TRIAL AND PUNISHMENT: THE ROLE OF INTERNATIONAL BANKS IN THE SPANISH MORTGAGE FRAUD SCANDAL.


Since the housing market bubble burst in 2008 with devastating impacts on poor people and families in many countries, the struggle of the mortgage fraud victims in Spain has materialized against entities that perpetrated a fraud within the financial system that was approved and supported by several State agencies.

 

As in other countries, millions of families and individuals in Spain are affected by the crisis. Hundreds of thousands have already lost their homes due to illegal foreclosure proceedings that should have been declared null and void for having violated Spanish legislative and democratic standards as well as those upheld by the European Community. Besides families and individuals losing their home, their assets or any heritage they possess are also confiscated. Savings invested in paying exorbitant monthly mortgage installments throughout the years are unrecoverable. They are burdened for life with huge debts that are impossible to pay because their homes were deliberately overpriced. As if that in itself is not enough, they have to pay the costs of court procedures that sentence them to a life term of economic and social exclusion, permanent inscription in credit defaulter’s records, and difficulties to maintain elemental rights and services, including the custody of children, often traumatized and unable to comprehend the incomprehensible world in which they find themselves immersed. The blatant daily violation of human rights in evictions of people and families without alternative accommodation is condoned and dismissed as a minor problem by the authorities.

 

However, despite government imposition of austerity measures, banks and investment funds are again speculating with financial products and property. Vulture investors, known as hedge funds, including Blackstone, Centerbridge, Cerberus, Apollo, Marathon and Castlelake, have migrated to Spain in order to manage real estate assets of financial entities. Those assets include the houses fraudulently seized by banks, at ridiculously low prices, from families ruined by mortgages. Bad debt assets of companies that had propitiated the housing bubble are also acquired in the same manner. So far, they are handling a volume of some 277,000 million euros from the real estate business. Social housing has also been hit hard by these predatory financial actors. Goldman Sachs, Blackstone, and Azora have acquired thousands of these homes below their market value. The presence of the vulture investors is the last link in a chain that begins with the sale of fraudulent mortgages to unsuspecting people and families.

 

At the beginning of this chain, the banks convert the fraudulent mortgages into bonds with null credit value and primary customers -those families and individuals unable to pay their installments due to abusive clauses in their mortgage contracts and the onset of the grave economic crisis- are denied payment in kind, that is to say that they cannot surrender their home to the bank in exchange for the cancellation of the mortgage debt. The banks force evictions and sell the packaged mortgages and emptied homes on the market at ridiculous prices to vulture investors and the SAREB, the so called “bad bank”, at a fraction of the hiked up purchase price for which the mortgage was sought. Fighting this untenable situation, the Madrid Mortgage Victims Platform (PAH Madrid) has struggled to campaign against those responsible for having created and promoted the mortgage fraud and bring about their TRIAL AND PUNISHMENT.

 

Part of the campaign is the Social Audit of the Mortgage Fraud. The Spanish State, responsible for defending citizen’s interests and ensuring respect for their rights, instead of living up to that responsibility, has chosen only to protect the interests of international banks. Citizens, organizations and professionals, all sharing social sensitivity and commitment, have taken on the task of developing an audit of the mortgage process that brought about the ruin of millions of families in Spain. It includes participative research activities of the financial and legal framework, social studies, and an inquiry into the psychological impact. These processes will expose those responsible for committing the corresponding illegalities, abuses and violation of human rights.

 

The intention is to take both the partial and the overall results of this audit, plus the evidence provided by the victims, to the courts to solicit sanction and punishment of those guilty. We have already initiated legal proceedings against three financial institutions. In the near future further proceedings will encompass others responsible for the fraud. Additional objectives are to demand reparations for the victims that compensate the damages caused, demand compliance with the rights that have been violated and seek guarantees of non-repetition, both through necessary legal and institutional reforms as well as the appropriate education, monitoring and supervision of the relevant authorities. Part of these diverse processes highlight the role and responsibility of international banks in the real estate bubble and mortgage swindle perpetrated in recent decades in Spain. We are committed to this task and ask you to join in because the financial and real estate frauds are still developing and expanding both in Europe and globally with the unprecedented complicity of major global financial institutions and governments.

 

The cornerstone on which we support this enormous task is organization and social mobilization at distinct levels and spaces in different territories where we maintain a presence, as well as activities of denouncement and signaling, combining our resistance, research and solidarity with other social struggles.

