Buyer Beware?

Always on the lookout for the next accident the mortgage documentation fiasco looks to be the newest baby for the ambulance chasing law firms smelling blood, or at least some rotten flesh. But don't think the lawyers or their prey, the holders of Mortgage Backed Securities (MBO's)are concerned about the homeowners who might or might not be dispossessed.

These investors in the securities the mortgages backed- the holders of MBO's- are only worried about the plummeting value of the securities they purchased, and are looking for ways to recoup their losses. The law firms are suggesting that faulty documentation might be a way to force the banks to buy them back.

Now I am not a defendant of the big banks. It is clear that they have no one's interest in mind but their own and will go to great lengths to achieve their golden calf. Unfortunately for the lawyers and the holders of MBO's, the letter of the law, not the spirit, is what counts.

This distinction is where I believe the the problem began. The pursuit of profit, selling misleading products protected by finely worded contracts which assign legal responsibility to anyone but the bank. The products they describe were designed to appeal to the investor's greed to such an extent that they would overpower fear, and rationality. How else can you explain the success of structured products which claimed to take low rated assets and turn them in to AAA rated assets?

The MBO market was on the less sophisticated end of the this game. And on the basis of Bank of America CEO Brian Moynihan's recent statement intended to criticise investors, some of the sellers were of the same ilk. In an attempt to dismiss legal challenges Mr Moynihan virtually self-indicted himself as he claimed that investor complaints essentially amounted to "I bought a Chevy Vega, but I want it to be a Mercedes".

Precisely. The bankers took a Chevy Vega, buffed it up and presented it as being as good as a Mercedes. Check their documentation. They never sold it as a Mercedes. They might have mumbled when they admitted it was a buffed up Chevy Vega, but if an investor were stupid enough to pay Mercedes prices for a Chevy Vega, who was really at fault?

It is perhaps telling that in the Q&A sessions at the various presentations by lawyers to MBO investors the focus is not on the merits of a legal challenge-but on the likelihood and costs of winning. Of course investors rarely let pride get in the way of money-driving up to the courthouse in their Chevy Vegas, with a crooked Mercedes Stern on the hood.