How The Looming Mortgage Bond Scandal Could Dwarf The Foreclosure Fraud Crisis

If you thought the fake doc foreclosure fraud crisis is bad, wait till you get a load of what could happen once people start looking at the pending mortgage bond meltdown. Reuters blogger Felix Salmon dug into the documents and he says it looks like banks have been lying to investors about the quality all this time.

The banks had a 3rd party check out the quality of the mortgages, running the numbers to see if the mortgages actually lived up to the originators’ underwriting standards (such as they were). When the bank found that the mortgages didn’t live up, instead of rejecting them, they simply negotiated for a better price. And, they didn’t tell investors that a big chunk of the mortgages were failing the smell test.

“The banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool,” Felix writes. “That’s a lie of omission.”

It’s one thing to unravel individual houses. But when you start talking about the mortgage bond pools, collected mortgages that are thrown in together and repackaged as investments, watch out. Next stop, lawsuit city! We’re talking both class action and SEC.

The enormous mortgage-bond scandal []


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  1. ajkilroy24 says:

    anyone else not suprised at this?

    • Unclaoshi says:

      Not me

    • Unclaoshi says:

      I mean I also am not surprised

    • fredbiscotti says:

      Dude, the banks are totally trustworthy. What are you talking about?

    • golddog says:

      Not surprised at all. The Economist predicted it down to the month that the bond issue would break out. I believe there was an article on Consumerist too a while back…

      Although I don’t know why anyone needed to “predict” it. The language in this article might as well be a cut-and-paste description of what happened in the original sub-prime crisis.

  2. TheFinalBoomer says:

    I don’t think anyone thought that this mess was anywhere near over. I’m sure that there will be revelations leading to litigation for years. I truly think that the banking industry is headed for a huge crisis over this, not that they aren’t in one already, it will just get bigger and bigger.

  3. B says:

    “It’s one thing to unravel individual houses. But when you start talking about the mortgage bond pools, collected mortgages that are thrown in together and repackaged as investments, watch out. Next stop,” …the government bails you out. Fixed that for you.

  4. craptastico says:

    this isn’t new. Merrill Lynch and several banks went out of business with the help of losses in their mortgage backed bonds. this is what the whole fiasco of whether or not to “mark to market” involved. it was whether banks should count mortgage bonds on their balance sheets at their actual market value, or face value.

    • hypnotik_jello says:

      ML went out of business? I thought they were acquired by BofA with the help of gov’t monies.

    • vastrightwing says:

      For all intents and purposes, Merrill Lynch is not in business anymore. It’s bank of America. Now if we can only get G.S. to go away along with bank of America, Wells Fargo, Chase and JP Morgan. Then we’re making progress.

    • Promethean Sky says:

      Seriously. I read the article twice before figuring out that we’ve already been through this crap.

  5. Loias supports harsher punishments against corporations says:

    Solution seems to make banking public.

    There, I said it. Sorry, but it seems the banks have failed at every level. From inception to fruition. I don’t see how we can trust them for anything anymore.

    • baconsnake says:

      What do you mean when you say “make banking public”? I don’t understand at all.

      • Loias supports harsher punishments against corporations says:

        Public Education

        Public Health Care

        Public Banking

        Not hard to understand.

        • Loias supports harsher punishments against corporations says:

          Sorry baconsnake is that last line sounding condescending – it sounded like a snarky comment at first. In case it wasn’t – my apologies.

          Some countries have national banks, which taxes pay for but all profits are also put back into the system. Since banks are businesses and therefore profitable, then national banks have the potential to be profitable for the country as well.

          • RandomHookup says:

            It gets a little confusing sometimes because we talk about businesses as “publicly traded” as opposed to private, yet we turn around and talk about the public sector to mean government. I have to take a second before I realize what folks are talking about.

          • baconsnake says:

            Thanks and no worries – I rewrote mine a couple times to try and make sure it wasn’t snarky as well.

            I understand what you are saying now, but not sure that’s the most efficient solution. I will grant that even as heavily regulated as banking is, those regulations are not doing a good job covering many of the issues that are coming up.

            I honestly don’t think that the govt will ever want to get into that business though.

            • Loias supports harsher punishments against corporations says:

              No such thing as the most efficient solutiono – because as humans we’re inefficient.

              Actually, attaching value to things is highly inefficient. Profit is inefficient. But, we’re human.

      • Doncosmic says:

        LIke is is in most other countries, their is a national bank run by the government.

    • Starrion says:

      Because the government would do so much better of a job of it?


      Look at how well the Government handles Medicare/Medicaid fraud before considering handing over complex investments systems to them.

      • Loias supports harsher punishments against corporations says:

        Yet Medicare has a higher approval rating by customers than any other private health care system.

      • jamar0303 says:

        So remind me why state-owned banks like Bank of China and such haven’t seen the trouble most banks that have touched this mess have seen?

      • Gulliver says:

        The two most successful and highly regarded health care organizations in the country are Medicaid/Medicare and the VA. The VA is 100% socialized medicine. Doctors on the government payroll taking care of other former government employees. I guess fighting for democracy gets you socialized medicine that is actually higher quality and free.