 

Understanding how the mortgage fraud was carried out by international banks and real estate agents begins by taking a look at Spanish toxic mortgages.

 

1.1 SPANISH TOXIC MORTGAGES.

 

In Spain the North American financial model that led to subprime mortgages was copied without major changes or adaptations. Banks employed a variety of abusive, illegal and punishable practices, to swindle homebuyers by starting up the machinery for granting subprime mortgages. They incentivized their employees, principally branch directors, to achieve objectives promoting and selling fraudulent mortgages which in turn would be sold on the markets to financial speculators and generate even greater financial derivatives for further speculative transactions.

 

Bank accountancy employed the corporate debt market´s magical "financial engineering" of securitization funds (SGFT) to hack and hide transparency within shady deals of swaps and junk bonds, including Collateralized Debt Obligations (“CDO”) that were comprised of Mortgage-Backed Securities ("MBS").

 

Banks set targets for staff to capture more and more mortgages. Low-paid workers; young people without savings; families with temporary work contracts; immigrants that had been in the country for only a short time etc, were targets for a broadside of propaganda extolling the economic virtues of home ownership. The machinery launched "mortgages for the young", "easy-share mortgages", "easy house-bridging mortgages", "3 year fixed-rate mortgages", "mortgages for immigrants", etc. No deposit was sought to secure the purchase of a house and the classic established time span of 15 years for mortgage repayment was extended to 25, 30, 35, 40 and even 50 years to families that could not even cover the solicitor’s costs which, as a result, had to be included in the mortgage. Banks resorted to the "interest rate hitch." Initial mortgage installments were low, comprised principally of interest, during the first 6 or 12 months, making them comparable to rents. Thereafter a higher variable rate was applied that compensated the risk, occasioning a considerable increase in the price of monthly installments and forcing either a renegotiation of the shortcomings applied or, as in many cases, default. As in the USA, mortgages were processed with little or no documentation provided by the customers, a method known as "No doc/low doc": It was enough for immigrants to provide a passport or residence permit and 1 or 2 payrolls, without any other evidence of income. In practice, the credit rating or credit history was ignored, and in many operations, information from the Central Credit Register of the Bank of Spain (CIRBE) was not even sought.

 

The business of granting mortgages to people known to lack the means to repay them multiplied. It was patently obvious that these client-victims would not be able to repay the loans because the monthly installments either represented a high percentage of their income or because they were employed in fragile sectors of the economy, such as the building industry. Real estate agents, notaries and other actors in the process obtained fees depending on the number of victims that had been captured as customers. There was no time to lose. The homes under default could always be recuperated way below their market price. To simulate fulfillment of guarantees for the banks, agencies that facilitated mortgages resorted to close relatives, jeopardizing the family estate. In the case of immigrants, they found other immigrants to guarantee payment of the mortgage even though they were unknown to each other. Mortgage guarantees for acquiring homes were passed around between the immigrants by either criss-crossing the families to guarantee repayment between them for each other’s homes or by financially chaining a circle of families together. The families unknowingly accepted this cynical practice called "solidarity program guarantees" in order to obtain a mortgage. Consequently, the failure of one family to meet their mortgage payments caused a domino effect that provoked the opening of court foreclosure proceedings for all the families.

 

A major part of the mortgage fraud was based on overpricing. The valuers were linked both to banks and financial institutions. These price appraisers valued the housing in accordance not only with what the sellers sought but also with what the banks encouraged to increase their mortgage portfolio. House prices soared and the real-estate bubble inflated even more but mortgages were easy to obtain.

 

It was a controlled and corrupt market without any transparency. The mortgages were bundled together in securitization funds. As in all securitization funds the risk of default on mortgage loans is fully assumed by the buyers of the bonds, leaving the generator bank loans without any responsibility, even though they charge a commission for the credit management until it expires. The mechanism was based on the transmission of risk. The outcome of the risks taken should have been controlled and penalized by the government instead of the customers and society as a whole. The bill of the speculative financial business oligarchy is passed on to the poorest and not those responsible for having armed the fraud.

