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14 Jan

Now Main Street Knows how Bear’s Jeff Verschleiser made Millions off Cheating Others

One of the central bad actors in my reporting on the alleged fraud machine Bear Stearns mortgage department was running made headlines this weekend for spending an absurd amount of greenbacks to promote his daughter’s coming of age. Jeff Verschleiser, age 43, and his wife Amy, age 41, went and bought out a popular Aspen hotel during a special local weekend celebration called Winterskol and now have a lot of people offended. Media reports estimated the Jewish family is spending between $500k to $1 million for the four-day weekend + Bat Mitzvah party. Now spending tons of money to throw a religious celebration for your teen isn’t anything new for the New York Jewish set but Matt Taibbi of Rolling Stone picked up on the notion Jeffery didn’t exactly make the dollars he’s spending this weekend honestly.

The daughter’s name is Madison Rose Verschleiser and when she’s not buzzing around the Aspen slopes entering ski races or hanging in her parents huge 2nd home at Aspen’s Stillwater Ranch area, she lives in her parents mega million Central Park-view apartment on 5th Avenue. Aspen Daily News reporters told me they saw Madison’s parents had three big LCD’s placed in the hotel lobby with their daughters face in a circle jerk of photos running repeatedly on the screens – you know because its ‘All about Madison this weekend’. I found a website, madisonaspen2012.com, created in honor of Madison’s big weekend but it looks like the family took it down after news broke on their spending habits. (Of course a google cache of the website still works.)

Readers of mine know the story about Verschleiser and his Bear Stearns trader buddy Mike Nierenberg allegedly stealing billions from their own clients during the housing boom by packaging and selling totally dysfunctional mortgage securities that helped bring down the bank. But now with Taibbi revisiting about a years’ worth of my reporting on the Bear traders’ apparent securities fraud Verschleiser is officially labeled one of Wall Street’s biggest pricks.

Taibbi Wrote:

At first, I couldn’t remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, “E-mails Suggest Bear Stearns Cheated Clients Out Of Millions.” And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!

In one of the latest civil fraud complaints against Bear Stearns, and their owner JP Morgan, about 30 whistleblowers came forward to explain Jeff and his fellow traders were known as ‘Bear Don’t Care’ for telling third-party due diligence firms to just ignore all the mortgage loans in the billions of securities they were selling when they put their stamp of approval on the deal. A stamp that got plenty of pension funds to buy their ‘sack of shits’. It’s this ‘Don’t Care’ attitude that seems to have upset a lot of people this weekend as the pitchforks and frustrated anger rang loud and clear in the comment section of every story written on Jeff’s daughter party (there are about 9 of them). The New York Post even got one Aspen weekender to call it “a disgusting display of ill-gotten gains.”

Because of the need for the Verschleisers to have a private event in a public place, the locals can’t use their favorite watering hole at Hotel Jerome, called the J Bar, and spend their hard-earned dollars watching the Broncos make a run at the NFL playoffs because Jeffrey is all about exclusivity. It’s unclear if the Verschleisers plan to compensate the bar staff for all the lost tips this weekend – locals tell me some bartenders can make up to $1k a night on a big weekend like this. The editor of the Aspen Daily News, Carolyn Sackariason, broke more news last night reporting Verschleiser spent about $7,000 to kick out anyone wanting to use the city-owned Aspen Family Rec Center tonight so his daughter Madison and her friends can privately run around in it.

As the world is soaking in what a douchebag Jeff Verschleiser is I’m wondering how his wife feels spending the millions he made off the backs of pension funds and the rest of Bear Stearns employees who lost sooo much money when the firm failed and their stock was sold for only few bucks. Taibbi writes that Jeff’s actions helped bring down the firm but for quite a few years he was actually the gold money maker for the bank with his hand in every part of the fee earning process a mortgage security could go through (the Ambac suit points out he just didn’t do it ethically or legally). It wasn’t until mid 2007 when he pigged out buying failed subprime lender Encore, that the bank got stuck with millions of very sick wholesale mortgage loans. Loans that sucked the life out the banks regulatory capital and eventually were a part of what led to a liquidity problem. Jeff’s wife Amy, a former private school teacher and Dalton 88’ grad, happens to be on a bunch of Jewish charity boards (such as the NYC United Jewish Association) and I wonder if the charity work (aka party planning) is to clear her conscious. It’s not like she can’t read the actions of her husband that are laid out in multiple civil fraud suits citing his own emails. Given she was also a Madoff investor who lost a few bucks, you’d hope there is some twinge of pain in seeing the rest of world want to throw up over their family’s obnoxious display of wealth this weekend.

