Two stories in today’s news provide court-side glimpses of two forms of market abuse that led us skipping down the garden path to the cratered economy. In this one from the Oregonian you can learn all about the alleged scams by various Oregon flimflam men who saw that the trough was unguarded. They apparently goosed up the value of properties, got inflated appraisals, and borrowed way out of proportion to the collateral, pocketing the overage.

They could act with impunity because the banks were turning their paper to Wall Street and didn’t have any reason to scrutinize loan applications.

And of course the liar loans promoted by banks were being bought by Bear Stearns. Here’s an update on criminal proceedings against former Bear Stearns managers facing indictments. Apparently, they knew that the loans they were buying were bunk.  Going to be fun to hear them explain why they kept hyping their hedge funds while secretly selling their own shares before it all crashed down.

All of this highlights the dark underbelly of deregulation.  Want a chuckle? Remember the movie, Wall Street? “Greed is good,” we were told by pop culture, by politicians and by professors.

So this is what they meant by “Good.”

David Sugerman

ps to regular readers-I’m out of here for a couple of weeks for vacation. While David Paul may pick up the slack, the blog may well go dark while I’m away. I’ll be back to it after the 4th of July weekend.

The story is coming out that Melvin Weiss, former class action securities lawyer, was sentenced to 30 months and fined $10 million under a plea deal with the U.S. Department of Justice. The Milberg Weiss law firm has been a national presence for years, handling some of the largest securities class actions in U.S. history.

I would be a hypocrite if I failed to write about this and say the obvious. As I’ve noted before, getting rid of the cheaters is critical to a healthy civil justice system. That’s true regardless of which side the cheater operates from. Melvin Weiss did a grave disservice to consumers and investors. I have my doubts that 30 months + $10 million is sufficient, if you think about the harm inflicted. Even so, it’s done.

I imagine that there will be quite the feeeding frenzy on the corruption at the Milberg Weiss firm in the blogosphere,  at the Chamber of Commerce, from the tort reform advocates, and over at FOX news. But let’s remember that the corruption that nurtured Milberg Weiss operated heavily on the investment firms, as well. If that’s not readily apparent, here’s a quick list for the consideration: Bear Stearns, mortgage lending, Enron.

All of that is beside the point. As one who handles class actions, I’m strongly in favor of getting rid of the corrupt. Good news in the end.

David Sugerman

NPR’s story and interview of a insider from the mortgage lending world provides a chilling glimpse into how we got here. Tracy Warren worked as a loan auditor reviewing mortgage loans that were being sold to Wall Street investment banks, like Bear Stearns.

The radio story makes for a great listen, as Ms. Warren comes across as straightforward and direct. She explains how she routinely saw loans for $500,000 homes in California. The borrowers were hotel workers who claimed to be making $15,000 a month.  Ms. Warren provides a compelling account of how her supervisors routinely overrode her reviews that sought to cull out bad loans before selling them on to Wall Street investment firms.

Sounds like the auditing firm that she worked for, Watterson-Prime, may have been eating at the trough. It would be interesting to see whether her supervisors were paid based on the numbers of loans approved or whether Watterson-Prime had a piece of the action of loans that moved on to Wall Street.

I can’t wait to hear Wall Street banks like Bear Stearns point the finger back at the auditors.  You know we’re in trouble when the smartest guys and gals in our financial system claim that they were duped. And of course, no one has the will to stand up and talk about the naked emperor here. When you insist on deregulating financial markets and transactions, greed will out. And no, unchecked greed is not a good thing.

The other thing is that I imagine we’ll hear similar stories coming out of what appears to be an impending  student loan system collapse.  But of course, it’s early yet.

David Sugerman

The analysis came from my good friend, Oregon trial lawyer Robert Neuberger. As I was heading down toward a full-on rant over the Bear Stearns rescue, Robert pointed out that we’ve arrived in an era of Wall Street vs. Main Street.

Today’s news couldn’t make the point any better. For full ironic effect, you have to go old school and look at today’s (April 4, 2008) Oregonian (that would be a newspaper with newsprint) D-2. Two articles sit one above the other, and the headlines highlight the Neubergarian point that it’s Wall Street vs. Main Street.

