Eric Schneiderman, co-chair of the newly titled “RMBS working group” investigating financial fraud, appeared on the Rachel Maddow Show last night (the interview starts around the 5:00 mark), and there were a few interesting moments. First you have his assessment of the the fraud involved here which he definitively cast as a pre-crisis issue. Schneiderman, from his public statements, is less concerned with the faulty documentation used to foreclose on borrowers; I would imagine he sees this as the cover-up for the initial crime of securitization fraud and going back even further, origination fraud. He sees that as where the banks’ real exposure lies. And so the working group will look at “all of the conduct that blew up the economy,” not the conduct being engaged in to paper over (literally) all that.

I would think you would want to leverage document fraud, which has a certain amount of exposure, to get back to that original sin by going up the chain as Catherine Cortez Masto is doing in Nevada. And if Schneiderman represented Nevada maybe that would be his choice too. But his perch in New York as the Sheriff of Wall Street is key to his thinking here.

I became Attorney General about a year ago and started digging into this, and realized that New York and Delaware, which is why my collaboration with Beau Biden was so important, we had a unique place. Because all of the mortgage-backed securities were actually pools of mortgages deposited into New York trusts or Delaware trusts. We started looking at what she’s talking about, did they actually get all the paperwork done, things like that. And we realized that there’s a lot of work to do but a lot of potential for proving liability.

Schneiderman turned to the feds on this to acquire resources and jurisdiction, in his words: [cont'd.]

To get this done Rachel, you need resources, you need jurisdiction, and you need will. And when I stood there today with Eric Holder and my other colleagues in government and other prosecutors, I really felt that we had that level of commitment [...] what we realized as we started to go back and forth over the last few months is that we all need to work together. There are situations that, New York’s securities law is a stronger law in some ways than the federal laws. Some of our statutes of limitations, though, are shorter. So we can’t go as far back. The federal statute is longer. We need everyone together. And the folks that we have in on this… the Consumer Financial Protection Bureau, Rich Cordray just, a whole array of new powers just came into existence with his appointment, which the President just got done very recently. That’s a huge addition. We have the Internal Revenue Service in, because there are huge tax fraud implications to some of the stuff that went on. All of the people who are in this, all of the agencies who are designated, working together, can achieve so much more than any one of us on our own.

Schneiderman talked about the “excitement in the room” among the working group, when they realized the scope of their powers. The fact that Lanny Breuer, the Justice Department official and one of the other co-chairs of the working group, didn’t even show up to the announcement yesterday is perhaps an indicator of something less than excitement. As far as resources go, Schneiderman mentioned “hundreds” of people working on the investigation while Eric Holder yesterday designated only 55, and that includes people from US Attorney’s offices. As I said yesterday, that looks light. Holder also said that they are “wasting no time” with this investigation when there’s been an active Financial Fraud Task Force that wasted over two years. And Holder’s statement about “unethical or reckless” behavior that “may not be criminal” is really a troubling perspective.

Over the past three years, we have been aggressively investigating the causes of the financial crisis. And we have learned that much of the conduct that led to the crisis was – as the President has said – unethical, and, in many instances, extremely reckless. We also have learned that behavior that is unethical or reckless may not necessarily be criminal. When we find evidence of criminal wrongdoing, we bring criminal prosecutions. When we don’t, we endeavor to use other tools available to us – such as civil sanctions – to seek justice. My number one to commitment to the American people is that we will continue to devote significant resources to combating financial fraud and be as aggressive and creative as we can be in holding accountable those who, in violating the law, contributed to the financial crisis.

For example, in just the last six months, the Department has achieved prison sentences of 60, 45, 30, and 20 years in a variety of financial fraud cases charging securities fraud, bank fraud, and investment fraud. And, just last month, I announced the largest fair lending settlement in history, resolving allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against minority borrowers from 2004 through 2008.

“Resolving allegations.” Not actual crimes, but “allegations,” because the Justice Department in their settlement did not even force Countrywide to admit wrongdoing. The prison sentences, above all, went to small-time players, too.

