Bank Lawyer's Blog

Pause...Then Resume

I'm taking a break for the holidays. Even snark, second-guessing, and general insensitivity needs to be renewed during this time of year. Perhaps I'll return next year with an inviting, open, accepting, post-modern personality, and revel in the diversity of opposing views with a hearty, back-slapping bonhomie and goodwill toward all.

Or, maybe not.

In a gesture totally out of character for the author of this blog, let me offer you, the regular or occasional reader (or the unlucky soul who stumbles across this intellectual wasteland purely by accident), regardless of your faith or lack thereof, a few minutes of peace from those concerns of our everyday lives that we seem to think are so very, very important. Put on the earphones, sit back in your chair, close your eyes, and simply take a few minutes to be still with the music.

Or, if you prefer, outclick to the next blog of your choice.

Regardless, have a Merry Christmas, Happy Chanuka, Fabulous Festivus, or whatever celebration otherwise floats your boat. I'll see you on the other side.

In The Bleak Midwinter, performed by the Glouster Cathedral Choir

Bailout Comes To Mainstreet

Emily Flitter brings us the inspiring story of an average homeowner,Thomas Haberson, who's had enough of the big banks getting all the bailout bucks. He's filed a handwritten complaint against the US Treasury Department in an Arizona court that seeks not only class action status, but $150 billion in damages, and asks Hank Paulson the plaintive query "Can I Haz Bailout?"

Mr. Haberson also claims that “we are entitled to know where the bailout money was used for. Since there are no oversight to speak of as to where the funds went to and how they used it…In this suit plaintiffs demands as taxpayer + citizen a detail record of what the fund went to + how they used.”

You have to admire a man who, like Howard Beale, is "mad as hell and is not going to take it any more." On the other hand, I hope he likes dancing with a bear, and that he's wearing comfy shoes, because as we've noted in other posts, when you dance with a bear, you keep dancing until the bear gets tired.

Merry Christmas, Mr. Haberson, and good luck.

IndyMac Fun Continues For OTS

When in early October, I discussed the "spreading stain" of criticism over the OTS's former Western Regional Director Darrell Dochow and his alleged mishandling of busted federal savings bank IndyMac, I warned that the drumbeat would get louder and louder. Today, the drumbeat got a whole lot louder: like the late Buddy Rich on speed. Via The Washington Post:

A senior federal banking regulator has been removed from his job after government investigators concluded that he knowingly permitted IndyMac Bancorp to present a misleading picture of its financial health in a federal filing only months before the California thrift was seized by regulators.

The Office of Thrift Supervision removed Darrel Dochow as director of its western region, where he was responsible for regulating several of the largest banks that failed or were sold in the past year, including Washington Mutual, Countrywide Financial, IndyMac and Downey Savings and Loan.

Dochow allowed IndyMac to count money it got in May in a report describing its financial condition at the end of March, according to an investigation by the Treasury Department's inspector general, Eric Thorson, which was described in a letter from Thorson.

Thorson wrote that OTS, one of four federal agencies that regulates banks, allowed other companies that it oversees to perform a similar legerdemain, though he did not name those companies.

While neither Dochow nor the OTS was immediately available for comment, OTS Director Reich previously stated in a letter to the Inspector General that Dochow's actions played only  a "relatively" small part in IndyMac's faiure. That's non-responsive to the issue at hand, since it's not the cause of the failure that's being questioned, but rather the potential backdating of capital infusions that permitted the thrift to operate with fewer regulatory restrictions, and the alleged complicity of the OTS in aiding IndyMac in such backdating. As I said a couple of months ago, the FDIC doesn't want the OTS propping up a dead horse, which only increases the ultimate loss to the insurance fund.The FDIC also doesn't want a less-than-adequately capitalized bank using brokered deposits without strict supervision and limits, and federal law requires such restrictions and limitations.

Senator Charles Grassley, whose office released the letters that are the basis for the linked article, isn't happy with the OTS.

