By Jesse Eisinger and Jake Bernstein: As ProPublica has been detailing for two years, Wall Street banks and the hedge fund Magnetar worked together to build mortgage-backed deals that the hedge fund also bet against. The more than $40 billion of deals helped fuel the crash of 2008.

Now, recently collected emails from bankers and a Magnetar executive involved in some of the deals appear to shed new light on how they did it.

Fiduciaries threatened with a loss of business if they didn’t cooperate. Prime movers behind a billion-dollar deal suggesting they need to keep their actions hidden. It’s all portrayed in the emails, which were included as part of a civil lawsuit against Magnetar filed in New York’s Southern District Court in late June. (Our reporting is also cited in the complaint.)

The suit was brought by Italian bank Intesa San Paolo, which lost $180 million on an investment linked to a mortgage bond deal put together by Magnetar and French bank Calyon. The deal was “built to fail,” in the words of the complaint.

Boston-based Putnam was the manager on the deal, called Pyxis 2006, which involved the creation of a $1 billion collateralized debt obligation. The managers in such deals were supposed to be independent and looking out for all investors’ interests.

Intesa is suing all three players, Magnetar, Calyon and Putnam. Intesa, which is seeking unspecified damages, accuses Calyon and Putnam of misrepresenting the deal and Magnetar of acting in a conspiracy with Calyon and Putnam to aid and abet fraud. (Much of the information cited in the suit comes from an earlier case involving many of the same players that was settled.)

As with all partial document trails, the emails are open to a variety of interpretations. Magnetar says they have been selectively excerpted and that the more complete email chains don’t show what the plaintiff alleges.

The firms involved in the deal — Magnetar, Putnam and Calyon — filed motions to dismiss the suit last month.

A Putnam spokesman said, “The lawsuit is completely without merit and will be defended vigorously.” A Calyon spokeswoman declined to comment.

Magnetar is reportedly under SEC investigation. The hedge fund says it has not received a formal notice of possible charges from the SEC and calls the lawsuit “meritless.” The hedge fund reiterated that it “did not control” what went into the deals, known as collateralized debt obligations. (Read their full response.)

Here are some excerpts from the emails, with our captions:

On June 14, 2006, an executive from Calyon wonders if Magnetar’s participation should be hidden, that is, remain “behind the scenes and outside of the docs” in “exactly the same way we did” with another Magnetar CDO:

Banker asks if Magnetar wants to be “behind the scenes” (p. 12)

Magnetar’s Jim Prusko responds: “No, not at all. What’s your number?” Magnetar points to that response as exculpatory.

Yet a week later, Calyon, Magnetar and Deutsche Bank (which was also investing in the deal and playing a similar role as Magnetar), discussed creating a side agreement giving Deutsche Bank and Magnetar veto power over assets that were to go into the deal. Such side agreements were rare and would have left some investors unaware of important details of the deal.

The Side Letter, giving DB and Magnetar control (p. 7)

Ultimately, that side deal was never consummated, according to Magnetar. But Magnetar made sure it knew about the asset selection for the CDO, which Intesa charges is an example of its secret control. Neither Magnetar’s influence in the deal nor the hedge fund’s bet against it were clearly disclosed to investors:

Magnetar wants to know about all purchases (p. 23)

As the linchpin investor on the CDO, Magnetar needed to know what went into the investment, the hedge fund says. This does not indicate it ultimately controlled what went into the deal. Magnetar points out that Prusko, the Magnetar executive, wrote to the manager in an earlier email that the hedge fund will buy assets “of your choosing”:

“We will buy… names of your choosing” (p. 24)

Though Calyon, which created and marketed the deal, told Intesa that it would select some better-quality, “prime” assets, none got in there, according to the complaint:

“Prime” assets didn’t make it into the CDO (p. 39)

A key issue is who exactly knew whether Magnetar was betting against, or shorting, the deals in which it was investing. In one of the email exchanges, from September 2006, executives from Calyon and Putnam discuss who is shorting. The Putnam executive says: “It is definitely Magnetar.” In other words, the manager who was supposedly looking out for investors’ interests claimed to know that Magnetar was betting against the deal:

“definitely Magnetar” (p. 29)

Other emails refer to a CDO manager, the Dutch-owned NIBC, which was involved in another Magnetar deal. (As we reported in 2010, NIBC once pushed back against perceived pressure from Magnetar to make a deal riskier.)

Regarding another Magnetar deal, Calyon’s Alex Rekeda writes in November 2006 that NIBC is concerned that it is ceding too much power to Magnetar and Deutsche, which was again partnering with Magnetar on the deal. He also relays another concern: “They feel very strongly that the older vintage bonds that they have in the portfolio have by far superior credit characteristics compared to the bonds they can pick up in the market now.” Translated: NIBC was feeling pressure to buy riskier bonds and didn’t think doing so would benefit investors.

