Whistleblower: Wall Street Has Engaged in Widespread Tampering of Mortgage Funds

Wait until Propublica learns that lenders are underwriting based on pro-forma forward Adjusted EBITDA net leverage, not past EBITDA leverage.<p>The whole idea of Adjusted EBITDA is insane to me. We add back &quot;one-time,&quot; expenses and other items, but the underlying business ends up seeing similar &quot;one-time,&quot; costs every year.<p>The result is that companies often borrow at a leverage ratio that looks 30% smaller than it actually is. This year we are doing &quot;COVID-19,&quot; addbacks. What the fuck? You lost money because of COVID, so add it back to EBITDA so that you are still meeting your loan covenants? Lenders are in on it too, because they don&#x27;t want to see their clients default and deal with bankruptcy or taking control of the assets.

This makes complete sense and there’s no question commercial restate is turning into a bit of a house of cards.<p>In some big cities you have many large buildings where their primary tenant was WeWork, which appears to be imploding, and now adding onto that the whole covid WFM shift where companies are starting to cancel and downsize future leases. When you start to dig into the revenue streams behind these buildings and the owners ability to pay the mortgage back it starts to look really shady in some cases.<p>Most buildings need a fairly high percentage of the floors to be leased out for the building rent to cover the mortgage and moving forward it seems a lot of buildings will struggle to hit that number. It’s going to be an interesting time for commercial office real estate.<p>On the plus side if you’re looking for office space there are going to be some amazing deals!

It’s sort of amazing how easy and widely accepted it is to submit, under oath, completely different corporate financial attestations depending on whether you are dealing with the IRS, the SEC, or FINRA.<p>I can imagine 50 years ago, when they all got the ability to check electronically, and knew that everybody was cheating, but they couldn’t do anything because it would it would crash the economy, and also these computers were taking their jobs, so the agencies decided to be willfully ignorant and inefficient and setting rules according to whatever people were doing already. So now it’s like, “OMG we never saw this coming!”

I find that a bit surprising. I used to structure CMBS transactions before the financial crisis and even then all income from properties would be ticked back against the leases and the dataset verified by an independent auditor.<p>In fact the CMBS market blew massive holes in banks balance sheets in 2008 but not because of fraud, but because the commercial property market tanked so much (and will likely not do much better after covid).<p>So it is always possible that underwriting standards drifted downward, and there are perhaps different standards in the US than Europe. But I find this story surprising and unlikely and would like to see more before forming an opinion.

This is in part due to a search for yield (same as we saw with the housing crisis). There is such a glut of capital that it will invest in anything - even risky CMBS - without performing adequate due diligence. If you don&#x27;t invest, someone else will. Unfettered &quot;quantitative easing&quot; distorts the price of risk. This is the not-so-surprising consequence.

&gt; Flynn has amassed “materials identifying about $150 billion in inflated CMBS issued between 2013 and today,” according to the complaint.<p>[...]<p>&gt; The SEC has the power to fine companies and their executives if fraud is established. If the SEC recovers more than $1 million based on Flynn’s claim, he could be entitled to a portion of it.<p>Hope he got a good lawyer!

Why do people keep expecting other people to act against their best interests? Why are buyers relying on sellers’ valuations? And given these are billion plus dollar products transacted between professionals, why does Buyer Beware apply?

I love how the SEC&#x27;s own lease is possibly mired in the scandal. What a mess. We need another Teddy to clean it all up.

Every MD running a trading desk comes to work and asks “who’s stealing from me today?” That’s the Wall Street mentality.

What if Flynn publishes a list of the companies involved and the timeframes, we construct a list of the executives, directors, and mangers involved, and blacklist them?<p>No business with any company that employs even one of them, ever again. Starting today.<p>Damn the chaos, signal that this kind of profiteering and crash-building is not tolerated.

&gt; Investors don’t comb through financial statements, added Riordan, who used to manage the CMBS portfolio for retirement fund giant TIAA-CREF. Instead, he said, they rely on summaries from investment banks and the credit ratings agencies that analyze the securities. To make wise decisions, investors’ information “out of the gate has to be pretty close to being right,” he said. “Otherwise you’re dealing with garbage. Garbage in, garbage out.”<p>Is there a way to add incentives so investors don’t analyze information from summaries?

&gt; The historical profits reported for some buildings were listed as much as 30% higher than the profits previously reported for the same buildings and same years when the property was part of an earlier CMBS. As a rough analogy, imagine a homeowner having stated in a mortgage application that his 2017 income was $100,000 only to claim during a later refinancing that his 2017 income was $130,000 — without acknowledging or explaining the change.<p>TL;DR

Carl Icahn&#x27;s short of the CMBX is looking more and more clever.<p><a href="https:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;carl-icahn-placing-a-big-bet-against-mall-owners-11574201244" rel="nofollow">https:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;carl-icahn-placing-a-big-bet-ag...</a>

The difference with the other capitalistic system is that the guys from Deutsche Bank are going to jail when this kind of shenanigans is going on. Bankers in the west do not have skin in the game.

Combine this with the fact that many business no longer exist and the new normal of the restaurant industry, I would expect to see the commercial market crash pretty hard.

Rating agencies - S&amp;P, Moodys, Fitch - are in bed with those they rate. It was a time bomb. It blew up in 2008. It’s a time bomb again.

This reads like 2008 all over again. How bad is this?

This will continue as long as human beings are in the loop. If it were automated, code-reviewed and made secure we might have a system that could follow the rules.

Am I the only one not surprised at all by this report?

Instead we just assume this is happening and extend 0% credit to all the investment banks so that they don&#x27;t blow up on their fraudulent bets and shady accounting<p>Since we&#x27;ll never prove anybody had the necessary knowledge of breaking the law and ignorance is an excuse when you write the law specifically that way