"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them. Capitalization requirements are there for a reason, and the failure of IndyMac cost the federal deposit insurance system $8.9 billion," said Sen. Charles Grassley (R-Iowa), who was briefed on the findings by Thorson. "It's good the inspector general has opened a full-blown audit as a result of this case. Everyone ought to be paying very close attention."

Expect Chuck Schumer to come piling on very soon, as he did in October. The OTS blamed him (rightly) for the run on deposits that was the immediate (although not long-term) cause of IndyMac's seizure by the FDIC, and he will have his payback.

Here's the heart of the matter, as explained by the Post:

Thrifts are required to file a report with regulators every three months detailing their financial condition. IndyMac's initial filing for the first quarter showed the company's capital cushion was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac executives were told by the company's accountants, Ernst & Young, that some of the numbers needed to be adjusted. The changes would drop the company below the capital threshold. Instead of "well capitalized," IndyMac would be categorized as "adequately capitalized," according to the inspector general's report.

The downgrade threatened IndyMac's survival. Thrifts classed as "adequately capitalized" need special permission from regulators to gather deposits through third-party brokers. At the time, 36 percent of IndyMac's $18.7 billion deposit base had been gathered through brokers, according to the report.

On May 9, Dochow met with IndyMac executives. The executives said they wanted to inject $18 million from the holding company into the thrift subsidiary, and to count that money as if it was already in hand at the end of the first quarter, according to the inspector general's report. It said that Dochow agreed.

On May 12, IndyMac filed its revised documents, showing the company was still well capitalized.

Thorson noted such a revision could be permissible if the company had intended to make the infusion as of the end of March.

"In our work thus far, we have neither found nor been shown any indication that this intent existed," he wrote.

Thorson's office is continuing to investigate why OTS allowed the revision, and planned to issue a report when the work is completed.

The investigation is ongoing and the Inspector General has not reached a final conclusion. Nevertheless, it doesn't look good for the OTS. It's not only that this state of affairs doesn't pass the smell test, it is as ripe as roadkill left for the month of August on the asphalt of I-40 just east of Amarillo. Whether or not it contributed to the ultimate failure of IndyMac, unless the Inspector General ultimately clears IndyMac and the OTS of any mishandling of the reporting of the capital contribution in question, this incident will be another nail in the coffin of the OTS.

Delaying The Inevitable

Housing Wire recently posted further evidence that the various state foreclosure moratorium laws are not achieving their goal of forcing lenders to modify loans with borrowers who are substantially delinquent.

It appears that California is now following in the footsteps of Massachusetts. Despite recent legislation in the state that added 45 days to the borrower notice period for defaults, impacting foreclosure activity during Sept. and Oct., new data from ForeclosureRadar finds that November saw significant activity increases across all stages of foreclosure. From October to November, filings of Notices of Default increased 28 percent; Notices of Trustee Sales increased 10 percent, and properties sold at auction increased by 14.8 percent.

In other words, the extra notice period appears to have only stalled defaults, at least to some extent, not prevented them.

On the other hand, the effect of the moratorium and, more importantly (in my opinion), the traditional servicing practice of delaying foreclosures during the holiday season, have resulted in foreclosure numbers that are at historic lows. All this means, in the opinion of ForeclosureRadar, is that we'll have an "unprecedented backlog" heading into the new year. If that's correct, expect loan servicers to greet 2009 with a "foreclosure tsunami." We used the word "tsunami" because it's become a cliche, and we're inordinately fond of cliches. As Dorothy Sayers once said about a facility to quote others, our fondness indicates an incapacity for original thought. We glory in our lack of originality. Everyone has to play to their strengths, and ours is a gift for mediocrity and imitation.

Continuing along this line, we agree with the concerns of Housing Wire's publisher, Paul Jackson. He's as convinced as we are that servicers are the ones suffering from these delays, since, in most cases, they must continue to advance delinquent payments to the investors, and recoup them only when the property is sold. Over the long haul, driving up costs and increasing losses of servicers and investors will restrict credit and make it more expensive. Such concerns are not likely to deter the spread of such moratoria, however. In fact, we wouldn't be surprised to see a federal moratorium enacted next year. Politicians are nothing if not short-sighted and, as they have with prior crises for which they've been partly responsible, have thus far have been able to deflect blame long enough that once the crisis passes, no accurate accounting of blame will be made.