(Last month, the Securities and Exchange Commission settled securities law charges against one of the players, the former Calyon banker Rekeda, accused of violating securities laws in conjunction with another Magnetar CDO. Rekeda did not admit or deny wrongdoing.)

“They feel very strongly” (p. 37)

Deutsche’s Michael Henriques replies that the original investors — which include Magnetar and Deutsche Bank — are taking “execution, credit and manager risk.” That suggests Magnetar and Deutsche viewed themselves as the real managers of the CDO, not the supposedly independent NIBC. Henriques, who later went to work for Magnetar, also complains that NIBC is treating Deutsche Bank and Magnetar poorly, lacking “a spirit of partnership.”

“Manager risk” (p. 37)

That same day, Deutsche’s Henriques threatens to withdraw a lucrative line of business from NIBC:

“Go back to the regular style” (p. 38)

In another deal from a few months earlier, Magnetar’s Prusko had also threatened to withhold business from the manager, Putnam, if it did not “play ball”:

“Take it or leave it.” (p. 18)

Magnetar says Prusko’s email solely refers to the fees on the deal, and not about controlling asset selection or any other issue.

In a statement, Magnetar said: “Intesa’s decision to amend this complaint appears to be little more than a transparent effort to sensationalize a baseless case in which each defendant has already moved for dismissal.

“As the Plaintiff is well aware from the motion to dismiss we filed some time ago, no Magnetar entity was a party to the credit default swap at issue in the case, and we were not even aware of that transaction until this complaint was filed.

“We continue to believe that Intesa’s accusations are meritless, and that the case should be dismissed.

“And, as we have stated numerous times in the past: Magnetar did not control the asset-selection process and our Mortgage CDO investment strategy was designed and implemented to maintain a market-neutral portfolio.”

This article was originally published on ProPublica.

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The title for Taibbi’s latest blog post:

And if you take the time to read Friedman’s New York Times piece ‘Syria is Iraq‘, it’s hard to disagree. Just take a look at these two completely contradictory and nonsensical paragraphs:

1. And, for me, the lesson of Iraq is quite simple: You can’t go from Saddam to Switzerland without getting stuck in Hobbes — a war of all against all — unless you have a well-armed external midwife, whom everyone on the ground both fears and trusts to manage the transition. In Iraq, that was America.

2. Because of both U.S. incompetence and the nature of Iraq, this U.S. intervention triggered a civil war in which all the parties in Iraq – Sunnis, Shiites and Kurds – tested the new balance of power, inflicting enormous casualties on each other and leading, tragically, to ethnic cleansing that rearranged the country into more homogeneous blocks of Sunnis, Shiites and Kurds.

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High interest loans to students has left millions in crippling debt (Photo credit: zingbot)

by Marian Wang: Much like the mortgage market, the market for private student loans has gone through a big boom and a messy bust. Some banks and lenders played fast and loose with student loans, aggressively marketing them to borrowers who couldn’t afford that amount of debt, according to a new government report.

“Borrowers who took out loans at the height of the boom are still suffering from those excesses,” said Consumer Financial Protection Bureau Director Richard Cordray in remarks to reporters on Thursday. The report, released jointly by the U.S. Department of Education and the CFPB, is the government’s first major study of the murky private student loan market, for which there has long been little regulation or reliable data.

American borrowers currently owe more than $150 billion in private student loans, according to the report. Default rates soared in the years since the financial crisis, and more than $8 billion in private loans are in default.

In the run-up to the financial crisis in 2008, the boom in risky private student loans was fueled by Wall Street investors’ demand for securities backed by bundles of student loans, the report said. See the below graph, which draws from proprietary loan data collected from major lenders:

After the crisis, investor interest in all manner of loan-backed securities 2014 including student-loan-backed securities 2014 collapsed. And with less packaging and reselling of loans to fund the creation of new loans, the private student loan market has since dialed back and raised its lending criteria.

The result: private loans are now much harder for borrowers to get.

According to the report, more than 90 percent of the dollar amount of private student loans originated last year were co-signed 2014 so if the primary borrower is unable to repay the loan, the cosigner will also be responsible for payment. That’s up from 55 percent in 2005.

Much of what the report describes 2014 private student loans originated by financial firms often for immediate sale and securitization 2014 is helpful context for understanding the quandary of many borrowers and their cosigners.

In June, we detailed the plight of Francisco Reynoso, a gardener in California who cosigned on several private student loans for his son between 2005 and 2007 2014 in the very heyday of the lending boom. His son later died in a car accident and now the bereaved father is saddled with the debt. Since his debt was resold times over, its not even clear to whom Reynoso owes the money may appeal to for forgiveness.

“For the relatively high number of [private student loan] borrowers currently having difficulty with repayment, it is hard to avoid default and equally hard to escape it, as compared to options available to federal borrowers,” the report explains.

