Getting angry at the banks, for a change


by David Malone

The stock price charts of the major banks look like the brain trace of man having a series of violent seizures while slowly sinking towards a flat-line coma.

The US FHFA (Federal Housing Finance Authority – Fannie and Freddie’s overlord) filed suit against every major global bank in America and Europe for fraud – every trace went in to major, limb convulsing decline.  The German court decided German participation in the first Greek bail out was constitutional – all the patients sat bolt, white-knuckle upright.  Italy agrees to impose austerity measures upon its people to save its banks and the wealthy who own them – they restart ragged shallow breathing.

Then U-turns on every aspect of austerity- eyeballs roll back and start choking.  And then, while Greece continues its slow motion default on its bonds, Italy passes ‘austerity plan 2.0’ amidst union occupation of the Milan Bourse – the trace is all over the place and the patients don’t know what is happening, their veins stand out like ropes, muscles lock sold and teeth grind.  The Swiss peg their currency to the Euro and say they will buy whatever amount of Euros and Euro paper it takes – speed-ball euphoria takes hold.  But for how long?

And it’s not going to stop.  Though thankfully this metaphor is.

So what next? Well late yesterday night ZeroHedge ran this story based on an article from which says simply that the gargantuan Norwegian Sovereign Wealth fund is suing Bank of America, CountryWide which Bank of America bought and KPMG (the auditors who saw nothing going wrong with sub prime securities at all, no nothing at all Your Honour) for fraud.  

Now that is very important. potentially heart fibrillating,  news.  Why?  Because there was the lurking suspicion, crystallized in this article on ZeroHedge that the FHFA suit might eventually be deliberately scuppered by higher powers in Washington in order to save the banks from certain justice and well deserved ruin.  It may sound fantastical but a cursory look at the political maneuverings concerning the State Attorney cases against the banks and how they are being pushed and seduced into settling for paltry sums makes it clear that such subversion of justice is the new American way.  As, I hasten to add, it is here too.

The article simply pointed out that the politicians in DC could milk the political advantage from being seen to be tough on the only to make sure they lost on some technicality and settled out of court to ‘avoid losing’ and one such judgement would undermine, if not stop dead, all pending cases.  The banks would get to keep their cake and the politician would be able to eat some of it too.

But the Norwegian case puts a troll in that ointment.  Because its one thing to sort out a judge and some US Lawyers in a plush, quite Washington office.  It’s quite another to stop a pissed off and still sovereign nation, which Norway still is.

It will be interesting to see how the markets react.  I think it will take a few days for it to sink into their fevered crania.

In the mean time the FHFA suit has prompted me to take a look at what it might mean for one bank – RBS.  Not out of simple curiosity but because, if RBS were to lose, then as owners of 80% of the bank, our tax money is what would be on the hook.  The bank is already on life support. Where do you think RBS would turn to get cash for a settlement?  If it had to sell assets to meet settlement costs – it would do so at fire sale prices far below what we paid for them.  The suit concerns $30.4 billion of Residential Mortgage Backed Securities sold by RBS between ’05 and ’08.  How much would the FHFA would want paid back?  Even a fraction of the 30 billion, say only 30 cents on the dollar – kills RBS without the tax payer being sacrificed –  again.

So, I have been at looking at two documents – which could not be more different, even though they are both about RBS. One the one hand is the FHFA law suit, which you can read in full here which paints a picture of not systemic but epidemic fraud.  And the other is the latest report from the UK government’s Asset Protection Scheme.  The scheme under which the UK tax payer is ‘protecting’ £282 Billion of RBS ‘assets’ the bank could not insure in the market and which, if it had to keep on its own books, would kill the bank stone dead.  The UK report essentially says everything is marvellous.

Now one way of reading the UK report is to say, well its written by professionals who have many years of experience in finance and banking, so they should know what they are talking about.  The other way of reading it is to wonder if the financial experts involved are overly happy to not question any figures and assurances the bank gives them and collude in painting a positive picture that serves the interests of the financial industry they work in and come from.  As well as please the politicians who want to make sure the public think only what the bankers want them to think.  I incline toward the latter reading.

It is hard to reconcile the Asset Protection report with the FHFA suit.  Of course you could argue that the FHFA suit is based on RBS’s American activities and what was done there might have been unconnected with and unknown to RBS HQ.  Which might stand if the FHFA was suing some rustic outpost of RBS.

RBS in America was and is huge.  The FHFA names as defendants RBS securities Inc (Formerly known as RBS Greenwich Capital), RBS Financial Products Inc and RBS Acceptance Inc.  as well as the principle officers of the above.  In 2006 RBS Greenwich Capital securitized $102 billion in Mortgage backed Securities and was the 4th largest “non-agency mortgage backed security underwriter” in America and the third largest Sub Prime underwriter.