Amy appears to have grown up in an influential upper east side jewish family. Her Aunt, Elaine Turner Cooper, was a huge patron of the Whitney Museum and her 1st cousin Steven Mnuchin is now the ex-Goldman guy who runs the carcass of failed IndyMac. (It might make sense that Mnuchin helped Jeffrey get the Goldman job when JP Morgan threw him out after the Bear take over.) During her husband’s boom earning years, 2006, online real estate records show the family moved out of a upper east side duplex they bought for $10 million on Park Ave and upgraded to a full floor Central Park apartment on 5th Avenue that has only 15 apartments in the building selling for at least $16 million (They live on the third floor of 944 5th Ave, New York, NY). Property records show they also spent $16.5 million for a new custom-built 5-bedroom Aspen home at 61 Stillwater Lane in the fall of 2006. This is the same time period billions of Bear mortgage securities were created by Jeff – securities that the Netherland’s largest state pension fund just sued Mr. Verschleiser individually for his role in fraudulent inducement and multiple violations of securities laws. The suit was filed on December 7th in New York State court.

Taibbi added an update to his story with a rant on why Verschleiser hasn’t been indicted yet for allegedly stealing billions from his own clients. But the colorful Rolling Stone writer must have failed to read my story this summer about NY Assemblyman Morelle pushing his friend the NY Attorney General to start a criminal investigation into the Bear mortgage team. The AG has asked civil attorneys suing Bear/JPM to share evidence with him and I’ve spoken with people his team has interviewed- they all say he’s serious about using the Martin Act against these bad boys. Given those facts, I’m not agreeing with Taibbi’s view these guys will never get charged although it will take some political balls to get it done.

So with the NY Attorney General having a keen eye on charging Jeffrey and his fellow mortgage traders for criminal acts, a federal housing regulator gunning for him individually in their mega-billion fraud suit, and locals in Aspen pissed off by his personal exclusivity needs; do you think the Hotel Jerome manager is looking a little foolish for telling the Aspen Times a ‘nice family’ had taken over the hotel?

UPDATE 1.16.12: It appears the Verschleiser had a like-minded friend write in to the Aspen Daily News about their weekend news story ‘Renter of Jerome Under Scrutiny for Wall Street Deals’ calling the coverage mean and nasty. His logic was Jeff’s civil fraud suits are old news and he couldn’t understand why the local paper would print news about the background of a part-time resident that had just made national news. Really? First off Jeff’s civil fraud cases are ongoing news and the subject of upcoming trials and just a few weeks ago he was sued again, as a named defendant, for fraud and securities violations. Second, it’s the local papers job to tell the reader who this colorful character is considering his actions, taking over public places for the private use of friends, effected their weekend. Third, it’s actually not the papers job to promote tourism for Aspen nor should they worry about how the reporting of factual events effects dollars spent on Aspen. When that happens then they should just shut the paper down.

Editor’s Note: The link to the 5th Ave apartment is not the Verschleisers but an apartment a few floors above theirs. It is used as an illustration of what apartments in this exclusive building look like. The party photo is a snapshot of the public homepage the Verschleisers used to promote their daughter’s event. It was taken down because I just learned the photographer owns the rights to the photo and thus I don’t have permission to publish it on this site.

29 Dec

Barclays Accused of Criminal fraud for Golden Key in Geneva

A criminal complaint has been filed against Barclays in Geneva, Switzerland this week for its role in a $1.4 billion structured investment vehicle (SIV) called Golden Key. The Barclays arranged and structured SIV blew up in spectacular fashion in 2007 and a French asset management firm, Oddo, tried to sue the British bank for fraud in a New York court but got the motion tossed, in 2009, on a technicality. So now one independent investor from Geneva has foregone the US court system and filed his own criminal complaint against the bank and the collateral manager they hand picked — Avendis Capital a Swiss asset management company.

Golden Key was considered a SIV-lite, meaning it would raise an amount of capital, borrow money in the short-term commercial paper debt market, and then invest all of this money in higher interest rate bearing instruments such as mortgage-backed securities, in its strategy for high returns. Investors in Golden Key originally sued, in 2008, because they believed BarCap was sitting on a bucket of rmbs they needed to off-load and the bank arranged for the SIV-Lites to expand their size by increasing their borrowings and use these borrowing to take the toxic securities off Barclays’ hands. The idea was collateral managers like, Avendis, were buddy-buddy with BarCap executives who were in charge of selling and creating the SIV, and would basically let BarCap pick the collateral for the SIV.