Federal loans offer more flexibility and protections than most private loans2014such as deferral and forbearance options or lenient repayment plans for low-income borrowers. Federal loans also are discharged if the borrower dies or suffer permanent disability. (See our reporting on the federal system for disability discharges.)

Some private student lenders, within the past year, have started to offer fixed-rate student loans, touting interest rates that are in some cases competitive with federal rates. But as Education Department and CFPB officials note, these loans are only a good deal for borrowers with exceptional credit who can qualify for the lowest interest rates and are willing to forgo the additional protections offered by federal loans.

Check out the full report. And if you’re a borrower who sees your own student loan story mirrored in this report, email us at education@propublica.org to let us know.

You can also check out the CFPB’s new tool if you’re struggling with your loan payments, or file a complaint with the agency for problems specific to private student loans.

This article was originally published on ProPublica.

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Maria Bartiromo: Wrong about everything, all the time. (Photo credit: Wikipedia)

By Ben Cohen: On our ‘Video of the Day’ section, we put up a clip of CNBC host Maria Bartiromo engaging in a nasty spat with Current TV’s Eliot Spitzer on the AIG/Hank Greenberg scandal. It’s an entertaining back and forth and Bartiromo comes off particularly badly in her defense of Greenberg given she clearly hadn’t read the judge’s opinion ruling that the ex AIG head had participated in conspiracy to defraud. Writes Matt Taibbi of the encounter:

Maria’s always been a little nuts, but this latest crusade to rewrite history and cleanse ex-AIG chief Hank Greenberg of culpability in a fraud scandal that at the time led to the biggest financial settlement ever paid is an absolute head-scratcher.

The confrontation between the two of them on air is epic. In it, Bartiromo blasts Spitzer for going after Greenberg and accuses him of only targeting Greenberg for personal reasons. Spitzer counters by asking her if she’s read a judge’s opinion ruling that Greenberg had participated in a conspiracy to defraud. “Have you read this opinion?” he asks.

She hedges, pauses, and here’s the funny part: Clearly she hasn’t read it.

This is typical of Bartiromo – a Wall St cheer leader who has been wrong on just about everything related to economics in recent years. AIG settled with Spitzer and three other regulators for $1.6 billion, and Greenberg personally settled for $15 million in a civil suit over fraudulent transactions related to the artificial inflation of AIG’s loss reserves and deceit of AIG’s investors in regards to the company’s loss reserves and the quality of its earnings.

What is amazing about Bartiromo is her indefatigable crusade to defend the rich and powerful despite the damning evidence against them, not only criminally, but ideologically.

I wrote a piece about Bartiromo back in 2009 for the Huff Post containing much of the same criticism. Here was my take then:

A few months back, I wrote a letter to ‘The Money Honey’ Maria Bartiromo trying to explain some basic economic principles she seemed to have missed in her 16 year career as a business journalist. Bartiromo had just interviewed Barack Obama, grilling him on his plans to increase tax on people making more than $250,000 a year. According to Bartiromo, these people weren’t actually rich, and the burden of paying their fair share would freeze up the economy and destroy the system that created wealth in America. I pointed out that anyone making over $250,000 (over 10 times the poverty threshold for a family of four) could probably afford to pay a little more in taxes, and that her economic ideology had caused the recession in the first place. At that time, the economy was in dire shape, but nothing compared to the horrors we face today. I never heard back from the CNBC host, but I liked to think she may have changed her tune after the almighty economic meltdown.

Now the economy is free falling into the abyss, the CNBC host is unfortunately at it again, railing against Obama’s stimulus plan, and proposal to tax people making over $250,000……

Ignoring the fact that only 2% of small business and individuals make over $250,000, Bartiromo’s pleas are clearly aimed at helping the business elite she has spent a career sucking up to. Bartiromo’s solution, like all the other members of the business classes, is to rely on private capital to stimulate the economy, describing the problems as a ‘lack of liquidity in the market’. Making sure that the richest of the rich still have disposable money they may or may not give to charity, or may or may not use to create jobs is of paramount importance, despite the overwhelming consensus that government spending is the only way out of this recession.

Bartiromo has made a career out of distorting fact, and it’s hard to swallow the notion that she genuinely believes what she is saying anymore. Bartiromo is still calling for market solutions to the stalling economy and goes out to bat for the Wall St titans responsible for driving the economy into the ground on a daily basis. Bartiromo represents the worst side of American corporate culture – blind deference to the rich and powerful and a strict adherence to the ideology du jour no matter how ridiculous it is. Perhaps she knows what she is doing, perhaps not, but the reflex is clearly instinctive now: Protect the rich and attack the poor regardless of the facts. I’ve used this quote from Upton Sinclair before in a piece related to the deliberate misunderstanding of overwhelming evidence, but I think it’s worth repeating. Sinclair wrote, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Bartiromo exemplifies this to the nth degree, except I’m not so sure she doesn’t understand it. It’s a good thing that people like Eliot Spitzer call her out on her parroting of Wall St propaganda. Spitzer told Bartiromo:

Maria, look, I hate to say this to you, deal with facts and reality, not what Hank Greenberg’s PR machine wants you to believe.  Hank Greenberg was thrown out by his own board.  His company paid $1.6 billion in a settlement, acknowledged that his accounting was fraudulent.  These are in facts.  Read the federal judicial opinion.  He was the one that instigated the conspiracy.  He is the one that began, this is a federal judge, began and instigated the conspiracy, fraudulent reinsurance contract.