So there’s a real tension here; the federal players in this are going to have to prove they’re actually serious about a legitimate investigation. I’m not convinced that the will, the key third leg of the stool in Schneiderman’s mind, is there among his federal counterparts.

But I want to pull out the sentence I highlighted previously in Schneiderman’s interview which shows that at least he is thinking creatively about this. He said that “We have the Internal Revenue Service in because there are huge tax fraud implications to some of the stuff that went on.” I suppose he could be talking about a few different things (like the tax evasion from the banks using MERS instead of recording mortgage transfers at public records offices and paying a fee), but my guess is he’s talking about REMIC claims.

REMICs are an acronym for Real Estate Mortgage Investment Conduits. When you’re talking about mortgage pools used in securitization, you’re talking about REMICs. And REMICs have special tax treatment; they are exempt from federal taxes provided they only invest in “qualified mortgages” and other permitted investments. Here’s the important part: under the 1986 Tax Reform Act, the REMIC must receive all of its assets in the trust within 90 days and the assets have to be performing (not in default). Any REMIC violations make the vehicle subject to a penalty tax of 100%, with additional penalties as they apply.

Well, the strong suspicion is that, during the bubble years, the trustees did not properly convey the mortgages to the REMICs. Which makes the whole investment vehicle a massive tax fraud. That’s a huge level of exposure. You’re talking about $3 trillion in REMICs. And as Yves Smith wrote about this issue last April, it would eventually go back to the banks:

If the IRS were to find any of the questionable practices to be violations, they’d lead to widespread and large assessments against mortgage investors. That in turn would spawn the mother of all litigations by investors against the originators and trustees. That would blow up the mortgage industrial complex and put us back in a financial crisis. That is the last thing the officialdom wants to happen [...]

We’ve argued that if the notes were not properly conveyed to the trusts (assuming they are New York trusts, which is the governing law in the vast majority of cases) then the trusts will have a big problem with foreclosing, since New York trusts don’t have any discretion and there is no mechanism for getting the notes into the trust other than shortly after it was formed.

But that particular concern isn’t germane from a tax perspective. State law doesn’t determine characterization of an entity for federal tax purposes. So, for example, even if a taxpayer said he a partnership and planned to set up a state law LLC as the partnership vehicle but failed to take all the legal steps, but did have a contract with a partner, and both has acted according to the partnership tax rules and reported income them on their tax returns accordingly, it would most likely still be treated as a partnership in spite of the lack of a state law legal vehicle.

The IRS has an ENORMOUS amount of available power here. And Schneiderman cited it specifically. That could be a powerful lever to get the kind of real accountability on this issue. When Yves looked into this in April she concluded that the IRS wasn’t interested in opening this can of worms. And yet they’re part of this working group, I would assume at the insistence of Schneiderman.

In short, lots of potential avenues of inquiry. The working group already issued subpoenas to 11 banks. We’ll see if these tensions emerge and how that impacts the investigation.

Could be a crazy weekend, so light posting. Or, maybe not!

• Man is Larry Summers a tremendous asshole. This is the must-read of the day.

• So we have a better name for the Schneiderman panel or UMOSA or whatever. The Justice Department is calling it the Residential Mortgage-Backed Securities Working Group. So RMBS Working Group is, well, workable. Incidentally, check out Eric Holder letting his slip show here in his remarks today:

Over the past three years, we have been aggressively investigating the causes of the financial crisis. And we have learned that much of the conduct that led to the crisis was – as the President has said – unethical, and, in many instances, extremely reckless. We also have learned that behavior that is unethical or reckless may not necessarily be criminal. When we find evidence of criminal wrongdoing, we bring criminal prosecutions.

• The White House’s blueprint for financial aid is here. As per the State of the Union, the big story is this idea of linking financial aid to college affordability. If the college isn’t affordable, it doesn’t get as much aid.