    • jamar0303 says:

      I dunno, how come places like Hong Kong haven’t seen this sort of mess despite having lots of private banks? Heck, even Citibank is better-behaved over there. Though the fact that they have so many banks (don’t like Citi? HSBC is right down the street. Don’t like them either? Standard Chartered is at the next intersection. Or Bank of East Asia, or Citic, or Bank of China, the choices are endless. Though Bank of America has but a token presence there… You don’t really see that many nation-wide players in America.)

      • jamar0303 says:


        Might have something to do with it. As a result of having so many competitors across the whole territory, the banks offer amazing rates and specials for savings, credit cards, you name it.

      • Loias supports harsher punishments against corporations says:

        I guess the driving force behind my comment is the deregulation that caused this mess. Having it government-run eliminates the chance of lobbyists destroying the system by deregulating.

        You can criticize the government for inefficiency or poorly run programs if you want – there are certainly examples of both. But I don’t think I’ve heard people complaining that the government runs risky programs. They are typically conservative and thought out. They actually weigh the consequences of their actions towardas the future. I don’t see how anything in history would suggest the government would run banks as risky as they have been run privately.

        • anewmachine615 says:

          If you think having the government run anything reduces the chance of harmful lobbying, then you need to look into agency capture.

          • jamar0303 says:

            Depends on how it’s arranged. For example, the connection between the Chinese government and Bank of China.

    • El Soze says:

      How would that help? There is a small list of things that the government does well, and managing money is not one of them. Not even close.

      • Loias supports harsher punishments against corporations says:

        See below. The government doesn’t hedge risk like the banks do.

    • FrugalFreak says:

      2 things to fix private Financial;
      1. The return of ethics of good businessmanship with consumers over greed for dollars.
      2. Ending United Sales Of America Corporate led American Government. As long as Government favors Corporate rather than citizens this will continue. They know that they can legalize criminal actions as long as there is a buck involved and can be donated to those guiding this nation.

      This will never be fixed and so glad I’m dying soon in this century. Good Riddance.

    • hansolo247 says:

      Banks are already public, in an extremely perverse way. Then you have the Fed…a beacon of what a truly public bank would be. A public bank would engage in social engineering with no thought of risk, because there is no way it would fail.

      If the backstop of bailouts from the NUMEROUS precedents wasn’t there, none of this would have happened.

      Now that the banks KNOW FOR SURE they will be bailed out again, the reckless behavior will continue.

  6. dush says:

    Banks sure are having a lot of problems these days.

  7. zantafio says:

    And what kind of people are the CEOs of those banks? Just asking…

  8. c!tizen says:

    Soooooooo…. we just spent billions to bailout banks so their investors can sue the shit out of them?

  9. Bye says:

    This means we need less regulation, right?

    I think the banking industry is just frustrated by the existing regulations. If we took away what remains, I’m sure they’d totally be more honest and up-front, right? Right?

    • vastrightwing says:

      The problem is the very people who are “regulating” the financial sector are the ones who work there. All the alumni of G.S. (Goldman Sachs), Chase, JP Morgan, etc. are all the ones who end up in government regulation positions. So when I hear government I immediately think G.S. (they are one in the same). You really can’t separate them. So no amount of regulation will work. The regulations effectively remove competition from the big names. The little guys can’t compete and deal with all the regulations. This is why you’re seeing fewer, yet bigger banks. Ultimately there will be a single bank, maybe run by government since no one will be able to comply with all the regs. Your guess is as good as mine.

  10. diasdiem says:

    Your free market economy and deregulation at work.

    • hypnotik_jello says:

      True free market only works with complete information transparency, which there is not a lot of in today’s “Free market”. This MBS scandal is a prime example of that lack of transparency.

      Deregulation could work with a free market which has total transparency and which makes all information available to all actors and participants.

    • hansolo247 says:


      We had a free market economy? We didn’t have regulators? Oh, wait, we did have regulators, but they were too busy sucking the teat, much like the new regulators from totally overlapping new agencies will do.

      I’ll tell you right now we did not and do not now have any semblance of a free market. In fact, nothing has really changed…the banks are a favored child of government that will get bailed out on demand. Bush supports it, Obama supports it. NO CHANGE.

      A real change would have been to disband the Fed, return to a currency with a stated value, and let companies fail when the screw up. but NOOOOO, we are taking all of the flaws, and doubling down on them.

      The fact that Obama has the hots for a Fed governor who advocates negative interest rates tells me all I need to know.

  11. diasdiem says:

    They say that come the Revolution, the lawyers will be the first ones lined against the wall. Me may have to make them stand back to back with the bankers.

  12. Andy Dufresne says:

    The solution is simple: reinstate Glass Steagall.

  13. bite back says:

    Greed is good…at destroying value, community and the economy.

  14. DaveWW says:

    They need to go after the individuals involved, not just the banks as corporations where only the current banks’ stockholders would actually lose anything, while the actual perpetrators of the fraud have walked away with huge salary and bonuses from back when they committed the fraud.