The problem is that Bartiromo, who is reportedly worth $22 million, doesn’t deal with facts and reality – otherwise she wouldn’t be where she is today. There’s a lot of money to be made believing and promoting an ideology that serves the interests of the wealthy, a trick Bartiromo figured out a long time ago. One would hope that actual facts would make a difference at some point, but in the world of finance, reality doesn’t seem to matter.

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Anger, British style

By Ben Cohen: The banking crisis in 2008 should have resulted in prison sentences for hundreds of Wall St executive and regulators responsible for decimating the global economy. Thus far, no major executive or government official has been carted of to jail – a horrifying indicator of just how corrupt the US government is. Both political parties in America refused to punish banks for their extraordinary behavior, and Wall St wields as much power today as it did in 2007. While there was enormous public outrage over the crisis, elected officials essentially pretended to get angry, then did nothing. The crisis exposed the truth about who runs the world – and it isn’t national governments working for the public interest.

In Britain, another serious  banking scandal has been uncovered, and given the public’s reaction to it, the consequences could actually mean something this time around. Matt Taibbi provides the background:

The furor is over revelations that Barclays, the Royal Bank of Scotland, and other banks were monkeying with at least $10 trillion in loans (The Wall Street Journal is calculating that that LIBOR affects $800 trillion worth of contracts).

The banks gamed LIBOR for two semi-overlapping reasons. As noted here last week, there were instances of Barclays traders badgering the LIBOR submitters to “push down” rates in order to fatten their immediate bottom lines, depending on what they were trading or holding that day. They also apparently rigged LIBOR downward in order to produce a general appearance of better health, essentially tweaking their credit scores a few ticks upward.

Most intriguingly, or perhaps disturbingly, there were revelations last week that Bank of England deputy Governor Paul Tucker had a conversation with Diamond at the peak of the crisis in 2008. The conversation reportedly left Diamond, and subsequently his traders, with the impression that the bank had carte blanche to rig LIBOR downward in order to help allay spiraling public fears about the banks’ poor financial health.

The British public is taking the Barclay’s/Libor banking scandal extremely seriously. The press is all over it, and with a criminal investigation underway, it could lead to some very high profile heads rolling. Here was Mervyn King, Governor of the Bank of England’s take:

It is time to do something about the banking system…Many people in the banking industry are hardworking and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today, news of yet another mis-selling scandal.

As Taibbi writes, King “Responded the way a real public official should (i.e. not like Ben Bernanke), blasting the banks.”

What’s interesting about the scandal is that the story has barely made the headlines in the US, despite it having extremely serious ramifications. Writes Robert Reich in the Guardian:

It’s becoming apparent that Barclays’ reach extends far into the US financial sector, as evidenced by its $453m settlement with American as well as British bank regulators, and the US justice department’s active engagement in the case. Even by American standards, the Barclays traders’ emails are eyepopping, offering a particularly a chilling picture of how easily they got their colleagues to rig interest rates in order to make big bucks. (Bob Diamond, the former Barclays CEO, says the emails made him “physically ill” – perhaps because they so patently reveal the corruption.)Most importantly, Wall Street will almost surely be implicated in the scandal. The biggest Wall Street banks – including the giants JP Morgan Chase, Citigroup and Bank of America – are likely to have been involved in similar manoeuvres. Barclay’s couldn’t have rigged the Libor without their witting involvement.

The difference in the reaction to the scandal between Britain and America – two countries where the financial sector wields more power than anywhere else in the world – is quite revealing. As Yves Smith notes, both major political parties in Britain are not beholden to banks, meaning politicians actually ask serious questions and can force government to act:

The Labor party in England really does represent different interests than the Tories, and is willing to go after the Tories and their allies in a much more persistent manner than our Dems, who ultimately depend on the same funding sources as Republicans. In England, as the News International scandal showed, there is the possibility of real amplification: of media discoveries being fed into political investigations, which in turn lead to more media ferreting. The fact that someone who seemed to have such a lock on power as Rupert Murdoch could be cut down is no doubt a bracing message to the British press, that they have infuence that for the most part they have failed to exercise effectively. So, ironically, a country where banking is a much larger percentage of GDP than the US may be the one where banking misconduct is finally unearthed and at least some of the perps suffer. And that would show our own officials’ failure to act to be the disgrace that it is.