FDIC Saying "Nyet" To New Charters?

Although the FDIC denies it, organizers and consultants who are trying to start new banks in certain areas of the country allege that the FDIC has put in place a "de facto ban" on all new bank charters.

“It is a de facto ban,” said Stephen Johnson, CEO of Alpharetta-based consultant T. Stephen Johnson & Associates Inc. “I’ve never seen a time this difficult to get a charter.”

The FDIC's regional director in Atlanta, Mark Schmidt, denies that there is a formal or informal ban, then proceeds to all but make the opposite case.

Schmidt did acknowledge deposit insurance approval is harder to get, and the FDIC is becoming more discriminating in who it approves nationwide, including in metro Atlanta.

“We have had four failures in Georgia, three being relatively new institutions,” he said. “We are asking a lot of very hard questions. They have to convince us they can get off to a good start. The standards don’t change. From our perspective, the economy changed.”

In other words, "We wish you luck, Mr. and Ms. New Bank Organizer, because you're going to need it."

The FDIC’s tougher guidelines broadly address three key issues, sources said.

First, the FDIC is requesting bank organizing groups have directors or executives with management experience dating to the Savings and Loan Crisis of the late 1980s and early 1990s.

Second, banks are required to present a plan to generate deposits from the wider community, beyond the so-called “friends and family” of the organizing group.

Finally, banks are now required to submit an economic assessment of their distressed geographic area, addressing how the bank plans to grow and survive when, in some areas, loan growth is nonexistent.

Have directors or management who went through the last big wave of bank failures, but preferably who didn't serve with a bank that actually failed. Have a plan to generate deposits from a wide market, but at the same time don't you dare use brokers! Submit a plan showing asset growth in an area we've already determined won't support asset growth, and don't you dare submit a plan that relies on out-of-assessment-area growth!

Are you familiar with the Internet term "Epic Fail"? If so, you'll understand what the FDIC is setting up your application to achieve.

The article cites specific areas where the crackdown is occurring, including Georgia (especially metro Atlanta), Florida, California, Arizona, Nevada, and Washington.

In June of 2007 we also discussed "putting the brakes on new banks" in Georgia, although at that time it was because capital was becoming harder to raise. The reluctance of investors then was due to the fact that they could better returns in the "sexy, hot" public stock market than they could in a private investment like a start-up commercial bank. Now, the stock market is wheezing and gyrating, and those with capital to invest are taking a second look, but since a number of the banks that have failed over the past year have been relatively new banks, the FDIC is reluctant to approve applications for insurance of deposits. Given the strain the FDIC fund is under, and the recent track record of new banks in the affected areas of the country, you understand their caution.

Two and one-half years ago, we discussed the fact that Texas was in a situation in the late 1980s where the FDIC believed that Texas had too many banks and set out to eliminate the excess, and how, in 1990, bank consultant Bill Ferguson predicted that by the end of that decade Texas would be "under-banked," and that there would be a new wave of bank start-ups. How right he was. Odds are, the same thing will happen in those areas of the country that now constitute toxic waste zones for new bank charters. Eventually, the wheel will turn full circle.

Of course, that long-term view doesn't make it any easier to take if you've got an application for a new charter in Atlanta or Las Vegas sitting at te FDIC right now. Patience is a lot easier if you've got no skin in the game.

Workin' It Out With Waters

Not to be outdone by Sheila ("Mama Bear") Bair in the race for the title of 2008's "Loan Mod Madam," California Representative Maxine Waters has not only stuck her toe in the loan modification water, according to an article in today's American Banker (paid subascription required), she's jumped off the high board and landed a tsunami-inducing cannonball.

