Wall Street's Obligations to Main Street

Looks like the banks are making it tough for Fannie & Freddie Mac to exercise their rights under their Master Loan Purchase Agreements ("MLPAs") requiring the big banks buy back any bad loans the big banks sold to Fannie & Freddie.  And with good reason, as the big bank repurchase liabilities could be massive.

To understand what's going on here, and how the big banks' repurchase obligations potentially represent large off balance sheet liabilities for these banks, you need a little background on how loans are bundled into Mortgage Backed Securities, or "securitized."  First, there's the originator of the actual mortgage loan.  The originator is the entity that gives a mortgage to an individual or business.  The originator decides if an applicant meets its loan criteria and handles the paperwork for the original loan.  The originator then bundles any given number of mortgages together and then sells them, usually to a special purpose vehicle, known as the "sponsor/seller," of a mortgage backed securitization.  The sponsor/seller then sells the loans to what is known as the "Depositor" who then sets up a common law trust that issue certificates sold by an underwriter to investors.  The certificates generally entitle the holder to a share of the interest and principal payments in the loans underlying the trust.  Sound complicated?  It is.  But you don't need to understand the intricacies of mortgage backed securitization to understand the massive liabilities involved, you just need to know a few simple things.

First, because the originators were selling the loans they originated they had little incentive to issue creditworthy loans because after the loan was sold the originator no longer carried the loan liability on its books.  This allegedly resulted in fraudulent or negligent loan originations to mortgagors unable to actually meet their loan obligations unless property values continued to climb.  And as we all know, property values fell off a cliff and people were stuck with homes they couldn't sell except for less than what they paid for them and a tsunami of defaults occurred.

Second, the sponsor/sellers often originated loans themselves, or repackaged loans purchased from originators, and sold them to other entities like Freddie and Fannie Mac.

Third, Fannie and Freddie Mac are government sponsored entities, guaranteed by U.S. taxpayers, that massively, some say foolishly, buy mortgages and MBS in order to provide liquidity to the mortgage market in a government directed effort to promote home ownership.

Fourth, every major investment bank set up entities along the whole mortgage securitization spectrum to capitalize on this market.

Fifth, when bundle of loans are sold between these entities, they are usually governed by MLPAs, which contain a repurchase obligation on the part of the seller to the buyer if there is a breach of the specified representations or warranties in the MLPA.

It's these repurchase obligations that give rise to the potentially massive liability.  If banks were issuing as many bad loans as some people say and the data seems to indicate, then it stands to reason that Fannie and Freddie, and by extension the American taxpayer, bought a lot of bad loans from the big banks.  And the big  banks are likely required under the terms of their MLPAs to buy them back from Fannie or Freddie.  But then the big banks would take a massive hit to their balance sheets.  So they're lawyering up instead, because it's probably cheaper to spend a millions of dollars on lawyers then it is to buy back the loans.  So once again America saves Wall Street, and Wall Street thumbs its nose at America.

What Happened to Alan Dershowitz?

I've been annoyed by Alan Dershowitz's knee jerk defense of all things Israeli for the last few years, but I've generally chalked it up to the sclerotic effects of aging upon a once supple mind. But today's sophomoric Huffington Post piece on the IDF flotilla raid earns the booby prize for nationalistic preening. If I'd turned in such a conclusory piece of legal reasoning to a partner at my firm I'd get the ax. A summer associate is capable of better reasoning. Talk about black and white thinking. The Law of the Sea is nowhere near as simplistic as Dershowitz makes it out to be. No lawyer worthy of the name makes such bald conclusions regarding the legality of something as complicated as the IDF's seizure of the Gaza Flotilla on the High Seas. I don't purport to be any expert on the issue, but I certainly wouldn't write a hack piece like Dershowitz's without doing at least a bit of legal research. No one has ever cited Dershowitz as an expert in admiralty jurisdiction, but his pomposity blinds him to his ignorance of the subject matter. For a different take on the legality of the IDF's actions, and some interesting debate in the commentary, check out this link.

IDF Storms Ship, Kills Civilians While Shooting Self in Foot

Been busy of late in corporate lawyer world defending weakling multinational investment banks against the depredations of pension funds, but the Israeli Defense Forces' ("IDF") ham handed raid on the Gaza Flotilla roused me from my dogmatic stupor by sheer force of its stupidity.

First, we all know that the phrase "military intelligence" is oxymoronic, but what idiot at the IDF or the Israeli government authorized this raid? Did it not occur to the geniuses behind this raid that a disproportionate show of military force in international waters against people armed with sticks and knives is exactly what the publicity hungry activists wanted? Most people weren't paying attention to the Gaza blockade but every sentient news reader is now. And how many people would have paid attention if you'd just let the ships dock but you prevented them from unloading, or some other less ostentatious approach? Instead we've been treated to a display of Israeli dick swinging followed by Israeli self defensive whining now that people justifiably want to cut that dick off. Which brings us to point two.

Second, the reason no one except the obtuse buys the IDF's self defense justification for their homicides is because it's ludicrous. This was a white flagged ship in international waters attacked by commandos from one of the fiercest and accomplished armies in the world. The flotilla didn't try to board any Israeli vessels on the high seas, it was the other way around. If anyone was acting in self defense, it was the flotilla, not the armed to the teeth IDF.