The law suit involves not just one or two rogue deals but 68 securities each of which is massive.  And it was RBS committing the fraud – sorry doing the work – at every stage of the process.  The various parts of RBS chose the securities, evaluated them, guaranteed they were safe and well found, bundled them, underwrote them, costed them, set up the SIV’s in which they housed, before selling them on to Fannie and Freddie.

“Defendant RBS Group wholly owns RBS Holdings and is the ultimate parent of RBS Securities, RBS Financial Products, RBS Acceptance and FAS Corp.” (P.31)

“Unlike typical arm’s length securitizations, the securitizations here involved various RBS subsidiaries and affiliates at virtually every step in the chain” (P. 30.)

And at every stage RBS took a fat, incentivised, bonus guaranteeing fee.

“Further, RBS Securities is included in RBS Group’s consolidated financial statements and, according to RBS Groups 2010 annual report, RBS Securities serves as RBS Group’s ‘U.S. broker dealer and one of its ‘U.S. brands’ and one of RBS Group’s Global Banking and Markets Division conducts its business in the United States ‘principally’ through RBS Securities.” (P.31)

Which means there was a very close working relationship between RBS UK and RBS America.  The consolidated financial statements means the UK would have seen and studied the details of what was going on in RBS USA.  In short it means that RBS in the UK would have been aware at all levels up to the top, what was going on in RBS in America.  

So if there was, as the FHFA claims, systemic fraud being perpetrated year after year, RBS in the UK would have known and if not actively condoned then made sure it was ignored on purpose.  Which in turn says to me, that the culture of fraud was not confined to RBS in America.  And if that is so, then WHY has nothing questionable been uncovered in the £282 billion in US, UK, European, and IRISH mortgage backed securities, derivatives, CDS and interest rate swaps which RBS dumped in the UK’s Asset Protection Scheme?

The UK document says they have done due diligence.  I think they asked the bank and accepted what was written on the bits of paper.  Fannie and Freddie did ‘due diligence’ as well.  Fat lot of good it did.  It has taken focused and determined research – finally – and the sort of statistical tools I have written about here which people like Propublica and later the US insurer Allstate whose related suit on systemic bank fraud I wrote about here, developed and used on the securities, to uncover the web of lies embedded in the securities sold not just by RBS but many other banks as well.  Why have such tests not been done by the UK Asset Protection Agency on RBS’s assets?

Are we to believe that securities involving US mortgage backed securities sold to Fannie and Freddie and fraudulent from top to bottom but American deals and loans hidden in the Asset protection scheme are 100 pure?  How likely is that?  For there to be no fraud in  we have to suppose that RBS UK was in fact wholly ignorant of US fraudulent practices, had a totally different moral culture in the UK bank to its America part.  We’ve already seen how closely they worked and cooperated.

If you read the Asset protection document it says all is well, losses will be less than the 60 billion RBS will pay before tax payer money is on the hook, and anyway the assets plus the fees RBS are paying for the insurance are going to make the tax payer a profit.  It does not deal with where RBS would get even a single billion never mind 60 of them, were it called upon.  RBS doesn’t have billions lying around.  If RBS has to pay our for losses or law suits it sells assets are fire sale prices or thieves your tax money again.

I have no faith at all that the Asset Protection Scheme or those running it can be trusted.  And frankly why should I trust them.  They are the same financial people who created the mess and oversaw its creation.  You may think I am unfairly tarring people with prejudices.  I am not.  I am ‘criminal profiling’ as the FBI does, as UK Border force does as the MET does with its stop and search.  You may not agree with it but it’s official policy.   Who are the people most likely to be guilty of lying and fraud in finance? The current financial class of experts and bankers. That is just a plane brute statistical fact.

I am not going to accept a banker’s word for it. I want open, public and verifyable proof. I want the RBS assets and the entire Asset Protection Scheme open to forensic scrutiny. I am after all being expected to underwrite it.

And one last thing while my blood is seething.  I would like to suggest a new category of cheap, public humiliation – the FASBO.  If the tenor of our times is to enjoy the public branding and humiliation that is so much a part of the ASBO idea, then I would like to see Financial ASBO’s slapped on Fred the Shred and those legions like him.  I would like them to be branded in the papers, have restrictions on where they can go – not within a hundred yards of the City Mile for example –  and to have to wear one of those ankle monitors which tell the police where the offender is.

If we are happy to treat stupid thugs this way let us also treat the clever thugs in the same manner.

David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here:

This article was republished with permission from David’s blog