By Brett Sherman
To be clear, Wall Street Law Blog does not intend the title of this blog post to be sarcastic, ironic, or hyperbolic.
1. Introduction (Summary of The Great Mortgage Swindle - the short, short version)
Financial institutions like Bear Stearns, Lehman Brothers, and Merrill Lynch
(to name a few) deceived sophisticated investors, including countless financial professionals around the world, about the relative risks and rewards of investments in complex structured securities backed by risky subprime and Alt-a mortgages (RMBS, CDOs and related securities).
Big Wall Street banks marketed and sold high risk mortgage bonds as if these securities carried risks comparable to US Treasuries (which are generally accepted as a proxy for riskless investments) and other highly rated bonds.
*As always, Wall Street Law Blog defines risk as "chance of financial loss."
Because AAA mortgage bonds higher yields than other AAA rated "low risk" investments, issuer banks knew that investor demand for these securities would be massive. And, for a long time, as the housing bubble expanded, the banks couldn't produce enough subprime/Alt-a MBS and CDOs to meet this demand. In a word, investor demand was inexhaustible.
Another word that works is insatiable. Insatiable demand subsided only after market conditions changed enough to gradually expose bonds backed by subprime and Alt-a bonds as junk investments. The disintegration of the market started sometime in mi to late 2006. By mid-2007, the market for these OTC traded securities was DEAD. Governments, companies and individuals lost trillions. The individuals responsible for this disaster were more fortunate. Indeed, personal wealth accumulated by senior management at the major Wall Street banks from bogus securitizations and related profit centers was staggering.
The reality of the housing bubble era is this: It was a short-term money grab by a cartel of powerful banks that generated enormous windfalls for senior management and executives in the mortgage securitization and trading businesses of those banks.
2. Why Don't AAA Credit Ratings Excuse Wall Street Fraud?
Why indeed? So glad you asked.
The credit ratings agencies, Moody's, S & P, and Fitch, did in fact give AAA ratings to mortgage bonds. These agencies are not affiliates of the big Wall Street banks that designed and manufactured the mortgage bonds. So - the standard Wall Street defense goes - the investment banks truthfully marketed and sold mortgage backed bonds with credit ratings AAA ratings.
Turns out, we now know, that the big securitizers knew there was a
significant distinction between the toxic AAA rated securities which the banks pushed like drug dealers and other AAA quality investments. While a majority of mortgage bonds were rated AAA, the bankers that designed, manufactured, and sold them knew that the AAA ratings they received were pure bull!$&@.
Fraud, in the context of securities transactions, is all about misleading
investors about important facts. Material facts are facts a reasonable investor would want to know when making a decision about whether to buy or sell securities. For example, the fact that toxic mortgage bonds received AAA ratings that were pure bull!$&@ is quite material.
3. Not Your Average Scam
At this point, the Great Mortgage Swindle may very well be the most financially rewarding crime in history. So, for context and perspective, we draw your attention to the following (the proverbial tip of the iceberg)
Among them, the five top executives at Bear Stearns in the 2000s took home
more than $1.4 billion in cash (cash based compensation plus sales of stock-
based compensation at pumped up prices) between 2000 and 2008.
For emphasis, we think it is okay to be a bit repetitive here:
1 RUINED COMPANY.
5 Top Execs pocketed $1.4 BILLION In CASH during 2000s.
NOW, PLEASE, AS A PERSONAL FAVOR, GO BACK 10 LINES OR SO AND RE-READ, STARTING WITH "NOT YOUR AVERAGE SCAM."
In other words, during the 2000s, the 5 top dogs at Bear Stearns -
killed the company, a major investment bank that was more than eight decades old, and
banked, on average, nearly $300 million apiece in cash (please spare us any tax-related excuses or adjustments).
Oh, and Bear was no aberration. The "take" was nearly identical for the 5 highest paid execs at Lehman Brothers.
And then there is former Merrill Lynch CEO Stan O'Neil.
Here are some of the highlights from O'Neil's reign of terror:
(a) He took a scalpel to Mother Merrill, cutting thousands and thousands employees from the Merrill Lynch payroll like he was an oncologist attacking a malignancy.
(b) He deployed legions of Six Sigma "black belt" storm troopers throughout Merrill Lynch, turning a company that had long inspired loyalty from its workers into the corporate equivalent of a fascist state.*
(c) He immunized Merrill's ultra profitable mortgage CDO group from any real scrutiny by qualified risk-managers or compliance professionals.
(d) He banked a personal fortune that probably makes him wealthier than many royal families.
And, as a final spit in the collective eye of Merrill's public shareholders and hordes of hard-working folks fired by O'Neil, the disgraced ex-CEO took home an astounding severance package worth more than $150 million, reportedly among the five highest severance payouts of all time when Merrill's board justifiably ordered big Stan to walk the plank.
When Stan O'Neil took over as CEO Merrill Lynch was one of Wall Street's premier brokerage firms. He left Merrill scandal ridden and broke. The company was in critical condition when Stan rode off into the sunset, presumably requiring a convoy of armored to haul all the wealth he accumulated while he steered the Thundering Herd to the brink of bankruptcy (ultimately, Bank of America came to the rescue and grossly overpaid to buy Merrill Lynch).
This post is not "about" Six Sigma, but if you don't know what Six Sigma is, we respectfully refer you to Wikipedia or Google for a tutorial on this evil of the corporate universe.
Is the Great Mortgage Swindle the most lucrative fraud ever? Who the hell knows? Perhaps this is a better question- How can we possibly let these folks get away with it?
All of top Wall Street's executives during the 2000s remain free as birds. Very, very rich birds.