See No Evil, Hear No Evil, Speak No Evil

The Massachusetts Supreme Judicial Court handed trustee banks a disappointing decision on Friday; Massachusetts Ruling on Foreclosures Is A Warning to Banks.  Gretchen Morgenson of the NYTimes has been a prescient observer of, and commentator on, the subprime frenzy, subsequent collapse and its aftermath.  In today’s paper, she reports on the  court’s ruling that U.S. Bancorp and Wells Fargo did not have proper title to mortgages when they instituted foreclosure proceedings.

Yes, everywhere along the way in the securitization process, people and institutions were sloppy.  Why pay attention to detail when there was so much money to be made?

However, there is a critically important sub-text here, which has far greater impact on our financial well being than simply paying attention to details.  The real issue is that the role of serving as a trustee has been dumbed down over time so that trustees claim, “not my job”  when it comes to assuming responsibilities for their actions.

The securitization process is a lengthy one with many parties participating.  However, at the end of the day, there is a trustee of a trust, and the trust holds certain assets.  In this case, notes and mortgages.

Scrape away all of the financial engineering and mumbo jumbo.  At a very minimum, a trustee must know what assets it holds and is responsible for the management and disposition of the assets.  This is not a new concept based upon fancy algorithms or computer models.  To the contrary, it is a basic principle of trust law dating back to the development of the common law in England.

And yet, in defending it’s actions, a spokeswoman for Wells Fargo, Vickee J. Adams states, “As trustee of a securitized pool of loans, Wells Fargo expects the entities who services these loans to abide by all applicable state laws, including those laws that govern foreclosure sales.”

There you go ….it’s the other guy’s fault!   Great legal defense.

Unfortunately, as a fiduciary, it is not that simple.  Yes, trustees are often authorized to hire service providers.  And, yes, trustees can make reasonable assumptions about the service providers.  But, trustees have an obligation to conduct due diligence on the service providers they hire and they have an obligation to monitor these service providers as they perform their duties.  They simply cannot hire someone and then walk away from this responsibility.

Serving as a Trustee requires the exercise of judgment and discretion.  The privilege of holding assets in trust, on behalf of another party, carries with it the obligation to act prudently. There is no way to get around this.

The problem is that the role of the institutional trustee has been dumbed down over the past decades.  The large trust banks sell their trust services as if they are simply record-keeping services.  Both the banks and their customers discount the obligations and responsibilities of serving as a Trustee.

In fact, with the blessing of ERISA, a whole new role has developed known as the “directed trustee”.  These are trustee’s whose roles are so limited  that they simply follow the directions of other fiduciaries.  It is this directed trustee role which has greatly diluted the concept of the discretionary trustee.

And so, we have ended up with a network of institutions who at one time proudly served as fiduciaries and exercised discretion on behalf of their clients, but now do everything to limit their roles.  Therefore it is now easy to point the finger of blame at someone else.

Our financial system is deeply in need of responsible individuals and institutions ready to assume fiduciary roles and discharge those responsibilities prudently.

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