OUTSOURCED CYA

We’ve had a few more thoughts on the role of the Trustee in the JPM settlement, as a follow-up to our earlier post (below).

In the second Godfather movie, Willi Cici is questioned by Senator Pat Geary as to the protective procedures that the family had in place when issuing orders to him. Was there always a buffer between Willie and his ultimate boss, to preserve deniability and so protect the Godfather?

“Oh yeah, a buffer. The family had a lot of buffers!”

In my Lehman days, investment banks saw their competitive edge as being “risk management” – the superior ability to analyze and assume risk. Post GFC, that reputation is tainted. But, as a structural matter, we must conclude that the remaining banks in fact manage their risks pretty well. They insulate themselves with a constellation of third-party providers that can absorb risk and obscure liability. There are indeed a lot of buffers.

Re-read Gradman below to see what we mean. In light of how the settlement is shaking out, Gradman nails it, and we are left to conclude that the primary role of BNY is outsourced CYA.

A TRUSTEE DILEMMA (previous post)

BNY Mellon is a global trustee and now in the middle of what may turn out to be the largest civil lawsuit in history. The case is a good illustration of the difficult position that trustees find themselves in as they balance the interests of various constituencies.

Isaac Gradman, in his subprimeshakeout blog http://www.subprimeshakeout.com/2013/07/objectors-siren-song-enchants-during-article-77-proceeding.html, lays out very clearly what is happening. It is such an excellent and clarifying discussion that we are quoting extensively:

“Now, here’s the problem for BNYM.  It has an obligation to act in the best interests of the Certificateholders in each of the 530 Trusts at issue.  Yet, it negotiated a settlement that released the claims of all Certificateholders, without consulting the majority of those holders…

…As Trustee of all 530 Countrywide MBS Trusts at issue, and by virtue of having brought this odd proceeding before Justice Barbara Kapnick in New York Supreme Court, BNYM’s role is to ask the Court to bless Bank of America’s (BofA) settlement and the conduct of the Trustee as reasonable and beyond reproach.  The odd thing is that BofA – the party with the most at stake – isn’t even a party to this proceeding.  Instead, BNYM – which derives no economic benefit from the settlement dollars themselves – is serving as BofA’s foil – arguing for the settlement to be approved, while absorbing any attacks levied by the opponents to the settlement…

… If this proceeding was the full and fair vetting of the settlement that the Trustee held it out to be, why wouldn’t it want all relevant facts to come to light, such as the actual breach rate in the loan pools at issue?  Wouldn’t this allow all Certificateholders to make a fully-informed decision about whether to support the settlement?

More importantly, what good is this opportunity for the objectors to speak out against the settlement if the Trustee isn’t listening?

…Indeed, as Trustee of the 530 Countrywide MBS Trusts, BNYM had an obligation to remain loyal to the Certificateholders in those Trusts and avoid conflicts in carrying out that duty.  However, as I’ve often pointed out and the objectors have argued, the realities were that BNYM wanted to keep BofA happy, as BofA supplied it with over 60% of its MBS Trustee business and promised to indemnify it from any liability if the settlement went through…

…At least one of the objectors, AIG, has stated publicly that it holds an interest in 97 of the 530 trusts at issue.  Should the Trustee be permitted to pre-commit itself to a settlement without speaking to investors like AIG, before all the facts have been examined, and before the settlement has been finalized?”

So many deals wrapped into one settlement! And so many different kinds of Certificateholders involved with each deal! Perhaps it was inevitable that apparent conflicts like those described here would arise.

Still, we believe that transparency is a great healer, and it does seem as if there are questions still to be asked here. What factors led some of the Certificateholders to agree to the deal? Why were more of them not consulted? In fact, why were all of them not consulted? What about minority holders, or smaller players that do not have a great amount of repeat business with BNYM or BoA? Were their interests fully considered?

If these questions are not fully explored, “trust” will be the casualty, and that is not something that will ultimately serve Trustees or their customers.