This is a method we’ve seen before in CDO fraud cases brought against Goldman and Merrill Lynch. But in the Barclays suit they didn’t have any hard evidence like emails from Avendis and Barclays’ executive, Kelsey Burr, detailing their cozy relationship or plan to screw investors in the name of saving Barclays’ balance sheet. Well now they do.

The Geneva investor, Philippe Rebourg of Coficap, just happen to get a hold of some damaging internal Barclays comunication, which are now evidence in his criminal complaint. You see in some European countries citizens can file their own criminal complaints when the local D.A. or prosecutor doesn’t do it first. Then a judge will decide if the criminal complaint goes forward. While the complaint is filed if any of these BarCap executives named in the claim show up in town they can be arrested. Rebourg told me he expects it will take two to three weeks for the judge to rule and the suit is currently sealed. Luckily there is also a changing of the guards in the Geneva A.G. office and incoming Attorney General Michael Lauber has told local papers he is gun hoe to file claims against the banks for financial crimes.

I’ve seen emails between Barclays and Rebourg for months now and he’s warned them he is going to file a criminal complaint and expose the damaging emails if they don’t settle with him. Well he clearly got sick of their cat and mouse litigation game and apparently called their bluff by filing the criminal complaint. The veteran Barclay’s executive who worked out of the Chicago office for years, Kelsey Burr, suddenly resigned or took a buyout package this summer. BarCap’s Chicago office confirmed for me in August he was no longer with the firm and Burr has not responded to emails for a request for comment.

Another alleged bad actor from BarCap was John Parker. I’ve seen an email chain from April 2007 between Parker and Avendis executive Katy Huang explaining that Avendis as the collateral manager was worried about owning the riskiest shares (capital notes) in Golden Key and their plan was to sell off the risky capital notes to investors (high yield chasers) Parker and team had lined up. Avendis also had a hedge fund that bought a ton of Golden Key notes but there were restrictions in the fund’s offering memorandum regarding how much they could buy. BarCap allegedly solved that little problem for them by simply giving the fund more leverage (borrowed cash) to buy more Golden Key notes. Then Avendis got stuck with all that Golden Key toxic paper, while the rest of The Street was shunning buying any SIVs in mid to late 07. The result was Golden Key investors lost their investment and Avendis got this neat loan from Barclays to cover it’s losses in 2007 but the hedge fund still ended up filing for bankruptcy. Ouch.

Barclay’s was smart in setting up the whole thing in offshore llc’s etc… to advert US securities laws thus the failed US lawsuits. The last time Barclays got caught up in a criminal complaint is when the US DOJ was not happy about them doing banking with countries the US had sanctioned and they paid the US a $300 million fine for their ‘special relationships’. But it will be interesting to see how the Swiss handle this new evidence and if other investors ,like Union Mutal Pension fund who sued BarCap in a French court this year, will join with Rebourg to file more suits given the nugget of internal emails he has. You see since bad faith has already been ascertained in September against Barclays by a Canadian judge in a similar situation (the Devonshire Trust case), Coficap hopes that the Swiss judge will recognize this time the criminal nature of Barclays’ misconducts under Swiss criminal law.

Stay tuned — once the case is unsealed I’ll be able to detail more on how the alleged plan by Barclays to screw their investors went down. Until then if you ever did deals with Barclays’ John Parker or Kelsey Burr I’d love to hear from you. I’m also interested in hearing from Golden Key investors regarding Jerry del Missier’s possible role in BarCap’s SIV strategy.

UPDATE 1/2/2012: John Ward a UK blogger has written an opinion piece on the news I broke. He details more about the history of the Avendis managers and points out one of them already went to jail for investor fraud.

14 Comments
21 Dec

Analyst says: JP Morgan could be in worse shape than Bank of America

Investors who bought billions of residential mortgage securities from Bear Stearns have woken up to the fraud machine I’ve been reporting on at Bear and EMC all year. On Friday, a Texas legal firm made famous for negotiating an $8.5 billion settlement with Bank of America for rmbs investors, made a similar move on JP Morgan. Gibbs and Burns, who represents clients like Blackrock and PIMCO, sent a nasty warning letter to five banks who act as trustees for JP Morgan owned RMBS. They called for an investigation into breach of contracts and substandard servicing of these mortgage bonds.