In Britain, there is still a belief that government should, and can act on the behalf of the public, and that is reflected in the political dialogue that seems completely alien to Americans. Here was Ed Miliband, leader of the Labour Party on the scandal today:

“Last September I said to the Labour party conference that Britain needed a different kind of economy. An economy based not on the short-term, fast buck, take-what-you-can culture we see too much of in our banks today. But on long-termism, patient investment, and responsibility shared by all.

“Today I am going to tell you what a better banking system would look like. I will describe the first steps towards moving from the casino banking we have to the stewardship banking we need.

“It will mean root-and-branch change for our banks if we are to deliver real change for Britain”

While Obama has scolded banks on occasion, there has never been a promise to fundamentally change how they operate. Americans have long given up on the idea that the government works in their interest and simply moves on when astonishing corruption is unearthed. The media knows that attacking major power centers like the financial sector can have serious ramifications, so they rarely move unless the scandal is so blatant it has no choice. The British press go out of their way to uncover corruption whereas the US press simply reacts as events unfold (anyone remember a major scandal Fox News or MSNBC uncovered in recent times?). This culture pervades public, political and media circles and it leads to dangerous apathy that severely harms public policy. With an apathetic media comes an apathetic public, and with an apathetic public, there is no pressure on government to behave responsibly. It’s a vicious cycle that feeds itself, and only a real sense of public anger will change the status quo. While the Brits could learn a thing or two about fixing their economy from the US, Americans could learn a thing or two about getting angry from their Trans-Atlantic cousins.

It’s time to get mad America, British style.

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Agora Partnerships: Attracting top talent for impact investing

By Ben Cohen: One of the main motivators for doing exceptionally well at school is the prospect of a high paying job afterwards. In the modern economy, salaries are highest in the financial sector, and given America’s gigantic student debt problem, it makes sense that the best and the brightest would head off into the city to make their fortunes.

Or so we thought.

In a fascinating article in the Washington Post, Ezra Klein profiles ‘Venture for America’, an organization dedicated to playing the middleman between small, growing businesses and students who would want to work for them. It takes its cues from ‘Teach for America’ – a wildly successful non profit teaching program that has managed to attract top talent without top salaries. Writes Klein:

Teach for America solved that problem [attracting top talent] by providing schools across the country with the recruiting capacity and brand equity they lacked, enabling them to pool resources to attract top students. Venture for America is eager to play a similar role, serving as the middleman between small, growing businesses and students who might want to work for them.

In its first year, Yang estimates that Venture for America received about 500 applications for 40 slots. The jobs are in fast-growing companies that are less than 10 years old, and they pay from $32,000 to $38,000. Right now, Venture for America is working with companies in Cincinnati, Detroit, Las Vegas, New Orleans and Providence, R.I. Next year, the organization expects to have more than a thousand applicants for 100 positions, allowing expansion to Baltimore; Cleveland; New Haven, Conn.; Pittsburgh; and Raleigh-Durham, N.C.

It is a sign of changing times that money isn’t enough to attract the best and the brightest graduates anymore, an indication that the era of ‘greed is good’ is coming to an end. Klein spoke with a recent Ivy League Graduate who on paper, fitted the exact profile of a Wall St apprentice:

Two years ago, Mike Mayer appeared headed in the same direction. A high school valedictorian, he attended the University of Pennsylvania. As a sophomore, he worried that he wasn’t learning usable skills, so he switched into an undergraduate program at the Wharton School and, as he puts it, “followed the herd into the finance concentration, and then into New York and Wall Street.”…..he’s finished with Wharton and heading to New Orleans to work at a small software company. “There is a sense of creating something, of creating real tangible value,” he says. “A big bank does create value for our economy, but as a first-year analyst among 80 or 90 peers, you’re not seeing it. At a start-up, you’re seeing it every day.”

There are many other small to medium sized ventures out there doing interesting and important work that are attracting phenomenally bright and talented people – people who maybe 10 years ago would have committed themselves to the world of finance, but see a more fulfilling future for themselves doing something they find meaningful.

Take for example ‘Agora Partnerships‘, a company that accelerates early-stage businesses throughout Latin America and links them to impact investors around the world. They work specifically with “impact entrepreneurs” in the region – men and women who are intentionally using their business to solve a social, economic, or environmental problem in their community. Agora has attracted top talent to work for them, not because they’re handing out Wall St salaries, but because they get to be involved with something they feel is important.

Director of marketing and communications Jesse Grainger was attracted to the company because of the principles Agora adheres to. He told me:

I chose Agora because it meant something more to me than a paycheck. Right out of grad school I worked with a record label for a year before realizing that selling music and concert tickets wasn’t fulfilling enough for me. We’re facing myriad of problems in our society today. I wanted to feel as if I was a part of the solution. Also, it’s an exciting time for the socially responsible sector. Traditional “do-gooder” organizations are embracing more market reforms and entrepreneurial ingenuity. There seemed like a lot of opportunity in this space to grow.

