The New York Times' Dealbook ran an article on JP Morgan where a series of e-mails confirms that observable event based reporting would allow investors to know what they own or what they are buying.
Equally importantly, the article establishes that observable event based reporting is necessary if the information advantage currently enjoyed by Wall Street is going to be eliminated. Without this information advantage being eliminated, investors will be reluctant to return to this market as they recall how much money they lost due to Wall Street's use of this informational advantage.
When an outside analysis uncovered serious flaws with thousands of home loans, JPMorgan Chase executives found an easy fix.
Rather than disclosing the full extent of problems like fraudulent home appraisals and overextended borrowers, the bank adjusted the critical reviews, according to documents filed early Tuesday in federal court in Manhattan.
As a result, the mortgages, which JPMorgan bundled into complex securities, appeared healthier, making the deals more appealing to investors.Please re-read the highlighted text as it nicely summarizes why observable event based reporting must be a requirement for all structured finance deals.
The trove of internal e-mails and employee interviews, filed as part of a lawsuit by one of the investors in the securities, offers a fresh glimpse into Wall Street’s mortgage machine, which churned out billions of dollars of securities that later imploded.
The documents reveal that JPMorgan, as well as two firms the bank acquired during the credit crisis, Washington Mutual and Bear Stearns, flouted quality controls and ignored problems, sometimes hiding them entirely, in a quest for profit.Let me repeat, the profits from Wall Street's information advantage comes from having tomorrow's news today. Wall Street had access to observable event based reporting on the underlying mortgages and the investors did not.
When it comes to rewriting disclosure regulations for structured finance securities, Wall Street is protecting its access to tomorrow's news today. It does this through the sell-side dominated industry trade groups, the American Securitization Forum (ASF) and the Association for Financial Markets in Europe (AFME), that keep lobbying the global financial regulators to focus on data templates and NOT when the data is disclosed.
The lawsuit, which was filed by Dexia, a Belgian-French bank, is being closely watched on Wall Street.
After suffering significant losses, Dexia sued JPMorgan and its affiliates in 2012, claiming it had been duped into buying $1.6 billion of troubled mortgage-backed securities.
The latest documents could provide a window into a $200 billion case that looms over the entire industry. In that lawsuit, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has accused 17 banks of selling dubious mortgage securities to the two housing giants. At least 20 of the securities are also highlighted in the Dexia case, according to an analysis of court records....
The Dexia lawsuit centers on complex securities created by JPMorgan, Bear Stearns and Washington Mutual during the housing boom. As profits soared, the Wall Street firms scrambled to pump out more investments, even as questions emerged about their quality....
JPMorgan routinely hired Clayton Holdings and other third-party firms to examine home loans before they were packed into investments. Combing through the mortgages, the firms searched for problems like borrowers who had vastly overstated their incomes or appraisals that inflated property values.
According to the court documents, an analysis for JPMorgan in September 2006 found that “nearly half of the sample pool” — or 214 loans — were “defective,” meaning they did not meet the underwriting standards. The borrowers’ incomes, the firms found, were dangerously low relative to the size of their mortgages.
Another troubling report in 2006 discovered that thousands of borrowers had already fallen behind on their payments....Please re-read the highlighted text as it shows that if the investors had access to the underlying mortgages on an observable event based reporting basis, they too could have known that the mortgages were bad.
Investors could have done the analysis for themselves or hired an expert like Clayton Holdings.
What is important here is that if there had been observable event based disclosure, these deals would never have been done on the terms they were done on.