• France is getting out of Afghanistan a year early, in 2013. And because this ties in to all the NATO drawdown plans, it could really throw a wrench into the 2014 plans. This time in a good way.

• I’m thinking everyone working in private equity firms right now wishes the world never heard of Mitt Romney.

• Romney, by the way, is pulling away in Florida, even as Newt Gingrich extends his lead nationwide. Newt’s only chance is this hard negative ad.

• The Senate has almost finished up work on a bipartisan surface transportation bill, but the House version is really horrible, so it’s unlikely there will be agreement this year.

• Problem: we’ve locked up so many people for so long that the prison population has become elderly and medical costs are soaring. Tough on crimes bites back.

• Here’s a real scandal from Murray Waas: how ex-regulators helped Ponzi schemer Allen Stanford evade prosecution for years.

• TARP just goes on and on and on.

• Rick Perlstein’s latest for Rolling Stone, on Newt Gingrich and the 1994 Contract With America, and how you can trace its roots back to Ross Perot.

• BP and its partners on the Deepwater Horizon rig are still arguing over financial responsibility.

• Cory Leibmann has lots of questions for Scott Walker.

• Thirty-seven people died in protests in Syria, as Russia said it would not agree to any Security Council resolution calling on Bashar al-Assad to step down.

• Yes, Ron Paul approved those newsletters. It was a business operation, why wouldn’t he?

• Pretty sure that Wolf Blitzer doesn’t know a damn thing about the foreclosure crisis. You’ve seen him on Jeopardy, right?

• Mortgage originations from 2010 and 2011 are not defaulting because lending standards have returned to something approaching reality.

• Today was Fitch’s turn to cut credit ratings for Eurozone countries. Spain, by the way, is also destroying itself through austerity.

• This doesn’t look like a serious peace offer on the part of Israel. But I promise not to call whoever proposed it an Israeli official, because that would be a baseless smear.

• Interesting back and forth between Matt Yglesias and Kevin Drum on trade and manufacturing.

• At least Rick Perry got the grifter part of running for President right.

• The whole posthumous conversion to Mormonism thing is completely bizarre. And yes, Mitt Romney practiced it.

This isn’t how conservatives wanted things to play out. They wanted to use the post-Tea Party period as a time to crush union membership. They sought out a coordinated strategy, in places like Wisconsin and Ohio and Indiana and Tennessee and Oklahoma and Idaho, to roll back and bust up unions. And despite all that, despite the millions in expense that the labor movement doled out to defend themselves, unionization actually went up slightly in 2011.

Overall union membership increased by 49,000 from 2010 to 2011, including 15,000 new 16- to 24-year-old members, according to new U.S. Bureau of Labor Statistics data out this morning. An increase of 110,000 in the private sector was partially offset by a decline of 61,000 in the public sector, making the rate of union membership essentially unchanged at 11.8 percent, with some 14.8 million U.S. workers union members.

Public-sector density increased from 36.2 percent to 37 percent though November 2011. Private-sector union membership remains at 6.9 percent. The largest increases in union membership were in construction, health care services, retail trade, primary metals and fabricated metal products, hospitals, transportation and warehousing.

The Center on Economic and Policy Research has more details. I would assume that the drop-off in the public sector comes mainly because of the shrinking public sector generally; indeed the share of unionization in the public sector increased, which is pretty incredible considering the union-busting efforts throughout the country.

We’re not seeing in the numbers a return to the union valhalla of the 1950s and 1960s. But if unions could increase their membership despite a series of assaults, imagine what could happen with friends of labor in policymaking positions and with new rules designed to help collective bargaining rather than harm it.

I’ll give AFL-CIO President Richard Trumka the last word:

The ability to come together for a voice on the job gives working people the power to solve workplace problems, to innovate on the job, and to improve their working conditions. Collective bargaining brings democracy inside the workplace door and fosters a fair, strong middle class economy. That’s why the labor movement is working with the next generation of workers, as well as emerging industries, to ensure that each person has a voice in the workplace and an economy that restores balance.

Right on.