City of Stockton, CA Is Declared Bankrupt by Federal Judge, Despite Protest from Creditors

Who are the creditors? Wells Fargo Bank, Franklin California High Yield Municipal Fund, Franklin High Yield Tax-Free Income Fund.

Wells Fargo has been seizing Stockton's public properties for lack of payment to the bondholders. It has already taken the new City Hall and three parking garages.

As often is the case for troubled US municipalities, Stockton has lost big in the interest rate swaps with Wall Street banks. Here's the city's document on bond deals and multiple interest rate swaps with Wells Fargo and Merrill Lynch over the municipal wastewater treatment system, entered on June 5, 2007.

That was about the height of the real estate bubble. Slightly over one year later, the entire financial system was on the verge of collapse, and Ben "Blackhawk" Bernank cut the rate to near zero. Stockton, as with many other cities across the US, have been stuck with paying interest to the banks at a high, fixed rate while receiving peanuts from the banks at a variable rate which remains near zero.

From Reuters (4/1/2013):

Stockton eligible for bankruptcy protection: judge

(Reuters) - The city of Stockton, California, is eligible for bankruptcy protection, a federal judge ruled on Monday, turning aside creditors' arguments that the city was not truly insolvent when it sought protection and had improperly failed to seek concessions.

U.S. Bankruptcy Court Judge Christopher Klein's ruling permits Stockton to proceed with its Chapter 9 bankruptcy protection filing from last June in a case with precedent-setting potential for other cash-strapped U.S. cities.

In a lengthy preamble to his ruling, Klein said Stockton's bondholders had failed to negotiate in good faith with the city prior to its filing for protection. He added the city was "by any measure insolvent" prior to its filing.

Stockton is the largest U.S. city to have ever filed for bankruptcy. Its case is being closely watched in the $3.7 trillion municipal bond market as it is likely to have key implications for other struggling municipal and county governments, their employees and their bondholders.

The city's capital market creditors had argued the city could have done more to cut costs and raise revenues.

Since at least the 1930s, bondholders in most major municipal bankruptcies consistently have been repaid their entire principal. But Stockton is expected - along with Jefferson County in Alabama and San Bernardino in California - to break with that tradition.

Bond insurers Assured Guaranty Corp, Assured Guaranty Municipal Corp and National Public Finance Guarantee Corp were joined by Wells Fargo Bank, the Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund in contesting Stockton's bid for bankruptcy eligibility.

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J.P.Morgan Chase Fighting 10,000 Lawsuits

and $4.5 billion short on reserves to cover the litigation costs, according to the article on The Street yesterday (2/28/11).

The proceedings are the result of "faulty" (fraudulent would be the word) mortgage origination, securitization, servicing and foreclosure processes by the bank, who is the originator, securitizer, servicer, trustee of REMICs all in one, just like other TBTF Wall Street banks:

NEW YORK (TheStreet) -- JPMorgan Chase is a defendant in more than 10,000 legal proceedings and may be $4.5 billion short of reserves needed to cover those costs in a worst-case scenario, the firm said in a regulatory filing on Monday.

The New York-based bank's legal woes range from individual actions against JPMorgan Chase to class actions with "potentially millions" of litigants to "regulatory/government investigations." The suits include common law tort and contract claims, statutory antitrust claims, securities claims and consumer protection claims, the bank said in its 10-K filing with the Securities and Exchange Commission.

...In a conference call last month, JPMorgan CEO Jamie Dimon predicted that securitization lawsuits alone will be a long, difficult battle.

"It is going to be years before this plays out and this litigation is going to be fought almost securitization by securitization," Dimon said. "There is almost no other way to do it."

No kidding, Jamie. J.P.Morgan Chase has inherited the securitization done by Bear Stearns and Washington Mutual, as well as their own.

The article also mentions how the other TBTF banks are faring in terms of litigation reserves:

• Citigroup: $4 billion short

• Bank of America: $1.5 billion short

• Wells Fargo: $1.2 billion short

With J.P.Morgan Chase's $4.5 billion, the total reserve deficit for these four banks is $11.2 billion. Considering Wells Fargo got Wachovia and Bank of America got Countrywide, their reserve shortage look too small.

Particularly for Wells Fargo, as the bank is one of the 3, 4 banks that act as the trustee of REMICs that supposedly hold underlying mortgages. What are the duties and responsibilities of a REMIC trustee? Among others, it is supposed to verify and confirm that the mortgages are properly transferred to the REMIC within the time frame specified in the pooling and servicing agreement, and that the mortgages meet the standard set out in the agreement.

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Wells Fargo Sues J.P.Morgan Chase for Mortgage Documents in REMIC

which, as the trustee of the REMIC, Wells Fargo should have verified when the trust was created.

Bloomberg reports:

JPMorgan Chase & Co.’s EMC Mortgage, facing homeowner lawsuits over foreclosures, was sued by the trustee of a mortgage portfolio for refusing to turn over documents detailing the quality of loans bought by the trust.

Wells Fargo & Co., the trustee, is seeking access to files for more than 2,000 underlying mortgages in the Bear Stearns Mortgage Funding Trust 2007-AR2, according to the complaint filed today in Delaware Chancery Court in Wilmington.

“The trustee has repeatedly requested that EMC provide access to the subject documents,” Wells Fargo said in the complaint. “EMC has played proverbial ‘rope a dope’ and otherwise continued to drag its feet, and has produced nothing.”

Rope a dope? Now that's funny. Isn't that how Wells, J.P.Morgan Chase, Bank of America, et al has been dealing with frustrated homeowners who try to save their homes over the past 2, 3 years?

According to the article, it was one of the suckers who complained to Wells Fargo after having bought a significant chunk of the certificates issued by this particular trust, under Wells Fargo's loving care. The certificates, or mortgage-backed securities, are most likely not backed by mortgages at all, if the industry practice of the past decade is followed.

An investor in the trust, who owns 42 percent of the outstanding face amount of the portfolio’s certificates, questioned the condition of underlying loans

, Wells Fargo said in the complaint, citing an August letter it received from David Grais, the investor’s attorney.

Grais, a partner at New York-based Grais & Ellsworth LLP, represents the federal Home Loan Banks of Seattle and San Francisco and Charles Schwab Corp. in litigation seeking to force banks including Bank of America Corp. and JPMorgan to repurchase mortgage-backed securities because they allegedly misrepresented the quality of the loans.

42 percent. Ouch.

As to the Bear Stearns Mortgage Funding Trust 2007-AR2, here's the last 10-D filing, in January 2008. The trust issued three classes of securities, A-1, 2, 3, B-1, 2, 3, 4, 5, B-IO, XP, R, R-X (the last three did not have initial certificate balance). The underlying mortgages are Alt-A, short-reset hybrid and/or negative amortization - in other words, junk.

Just out of curiosity, I checked to see if there's any info on the securities.

Here's one, A-1 (CUSIP 07401TAA4), as of August 20, 2008, by Standard & Poor loss assessment: Projected loss = 18.84%.

Here's another A-class, A-3 (CUSIP 07401TAC0), downgraded on August 19, 2009 by S&P from B to CCC, and put on a negative watch.

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