 

 

1.2 THOSE RESPONSIBLE.

 

The key actors of the housing bubble securitization in Spain are to be found in the entire Spanish financial system, backed up by funds and protection of big international banks. The Bank of Spain (BE) and the National Commission of Market Values (CNMV), both empowered to supervise the Spanish financial system, were collaborators, supported by political power. Both the executive power that proposed laws and issued regulations (mainly concocted by the Economics Ministry) and the legislative power that approved the necessary legal framework, cooperated. The authorities embraced the machinery as a generator of development and wealth that answered the demands of the financial sectors that benefitted from it. Big international banks had a key role but worst of all was the EUROPEAN CENTRAL BANK, a component of the TROIKA, which financed, supervised, and orchestrated the conduct of the Spanish banks.

 

 

1.3 INVESTMENT BANKS AND SAVINGS BANKS IN SPAIN.

 

Besides granting abundant mortgages without control, paving the way to huge profits, the Spanish financial institutions gave loans for the establishment of funds to create new resources which were employed to further expand the volume of mortgages which in turn continued to inflate the housing bubble. They raked in even more money charging commissions for the administration of the loans.

 

The Spanish Confederation of Saving Banks (CECA) has played a key role in the real-estate bubble, particularly with the model of diffusion of securitization of mortgages. Large investment banks, savings banks and their allies, supervised by international banks, actively participated in the creation of six management companies of securitization funds that were integrated into others already established. These management companies are:

 

 

MANAGEMENT COMPANY

OWNERS

 

 

Santander de Titulizaciones

Banco Santander. (Santander Bank)

Gesticaixa

Caixabank. (Savings bank)

Gestión de Activos Titulizados

Catalunya Caixa. (Savings bank)

Ahorro y Titulización

Confederación Española de Cajas- CECA. (The Spanish Confederation of Savings Banks).

Europea de Titulización

BBVA (Bank)

Titulización de Activos (TDA)

Bear Sterns and various savings banks

Intermoney

ICAP and CIMD.

 

 

 

2. INTERNATIONAL BANKS.

 

International banks played a major role in this process of mobilization of financial resources that fed the housing bubble, participating in several ways. They were directly involved as shareholders of management companies of securitization funds (SGFT) as is the case of Bear Stearns, which owned 10% of the shares of of the company Titulización de Activos (TDA).

 

In the company Europea de Titulización the majority share holder was Argentaria, which later became BBVA. Within Europea de Titulización, international banks had the following participation:

JOINT STOCK COMPANIES

SHAREHOLDING

 

 

J.P. Morgan Spain, S.A.

4.00%

Barclays Bank S.A.

1.53%

Citibank España S.A.

1.53%

Deutsche Bank Credit

1.53%

BNP Paribas España S.A.

0.77%

 

 

2.1 THE IMPLEMENTATION OF THEIR SECURITIZACION MODEL.

 

The alliance and influence of international banking with Spanish banks was patently obvious from the beginning. It included the subterfuge of copying the names of the securitization funds as in the case of BBVA RMBS, MADRID RMBS, IM SABADELL RMBS, etc. The Bear Stearns case should be particularly noted. They issued "interest only" mortgage derivatives bonds (NAS-IO valued) together with many other bonds and funds. They directed many of the initial and subsequent securitizations. This requires a signed management contract with responsibilities for the coordination of relations with market operators, auditors, rating agencies and authorities. The contract logically appeals to the strength and confidence that financial institutions have between them and the market in general.

 

INTERNATIONAL BANKS

FUNCTIONS

NAME OF INVESTMENT FUND

SPANISH BANK OR SAVINGS BANK.

Citibank N.A.

Advisory and structuring.

Foncaixa Hipotecario 1

La Caixa de Barcelona.(Savings)

Citibank N.A.

Advisory, structuring and financing.

BZ Hipotecario1.

Banco Zaragoza S.A.

J.P. Morgan S.V.

Direction.

Hipocat 1

Caixa Catalyuña.(Savings)

J.P. Morgan Securities.

Entity for Direction.

AyT Kutxa Hipotecario 1

Kutxa-Caja Gipuzkoa y San Sebastian (Savings)

J.P. Morgan S.V.B.

Direction.

Bancaja 1, Fondo de Titulización Hipotecaria.

BANCAJA (Savings)

HBSC, RBS, Société Générale.

Direction.

BBVA RMBS 1 Fondo deTitulización de Activos.

BBVA.

Credit Suisee First Boston, Societé General Investment Banking, Crédite Agricole Indosuez.

Direction and Insurance.

TDA CAM 1, Fondo de titulización de activos.

