KETR

The Return Of Toxie

Sep 11, 2011
Originally published on September 13, 2011 3:52 pm

Last year, as part of a reporting project, we bought a toxic asset — one of those complicated financial instruments that that nearly brought down the global economy.

We spent $1000 of our own money and bought a tiny slice of a bond backed by mortgages. We paid just a fraction of what it originally cost. It was such a good deal, we thought maybe we'd make a few bucks, which we'd give to charity.

That didn't happen. The mortgages in our toxic asset — Toxie, to those who knew her well — went bad so fast that we wound up losing half our money. Last fall, we declared Toxie dead.

Recently, though, a lawsuit was filed against the bank that put Toxie together. If this lawsuit is successful, we could conceivably receive the original face value of our slice of the toxic asset: $75,000.

In other words: Toxie lives!

Just a few days after the Toxie lawsuit was filed, the federal government got in on the action. The agency that oversees Fannie and Freddie filed 17 separate lawsuits against some of the world's biggest banks.

The government lawsuits (which we explained at length in this post) make pretty much the same arguments as the lawsuit over our toxic asset: The mortgages in the assets were much shoddier than promised.

The Toxie lawsuit describes a mortgage loan for $737,000, where the borrower claimed to earn $200,000 a year at a "communications company."

That borrower actually earned zero dollars that year, according to documents cited in the lawsuit.

"A couple of additional questions — like a paystub, or a call, or even just to see if the company existed — an extra two minutes of work just didn't occur," says Wit Solberg's an investor who helped us buy Toxie, and who bought himself another slice of the same toxic asset

A review of 786 mortgages backing our toxic asset showed that two thirds of them had been misrepresented in some way, according to the lawsuit.

The loans were initially issued by Countrywide, which was acquired by Bank of America in 2008. The lawsuit says B of A should buy back the defective mortgages at full face value — over $2 billion.

Bank of America sent us a statement saying it's not legally obligated to buy back all the mortgages.

The bank may argue that some of those people who took out those mortgages lied about their income, or their job, according to Jacob Frenkel, a lawyer we spoke with for this story.

Frenkel says this and other cases are likely to settle out of court.

Whatever the outcome, the lawsuits against the banks probably aren't going to satisfy the public's desire for justice, according to Frenkel.

"The path to resolution most of the public wanted to see was bank executives in handcuffs," he says. "That did not happen."

Prosecutors, Frenkel says, just didn't have the evidence for large-scale criminal cases.

Now we're left with lawsuits that aim to divide up the money that's left.

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DAVID GREENE, host:

From a lethal pandemic on the screen to real life toxic assets. We're talking about these complex financial instruments, which are created when home mortgages are bundled together. Lots of people lost money buying the assets, and when people lose lots of money, they often sue. In the last week of August, more than a dozen lawsuits were filed against the big banks that helped put these toxic assets together.

Our Planet Money Team found itself in the middle of one. Here's Chana Joffe-Walt and David Kestenbaum.

DAVID KESTENBAUM: We didn't mean to be part of one of these lawsuits. Last year, as part of a reporting project, we bought a toxic asset. One of those complicated financial instruments that nearly brought down the global economy.

CHANA JOFFE-WALT: We spent $1,000 of our own money on our toxic asset, which was just a fraction of what it originally cost. It was such a good deal we thought maybe we'd make a few bucks, which we'd give to charity. Instead we lost half.

KESTENBAUM: Now, however, if this lawsuit is successful, we might have a lot of money to give away, its possible we could receive the original face value of our investment, $75,000.

Mr. WIT SOLBERG (Former Trader, Wall Street): Can you believe we were baffled. We were all very surprised.

JOFFE-WALT: That's Wit Solberg, a toxic asset specialist who helped us buy ours. He read about the lawsuit involving our toxic asset in the Wall Street Journal.

KESTENBAUM: As toxic asset investors go, we're pretty unusual. Most of these toxic assets were bought by bigger players with real money; pension funds, insurance companies. They're usually the ones suing.

JOFFE-WALT: Just last week, the government got in on the action, filed 17 separate lawsuits, against some of the world's biggest banks. The government owns mortgage giants Fannie and Freddie, which lost a lot of money on toxic assets.

KESTENBAUM: The government lawsuits make pretty much the same arguments as the lawsuit covering our toxic asset - that the banks cut a lot of corners when they put these things together.

JOFFE-WALT: Wit Solberg flips through the lawsuit when we had him on the phone.

KESTENBAUM: Page 21 describes a mortgage loan for $737,000. The person claimed to earn $200,000 a year at a communications company.

JOFFE-WALT: The person actually earned zero dollars that year, according to other documents cited in the lawsuit. Wit says it looks like Countrywide, which gave out the loan, just didn't do its job.

Mr. WIT: A couple of additional questions, like a paystub or, you know, a call or even just to see if the company existed. An extra two minutes of work just didn't occur.

KESTENBAUM: And it didn't occur over and over again. According to the lawsuit, a review of 786 mortgages backing our toxic asset, showed that two-thirds of the mortgages, had been misrepresented in some way.

JOFFE-WALT: And because of that the lawsuit is asking Bank of America, which now owns Countrywide, to buy back the mortgages at full value. The total value of the mortgages at issue here, over two billion dollars.

KESTENBAUM: Jacob Frenkel, a lawyer at Shulman Rogers, says this is just one lawsuit out of many against the big banks.

Mr. JACOB FRENKEL (Lawyer, Shulman Rogers): If the plaintiffs were to get judgments in the full amounts for what they're demanding, they could cripple the American banking system.

JOFFE-WALT: Bank of America sent us a statement, saying it is not legally obligated to buy back all the mortgages.

KESTENBAUM: Jacob Frenkel says one argument the banks might make: Some of those people who took out those mortgages, they lied about their income or their occupation or their debts. It's not our fault.

JOFFE-WALT: Frenkel says these cases are likely to settle out of court. And the banks will do their best to pay as little as possible. Investors will do their best to get some of their money back.

KESTENBAUM: Either way, Frenkel says. The lawsuits probably are not going to satisfy the general public's desire for justice.

Mr. FRENKEL: The path to resolution most of the public wanted to see was bank executives in handcuffs. That did not happen.

KESTENBAUM: Prosecutors, he says, just did not have the evidence for large-scale criminal cases.

JOFFE-WALT: And now, we're left with lawsuits, trying to fairly divide up the money that's left.

I'm Chana Joffe-Walt.

KESTENBAUM: I'm David Kestenbaum, NPR News.

(Soundbite of song, "Toxie the Toxic Asset")

Mr. JAMES GAMMON (Singer): (Singing) She's Toxie the toxic asset. We love every complicated facet. She's your pet ZMO, but you'll never know if this cash flow is your last yet...

GREENE: It's MORNING EDITION from NPR News. I'm David Greene.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Transcript provided by NPR, Copyright NPR.