Why does Staten Island have so many foreclosures and who owns the real estate anyway?

This is a continuation of the first email that I wrote, last September, where I told the story about how I called an old friend at Merrill Lynch, after they had just written down $7.2 Billion in losses due to bad mortgages (and that was when a Billion Dollars was still a lot of money), and I asked him if I could help them with their Staten Island Real Estate, at which time he told me that Merrill Lunch didn’t own any real estate and that they only had bonds. I followed up with another email which discussed servicing companies that run the whole mortgage industry servicing the bonds from Wall Street. Later I spoke about organized crimes role with Straw Buyers. In November I wrote that the financial crisis was a ploy by Wall Street so they could trim off the fat, fire their older employees, and insure that they had money for end of the year bonuses. Anyway, this is the next installment of that series.

Today the big story is all about AIG’s bonuses, although we are still talking about Merrill Lynch’s. Can you imagine the unmitigated gall of these people?

So what did these geniuses do to earn these fantastic bonuses in the first place?

Well it all goes back to the mortgage business. As credit eased, everyone wanted a piece of the pie. Everyone was making money and the values of property kept going up so it was a win/win situation- even if people couldn’t pay their mortgages, they could refinance them. They even went so far as to create products that didn’t require re-payments. That’s old news.

Merrill Lynch decided to get into the mortgage business because they saw others making big profits, but they were pigs about it.

As a way to squeeze extra dollars in profit, for themselves, Wall Street created layers of the same thing. Wall Street has to grab not only the cream, but the fat, and grizzle, and then suck the bones dry.

They did this by coming up with a type of modern financial engineering known as derivatives. Derivatives are a combination of financial instruments that are used to limit risk (ha ha). An amalgam (a combination of two or more characteristics) of “collateralized debt obligations (CDO’s- pools of loans bundled for investors) and credit-default swaps. Their value is derived by the amount of the underlying asset.

What does all of this mean?

In order to reduce the risk of losing money, Morgan Stanley came up with these CDO’s bundling various obligations (stock, bonds, notes) of their prime customers (IBM, GE, GM, etc.,) along with riskier loans (junk bonds), unsecured loans, and including some insurance from AIG to secure the bonds against losses. Then they would put a value on this package, charge a fee for putting it together, maybe charge fees for “servicing the loans” and maybe earn a commission by re-selling the package to a different investor (foreign investors, foreign governments, city, state, and local government) or for the un-used portions of bond issues that they haven’t used yet, etc.

Originally when you bought a CDO, there could be hundreds or thousands of original notes, mortgages, stocks or bonds, included in the CDO.

Now Merrill Lynch figured out how they could do it electronically, via computer, and no longer have to deal with the physical paper of the documents. This begat electronic reporting services. This is why the owner of the mortgage on a house could be Deutche Banque as trustee of a series of bonds # 1-200, etc. etc.

But good old greed reared its ugly little head into the picture again.

Originally, these bundles, packages or “derivatives” were safe. After all we were dealing with real estate mortgages, stock certificates, corporate bonds, etc.

Merrill Lynch wanted to be the biggest player in mortgages. Bigger even than Lehman Brothers, and so they bought their own banks around the world, to be able to make more fees and commissions on originating the mortgages, servicing them, bundling them, and making their own derivatives. They were the biggest players in the game at the end.

And all was good for a while. The economy was good, the real estate market kept going up, and there were no losses, because even with bad credit you could refinance your loan, and take out the payments for another year or so. They were all performing, and since they were bonds, they weren’t even regulated. (Not to be political, but thank you Bill Clinton and George Bush).

But big surprise, Merrill Lynch got sloppy. They started bundling the loans together without regard for risk factors. Their risk profile at the end was non-existent.

There used to be a mortgage banker in Brooklyn that had the best deals. Only thing was that they closed all of their loans, in large amounts of mortgages together ($25 Million, $50 Million) whatever it was. (This always created problems to buyers and sellers who needed a closing, but the bank wasn’t ready, always just another day, just another piece of paper, where what they were doing was buying time to get them all together at once. This was so that they wouldn’t have to pay for warehousing (holding) the money. If they closed all of the loans and they always resold the package the same couple of days, then it was all profit.) Smart for them.

In order to sell this portfolio of mortgages, they had to comply to certain formulas. The vast majority was owner occupied 75-80% loan to value; a small percentage was even lower risk, and a small percentage was higher risk (5-10% down). These packages or bundles were packaged according to industry standards at the time. The percentage of risk was known and the prices for the bundles based upon risk factors.

The geniuses that were making the money for Merrill Lunch, and don’t forget, we are talking about making Billions of Dollars in profits here, these guys were getting multimillion dollar bonuses. To make the loans faster, and reap larger profits, they stopped doing too much due diligence, stopped risk management (translation - looked the other way), at the quality of the loans, or mortgages, or paper contained inside. If someone complained, they got fired, or told to shut up. But not too many people complained because they were all making so much money.

But then AIG stopped insuring the Merrill Lynch derivatives, because they were too risky, Merrill Lynch wrote down $7.2 Billion in losses, and that’s where my story began.

And where are these geniuses now? Huge paying jobs with hedge funds or other monetary funds, making fortunes by picking up the pieces, for huge fees, and selling them to other investors’, for huge fees. God Bless America!

So what happened to AIG?

Well the former Secretary of The Treasury, Henry Paulson, who was also the former head of Goldman Sachs, always had a rivalry with the head guy at Lehman Brothers, Richard Fuld. So while the economy was melting down, he told Lehman that we weren’t going to bail them out, “get thyself sold.” Of course the arrogant former head of Lehman Brothers, who became the poster boy for Wall Street greed when he defended the $484 million he received in salary, bonuses and stock options when he terrified before Congress in October, before the fall of Lehman. waited until it was too late, and couldn't find a buyer for Lehman. Paulson said we weren’t going to bail out Lehman Bros, and we let it fail. And of course that was the mistake that almost brought down the entire world, and which is why AIG got bailed out so quickly. Perhaps if Lehman Brothers had been bailed out the melt down might not have happened? Who knows?

But Lehman Brothers did fall. Problem was, AIG, the huge insurance company, who was in the business of collecting fees, basically insured that the world wouldn’t end. Whenever Lehman Brothers did a bond issue, or some sort of other financial derivative or whatever, AIG got a piece for insuring that Lehman Brothers would be there. AIG sure sounds like a scam.

All of a sudden, “poof” no Lehman Brothers! AIG has to pay out Billions in claims, and we found out in today’s news, that besides paying themselves bonuses, they used the bailout money to pay: Goldman Sachs $12.9 Billion; Merrill Lynch $6.8 Billion; Bank of America $5.2 Billion, etc. These are the same people that we had to bail out because they had losses, but then they collected for their losses again, from more money that we paid out.

Life sure is good here in America except that when the US gets a fever, the rest of the world gets the flu!.

SNAFU means- Situation Normal- All Fouled Up- this was created during the battle of the bulge during WW II. It's sort of irrelevant to anything I’ve written, but I just found it out, and thought that it was interesting, and worth passing along. (there is another less politically correct meaning… Situation Normal – All F---d up).