Caja de Ahorros del Mediterráneo-CAM (Savings)

Bear Stearns

Co-Direction.

TDA 4, Fondo de titulización Hipotecaria

Caja de Ahorros del Mediterráneo-CAM (Savings).

Societé Générale y DG BANK Deutsche Genossenschaftsbank AG

Directors and insurance.

Rural Hipotecaria 1. Fondo de titulización Hipotecaria

Caja Rural Almería. Caja Rural Málaga. Caja Rural Navarra. Caja Rural Valencia

(Savings Banks)

 

When the trend was assured, the direction was assumed by the Spanish. The application of this model and the huge involvement in the real estate bubble of the Spanish savings banks such as Caixa Catalunya, Caja de Ahorros del Mediterráneo (CAM), Bancaja and Caja Madrid caused these to go bankrupt. They were sold off to national banks at prices than can only described as ridiculous, or reconverted after being rescued with public money.

 

On the other hand, a group of international banks were implicated in the direct allocation of mortgages in Spain. These mortgages were then released to constitute of securitization funds.

 

ENTITY

NUMBER OF FUNDS

VALUE IN EUROS

 

 

 

Barclays Bank

13

20,875 million

Citibank

1

378 million

ING Direct

1

4,500 million

BANKOA-Crédit Agricole

1

530 million

 

In the case of BNP Paribas, it had a 50% share together with the Santander Bank in the UCI credit bank, which securitized 19 funds that totaled 14,816 million euros.

 

 

 

 

 

As can be appreciated in the above diagram only a fifth part (approximately 20.6%), were taken by Spanish investors while French banks took over a quarter (26%), German banks 22.4% and US banks 11.5%. A key element is the role of international banks in underwriting and placing bonds of the vast majority of Spanish mortgage securitization. This means that these financial institutions decide the quantity and acceptable day for the bonds to be launched on the market of mortgage finance clients, investment funds, pension funds, including those of Northern Europe, and insurance companies. This was based on the alleged security attributed to financial institutions for securities or financial products offered, and that buyers seek to obtain.

 

In the case of CAIXA CATALUNYA, (Catalonia Savings Bank) the relationship with JP Morgan has been very significant, because this bank intervened in 14 of the 20 Hipocat securitizations.

 

 

 

 

 

In the case of CAJA MADRID, the Madrid savings bank that also went bankrupt due to its exposure to mortgage market risk, 46% of the bonds remained in Spain and 19% were sold through intermediation of German banks, another 10% through French banks, 10% through US banks and 9% to an Italian bank. LEHMAN BROTHERS was part of the securitization group and co-directed CAJA MADRID in 1999 in the issue of preference shares to CAYAMADRID which was the subsidiary of CAJA MADRID in the Cayman Islands.

 

The first eight securitizations of the now bankrupt Caja de Ahorros del Mediterraneo-CAM (Mediterranean Savings Bank) summed up to 12,062 million euros. Of these, only 3.92% of the bonds were sold in Spain. The remaining 11,590 million euros of bonds were placed on the market through European banks and the USA.

 

 

 

The proportion of each bank in placing bonds is indicated above and shows the participation of various banks in the placing bonds of group mortgage securitization funds which added up to a total of 36,458 million euros. Only 20.6% was placed with Spanish investors, while 26% were placed in French banks, 22.4% in German banks and 11.47% in the United States.

 

 

A shareholder on the board of directors of Banco Santander, which issued bonds of 14 funds totaling 21,465 million euros in addition to structuring MBS and CDO bonds for many more millions, was RBS Royal Bank of Scotland. It also went bankrupt and for its involvement in the real estate bubble and had to be rescued.

 

Bonds have of course also ended up in the European Central Bank. Financial entities used them as collateral for refinancing operations. A whole group of funds amounting to some 16,000 million euros, basically GLOBAL MORTGAGE COLLATERAL SECURITIES, where established solely for this purpose.

 

 

 

At the beginning of the implementation of this model, and to give an image of sound financial operations, international banks acted as counter parties to swaps. That occurred between international and Spanish banks with respective swap agreements that established the responsibilities of each party. This exchange of interest is intended to ensure, or rather to cover, the interest payable to the buyers of bonds in the event that the mortgage interests paid lowers due to the fall in the benchmark interest rate (generally the Euribor but also the Libor, which was manipulated). This maneuver allows an excess of interest paid on mortgages to be passed on when it is higher than the interest paid on the bonds.