  15. jason in boston says:

    SEC gets involved! This makes me happy because that could mean actual jailtime. I wish I knew more about the S&L scandals in the ’80s (too young) but isn’t this kind of parallel (methods, not the actual investments)?

    • Gulliver says:

      Yes, and we should ask the Senator from Arizona about his involvement in this. The problem is, Americans have such short term memories they reward criminal behavior.

  16. Talisker says:

    Don’t bail out the banks again. Bail out the homeowners.

    • hansolo247 says:


      A bailout of the homeowners (who will get it again, the smart ones or the dumb ones?) would be extremely unfair. Will I get something (I don’t own a home), or will only the people over their heads in financial ignorance get help? How about those that own their homes outright?

      Either way, money to the population increases the money supply in circulation, yielding high inflation. As it is now, all of the extra money is contained in bank balance sheets…if that gets out our economy is toast.

      In summary, a bailout of the people would be an economic nuclear bomb. It will have far-reaching consequences, namely the precedent that contract law is null and void. Then you also have the fact on one learns a lesson.

  17. TailsToo says:

    It’s time to get FDR on the banker’s behinds.

  18. Mr_D says:

    Ok, I like to think I’m pretty clever, but I’m not seeing how these mortgage bond pools are different from CDOs. Is a CDO the result of buying a mortgage bond pool and slicing it into tranches?

    And the scandal is that the banks misrepresented the quality of the underlying mortgage bonds?

    • grapedog says:

      All these mortgages are supposed to be bundled together and sold as an item, and item that is SUPPOSED to be very reliable, all high quality mortgages. Sure some small % might fail, but by and large the investment is meant to be very safe and sound. It has to be… But now, the holders of the MBS’s find out that 1. what they hold isn’t what they were sold. 2. what they hold might be a bunch of nothing, if a decent portion of these mortgages weren’t properly put together, for example…actually providing the correct and true paperwork. So, they paid for something that is most likely to fail, which they don’t even own, and can’t own in the future. Paperwork submitted now won’t work either, because by law all the paperwork for the MBS’s has to be submitted within 90, and can’t be backdated, unless you want the REMIC’s to lose their tax status, which would cost billions, possible trillions of dollars.

      it’s a huge clusterfuck…

    • Posthaus says:

      I don’t know if anyone has distinctly pinned banks for deliberately misleading about the real value of CDO’s, even though for all intents and purposes it seems like they were; the bottom line is part of the problem is valuing these things, and they are still out there, CDO’s just didn’t disappear with the fall.

    • bishophicks says:

      Morgages are combined to build the bond pools and the bond pools are combined to create the CDO. It’s like clay being fired into bricks and bricks being used to build a house.

      The brickmaker used lousy clay, added too much sand and fired them for too short a period of time (all to save money).

      The company the building supply house tested the bricks, discovered a lot of them were substandard and renegotiated a lower price.

      The builder buying the bricks were told they had been tested for quality but not told the results. The builder pays full price for the bricks but cuts all kinds of corners in the building process in order to pad his bottom line.

      A building is constructed using the lousy bricks. The owner soon discovers he paid for low grade materials and shoddy workmanship and it’s all coming down. There is a clause in his purchase agreement that states that if more than .01% of the bricks are bad, he can force the builder to buy the building back. Owners want to sue the builders, the builders and owners want to sue the brickmakers, and most of the brickmakers are out of business because they spent years making bricks you can’t make anything out of, so people stopped buying bricks or anything made of bricks.

      It’s actually way worse than that.

      The foreclosure scandal is bringing this to light, but it’s not just foreclosures. ANY loan underwritten during the bubble years is likely to have poor documentation. Who owns the loan? Will people who are current on their mortgages have trouble selling their homes? Are titles everywhere completely muddied? How will big banks, companies and municipalities fighting over who owns what and who owes whom how much affect the economy? If Citibank, BofA and others are forced to take back billions in morgage bonds and become insolvent (again? still?) what then?

  19. zantafio says:

    I seriously wonder if the Mafia took over the boards of directors of all the major banks in this country

  20. MarvinMar says:

    So, In the picture above, how long could somebody make use of the empty lot next door befor owning it through something like squatters rights?
    Maybe throw a pop up pool or swingset over there and wait it out..

  21. CBenji says:

    I wonder who owns all these pools of mortgages, or most all of them anyway? I am gonna go out on a limb here and say China, and then I am going to go out and say that isn’t such a good thing. The last big scandal in China where everyone was poisoned with that Melamine stuff people were killed. Here people would get bonuses, and figure out new ways to screw everyone. We will be dealing with the loss of jobs in this country because of this for years no matter what the politicians do, and that won’t be the half of it.

    • Posthaus says:

      Well sadly enough before, it was the banks themselves that owned significant portions of mortgage-baked bonds, being yet another reason for the severity of the crisis.

  22. q`Tzal says:

    I’m waiting for some idjit to explain why this crisis is all Obama’s fault.