Eyeing issues on 1MDB Malaysia episode 9

The Third Force

On the 7th of February 2007, HSBC Holdings became the world’s first financial institution to announce colossal losses owing to the unprecedented number of subprime mortgages it had written. The announcement came less than five months after the bank triggered its first ever profit warning by making public the closure of its Arizona and South Carolina based Decision One Mortgage unit

Then the world’s third largest bank in terms of net asset worth, the British multinational attributed these losses to a spike in delinquencies by homeowners who, according to the bank, couldn’t cope with adjustments to their mortgage interest rates. The announcement opened a floodgate of reactions and criticism by investors who were overwhelmed that a bank reputed for its stringent assessment protocols and rigorous standards of performance could have succumbed to such a high rate of defaults.

In a bid to defend the bank, a group of analysts from Dealogic (refer part eight, link below) claimed to trace most delinquencies to people affected by the decline in manufacturing throughout the US. However, documents my team sighted revealed that not only did the bank approve mortgages in neighbourhoods that were destitute of economic activity, those who were granted loans didn’t even come close to meeting the minimum criteria set by the bank.

Years later, on the 5th of February 2016, New York attorney general Eric Schneiderman announced that the bank had been fined USD470m (£325m) for its role in “abusive mortgage practices.” What Schneiderman failed to mention, however, was the billions the bank made through systemic fraud schemes that assisted billionaires, arms dealers, terrorists and drug lords from around the world spirit out dirty money from the Mideast.

Most of that wealth was secretly channelled to anonymous entities based in Panama and the British Virgin Islands that were linked to world renowned billionaire George Soros. Comprising largely of hedge funds, these entities converted most of the ill-gotten wealth into fixed assets in the United States (US) and used those assets as ‘security’ to purchase bonds through the secondary mortgage market.

Because of this, many investment banks across the US began snapping up a large portion of HSBC’s mortgage debt and used the mortgage as backup to issue a large number of bonds. Through this scheme, HSBC was able to pull all its dirty money into legitimate assets without anyone suspecting anything.

The net result was the creation of a housing bubble that soared property prices all across the US, including prices of assets purchased by the hedge funds. In order to inflate that bubble, Soros got the funds to keep on purchasing bonds despite some of them being ridiculously priced. You’re reading all of this for the first time ever in Malaysia Today.

How it all began

When HSBC first announced losses, its Chief Executive, Michael Geoghegan, promised investors that “everything was under control,” that “things would not deteriorate any further.” However, the situation was not as contained as Geoghegan had implied.

My team discovered a trove of documents that revealed how Geoghegan’s team had approved mortgage lending to persons who were already in default with financial institutions. It puzzled my team that HSBC signed these people up anyway. The fact that they numbered in the thousands struck off the possibility that the bank had erred in its judgement or factored in guarantees from third party individuals.

Then, an activity log we stumbled upon revealed that the bank had organised massive promotional tours between the fourth quarter of 2004 and the first quarter of 2005. It shocked my team that the tours were specifically targeted at people from downtrodden communities in rural townships. A separate trove of documents showed clearly how these people were conned into refinancing their homes through adjustable-rate mortgage schemes.

To lure this group, banking officials spoke only of the cash homeowners would receive should they refinance their homes. They deliberately neglected to explain that the mortgages would ‘reset’ after two years at double the interest rate. As a result, many were caught off-guard when interests began to soar late in 2006.

Squeezed for cash, those affected sought recourse to the bank as their mortgages lapsed into defaults. Rather than work out a rescue package, HSBC began serving these people eviction notices, knowing well in advance that they could not afford the legal fees required to trigger lawsuits against the bank.

Seeing no alternative, a large group of defaulters began filing petitions against the bank through interest groups that had links running deep through Washington. When Geoghegan came to know of this, he secretly instructed his subordinates to bulldoze through foreclosure documents without the need to properly review paperwork. By mid 2007, millions of Americans found themselves being chased out of their homes without ever being offered a recourse by the bank.

None of what happened ever made it to the media simply because the bank conspired with US authorities and Soros to keep such information from the public. Basically, not even the CEO of your local bank knows any of this because much of what the analysts reported was fabricated, the same way Clare Rewcastle Brown of the Sarawak Report fabricates stories against 1MDB.

To what extent was Soros responsible for the crisis?

