Wall Street Is Our Main Street (Part 2)

So, heres how things went down in reality (and this is the point behind this article in the NY Times today)

1. Banks - e.g. Countrywide - collected mortgages of extremely dubious provenance (Remember NINJA loans?)
2. The banks then packaged these loans into Mortgage Backed Securities, usually under New York Law (for various reasons).  The problems here were varied, but included
1. They guaranteed that the mortgages were all at least of a certain quality.  e.g., the NINJA mortgage was actually a AAA rated mortgage.
2. They usually didn't actually transfer all the mortgages over to the security in time.  Slightly trickier, but according to New York law, the mortgages needed to be transferred (signed, checked, stamped, etc.) over to the security within 90 days (or thereabouts) for the security to be valid.  If it wasn't transferred, there is a tax penalty of 100% on the security.  This is to prevent people from playing silly buggers with trusts - e.g. if you created a trust then the assets in the trust were any assets that were transferred in at the time of creation.  If you tried to transfer stuff in 5 years later to beat the taxman, the taxman confiscated all the new stuff you put in.  Thing is, they were packaging up so many mortgages (10s of thousands), nobody had the time to spend days per mortgage doing the paperwork .
3. Sometimes they didn't transfer the mortgage at all, and instead used the same mortgage in multiple securities, or for other loans.  Yeah, pretty bad.
4. The paperwork on the mortgages that were transferred was busted.  There is supposed to be a complete *physical* list of annotations to the docs showing chain  of title (to prevent people from showing up with "magic paperwork" that sez. they now own City Hall...).  This never happened.  Literally.  Never.  Happened.  When the mortgages went from security to security, they never did any of the intermediate stuff, and only when the place got foreclosed did they get around to 'backfilling' the stuff (robo-signing came from this).  One problem here - its illegal.  And not just from a paperwork perspective.  Its a real problem, since lacking a chain of title, You cant really prove who owns the property!
3. The third party banks that were supposed to validate all these transactions (e.g., Bank Of New York Mellon) affirmed that everything was good, kosher, yes-siree-bob, without actually checking.  Which means they are now on the hook for vast damages for everything in the above list

Sooo, what you are seeing in this article is the Treasury/Fed pressuring the NY Attorney Gen to *ignore* all the stuff above, shove it under the carpet, because, you know, banks are important, and Too Big To Fail.

Now you know....