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Daniel
ParticipantParticipantParticipantParticipantThe bonus is probably in a watertight contract, so Citi will end up paying it (unless Congress screams again).
But this type of “performance” bonuses are precisely what’s wrong with the whole system: say there was John Doe from AIG or BoA or whatever on the other side of the Citi trade. Is John Doe going to pay $100 million out of his pocket to share in the loss? I think not. He may get fired. So what? When presented with the odds, any sane, rational trader in this world would make a big trade if the probabilities were: 50% chance of making $100 million dollars, 50% chance of getting fired. I know I would.
ParticipantThe bonus is probably in a watertight contract, so Citi will end up paying it (unless Congress screams again).
But this type of “performance” bonuses are precisely what’s wrong with the whole system: say there was John Doe from AIG or BoA or whatever on the other side of the Citi trade. Is John Doe going to pay $100 million out of his pocket to share in the loss? I think not. He may get fired. So what? When presented with the odds, any sane, rational trader in this world would make a big trade if the probabilities were: 50% chance of making $100 million dollars, 50% chance of getting fired. I know I would.
ParticipantThe bonus is probably in a watertight contract, so Citi will end up paying it (unless Congress screams again).
But this type of “performance” bonuses are precisely what’s wrong with the whole system: say there was John Doe from AIG or BoA or whatever on the other side of the Citi trade. Is John Doe going to pay $100 million out of his pocket to share in the loss? I think not. He may get fired. So what? When presented with the odds, any sane, rational trader in this world would make a big trade if the probabilities were: 50% chance of making $100 million dollars, 50% chance of getting fired. I know I would.
ParticipantThe bonus is probably in a watertight contract, so Citi will end up paying it (unless Congress screams again).
But this type of “performance” bonuses are precisely what’s wrong with the whole system: say there was John Doe from AIG or BoA or whatever on the other side of the Citi trade. Is John Doe going to pay $100 million out of his pocket to share in the loss? I think not. He may get fired. So what? When presented with the odds, any sane, rational trader in this world would make a big trade if the probabilities were: 50% chance of making $100 million dollars, 50% chance of getting fired. I know I would.
ParticipantThe bonus is probably in a watertight contract, so Citi will end up paying it (unless Congress screams again).
But this type of “performance” bonuses are precisely what’s wrong with the whole system: say there was John Doe from AIG or BoA or whatever on the other side of the Citi trade. Is John Doe going to pay $100 million out of his pocket to share in the loss? I think not. He may get fired. So what? When presented with the odds, any sane, rational trader in this world would make a big trade if the probabilities were: 50% chance of making $100 million dollars, 50% chance of getting fired. I know I would.
July 17, 2009 at 1:46 PM in reply to: Ethical considerations (none) for defaulting on non-recourse loan. #433434Participant[quote=analyst]
If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.[/quote]
Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).
I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.
July 17, 2009 at 1:46 PM in reply to: Ethical considerations (none) for defaulting on non-recourse loan. #433275Participant[quote=analyst]
If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.[/quote]
Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).
I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.
July 17, 2009 at 1:46 PM in reply to: Ethical considerations (none) for defaulting on non-recourse loan. #432690Participant[quote=analyst]
If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.[/quote]
Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).
I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.
July 17, 2009 at 1:46 PM in reply to: Ethical considerations (none) for defaulting on non-recourse loan. #432904Participant[quote=analyst]
If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.[/quote]
Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).
I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.
July 17, 2009 at 1:46 PM in reply to: Ethical considerations (none) for defaulting on non-recourse loan. #433202Participant[quote=analyst]
If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.[/quote]
Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).
I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.
July 17, 2009 at 1:05 PM in reply to: Ethical considerations (none) for defaulting on non-recourse loan. #433152ParticipantTotally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.
But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.
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