The news hit every major paper because the number of bonds in question was $95 billion. And this was the first time we saw blind investors figure out who the other was to get a quorum together to fight JP Morgan. You see to get the trustee to actually do their job and make sure the loans in the mortgage security are what the bank said they are; you need at least 25% of the investors to complain. Well that’s happen now and as a result we see top mortgage industry analyst like Mark Hanson, sending warning notes out to clients about JP Morgan facing a mega billion payout over the sins of Bear’s Mortgage team run by Tom Marano.

Hanson wrote to clients yesterday:

“on the JPM $95bb MBS inquiry because I feel it will turn out unlike anything we have seen to date in MBS suits and settlement. In short, the various smaller monoline suits are blazing the way for the much larger MBS suits. My views seem draconian in nature relative to what we know in the Gibbs and Bruns / BAC $8.5bb settlement. But I think those using GSE or BAC math coming up with a few of billion dollars for JPM/Bear/WM MBS fraud will be disappointed.’

Anyone reading my reporting detailing things like EMC analyst being told to make up loan level detail to the raters — to newer news that outside due diligence firms like Clayton were told to ‘not find any bad loans’ when they prepared reports for Bear RMBS investors, knows the level of outright fraud was blatant. I agree with Hanson that $JPM can’t be compared to $BAC when trying to estimate how many billions of RMBS they will have to buy back because this isn’t a case of irresponsible underwriting from the likes of Countrywide – with Bear we have former EMC employees coming forward alledging out right cheating and lying.

Of the $95 billion of JP Morgan RMBS the trustees have to inspect, 47% were originated by Bear Stearns. In the monoline suits against Bear/JPM they’ve shown on average 50 percent of the loans were an early payment default and should be bought back. And then there is the issue of loans already in default before mortgage bonds were even sold. Securities like PRIME 2005 / PRIME 20007 are packed with loans from Puerto Rico. This is interesting because in August I reported a story at DealFlow Media detailing how EMC loan analysts went to their superior, David Hamilton, to complain the $500 million of loans Bear bought from a Puerto Rico bank were already in default. The story explains Hamilton sent the findings up to Tom Marano’s mortgage trading team at Bear and they said “don’t worry about it we’ll just swap them out latter.”

Then there is this little issue I reported on also at DealFlow this summer:

“In 2004, Bear decided to tap the short-term debt market for capital to expand its mortgage operations. To do this, Bear has to set aside some of the mortgages it already had booked as collateral in the RMBS, Van Leeuwen said.

“When the company first did this, it was a little hairy because a couple of times I remember a loan that would be designated for the funding, call is master funding, that was set aside as collateral for the sort-term debt was also sold into a security, so it was in two places at once”, he said. “But because it’s not regulated and nobody is really watching, you can do it quietly.

If Bear couldn’t cover the short-term debt payments, the servicer would have been in a mess trying to figure out who really owned the collateral.

Eventually, the decision from Marano’s mortgage group in New York was to forego the due diligence of wholesale loans that Bear was buying from banks like Countrywide and Wells Fargo, Van Leeuwen said.

Towards the end of 2005, Bear decided to buy the loans and then review them later. If there were problems, Bear would take the most obviously troubled loans out later, which, at least into the 2006 era, kept them from running afoul of customers. Yes, as Van Leeuwen argues, this also helped inflate the value of the MBS that Bear was selling.”

Now when the trustee goes back to ask JP Morgan about this it will be interesting to see if they can wiggle their way out of this apparent breach of reps and warranties. All the trustee has to do is start reading the discovery by New York law firm PBWT in the Ambac, Syncora, and Assured cases. It’s a dotted line to the fraud at Bear Stearns and even details some of the cover up JP Morgan has been doing since they realized they were sitting on a mountain of rmbs putback liability after they bought Bear Stearns.

But what’s really scary for JP Morgan is a loss causation motion in a RMBS putback suit against Bank of America. It’s in New York state court right now and Alison Frankel at Thomson Reuters legal news has written about its possible effects. If the New York Judge decides in the favor of the investors suing it could mean all they have to prove is a bank lied about some aspect of the collateral in the RMBS and that lie, weather it actually caused a loss, means the investors can argue they never would have bought the security. There are already quite a few documented lies in the putback lawsuits against Bear/JPM, which is why Mark Hanson is warning clients that every one of these inquiries and cases are unique and based on the monoline cases against Bear, they made Bank of America look like petty thieves.

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9 Dec

Jefferies Bond Trader Claims MF Global Lied to get Bonds Issued

While we wait for an army of MF Global’s regulators to figure out how and who transferred trading clients’ money into the firm’s house accounts there is another issue that needs equal scrutiny.

How did international brokerage house Jefferies convince institutional investors to buy over $600 million of secured and unsecured MF Global corporate debt this summer?