Finally, how long can the Israelis kid themselves that they're not treating the Palestinians in the same despicable ways that the Jews have been treated for centuries throughout the world. Talk about losing you moral compass.

Top Ten Reasons Goldman Sachs Would Be Dead Without Government Help

10) TARP

9) TALF

8) Being allowed by the Government to become a Bank Holding Company (thus gaining an implicit government guarantee) overnight;

7) Being able to issue FDIC insured debt as a bank holding company;

6) Temporary SEC ban on shortselling when investors starting selling Goldman short during the height of the crisis and Goldman changed its position on short sales and asked the SEC for a ban;

5) Getting paid 100 cents on the dollar as a counterparty to AIG credit default swaps as a result of the government's AIG bailout that prevented AIG from going bankrupt;

4) The revolving door between the Fed, Treasury and Goldman that made Goldman privy to non-public information regarding the government's deliberations during the crisis;

3) Selective government intervention, or lack thereof, that allowed some of Goldman's competitors to fail, most notably Lehman Brothers, thereby bolstering Goldman's trading positions;

2) Being allowed to actively market and sell the toxic assets at the heart of the crisis while at the same time selling them short and eliminating them from their balance sheet;

1) If murder wasn't illegal mainstreet would have killed everyone at Goldman by now for being tone deaf while doing God's work.

Death of the Dollar

Funny how the dollar is supposed to be so weak but everyone runs to it when global economic catastrophe looms. Why is that? A panicked sense of tradition? The size of our military? A capitalist legal system? Then when the storm clears everyone says it was a nice visit but now they have to go.

Bearing Scalia's Cross

Ahh, Justice Scalia, just when I was going to lay off you for a while you paint a big bulls eye on your forehead with an intemperate outburst about how a war memorial cross on what was once public land is not an establishment clause violating religious symbol but a one size fits all commemorative symbol. Scalia's outburst was in reaction to an ACLU lawyer upstaging Scalia by pointing out, to laughter in the courtroom, that Scalia's argument that the cross was a generic commemorative symbol in the memorial context made no sense in light of the fact that there is a dearth of crosses in Jewish cemeteries. The ACLU lawyer's riposte was in reaction to Scalia's smug question as to whether it would be better if instead of a cross there was some sort of amalgamation of the cross, the star of David, and Islam's star and crescent. Because you know, all dead soldiers belong to one of the religions of Abraham and there are no atheists in foxholes. Scalia emphatically argued that crosses in this context aren't really Christian symbols because they're all over the place in cemeteries, everybody does it, so it's really not religious symbolism but popular symbolism that is not subject to establishment clause challenges. Scalia is all about majority rule on this point, the minority can and is going to hell as far as he's concerned. No doubt if the case was about a secular attack on Catholicism for its seemingly entrenched pederasty and ritual cannibalism he would rush to protect minority rights. Weak. What happened to you Scalia? I used to have a grudging respect for you. Were you just fronting in the Texas flag burning case?

Defending Polanski

As a father of two children I have no sympathy for what Polanski did and believe he needs to face the music without any "but I'm a great artist" mea culpas. If he had any guts he'd waive extradition and confront the situation head on. But as a defense lawyer I can't help note that a lot of what has been written, pro and con, about Polanski misconstrues the procedural record and the weight one should give to grand jury testimony.

Some basic facts. He never had a trial and has never been sentenced. He pleaded guilty to statutory rape to avoid trial on more serious charges and then was put under psychiatric observation for 42 days for the purposes of preparing a sentencing report. When Polanski decided that the Judge was not going to honor the terms of Polanski's deal with the prosecution (a plea deal does not bind a court because the deal is only between the prosecution and the defense) and just give him probation he fled the country in the face of a maximum twenty year sentence.

Polanski's detractors (including me) repeatedly cite to the victim's grand jury testimony for the facts of Polanski's rape ("the so called crime") of a 13 year old carried out in part by plying her with champagne and quaaludes. But caution is in order when citing to grand jury testimony as proof of facts. When you read the grand jury testimony of the victim it's quite obvious that she was coached. This doesn't mean it's not true, but doubtless the DA sat the victim down for witness prep before her testimony. It is perfectly legitimate to prepare a witness, particularly a rape victim, for the experience of testifying as long as you don't tell them what to say. But it's not always so easy during a prep session to avoid shaping a witnesses testimony to conveniently fit your case. Particularly when you are dealing with a young and probably impressionable witness. The transcript reads as if the prosecutor had gone over his line of questioning with the victim before hand. Whether everything that she testified to was accurate is difficult to determine however because there was no cross-examination. Grand jury witnesses are not subject to cross-examination. Grand juries are convened to determine if there is sufficient evidence supporting a finding of probable cause for an indictment, not to make final findings of fact. The prosecutor runs the show exclusively. So when you're reading the grand jury testimony, you're reading the Prosecutor's unchallenged narrative exclusively, and the prosecutor is always striving for the most dramatically compelling narrative possible to justify the charges. Thus grand jury testimony should always be read with some skepticism.