It seems that with every new day we get more bad news from Wall Street.  The most recent bad news came on Friday when the SEC announced that it had opened an investigation of the fabled Merrill Lynch, on of our leading investment banks.   According to a story in the Wall Street Journal,  Merrill Lynch struck deals with several Hedge Funds to take certain positions that did not transfer the risk of the loss to Merrill, but merely delayed when Merrill Lnych would ahve to discloses its exposure on the risk.  That pracitce, the paper reported, is what is now under investigation by the Securities and Exchange Commission. 

The AP story that ran Saturday is reprinted below:

Investment Banks Facing New Writedowns

November 3, 2007
NEW YORK (AP) — Wall Street turned on itself Friday, as one widely watched analyst said investment banks face $100 billion or more in writedowns this quarter from bad mortgage debt, and another downgraded much of the banking sector on similar fears.Shares of Merrill Lynch fell almost 8 percent, touching their lowest point since early 2005. Other investment banks fell substantially as well.The downgrades and the commentary renewed fears of a repeat of August, when stocks sank, credit markets locked up and banks slashed the value of their investment portfolios. Standard & Poor’s equity analysts suggested even the banks with the best risk controls will still struggle through the current market.Deutsche Bank analyst Mike Mayo predicted late Thursday night that the investment banks will need to take another $10 billion in writedowns in the fourth quarter, with hits of $4 billion each at Citigroup and Merrill Lynch and a total of $2 billion at places like Wachovia and Bank of America.But after a Wall Street Journal article Friday morning suggested Merrill Lynch could be under investigation over its handling of mortgage debt, Mayo issued a new note, downgrading Merrill to “Hold” from “Buy” and saying it could face another $10 billion in writedowns on its own.Meanwhile, S&P equity analyst Matthew Albrecht also cut his rating on Merrill Lynch, dropping the company to “Hold” from “Buy.” S&P downgraded Wachovia Corp. and Goldman Sachs Group Inc. to a “Buy” from a “Strong Buy” and Citigroup to “Hold” from “Strong Buy” as well.Even Goldman Sachs, which has the “strongest risk management controls and is best positioned to weather the current storm,” will still face struggles and potential writedowns because of the tightening of credit markets, Albrecht said.The problem at the banks stems from their exposure to complex instruments known as collateralized debt obligations. So-called CDOs combine slices of different kind of risk; many include pieces of bonds backed by subprime mortgages. As those mortgages have gone into default at rising rates, the bonds have lost value and the CDOs have as well.That trend has shown no signs of abating, which has meant fresh rounds of charges by banks to recognize the decreased value. Writedowns related to declining mortgage debt values have already exceeded $25 billion this year, and any more could cause serious damage, Mayo said.“If there are much higher CDO writedowns, Merrill may have additional credit rating downgrades and may need to find a partner to give it new credibility and financial strength,” Mayo wrote in a research note Friday.The trigger for Mayo’s pessimism was the Journal story. The Journal reported Merrill Lynch struck deals with hedge funds to take certain positions that did not transfer risk, but merely delayed when Merrill Lynch would have to disclose its exposure to that risk. That practice, the paper reported, is under investigation by the Securities and Exchange Commission.Merrill Lynch said in a statement that it has “no reason to believe that any such inappropriate transactions occurred,” adding they would violate the company’s policy.”Merrill’s marks reflect all of its exposure to CDOs, regardless of how they are financed, on- or off- balance sheet,” Merrill Lynch spokeswoman Jessica Oppenheim said in a later statement.SEC spokesman John Nester in
Washington declined to comment, and would neither confirm nor deny that the agency was investigating Merrill Lynch.Merrill Lynch was hit the hardest in the third quarter by the deteriorating subprime mortgage market. The investment bank took $7.9 billion in writedowns — less than three weeks after it told investors that its mortgage losses would only amount to $4.5 billion.Stan O’Neal, Merrill Lynch’s chief executive, was forced to retire because of the fallout over the writedowns. Mayo said the new chief executive at Merrill Lynch will likely take a more conservative route when valuing CDOs and other subprime-backed securities.O’Neal’s ouster has put other CEOs on notice that they must right the ship sooner rather than later. Citigroup’s Charles Prince and Bear Stearns’ James Cayne both came under fire after reporting multibillion dollar writedowns related to bad bets in the subprime mortgage market.Merrill Lynch shares fell $4.91, or 7.9 percent, to $57.28. The stock traded as low as $54, its lowest point since roughly mid-2005. Shares in Bear Stearns fell $5.78, or 5.4 percent, to $102.16. Shares in Morgan Stanley fell $3.52, or 5.6 percent, to $58.90. Shares in Goldman Sachs fell $10.61, or 4.4 percent, to $229.60.AP Business Writers Dan Seymour and Joe Bel Bruno in New York and Marcy Gordon in
Washington contributed to this report. 

Since I worked with Mark Redmiles on a Panel at the annual Hudson Valley New York Bankruptcy Seminar, I have requested him to provide me with a written statement confirming that his office has been and will be taking actions to enforce the Bankruptcy Code against Abusive Creditor Practices.  The abuses of mortgage servicers in consumer bankruptcy cases is currently running at epidemic levels.  Well, Mark, who is the Deputy Director of the U.S. Trustee Program, finally came through with an email this week.  I have posted the email on all of the major consumer listservs.  The substance of the statement is reprinted below: 

The U.S. Trustee will protect consumer debtors from abusive creditor practices, according to a statement issued by Mark A. Redmiles, Deputy Director of the Executive Office of the United States Trustee.

“The United States Trustee Program (Program) is responsible for protecting the integrity of the bankruptcy system,” he said. This responsibility includes a duty to protect consumer debtors from and to redress violations by, creditors; particularly when the abuse is systemic or multi-jurisdictional. In many cases, misconduct by creditors is best addressed by the private case trustees who review and object to claims, or by debtors’ lawyers who engage in two party disputes. However, where the integrity of the system is at stake, and where the U.S. Trustee is in the best position to protect debtors against abusive practices, we will investigate and we will take appropriate enforcement action.”

Redmiles said, “the Program has recently focused enforcement efforts, and has engaged in litigation, to redress identified practices among mortgage servicing creditors and their attorneys in chapter 13 cases. This includes enforcement activity to redress the filing of false or inaccurate claims, the assessment of unreasonable post-petition charges, and the failure to properly account for post-petition mortgage payments.”

Forbes introduces us this month to April Charney, a Legal Aid lawyer from Florida who made an interesting discovery that she’s used to the benefit of dozens of clients in foreclosure: in the rush to flip, lenders across the country have gotten sloppy, and when an attorney like April Charney or one of several others working similar cases across the country takes the time to follow the paper trail, it often emerges that no one is really sure who holds the mortgage note. That can bring foreclosure proceedings to a screeching halt.

The Forbes story touches on just a few examples of the incredible number of mortgages across the country that are not properly documented, a situation Charney discovered when she noticed the high percentage of mortgage foreclosure cases in which alleged mortgage holders were filing “affidavits of lost notes”.

In addition to transfers not properly documented, attorneys are discovering that many transfers were made illegally, after the notes were already in default. In those cases, courts may refuse to recognize the purchaser as the owner of the loan.