Five days after the Corzine led firm filed bankruptcy I posed this question to a Senior Vice President of debt securities at Jefferies. We’d been introduced through a social friend at a popular New Canaan watering hole and, me being the enterprising reporter took the opportunity to look him in the eye and ask my most pressing question:

What in heck possessed you guys to sells hundreds of millions of MF Global secured bonds in August?

Without hesitation he looked right back at me and said, “MF Global lied to us”.

A little taken back I gave him a slight smile and said, “Really? About what? The health of the balance sheet?”

“Mr. Jefferies” shot right back with a slightly frustrated face, “Yes they lied.”

As we watch traders go on CNBC today casting doubt on the legitimacy of Corzine’s congressional testimony – He claims to not know where his clients $1.2 billion is – I’m wondering what else this CEO is possibly misleading people about. And does my ‘Mr. Jefferies’ accusations have any meat to them.

We know Jefferies had to do a certain level of due diligence. Their job was to dress up $325 million of 6.25% notes due 2016. How could Corzine or his underlings lie to the lead underwriter and ultimate salesman of these bonds? Did MF Global’s auditor PricewaterhouseCoopers not disclose specific information to Jefferies when they issued an audit opinion on the bonds?

I don’t know this answer yet but Francine McKenna, a sharp columnist at American Banker and former auditor pointed out this simple fact: The financials and audit opinion PwC authorized for inclusion in the bond offering were from MF Global’s March 31st audited year-end numbers. The dual bond offerings were issued in August and September so unaudited, but auditor reviewed financial from the 1st quarter (April-June) would have been available.

This is important because as we later learned it was in this 1st quarter report that Team Corzine admitted they needed to respond to FINRA about their pesky question of 40-1 leverage as a result of the $6bnish Euro debt trade. On top of that this is when the firm starts to admit that while the trade is off-balance sheet they’re required to raise more regulatory capital.

Hummm sound like PwC and Corzine were walking a fine line on disclosures. But it also reads like Jefferies didn’t push the firm’s auditor to disclose a more timely view of the health of MF Global.

I don’t know how desperate Jefferies corporate bond traders were to make their sales number that quarter. Maybe they got sloppy on due dilly or maybe they were actually lied to, but it’s worth a regulator checking out.

Hint to regulators — Jefferies isn’t exactly all-so-unaware of how MF Global operates its trading business. They were co-defendants in a class action lawsuit brought on by pension funds that sued over $MFG IPO disclosures. The pension fund scored a $90 million settlement this summer after alleging the defendants erroneously assured investors MF Global had real risk management controls that actually monitored trading risk ‘real time’. This stemmed from one of the firms commodity traders losing $141 million on wheat futures overnight and $MFG’s stock lost $1.1bn in market cap within two days. Ouch!

So right about the time, summer 2011, MF Global and Jefferies were getting ready to pony up millions to payout on the class action suit; Jefferies was able to earn back some nice fees in underwriting the corporate bond offering.

It’s also worth noting that another bank – one that knew MF Global pretty well – JP Morgan made a hasty exit on another MF Global corporate bond offering in December 2009. ZeroHedge noted the sudden offer pull on a $250 million 10 year bond offering with JP Morgan giving the excuse ‘market conditions’ were the reason to back out of the bond sale. But maybe JP Morgan, MF Global’s biggest creditor in the bankruptcy, knew back then how sloppy MF Global’s clearing business and accounting was and didn’t want to put their silver-plated good name on a brass-plated bond deal.

Either way if you are an investor who is sitting on some of these MF Global corporate bonds and question now how Jefferies marketed the bonds, I’d love to hear from you.

Editors Note: A special thanks to Bob English, contributing editor at www.EconomicPolicyJournal.com, for his research ideas on the history of Jefferies and MF Global.

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21 Nov

Lawsuit shows more Fraud and Coverup from Bear’s Mortgage Team

This summer I wrote a story for DealFlow’s The Distressed Debt Report warning more whistleblowers have come forward to spell out how Tom Marano’s mortgage team at Bear Stearns knowingly threw out any form of loan level due diligence while packaging and selling residential mortgage backed securities years before the 2008 financial crisis. When investors complained about early defaults in the RMBS they’d bought from Marano’s traders, the Bear executives simply instructed their servicing and due diligence underlings to massage the numbers or mislead the trustee of the securities about the real health of the loans. Viewers of RT’s The Keiser Report heard me warn this summer about upcoming litigation that would detail the alleged pre-planned scheme designed by Bear’s mortgage team to cheat their own clients in the name of sales and fee revenue –now those details have been made public in an amended complaint filed late Friday by monoline insurer Assured Guaranty against Bear Stearns, EMC, and it’s current owner J.P. Morgan.