Rep. Maxine Waters, a nine-term Democrat from California, one of the states hit hardest by the mortgage crisis, is personally calling servicers to help her constituents get a lower rate, a longer maturity or some other modification that will help them meet their payments and avoid foreclosure.

The chairwoman of the House Financial Services’ housing subcommittee said she is unconcerned that she may be leaning on companies she oversees, potentially creating a conflict of interest and violating House ethics rules.

“The Ethics Committee said we are not to get involved -- it’s a third party and contracts between citizens,” Rep. Waters said in an interview this week. “I don’t care. Throw the book at me. Put me in jail. Do whatever you have to do. I am defying them.”

So far, Rep. Waters and her staff have succeeded in helping seven borrowers avoid foreclosure, and another 30 cases are in the works.

If they throw the book at her, I hope the book is War and Peace. That's about the only book large enough to take down a rampaging, enraged she-boar like Waters once she's got up a full head of steam. Knowing the spineless, hot-house flowers that grow in Congress, and with Barney Frank in charge of the committee Waters infests, the book will more likely consist solely of a short story, perhaps "Brokeback Mountain."

Waters' nose-thumbing contempt for ethical rules would be breathtaking in an era not epitomized by the likes of Rod Blagojevich, Bernie Madoff, and Eliott Spitzer. Instead, it merely seems like business as usual among this country's political and business "elites." Her gall is exceeded only by her cynicism. She's doing something unethical, she knows it, and she knows that she's likely to get away with it, because in her case, she's posturing herself as the champion of "the little guy," the guy (and gal) no one else is going to help. In addition, she's effective.

She concedes servicers respond differently to her because she is a member of Congress. “One of the reasons why I think we are able to kind of be successful at what we are doing is it’s kind of the threat of the member of Congress calling you and working on this,” she said.

Tony Soprano couldn't have said it any better. A threat is better than a reasoned argument any day of the week.

Waters makes it clear that she's just getting started.

“I am working on foreclosures here in the office today with my staff and to make sure that of the ones who have contacted us, that we have no homes that are sold between now and January,” she said. “We are trying to do that so we can make sure that no one’s home is sold during this holiday season.”

Maxine Waters: a thug who believes that the rules exist only for the saps dumb enough to follow them. For those who believe that the ends justify the means, ethical rules exist only until they disappear in your rear view mirror.

Betsy On Bair

Fortune senior editor Betsy Morris has a girl crush on Sheila Bair, and boy, has Betsy got it bad!

Sheila Bair may now be a lightning rod, but at least she's finally getting some respect.

For months, her agenda was a non-starter. Her proposals to try to turn distressed mortgages into performing loans through a loan modification program were getting absolutely no traction with either Federal Reserve chairman Ben Bernanke or Treasury Secretary Hank Paulson.

When the three of them testified before Congress last month, Bair, the chairman of the Federal Deposit Insurance Corp., got practically zero air time (one banker complained that every time it was her turn to talk, the TV cameras cut to a commercial).

Bloggers dumped all over her, saying she was irrational, self-serving, arrogant and gave the private sector "a bad case of shingles." Just last week, Bloomberg News reported that Tim Geithner, Obama's pick to head Treasury, was trying to get rid of her.

Now though, she's Page One news and her ideas have to be reckoned with.

Before we proceed, let's pause for a moment to acknowledge that Bank Lawyer's Blog originated the phrase "a bad case of shingles" in reference to the effect of Ms. Bair's proposals in this post from November 18th. Now, we're pleased to be in the same league with Tim Geithner when it comes to "trying to get rid of" Ms. Bair (preferably, without bloodshed), but we think the least Ms. Morris could have done was to attribute the source of her quote, even if, in doing so, she used the opportunity to look down upon the blogosphere from her perch high atop Mount Mainstream Media. But, enough about us. Back to the tale of two women who, frankly, should "get a room."

Among the many accomplishments of Ms. Bair, and signs of her impeding beatification, Betsy includes the petition we discussed in our recent post.

