The U.S. experience during the Great Depression — in particular, in 1937 — is a classic example for monetary historians: In response to the positive growth and reinflation that occurred after devaluation and suspension of gold convertibility, the Fed raised reserve requirements, the Treasury sterilized gold inflows, and there was a fiscal contraction. Subsequently, the economy dropped back into recession and deflation. During this time, interest rates remained very low. The discount rate was lower after 1937 than before, and Treasury bill rates were less than 1 percent. By many economic accounts, it took the big fiscal expansion associated with World War II to exit the Great Depression.”

Thanks to the outstanding historical archives on the Great Depression maintained by the St. Louis Fed, we can go back and actually observe exactly what did go wrong in 1937 once the Fed tightened policy. To put it bluntly, the economy fell off a cliff.

The November 1937 Survey of Current Business released by the Commerce Department summed up the stock market fallout as follows:

“In the fluctuations of October 19, industrial, railroad, and utility share prices fell to the lowest points since May 1935. At the bottom of the movement, the New York Times’ index of 50 stocks was down 40 percent from the March high.”

Thanks to the ill-conceived notion of chaining today’s worker and his or her confidence level to the rise and fall of the stock market by replacing corporate pensions with 401(k) plans, a 40 percent drop in the stock market triggered by Fed tightening next year would instantly translate into lowered levels of confidence and consumer spending.

The Federal Reserve Bulletin dated December 1937 shows just how dramatically and precipitously things fell apart:

“The volume of industrial production has declined sharply during the last three months, and the Board’s adjusted index, which, during the first eight months of the year, averaged 116 percent of the 1923-1925 average, is expected to be below 95 for November…

“Output of nondurable manufactures declined by about 15 percent from the spring of this year to October…

“Iron and steel production has shown the most pronounced decline. Activity in this industry, which in the first half of the year was the greatest since 1929, has decreased steadily since August and at the end of November output of steel ingots was estimated at 30 percent of capacity, as compared with an average rate of 85 percent in August…”

On September 24, 2014, the same day that Chicago Fed President Charles Evans was delivering his sobering speech on parallels to 1937, Wall Street On Parade reported the following:

“The serious downward draft in commodity prices is also flashing another warning signal. Deflating commodity prices are not compatible with a global economic growth story that would sustain a legitimate bull market in corporate stock prices.

“Iron ore has now slumped 41 percent this year, marking a five-year low. In just the third quarter the price is off by 15 percent, suggesting the trend remains in place. This week the price broke $80 a dry ton for the first time since 2009.

“Agricultural commodity prices are also confirming the trend with corn off 22 percent since June and wheat down 16 percent in the same period. Soybean prices are down 28 percent this year to the lowest in four years.

“Deflationary winds blowing in from Europe, cooling economic growth in China, together with the question of just how disfigured the stock market has become as a result of $1.09 trillion propping up the S&P 500 through corporate buybacks in the last 18 months, all signal one word for the average investor: caution.”

This morning, the price of Brent crude oil is trading below $80 per barrel, a fresh four-year low with no bottom in sight.

The Fed has already been effectively tightening by cutting back its bond purchases (QE-3) since January and ended further purchases last month on the basis that the economy is improving. It has also signaled that it believes the economy will be strong enough to hike rates at some point next year.

But if you look at the declining yields on U.S. Treasury notes that have accompanied the Fed’s tapering and the decline in commodity prices, what the markets are telling the Fed is that it may already be too late to avert another 1937-style slump.

Producer Price Index -- Industrial Commodities, July to September 2014

Producer Price Index — Industrial Commodities, July to September 2014            (Courtesy of St. Louis Fed)