“Bear don’t Care” was the mantra spread throughout the halls of outside underwriter firms Bear hired to review the mortgage loans for its residential mortgage securities, says the Assured lawsuit. It spells out a callous disregard to create products that could perform and then shows how Bear allegedly executed a widespread fraud to cover it up when their investors started to question the legitimacy of the product they were sold.

Over 30 whistleblowers from an outside due diligence firm hired by Bear Stearns, Watterson Prime, have come forward since I first warned about possible fraud and criminal acts by the Bear traders in two stories for The Atlantic. But what is really telling is the fact that this complaint has people speaking out from every part of the Bear mortgage securitization machine admitting Team Marano knew from the start the RMBS they were selling to pension funds and the monolines were not packed with gold platted performing loans. Emails obtained by Assured’s lawyers during discovery show Tom Marano sold personal investments in the mortgage insurance companies that are now suing Bear. Yet at the same time, in late 2007, his team was assuring these companies the RMBS they sold them were a quality product. This should be of interest to the New York authorities who I reported are now building a case against his Bear team.

Stay tuned for more as I match up what my sources have told me about the Bear mortgage machine v. the detailed and documented allegations Assured Guarantee lawyers from PBWT have now laid out. While this new lawsuit still has to survive a motion to dismiss, I have a strong feeling the 171-page amended complaint is going to read like a crime novel that leaves our jaws on the floor and makes us question how this group of Bear Stearns executives have not been charged with wrong doing yet.

4 Comments
19 Oct

Occupy Wall Street’s New Bank Responds to Reports

It took them more than 24 hours but Occupy Wall Street’s new Union owned bank has decided to respond to reports that an FDIC enforcement action showed some not so safe banking practices. I’ve still been denied an interview with any of the banks newly placed executives nor have they answered questions about the glaring number of loans on their books that are not paying. So all we have is a public relations crafted statement that has been approved by the Bank’s new president Edward Grebow.

From the Bank:
“Amalgamated Bank was founded by the Amalgamated Clothing Workers of America and chartered by New York State in 1923. Its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). Amalgamated has been a bank for America’s working men and women since its inception and has always operated in a safe and sound manner.
In the aftermath of the financial crisis, Amalgamated Bank’s Board of Directors agreed (without admission of any violation) to the issuance of essentially identical Consent Orders by the FDIC and the New York State Banking Department. The Orders became effective on August 31, 2011.
Information provided by a former federal regulator, who was quoted in a recent news report about the Bank’s handling of its non-performing loan charge-offs, is totally inaccurate. The conclusion that the Bank was engaged in potentially fraudulent activity is both false and misleading.
Specifically, with regard to non-performing assets, all charge-offs identified during the 2009 examination were taken during the examination or shortly thereafter and are fully reflected in the Bank’s audited financial statements. Also, the Bank in late 2008 put in place a detailed process to identify and address loans that have the potential to be classified as non-performing assets, including an independent outside firm that reviews the Bank’s loan portfolio and related provisions for loss. Problem loans are monitored on a monthly basis through a rigorous quality review process, which the Bank’s Board and the regulators are familiar. In addition, the Bank identifies, and appropriately classifies, reserves and charges off problem loans in accordance with the relevant accounting and regulatory guidance. “

The banks have used ‘the financial crisis’ as an excuse for their underwriting that lead to non performing loans for a while now and the FDIC often takes the path to least resistance in getting them to admit to unsound or unsafe lending practices. In the case of Amalgamated it’s odd that they didn’t not deny the FDIC consent order if they just stated above they are operating within regulatory parameters. The FDIC on the other hand was pretty clear on detailing that the Bank has to make sure they are charging off the loans that have stopped paying for more than 90 days correctly.

The FDIC enforcement action states, “Elimination or reduction of such assets with the proceeds of other Bank extensions of credit shall not be considered ‘collection’ for purposes of this paragraph.”

Meaning the bank can’t just extend more credit to borrowers that don’t pay to make the loans look performing. If they do it effects their risk-based capital levels and bottom line numbers. In fact according to the Banks 6-30-2011 Call Report they have $122 million of nonaccrual loans. When you compare that to their Allowance for Loan and Lease Loss (ALLL) it shows a 3:1 ratio.