Bair's staff, meanwhile, signed a petition on petitionsite.com singing her praises and asking Obama "that you please retain her as our leader." TV stock picker Jim Cramer joined in the chorus, saying: "Don't kick out Sheila Bair! She knows the numbers." If she's not a team player, blogged Cramer: "Thank Heavens!"

Leave aside the fact that when Jim Cramer sings your praises, you're destined to be struck down by lightning hurled by an angry God who abhors the false prophet. It's the petition that requires a closer inspection. When we used that petition as the subject of our earlier post, we sparked some tart rebuttal e-mails from former FDIC employees. One, a former FDIC lawyer, joked that it was not beyond the realm of possibility that all signatures on the petition were actually pseudonyms of Ms. Bair's, and that she, likewise, might have been sending me e-mails from the FDIC praising herself and using fictitious names. As I said, this former employee was joking.

Another former employee, not a lawyer, was more scathing, and not joking, when this person asserted that "there must be some real kool-aid drinking going on in some small corners of the FDIC for such a petition."

My contacts over there say not much has really changed. There was real hope that Bair would make some serious changes, but there have only been minor changes with a lot of talk. Supposedly Bair ended the merit examination program, but in principle it remains. The examination budget process is still a zero-sum exercise. While it may be easier to spend more hours in Bank A., those hours must be cut in Bank B or Bank C. On a recent internal call hosted by Bair, she quickly shut down examiners when they complained about an inability to spend sufficient time examining the banks.

Bair has kept in place all of the senior executives that created that bad morale. Not a single one has been let go or reassigned. Many have received "war time" promotions during the crisis. She should be called out on this and by the FDIC's massive failure in its prevention duties. Specifically, the FDIC's division of insurance & research was formed in 1995, after the last crisis, to proactively identify emerging systemic risks facing the insurance fund. The risk branch...failed miserably and actively shut down voices that started issuing warnings as early as 2003... Also, where was the FDIC's Supervision Division. They have failed in front-line supervision of banks. Look among the 22 failures this year that were nonmembers [of the Federal Reserve System] (direct supervision by FDIC) and how many failed without being subject to a formal cease & desist order. Other signs of the laxity in supervision is the high cost of the failures. Almost all of the failures are costing 30-40% of assets, which is about 3 times the historical loss rate. Someone needs to call out Bair for the utter failures in FDIC's prevention business lines. One must give her credit by diverting attention away from these problems by touting the "mod in a box." By the way, that program has major analytical shortcomings for any portfolio lender.

Not everyone "in the know" seems as ready for a roll in the hay with Sheila as is Betsy, it appears. None of my correspondent's criticisms are addressed in Betsy's puff piece on Bair. Instead, it's filled with air kisses concerning Sheila "speaking out loudly and courageously;" "standing firm;" saving "consumer spending," which is "the major growth engine of the economy" (presumably, so that consumers will resume using their home's equity as a piggybank to further mortgage the future of their children and grandchildren and to make the future meltdown even more cataclysmic than is the current one);  and offending the old boys network in D.C. (which is presumptively a good thing when your attitude is that "all boys are bad."). Therefore, we decided to look a little more closely at that "petition" that Betsy cites as proof that "mother bear" Bair (Betsy's description, not ours) is loved by "her staff."

To date, just 270 signatures have been obtained on the petition. The FDIC had in excess of 4,000 employees as of 2006, with more today, I presume, given the recent rush to beef up the liquidation staff in Dallas and the recall from retirement of former employees to serve that purpose. The petition was placed online on November 5, 2008, is open to signature by any human being with access to the world wide web, and yet has been signed by a number that represents, at best, less than 7% of the FDIC's workforce. That's not exactly overwhelming support for Bair from within the FDIC, much less from the rest of the world, especially in light of the fact that the stated goal for signatures is a measly 500. On the other hand, it's nice to note that while a severe case of "brown nose" may have infected a tiny minority of FDIC employees, the vast majority appear to be "clean," and the rest of the world appears to be blissfully indifferent.