Top article, entitled “Fed chief defends Bear Stearns rescue” is an account of Federal Reserve Chair Bernanke’s appearance in front of the Senate Banking Committee. Just below is “Homeowner aid provision dies,” an account of how the mortgage relief act provides $25 billion in tax relief to businesses but will not give homeowners the ability to restructure mortgages in bankruptcy.

Bear Stearns, we’re told, had to be rescued or we would face grave consequences. Fair enough. So we went with the old government supported bailout. Not necessarily a bad play, given the stakes. But consumers are left to their own devices and will lose their homes to foreclosure.

In the trenches, I hear all the time about choices that consumers made when they signed agreements, when they opted to borrow money, when they took on obligations. No one will rescue the consumer, and it looks like Congress and the current administration isn’t about to start.

My beef with all of this is very simple. If you are going to give corporate welfare to the rich, then consumers should get like-kind relief.

Using cold contract logic, Bear Stearns and its investors made choices and they should suffer the consequences. That’s a little absurd, in that it reduces very complex problems to black and white platitudes. But the same is true of consumers who signed up for horrible mortgages on a wing and a prayer. The deals were bad, but you cannot and should not shove cold contract logic down the throats of consumers if you are unwilling to do the same thing to Bear Stearns and Wall Street.

David Sugerman

Today’s news reports that Senate reached a compromise on the subprime mortgage relief for borrowers. The Senate measure excluded a provision opposed by banks that would have amended the bankruptcy laws to allow borrowers in trouble to stay in their homes.

The Center for Responsible Lending estimates that 20,000 subprime mortgage holders lose their homes every week. That number doesn’t do justice to the impact. Every foreclosed houme is in a neighborhood, and every neighbor loses value when neighborhood homes go into foreclosure. Every foreclosed home is in a community, and every community bears the burden of the added strain on the community safety net when a family loses its home.

But the Senate’s choice is more galling than tragic. The protections that consumers sought are the same ones available to commercial real estate owners and yacht owners who go into bankruptcy. When things go bad for the yachts owner, the loan is restructured in bankruptcy, and the yacht owner keeps the boat and pays the restructured loan. But not so for the subprime mortgage holder.

The last galling piece is the double-standard for failure. When banks make bad loans and get heavily invested in bad, unregulated securities, Wall Street and the federal government ride to the rescue. But subprime mortgage holders are on their own. Seems only fair that if we’re going to bailout one, we should bailout the other.

David Sugerman

So I’ll admit to being jaundiced. But when Bear Stearns is at risk, the government works over the weekend(!) to craft a bail out that will “save” the embattled Wall Street firm. Where Wall Street gets lifeboats, consumers get tossed into the sea, with a “Good luck with that,” kind of  castoff .

There are obvious differences, of course. Consumers signed up for complex mortgages on wings and prayers. To the extent that they understood what they were getting, they were betting on rosy economic futures to cover the spread.  Wall Street firms merely took the rosy deal-based transactions, lumped them together for that all-important multiplier effect and then invested in, loaned on and traded around a series of unregulated securities that were rotten to the core. And then it all went to hell.
I’m not really tickled to learn that I am helping to guarantee the failures of unregulated greed. We all pay because taxpayers get to fund the Bear Stearns bailout.  I’m waiting for the advocates of the free market to explain why Wall Street gets bailed out and why consumers are left to drown in debt. If we’re going to enter an era of socialized banking, shouldn’t the borrowers also get bailed out.

David F. Sugerman

The news reports over the weekend of the Bear Stearns bail out tell the remarkable story of federal intervention to avert a complete melt down. The Wall Street investment bank was about to go down the tubes when the feds intervened and helped JP Morgan purchase Bear Stearns for a price reported to be two dollars per share.
Apparently, when Bear Stearns is circling the drain, the feds get really concerned and even work over the weekend. This is a remarkable thing. Of course, when consumers go into crisis over bad mortgage loans, the fed doesn’t do so much.

Interestingly, when consumers sought relief from Congress, the problem wasn’t urgent. Many opposed consumer relief, including this master of one-sided rhetoric. When it finally came, consumer relief was thin, to be charitable.

We are told that regulation is bad and free market is good. When consumers get into trouble with predatory loans, we are told that this is a market problem, and some go so far as to blame consumers for agreeing to bad deals. I get that. But I haven’t heard any squawking about the free market when it comes to Bear Stearns’ bail out. Maybe it’s early.
David F. Sugerman