Ralph Hutchinson, a 20 yr former federal regulator who now consults to banks who get in trouble with the FDIC says, “Their noncurrent loans to their ALLL(loan loss allowance) is out classed. Typically this ratio for a sound bank is a 1:1 ratio. They have approximately only $35 million in ALLL to cover the $122 million in non performing loans on their books.”

Hutchinson thinks their loan loss reserves are under reserved by about $100 million.

“In my opinion the bank will need another $100 million in ALLL reserves and on top of the $75 million to recapitalize the bank because the ALLL will burn right through.”

Until the FDIC and the banks shareholders approve the $100 million common stock investment by WL Ross VI fund and The Yucaipa Companies fund, their Tier One risk based capital is only $304 million. The FDIC has stated within a year they have to get their capital level to 7% and within two years up to 8%. Now with the $100 million investment added into the capital, stated on their last Call Report, it would raise the capital level to 9%. From the outside that makes it look like they fixed one of their problems.

Amalgamated said in their statement this morning, “A key goal of the Bank, which is also reflected in the Orders, is to raise its capital levels to current industry standards. The investments by Yucaipa Companies and WL Ross will enable the Bank to comfortably exceed the increased capital levels established in the Consent Orders well ahead of the time frames set forth in the Orders.”

But Hutchinson who reviewed Amalgamated’s uniform bank performance report back to 2008 thinks otherwise and says this bank is really on the verge.

“Because they don’t have enough loan loss reserves set aside they will burn through at a third to half of that investment instantly. In reality the capital ratios are now just above 3% and at 3% the charter can be seized,” says Hutchinson. “The UBPP report shows they are in the top percentile compared to their peers with their noncurrent/nonperforming loans at $122 million. Half or more could tank in the next few quarters so the burn rate is significantly higher to recapitalize the bank and maintain 7% stepped up to 8% capital levels the next year per the FDIC consent order.”

The bank also appears to be downplaying the seriousness of the FDIC consent order. This morning they said in a written email statement, “The Orders contain specific commitments by the Bank to resolve certain issues identified by the FDIC and the Banking Department in their Joint Report of Examination of the Bank as of December 31, 2009, which was conducted during the summer of 2010. Since the time of the examination, the Bank has been working to resolve these issues, and has largely completed addressing them. “

Really – Certain Issues? Why not just name them such as the fact that prior management had to be cleaned up and the board was ordered to do more oversight of management actions.

Hutchinson explains “This is a formal action they received. It’s has the same teeth as a Cease & Desist Order and it’s legally binding in a court of law. If the Bank had addressed everything the FDIC was asking it to do they wouldn’t have issued a formal action almost two years later.”

Amalgamated Bank’s next set of financials to be stated in a Q3 Call Report has to be in by the end of the month. It’s likely they are negotiating with the FDIC still about how those numbers will look. Hutchinson still thinks some of those call reports will have to be restated. But still it could be 90-120 days before changes show up in the FDIC database and it will be interesting to see if the outside private equity investment has to pony up more to keep the bank capitalized or just bows out of the deal all together.

A spokesperson for Occupy Wall Street has not responded to questions regarding if they will keep the donated funds in Amalgamated Bank.

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17 Oct

Occupy Wall Street’s New Bank Under FDIC Enforcement Action

Occupy Wall Street has deposited donated funds in New York-based Amalgamated Bank but the FDIC has a bulls eye on the bank’s executives. At the end of August the federal regulator issued a scathing enforcement action calling for a third party review of the banks management and issuing a directive for the bank to lower its leverage ratios to 7 percent within a year. But that’s not all the FDIC is unhappy about. It appears some creative accounting for non performing loans are an issue.

According to the FDIC enforcement action the bank isn’t charging off its nonperforming loans that are more than 90 days delinquent. Instead it appears the bank’s been issuing new loans (through a restructuring) to pay off the delinquent loans and not booking the delinquent loans as a charge off.

This is important to the bank’s bottom line because they are required to book a charge off, which would affect the banks earnings, their loan loss reserves or their capital levels.

Ralph Hutchinson, a former federal regulator who now consults on bank fraud says, “They are masking the strength of the bank. The FDIC goes ballistic when they see banks do this. Essentially they are falsifying financials which could be considered fraud.”

The FDIC gave the bank 60 days to start booking loss charge offs and are not allowed to extend credit to borrowers over 90 days delinquent unless they can prove there is a viable workout plan.

The enforcement action states: “The bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” in the report of examination dated June 14th 2010 issued jointly by the FDIC and the New York State Department of Banking that have not been previously collected or charged off.”