Nevertheless, we'll assume that these facts won't cool Betsy's ardor for all things Bair. From both the tone and content of her fine "objective" piece of MSM reporting, it's obvious that no facts will prevent Ms. Morris from continuing to swoon over the object of her affection, whether or not her love remains forever unrequited.

Too Dumb To Borrow?

For decades, there's been a split between those who think that consumers should be free to make informed decisions about credit, good or bad, as long as they have available to them the relevant information to make such informed decisions. Others argue that the average consumer will never have enough information to make informed decisions, either because the average consumer has a head full of rocks or because creditors are so vilely devious that they make Angelica Huston's ruthless character in "The Grifters" look like Mother Teresa and they will trick-screw the consumer some way, somehow, no matter how much disclosure is made. For the latter, the only solution is government intervention to ban certain creditor practices that a majority of legislators either (1) believe are "unfair" (based upon a Platonic ideal of "fairness" I assume, the ideal form of which exists somewhere in the realm of metaphysical reality, since everyone knows that most politicians favor the practices of the Greeks), or (2) abhor because "the freakin' creditors" have been contributing jack-squat to the legislators' campaign war chests. A recent article in Housing Wire adds ammunition to the gunbelt of those who laugh at the very concept of "informed" borrowers of consumer credit.

A study conducted by the Center for Economic and Entrepreneurial Literacy, released Thursday, finds that many Americans aren’t exactly the brightest bulbs in the room. Which means if you wonder how we got into this mess, you have to at least consider the average intelligence of the masses that took out a mortgage loan they couldn’t afford — however politically incorrect it may be to do so.

“The national survey conducted last week shows that an overwhelming number of Americans are unable to answer some of the most basic questions about borrowing, interest rates, terminology, and even basic math,” the Center said in a press statement. “More troubling is that many Americans admit to making poor decisions with their own personal finances.”

No kidding. Some highlights from the survey are eye-opening — and others are questionable, as early commenters caught onto (such as FICO being the most important part of originating a loan, for example). But the following two findings stood out to me more than anything else:

• 65% of respondents could not identify what would remain if you subtracted 25% from 8.
• One in three respondents could not identify what 1% of 50,000 was.

As Paul notes, "if you can't do basic math," just about any dumb decision is possible with respect to your financial affairs, including not having a clue about what the financial disclosures contained on a good faith estimate or HUD-1 might mean, much less what the financial implications might be of all that "legal mumbo jumbo" that forms the legal agreement between borrower and lender or that might be contained in a periodic notice mandated by law. I'm not certain that I agree with the managing director of the Center for Economic and Entrepreneurial Literacy, that "[e]conomic illiteracy is at the heart of our current eeconomic crisis." It's certainly a cause, but I'd argue that it will be hard to assert that it was`"at the heart" of the crisis." If I had to pick a "heart" right now, I'd pick "greed" over ignorance. We'll likely understand the most critical factors looking back. However, I do agree with the assertion "that we need to increase personal finance education at all ages so we have better informed employees, borrowers, and voters."

Stamping Out Equity Stripping In Texas

If we can bash Texas Attorney General Greg Abbott when he grandstands publicly to no practical purpose other than advancing his political career, we can give him his "props" when he grandstands to advance his political career and incidentally screws people who desperately deserve it.

Texas Attorney General Greg Abbott is encouraging the passage of the proposed Foreclosure Rescue Fraud Prevention Act, which would require companies and specialists working as foreclosure prevention consultants to obtain certain permissions and provide quality information before taking on loss mitigation cases.

Abbott, who is proposing the bill alongside State Sen. Craig Estes, R-Wichita Falls, says the measure is needed to crackdown on foreclosure schemes in which businesses prey on troubled homeowners by promising a rescue plan that instead ends up stripping homeowners of equity and causing them to lose their properties.

[...]

If passed, the state could require that foreclosure prevention specialists offer clients an agreement that is clearly written and includes disclosures advising homeowners to communicate with an attorney before entering a loss-mitigation agreement with a business or an individual. The new regulations would apply to agreements tied to equity purchases or documents related to foreclosure prevention services.