The next generation of America’s best and brightest are not necessarily anti-money or anti-business, they are just concerned about the products they will be involved in making. Companies like Agora are for-profit businesses, but they care about where that profit comes from. That concern is also reflected in the talent they attract to work for them. Says Grainger:

We attract talented people by selling the vision/purpose of Agora as well as the nuts and bolts of what we do. We communicate to people that we are building a movement to use business to solve social problems using tried and tested best business practices.

Young people are growing up in a world where consumerism and materialism are the defining features of our culture – they are bombarded with non stop advertising encouraging them to buy an endless choice of products. The results have been disastrous from a societal point of view – mental illness is soaring along with reliance on chemical medication, young people feel increasing disconnected from the political process and are depressed about their future prospects. The idea of clocking in to a 9-5 day in day out for the rest of their working lives for institutions with little impact on anything relevant to them isn’t enough any more.

The rise of social entrepreneurialism, the rekindling of interest in small business is a sign that the next generation is fighting back – not by protesting on the streets or engaging with the political process, by opting out of Wall St and Big Business culture and forging their own paths. It’s a quiet revolution, but one that is definitely happening.

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by Marian Wang: A few months after he buried his son, Francisco Reynoso began getting notices in the mail. Then the debt collectors came calling.

“They would say, ‘We don’t care what happened with your son, you have to pay us,’” recalled Reynoso, a gardener from Palmdale, Calif.

Reynoso’s son, Freddy, had been the pride of his family and the first to go to college. In 2005, after Freddy was accepted to Boston’s Berklee College of Music, his father co-signed on his hefty private student loans, making him fully liable should Freddy be unwilling or unable to repay them. It was no small decision for a man who made just over $21,000 in 2011, according to his tax returns.

“As a father, you’ll do anything for your child,” Reynoso, an American citizen originally from Mexico, said through a translator.

Now, he’s suffering a Kafkaesque ordeal in which he’s hounded to repay loans that funded an education his son will never get to use 2014 loans that he has little hope of ever paying off. While Reynoso’s wife, Sylvia, is studying to be a beautician, his gardening is currently the sole source of income for the family, which includes his 18-year-old daughter Evelyn.

And the loans are maddeningly opaque. Despite the help of a lawyer, Reynoso has not been able to determine exactly how much he owes, or even what company holds his loans. Just as happened with home mortgages in the boom years before the 2008 financial crash, his son’s student loans have been sold and resold, and at least one was likely bundled into a complex Wall Street security. But the trail of those transactions ends at a wall of corporate silence from companies that include two household names: banking giant UBS and Xerox, which owns the loan servicer handling the bulk of his loans. Left without answers is a bereaved father.

The risk of cosigning on Freddy’s loans seemed to have been worth it when he graduated in May 2008 and began looking for a job in the music industry. He was on the way back from a job interview on the evening of Sept. 4 when he lost control of his car and it rolled over. Freddy’s family learned of his death the next morning.

The grief was relentless; the debt collectors, ruthless. By law, debt collectors must go through a debtor’s attorney if one has been hired, but even after Reynoso hired an attorney, he said they continued to call him every day, several times a day, for about a year and a half: “I would tell them to call the lawyer. And they would still say, ‘The lawyer doesn’t owe us. You’re the one who owes us. You’re the one who has to pay us.’”

Meanwhile, Reynoso was still reeling: “I was crying for him every day,” he said.

The question of to whom Reynoso’s debts are actually owed 2014 and who has the authority to forgive them 2014 is a mystery that thus far neither Reynoso nor his lawyer has been able to solve.

One of Freddy’s student loans was cancelled after his death without a problem: his federal loan. That’s because the government cancels student loans if a student dies.

But the bulk of Freddy’s loans were private student loans, which typically offer less favorable interest rates and fewer consumer protections. Only a few private student lenders offer debt discharges in the event of the borrower’s death, though public outcry over specific cases has swayed lenders to grant occasional death discharges.

But for the Reynosos, just figuring out whom to appeal to has been an exercise in futility. Working with a law firm, Francisco Reynoso sent copies of Freddy’s death certificate to any company that sent paperwork about the loans. He remembers being told by at least one company that they’d call him to work out a solution. But no one ever did, he said, and the bills kept coming 2014 each time larger than the last with more interest, more late fees.

“We sent out death certificates to all of them,” said Dolores Orozco-Serrano, a legal administrator with Borowitz & Clark, the bankruptcy law firm handling the Reynosos’ case. Only the federal loan was discharged. “Everyone else was not cooperative at all.”

Freddy Reynoso’s private loans were originated by two companies 2014 Bank of America and Education Finance Partners. Neither company still holds onto them. ProPublica tried to find out who did.

