The Market Ticker – Chris Whalen On JPM And Fraudclosure (IMPORTANT!)

Heh heh heh….

What is really interesting is that the legal complaint filed by Schneiderman talks about sloppy procedures for loan selection, but still does not get to the real fun, namely multiple pledges of loans for different RMBS. And you can be sure that Schneiderman does not really want to go that far because it might force him to ask the same question about the other, far larger issuers of RMBS.

Remember, the whole point of the Robo-signing settlement is not consumer protection, but rather fraud. The key question: Who’s got the note? If you don’t have to deliver the note into an RMBS trust, then the door is wide open for securities fraud.

What’s being talked about here is the NY lawsuit against JPM (really Bear Stearns, but now JPM since they bought it) for securities fraud.

I have long maintained (since this crap begain to become public in 2007 and 2008) that the 900lb Gorilla in the room was going to come about when someone managed to bring the following argument before a Judge in a foreclosure action:

Your Honor, defendant moves that the plaintiff be required to show a full and complete accounting of all activity of the subject claimed note, including but not limited to:

    • Where the actual funds came from to fund the loan he entered into, and whether they ever actually existed or were fabricated out of thin air. 
    • The chain of custody of the note he signed, including the consideration paid for its negotiation each time it was negotiated, and that it was pledged and negotiated exactly once into one trust, and that this occurred in a lawful manner on or prior to the closing date of said trust. 
    • All financial events at a line-item level of detail, identifying each payee and payor along with each event from the date of origination to the averred default being sued under, including not only payments made and alleged payments missed along with penalties and interest but also any and all swaps collected upon or other transactions that acted as insurance or in any other way mitigated the plaintiff’s or any other party at interest’s damages.

The intent here is quite simple — not only is there a judicial interest in guaranteeing that the person who is standing before the judge is really the assignee of the note (or his lawful agent) and there is only one of them out there (who is the one standing before the bar) in addition you can only collect on a loss via lawsuit or other payment once!

If you get into a car accident and your auto insurance pays your $20,000 in damage you cannot then sue the person who hit you, as you were made whole and you can only collect once. In point of fact the insurance company will almost-certainly force you to sign over your right to sue to them before they pay you, but if they don’t you still can’t sue the person who hit you as you have no economic harm as you were already paid!

Recovery by lawsuit, including foreclosure, requires economic harm. If there was no economic harm there is no foul and your judgment, which you may well be entitled to, is for $0.00. Further, if the person who actually suffered the harm isn’t the one in court he can’t recover anything because the wrong person is suing and only a real party at interest with economic harm can sue.

So if the bondholder was made whole via a credit default swap or any other act, including rescission, his claim on you is extinguished. The person who sold him the swap may have a legal claim via lawsuit or the person who was forced to buy back the bogus loan may have a right of recovery but he cannot foreclose unless he obtained possession of the defaulted instrument through that process of payment and if he does then he had better be the person standing in the courtroom before the judge.

This is really basic stuff here folks — you don’t get sue because you’re “butt-hurt” by someone’s acts; you can only sue to recover actual economic injury, whether your requested remedy is foreclosure or simple money damages.

Chris is onto this but this rabbit hole goes a lot further than many people think it does.

If — and this is a big if — we can get just one honest judge to hear these arguments and force that accounting to take place in his courtroom then the game is up.

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