 

Despite the risk, international financial institutions received good returns on these transactions, which enabled Spanish banks, especially large ones, to assume the role of counterparty to cover the differential to be paid to bondholders and receive any surplus.

 

2.4. THE RISK RATING AGENCIES

 

The business could not be carried out successfully had it not had the collaboration of the famous rating agencies, being known that each rating agency was only interested in maximizing the number of transactions evaluated for banks and charge them fees. How could it be otherwise? International rating agencies (Moody's, Standard & Poor's and Fitch Ratings) were involved right from the start.

 

Packages of issued bonds backed by mortgage loans received pre-sale ratings of risk assessment. Thereafter, until final bond maturity, the agencies issued their ratings of improvement, maintenance or degradation of bond values.

 

This mechanism of risk rating bestowed a feeling of reliability and safety in solvency, and a guarantee of profitability and return on investments. When the rating agencies so obviously failed, they shielded themselves with the pretext that their evaluations were merely journalistic analysis and not technical, and as such, were neither binding nor bore responsibility.

 

It can be seen that aside from risk assessment being a profitable business, their practices principally served to hide what was really behind the new investments and give them an appearance of high quality. Mortgage-backed securities were thus sold as a safe guaranteed investment. The vast majority received an AAA rating from the agencies.

 

2.5. AUDIT COMPANIES.

 

Likewise, international auditing firms have also been involved from the start: Arthur Andersen in the early years, and then Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG. They prepared audit reports which served to create groups of loans based on the relevant series of bonds to be issued. They also periodically performed audits of the financial statements of each fund.

 

 

2.6. LAW FIRMS.

 

The design and legal advice for the establishment, operation and termination of funds has been in charge of large consortia of legal lobbies in the country (J & A Garrigues SL, Cuatrecasas SRL, Uría & Menéndez and Gómez Acebo & Pombo). At the beginning, a few international law firms, especially those of US investment banks, also contributed their know-how of securitization methods and their respective derivatives.

 

3. TOTAL AMOUNT OF FUNDS THAT WERE FOUND.

 

Among bonds issues, structured bonds and others, we found about 400 funds. To date 269 of them have been processed, as shown in the chart below.

 

 

 

 

The total amount of these funds is:

 

305,038,424,225 euros corresponding to 3,176,934 mortgages.

 

As can be seen, this is an extremely serious subject because of the enormous magnitude of the business, the number of stakeholders, the entities involved and, of foremost importance, the number of families that have been damaged by the mortgage swindle.

 

CONCLUSION

 

The effects and aftermath of the mortgage fraud not only encompass individuals and families. Its tentacles extend way beyond and grip the core of the financial system. The mortgage fraud and housing bubble intertwined and gave birth to a bank crisis that finally resulted in a debt crisis whose effect was a global economic crisis. The Spanish banks were saved by the government and private debt converted into public debt. We Europeans are paying this debt. The overall payment for the fraud is disguised as austerity and carried out by cuts in social security, public education, public health services, social housing and, in the end, a high price is paid in human lives.

 

Meanwhile the financial system has resisted changes and actively lobbies against regulations, continuing to thrive and, so to speak, “to cycle in the air”, creating the next financial crisis while we pay its errors. The toxicity continues to exist, for example, in the Danish pension funds. To be sure, the final act of the fraud, i.e. the debt and the sale of housing to hedge funds, is the movement that closes the circle of this gigantic fraud and allows its repetition. .The houses fraudulently taken from the indebted families are now the property of the same people who started the mortgage fraud. The stolen money has been maintained and hidden in the fiscal paradises and was invested in vulture funds that are now buying these houses to create the next bubble: the rent bubble.

 

This way, the mortgage problems of the families have become rent problems. In the meantime, all their properties have been stolen and put in the hands of the banks. Against this, PAH Madrid created its campaign of TRIAL AND PUNISHMENT and we reiterate our intention to take the results of this investigation to court and begin the legal proceedings against the people and institutions responsible for it, demand damages for the victims, and demand respect for the right to housing which has not been respected.

 

Finally, we demand the guarantee of non-repetition of the fraud, through legislation changes like the reform of the antiquated Mortgage Law of 1905 of colonial origin and the reform of the regulations that guide the supervision authorities. Only this way, we can be sure that this huge fraud will never ever happen again.

 

 

 




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