First, the Bank of America loan: Almost as soon as Bank of America originated it, the loan was sold to a Boston-based company called First Marblehead, once one of the biggest securitizers of student loans. But nowhere in the paperwork sent to the Reynosos and reviewed by ProPublica does the name First Marblehead appear. Instead, the Reynosos have received paperwork emblazoned with the logo of National Collegiate Trust. That’s the name First Marblehead gave to bundles of loans that it turned into Wall Street securities and sold to investors. Was Freddy’s loan bundled into a security? And if so, who owns it now? First Marblehead has not returned repeated requests for comment.

Freddy Reynoso’s other loans followed an even more complicated path 2014 and one tainted by scandal. Education Finance Partners, the private student loan company that originated the largest portion of Freddy’s student debts, reached a $2.5 million settlement agreement with the New York Attorney General’s Office in 2007 to settle charges that it had paid colleges across the country to steer students toward its high-interest loans. And Berklee College of Music, Freddy’s alma mater, was one of the schools singled out in that investigation for accepting the improper payments. Berklee College of Music spokesman Allen Bush acknowledged in a statement to ProPublica that the school accepted a total of $23,000 from Education Finance Partners between 2005 and 2007, but said that “all of these funds were deposited into a financial aid account and disbursed through a need-based grant system to current Berklee students.”

Education Finance Partners, Freddy’s lender, never admitted any wrongdoing. A year after the settlement, the company declared bankruptcy.

But who holds Freddy’s loans now remains a mystery. The company’s archives 2014 now kept by a company called Loan Science 2014 show that his loans were scooped up by the Swiss bank UBS in October 2008. But the entire portfolio changed hands again in 2009. “That 2009 sale was private, it was bound by a confidentiality agreement and, therefore, we’re not in a position to disclose the identity of the purchaser,” wrote a UBS spokesman in an email.

One possibility: Freddy’s loan may have been among those acquired by the Swiss National Bank, Switzerland’s equivalent of the U.S. Federal Reserve, when it bailed out UBS. (See our sidebar.)

Reynoso and his lawyer don’t even know exactly how much he now owes, but it appears to be well into the six figures. The loan that Bank of America originated is clear: At the end of March, the balance was around $7,400, according to Mike Reiber, a spokesman for PHEAA, a company that once serviced that loan. (With the loan in default, it now resides with First Marblehead, Reiber said.) But the other, much larger portion of Reynoso’s debt remains murky. A 2009 lending disclosure document indicates that through Education Finance Partners, UBS extended nearly $160,000 in credit to Freddy Reynoso, and projected that if he made all payments as scheduled, the loan for his music education would end up costing him $279,000.

Seemingly the only party who knows 2014 and is obligated to tell Reynoso 2014 about this debt is the servicer, ACS Education Services.

Citing privacy reasons, ACS declined to disclose any specifics about the loans to ProPublica, even with Reynoso’s full consent. Three weeks ago, Francisco Reynoso himself sent a letter to ACS asking who currently holds the loans, but he has received no response.

ACS is a subsidiary of Xerox, so ProPublica put in several calls there. Given more than a full week to respond, Xerox’s corporate communications team has yet to provide a response to queries about when Reynoso can expect basic information about his son’s loans, including the amount he owes and the name of the company that now owns the debt.

Even with the help of a lawyer, Reynoso’s options are limited. Unlike most kinds of debt, private student loans are not dischargeable through bankruptcy, though Sen. Dick Durbin, D-Ill., is leading an effort to change that. So for the time being, Reynoso’s hope hinges on a narrow provision in the bankruptcy code called a hardship discharge. The bar for proving “undue hardship” is high, but Reynoso still hopes for the best as he waits for a ruling from the bankruptcy judge. As he puts it: “I’m in the hands of God.”

This article was originally published on ProPublica

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Did Zuckerberg, founder and CEO of Facebook know what his company was really worth? (Photo credit: Wikipedia)

By Ben Cohen: The news that Facebook shareholders are suing the social network, CEO Mark Zuckerberg, and a number of banks that collaborated with Facebook’s IPO last week should not come as a surprise to anyone familiar with the murky dealings of Wall St.

The shareholders are alleging that crucial information was concealed ahead of the offering and that the defendants did not disclose “a severe and pronounced reduction” in forecasts for revenue growth due to users increased access of the social network through mobile devices. Facebook shares fell 18.4 percent from their $38 IPO price in their first three trading days, causing a panic amongst investors who had subscribed to the incredibly high initial valuation (Facebook was given a price tag of US$104 billion based on only $1 billion profit in 2011). According to Reuters:

The lawsuit said the underwriters disclosed the lowered forecasts to “preferred” investors only, instead of all investors.

“The main underwriters in the middle of the road show reduced their estimates and didn’t tell everyone,” said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. “I don’t think any investor in Facebook wouldn’t have wanted to know that information.”