The proposed act also would protect a majority of a homeowner’s equity by requiring equity purchase agreement buyers to put down at least 82 percent of the property’s market value, Abbott’s office said.

Desperate people are often subject to being taken advantage of by jackals like equity strippers. Therfore, anything that curbs such abuse is welcome. I'll have to parse the legislation once it's introduced to make certain that it provides for the summary execution of offenders, after a fair trial, of course. Not as a matter of revenge, but of deterence. As English statesman George Savile once observed, "Men are not hanged for stealing horses, but that horses may not be stolen."

Litigators, Line Up Your Experts!

Well-known legal social media guru Robert Ambrogi authored an article in the latest Bullseye Newsletter entitled "Legal Tsunami Is Coming, Batten Down The Experts."

As James J. Angel, associate professor of finance at the McDonough School of Business at Georgetown University puts it: "When there's a trillion-dollar hole in the economy, there will be a lot of litigation."

No argument here, professor. As even Stevie Wonder could see, that litigation wave has already washed ashore. There's no question that it will travel far inland, causing much wailing and gnashing of teeth.

As is the case in every financial or economic crisis, Bob rightly points out that in this one, trial lawyers who want to surf from the top of the litigation tsunami wave will need experts to answer the basic question, a variation of which was once made famous by Senator Sam Ervin during the Watergate Hearings: "What did they know and when did they know it."

Through it all, expert witnesses will play two key roles, says Angel, a financial expert whose work focuses on the operation of markets in the United States and abroad. One will be to explain the transactions in terms juries can understand. The other will be to study and dissect the transactions and the documents underlying them.

That latter role, he adds, could well involve equal parts professional analysis and detective work.

While documents alone may provide the smoking gun in some cases, they may be insufficient to prove allegations of bad faith or misrepresentation. In these instances, the role of the economic expert might be to provide models that help explain the behavior of one party or another.

In other words, dueling experts will vie to convince a judge or jury about what was reasonably foreseeable risk as of a prior date, what Ambrogi calls "crystal-ball gazing in reverse." That's always fun, and expensive.

Another role for economic experts in subprime mortgage litigation is to chart patterns of behavior by individual lenders that might show a tendency for or against risky business. "One of the things you might want to look at is whether some lenders systematically were off in a way that suggested that someone there was improperly manipulating these loans," [University of Michigan School of Business professor Robert] Van Order suggests.

Bob also discusses litigation in California in which a subprime lender was sued for not giving its workers a California WARN Act notice of layoffs at least 60 days in advance. An exception to the notice requirement is in the event that the layoff could not have been reasonably foreseen. One expert, a University of California professor, was engaged as an expert to render an opinion on the foreseeability of the collapse. I suppose if they can stick a subprime lender with the duty to foresee the subprime lending collapse, maybe we can make the same allegation stick against the regulators who also failed to foresee that collapse. Oh, I forgot: at the regulatory level, there's never an adequate remedy for negligence. Never mind.

Bob also discusses the case of a credit default swap transaction that unraveled due to a "credit event." While in that case the expert opinion required had to do with the law of the Philippines, I wonder how many experts will accurately unravel the complexity of the foreseeability of risk in credit default swaps. From what I can determine, the parties that put them together never adequately understood how they might ultimately unravel. Then again, that's the beauty of hired guns who operate with perfect 20/20 hindsight, and can take all the time your client can afford to run their models based upon the way events actually transpired.

At any rate, the article closes on a cautionary note of common sense from George Washington University economics professor Anthony Yezer, but one that will likely not be heeded by anyone.

"We all make mistakes," he says. "Not everyone who is wrong is a crook or has committed fraud. If we take that position, no one will ever take risks."

I don't know if the professor's tried to get a loan lately, but there isn't a heck of a lot of risk-taking going on these days. By the time the "tsunami of litigation" recedes, and all the experts have not only been battened down, but stowed away, it may be a long time before anyone takes one again.