While HSBC may have been responsible for creating a housing bubble, it was not alone in the scheme of things. When prices of property began to soar, a large number of financial institutions got greedy and began writing an unrealistic number of low quality (subprime) mortgages. They were able to do this because a large number of investment banks were willing to purchase those mortgages.

Among institutions that dived into the subprime mortgage scene were JPMorgan Chase & Co (JP) and The Goldman Sachs Group, Inc (Goldman), two of America’s foremost financial institutions by net asset worth (refer part eight). Barclays became the second British multinational after HSBC to enter the scene, while The Bear Stearns Companies (Stearns), Inc became the first New York based financial institution to set up hedge funds just for the purpose.

The funds – the Bear Stearns High-Grade Structured Credit Fund (SCF) and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund (SC-SCF) – were inspired by the bank’s then chairman, James E. Cayne, though many are unaware that it was Soros who got Cayne to set the funds up in 2004.

Stearns acted as an investment bank and snapped up a large chunk of mortgage debt from several financial institutions. Using these mortgages as backup, Stearns went on to issue bonds (securities) and sold them to its own funds and to institutions that were enticed by the booming property market. On the surface, there seemed to be no cause for concern as everything appeared legal and orderly.

However, unbeknown to many, Soros secretly channelled ill-gotten wealth from companies linked to HSBC into the SC-SCF and the SCF. Both the funds went on to convert that wealth into fixed assets through developers linked to Stearns. As the housing bubble ballooned, so did the prices of the assets and the confidence with which the two funds stocked up on bonds through the secondary mortgage market.

Two years later, Soros got the chair and cofounder of The Carlyle Group (Carlyle), Daniel A. D’Aniello, to follow suit by establishing the Carlyle Capital Corporation (CCC), yet another hedge fund that appeared to have an insatiable appetite for subprime mortgages. Like Stearns, the CCC helped Soros pull millions and millions of dollars from Panama and the BVI into legitimate assets through the US financial system.

Now, Soros was not alone. He was assisted by Marcus Ambrose Paul Agius, the current non-executive director of the British Broadcasting Corporation, or the BBC. Marcus joined Barclays on the 1st of September 2006 as its non-executive director and succeeded Matthew Barrett as chairman from the 1st of January 2007.

By then, Marcus had already grown some deep roots within the banking fraternity through his father in-law, Major Edmund Leopold de Rothschild. Edmund was a well-placed English financier and a member of the prominent Rothschild banking family of England. As far as Edmund was concerned, no major decision that concerned investments into hedge or wealth funds could be made by any member of the clan without Marcus’ consent.

Despite him wielding a non-executive position in Barclays, Marcus often got what he wanted owing to his ties with the Rothschilds. At the height of the housing bubble, Soros got Marcus to agree on the establishment of a secondary network of offshore entities that would channel more wealth through the CCC and the Stearns’ funds.

The more wealth these funds got, the more they invested in the booming property market. Marcus convinced Barclays’ top executives to dive into the mortgage market. Because of him, Barclays was able to free a lot of its capital and went on to issue subprime mortgages like there was no tomorrow.

The plan seemed so foolproof that neither Soros nor Marcus foresaw what came after. Days before HSBC triggered its first profit warning, the duo got word that the bank had cheated existing homeowners and loan defaulters into mortgage schemes they could never have afforded. Both Soros and Marcus knew that shit was about to hit the fan.

In June 2007, Soros watched in horror as the Stearns’ funds recorded off-the-chart losses and were forced to dump assets. Trouble spread through Wall Street as JP, Goldman and Citigroup began loaning tons of money to the SC-SCF and the SCF to contain the housing bubble. But that only compounded to losses on all fronts as the bubble suffered a total collapse some time in July 2007.

The market suffered a “complete evaporation of liquidity” and plunged the banking sector into chaos. The problem spread worldwide when currencies became the subject of speculation and experienced sudden and volatile price movements. The 2007 financial crisis had begun, sparking a general run of investor withdrawals due to the worsening financial climate.

Many journalists and academicians vindicated Soros of blame by pointing their fingers at HSBC. But had it not been for Marcus and Soros, millions of Americans would never have lost their homes, while hundreds and thousands of Asians would never have been let off by American multinationals based in the region.

And yes, you’re reading this for the first time ever in Malaysia Today.