This is another example of banks colluding to distort the market at the expense of everyone else to serve their own interests – a highly dangerous practice given their enormous power over the market. Writes Matt Taibbi:

All of these stories suggest that Wall Street is increasingly turning into a giant favor-and-front-running factory, where the big banks and broker-dealers that channel vast streams of crucial non-public information (about the markets generally and their clients specifically) are also trading for their own accounts, and sharing information with a select group of “preferred investors,” who in turn help the TBTF banks move markets in this or that desired direction by jumping on or off various pigpiles at the right times.

Sooner or later, people are going to clue into the fact that one or two big banks, acting in concert with a choice assortment of unscrupulous “preferred investors,” can at least temporarily prop up or topple just about anything they want, from Greece to Bear Stearns to Lehman Brothers. And if you can move markets and bet on them at the same time, it’s impossible to not make tons of money, which incidentally is made at everyone else’s expense. So we should always be on the lookout for any evidence that that sort of coordinated, non-disclosed activity is taking place.

This coordinated, non-disclosed activity is exactly what brought the economy down in 2008 – insiders knew exactly how inflated the property market was (because they were of course the ones inflating it) yet went to extraordinary lengths to hide this information from their clients. Not only that, they were hedging against their own investments to ensure they couldn’t lose, knowing full well the tax payer would step in and supply them with cash if it all went belly up.Wall St has a very clear history of this type of behavior, and if it isn’t carefully monitored, we could experience another giant bubble that could have been avoided if vital information had been made public.

Anyhow, check out this discussion with my two good friends Alyona Minkovski and Lauren Lyster on Alyona’s show as they do a much better job than me of explaining exactly what occurred during the Facebook IPO and why it is so dangerous:

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JP Morgan's CEO Jamie Dimon in the hot seat

The US justice department opened an investigation into how JP Morgan lost more than $2bn in poorly managed trading at its London office as the bank’s embattled boss, Jamie Dimon, saw off attempts by shareholders to strip him of his role as chairman.

The justice department inquiry is at a preliminary stage and as yet there appears to be no evidence of criminal wrongdoing at the bank. The Securities and Exchange Commission has already launched a separate investigation and as political pressure for greater regulation of Wall Street banks begins to mount.

President Barack Obama appeared on the daytime talk show The View on Tuesday to call for Wall Street reform. “JP Morgan is the best, or one of the best managed, banks. You could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in. That’s exactly why Wall Street reform’s so important,” he said.

He said Dimon, the chairman and chief executive officer of JP Morgan, was “one of the smartest bankers we’ve got – and they still lost $2bn and counting.”

At the bank’s annual meeting, held at a tightly secured facility seven miles outside Tampa, Florida, shareholders quizzed Dimon on what went wrong. He said the losses “never should have happened” and that “all corrective actions” were being taken.

Forty-one percent of shareholders voted for a proposal by the American Federation of State, County and Municipal Employees (AFSCME) to appoint an independent chairman. Dimon also received 94.8% approval from shareholders on his $23m pay package from last year.

Lisa Lindsley, a AFSCME director, said the vote on splitting chairman and CEO was “pretty high” in favour considering most of the votes were in before the losses were announced last week. A similar proposal last year for an independent lead director got only 11.9% of the vote.

“We’re not saying he should be fired as CEO,” said Lindsley. But the “stakes were too high to continue business as usual,” she told shareholders. “An all-powerful CEO is his own boss,” she said. “Looking for an infallible CEO is a fool’s errand.”

Read more at the Guardian…

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JPMorgan Chase is expected to accept the resignation of one of the highest-ranking women on Wall Street after the bank lost $2 billion in a trading blunder, a person familiar with the matter said Sunday.

The bank will accept the resignation of Ina Drew, its chief investment officer, the person told The Associated Press, speaking on condition of anonymity because the person was not authorized to discuss the decision publicly.

Drew, 55, one of the highest-paid officials at JPMorgan Chase, had offered to resign several times since CEO Jamie Dimon disclosed the trading loss on Thursday, the person said. Pressure built on the bank over the weekend to accept.

At least two other executives at the bank will be held accountable for the mistake, the person said.

The casualties come as JPMorgan, the largest bank in the United States, seeks to minimize the damage caused by the $2 billion loss. Investors shaved almost 10 percent off JPMorgan’s stock price on Friday.

Dimon has said the mistake will complicate the efforts of banks to fight certain regulatory changes three years after the financial crisis.

JPMorgan’s disclosure has led lawmakers and critics of the banking industry to call for stricter regulation of Wall Street. Many post-crisis rules governing risk-taking by banks are still being written.

Drew oversaw the division of the bank responsible for the loss. She was paid $15.5 million last year and almost $16 million in 2010, making her one of the highest-paid officials at JPMorgan, according to a regulatory filing.

Drew declined comment through a bank spokeswoman. Kristin Lemkau, a spokeswoman for JPMorgan Chase, also declined comment. The Wall Street Journal reported earlier Sunday that Drew and two other executives were expected to resign soon.

Read more at Business Week….

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