The SEC has charged four former veteran investment bankers and traders at Credit Suisse Group for allegedly engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis. The SEC alleges that Credit Suisse's former global head of structured credit trading Kareem Serageldin and former head of hedge trading David Higgs, along with two mortgage bond traders, deliberately ignored specific market information showing a sharp decline in the price of subprime bonds under the control of their group. They instead priced them in a way that allowed Credit Suisse to achieve fictional profits. Serageldin and Higgs periodically directed the traders to change the bond prices in order to hit daily and monthly profit targets, cover up losses in other trading books and send a message to senior management about their group's profitability, according to the SEC, which alleges that the mispricing scheme was driven in part by these investment bankers' desire for lavish year-end bonuses and, in the case of Serageldin, a promotion into the senior-most echelon of Credit Suisse's investment banking unit.
Federal Deposit Insurance Corp. Chairman Sheila Bair called for establishing a foreclosure claims commission, modeled on the BP and 9/11 claims commissions and funded by servicers, as a step toward providing remedies for borrowers harmed by the mortgage industry’s past practices.
Speaking Jan. 19, 2011, in Washington D.C., Bair anticipated that many in the servicing industry would resist the idea, “because it would impose much of the immediate financial cost on the major servicers themselves.” Bair noted that this would be short-sighted however, as “every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them—and the rest of us—even more.”
The Financial Crisis Inquiry Commission has released a group of preliminary staff reports that provide background factual information to the Commission on subject matters that are the focus of a series of hearings titled “Subprime Lending and Securitization and Government-Sponsored Enterprises.”
The SEC announced administrative proceedings against Memphis, Tenn.-based firms Morgan Keegan & Company and Morgan Asset Management and two employees accused of fraudulently overstating the value of securities backed by subprime mortgages. The SEC's Division of Enforcement alleges that Morgan Keegan failed to employ reasonable procedures to internally price the portfolio securities in five funds managed by Morgan Asset, and consequently did not calculate accurate “net asset values” (NAVs) for the funds. It further alleges that Morgan Keegan then recklessly published these inaccurate daily NAVs, and sold shares to investors based on the inflated prices.
The Financial Crisis Inquiry Commission has announced that it will hear from public and private sector entities next month in a hearing titled “Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs),” on April 7--April 9, 2010, in Washington D.C. Hearing sessions will include the following entities: the Federal Reserve Board, Citigroup, Fannie Mae, the Federal Housing Finance Agency and its predecessors the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight, and the Office of the Comptroller of the Currency.
The FDIC has issued new guidance on the classification of refinanced mortgages with a high loan-to-value ratio. According to the agency, a high LTV ratio is not, alone, a reason to adversely classify such a loan. Retail loan classifications should be based on the borrower's payment performance, not on the value of the collateral, as that value can rise and fall with changes in market conditions. The guidance applies to residential refinance loans that lower the mortgage interest rate to a market rate and that follow sound underwriting guidelines other than having a high LTV ratio.
At the public briefing of the United States Commission on Civil Rights, the Federal Trade Commission described its efforts to protect consumers from unfair, deceptive, and discriminatory practices in the mortgage lending market. It stated that, since the late 1990s the FTC has focused on the most egregious illegal lending practices of nonbank lenders, particularly in the subprime market, bringing 26 law enforcement actions that resulted in almost $345 million being returned to consumers. The agency also has brought dozens of cases alleging discriminatory lending practices, including the unfair pricing of mortgage loans to minority borrowers.
A bill to improve enforcement of securities fraud and financial institution fraud involving asset-backed securities and fraud related to federal assistance and relief programs was introduced by Senator Patrick Leahy, chair of the Judiciary Committee. Fraud contributed to an unprecedented collapse in the mortgage-backed securities market, he noted, and as Congress passes legislation to make sure this kind of collapse cannot happen again, a component of reform must be the reinvigoration of federal anti-fraud measures.
The biggest near-term priority facing the House Financial Services Committee is the creation of a systemic risk regulator, Chairman Barney Frank, D-Mass., said at a February 3 briefing outlining the committee’s upcoming agenda.
The Fed expects that its program to purchase mortgage-backed securities guaranteed by the government-sponsored housing enterprises will begin operations in early January 2009. Under the program, the Fed will support the housing and mortgage lending markets by purchasing 15-year, 20-year and 30-year fixed rate MBSs backed by Fannie Mae, Freddie Mac and Ginnie Mae. Securities of other maturities also may be included.
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