It’s no wonder some of the banks executives have jumped ship in the last six months. According to people who have worked for the bank there has been mass exodus of bank executives recently that includes the president. There is also the issue of board member Bruce Raynor who had to resign from his garment union leadership position after allegations of misconduct regarding his union expense reports.

CNBC’s John Carney reported last week that Occupy Wall Street raised $75k in about a week via small individual donations of up to $85 a person. Today we learned that total has grown to $300k. Except it’s odd that the Bank protestors, who inspired an international protest on Saturday, choose to put their money in a community bank that appears to be executing some of the fraud they are speaking out against.

I am still awaiting a call back from an Amalgamated Bank press person. Stay tuned as this story develops.

UPDATE 4pm: An outside press person for Amalgamated confirmed Patrick O’Sullivan, who ran the asset management group, left also this summer. You know before the enforcement action was made public.

UPDATE 5pm: An Amalgamated outside press person points out Wilbur Ross and Ron Burkle investment funds have verbally committed to invest $50 million each in the bank’s common stock. The FDIC and other common shareholders will have to approve this but if it goes through that could help solve their leverage ratio problems. According to Ralph Hutchinson the bigger issue though is the likelihood the bank will have to restate bank call reports. These are the financial loan level operating reports FDIC-backed banks are required to file.

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10 Oct

FDIC calls USA Bank Borrowers in to Testify Against DeCaro

It looks like the FDIC is finally building a case against the DeCaros for their role in the failure of USA Bank. Borrowers who spoke out in my DealFlow stories about alleged lending abuse and forged mortgage documents were subpoenaed by the FDIC two weeks ago. Ron Scheckter, James Scheckter, and Maurizio Carusone have all confirmed they will testify latter this month against the father-son team who the Office of Inspector General says ran USA Bank into the ground.

Last week Lisa Chamoff of Greenwich Time inaccurately reported that the FDIC already had a case against Fred DeCaro III. DeCaro III was the bank president when the FDIC seized the institution last summer and is also an elected official in charge of Republican voter registration in Greenwich, CT.

A FDIC spokesperson confirmed there has been no officers and directors suit filed against the DeCaros or any other USA Bank board members. But after the Office of Inspector General wrote a report on the lack of FDIC oversight of the failed bank it appears the FDIC decided to get their rear in gear and prepare for a civil suit. I reported on the OIG’s findings in July at The Distressed Debt Report which detailed how the board and the DeCaro’s lied to its bank regulators and violated lending limits.

USA Bank borrowers who have spoken with the FDIC say senior attorney Jose Rivas is leading the investigation. Rivas LinkedIn profile says he joined the FDIC last year from the big bank regulator the Office of the Comptroller of the Currency.

The federal regulator has three years to file a civil claim against executives of failed banks in a move to recover some of the millions they have to pay out of the FDIC insurance fund after they seize a bank. Unfortunately this money doesn’t go back to burned borrowers or investors in these failed banks. We usually don’t see the FDIC file a suit unless it thinks the alleged bank fraudsters have money stowed away to recover or there is a large directors and officers insurance policy. In the case of USA Bank I previously reported the insurance policy was minimal so if we see the FDIC file it means they think DeCaro and board members like Zeisler & Zeisler attorney Jim Verrillo or New Canaan bank executive Peter Keller have deep pockets.

On Friday, the FDIC filed a suit against the board of Georgia-based Alpha Bank & Trust. The suit came over a year after Alpha Bank investors had filed similar charges laying out a clear case of the bank’s board lying to investors about the health of the bank while they continued to encourage more investments. Unfortunately for these Georgia investors after the FDIC becomes the receiver for a failed bank they can supersede prior legal claims against the bank executives.

Attorney Kevin LaCroix wrote last year, “The FDIC may yet of course attempt to assert its right to priority over the claims of the plaintiffs have asserted, and even assert its own claims, based on its status as the bank’s receiver.” LaCroix believes the federal regulator can do this because of their rights under FIRREA.

Net Net this means investors in failed banks who sue first can end up with hefty legal bills and a big zero if their litigation plan isn’t clever enough to circumvent FDIC claims. Which is what happen to Sal Pani, the original USA Bank whistleblower who went to the FDIC in the fall of 2006 (less than a year after the bank was founded) to warn them of executive lending abuses and fraud. It took the FDIC four more years to shut down the DeCaro’s who meanwhile enticed around 3,000 main street investors to pump their life saving into the bank’s penny stock. Earlier this year Pani dropped his suit against USA Bank and the DeCaro’s although he says if there is a criminal fraud suit brought he’d think about restarting litigation.

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