“What they are basically saying is they can forge an assignment and there is nothing the citizen or court can do about it. It is a brazen attempt to legalize robosigning,” says Hertel. “It’s just another example of Fannie Mae thumbing its nose at the American people, and unfortunately while they are under federal bailout we are paying for it.”

This is happening in the case of a Haslett man who suffered a stroke and fell behind on his mortgage payments. As a result, Flagstar Bank and Fannie Mae foreclosed on him and are now in the final stages of evicting him from his Haslett home, says Hertel.

Lawyers representing Flagstar and Fannie Mae put the issue this way in a court filing:

“In this case, Flagstar was and always has been the foreclosing party. MERS assigned its interest in the mortgage to the note holder. The defendant lacks standing to challenge the assignment as the defendant was not party to the assignment. The only party that may object to the language of the assignment is MERS or Flagstar Bank. Because defendant is not a party to the assignment, the defendant cannot challenge the assignment. Further, the Defendant expressly allows MERS to assign the mortgage at any time without notice per the mortgage itself.”

By this reasoning, Hertel says that he has no way to assist homeowners who are being victimized by fraudulent filings, such as robosigned documents his office has been uncovering since April. He has turned dozens of such robosigned documents over to Attorney General Bill Schuette and the FBI. Hertel has also been holding foreclosure town hall meetings across Ingham County, including one Wednesday evening in Webberville

Hertel has filed a formal statement with the court in the Haslett case challenging these arguments.

“Without the ability to challenge in court the validity of documents that appear facially valid, but which are actually fraudulent, our land records system will degrade into an unreliable and meaningless stack of paper in which wrong-doers can commit fraud upon the people of this state with impunity.”

“Basically they are saying I have no choice but to accept documents I know are criminal,” says Hertel. “I believe this is arrogance beyond belief and is them basically saying we can commit fraud and you can’t challenge it. In other words robosigning is fine.”

The 30-second spot, which features attorneys, sheriffs and sergeants of all political stripes digging into Scott for pleading the fifth 75 times when questioned about his role in a Medicare billing fraud scheme in which his company was indicted, is pretty damning. It also shows a potential opening for Sink to outflank Scott on the issue of law enforcement and appeal to conservative voters in this area. Sink’s Democratic Party affiliation might make her chances slim were she running for Senate, but in state office contests there’s generally still a little more leeway for candidates to nab votes across the political aisle.

From the SEC’s press release:

The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.”

The settlement was widely expected. And given its timing on the day of the passage of Dodd-Frank, it underscores the need for good regulators. In this case, Goldman seemingly got off easy, and it is one of few banks dinged for what Wall Street’s own have described as a pervasive business practice. The Dodd-Frank bill gives enormous power and discretion to regulators. But it cannot make them do their job well.

Both the debt commission and Levin commission have released prepared remarks as well.

In today’s prepared testimony, Ben Bernanke argues that the government needs to fix its tax code and cut entitlements, or else face fiscal doom:

[The] federal budget appears set to remain on an unsustainable path….Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies….

The commission will have the difficult job of weighing the economic, social, and other benefits of these [entitlement] programs and comparing the implications of cuts in these areas against other means of closing the fiscal gap. Choices regarding Medicare, Social Security, and other spending programs cannot be made in a vacuum but must be combined with decisions about how much revenue the government will raise and how it will raise it. No laws are more basic than the laws of arithmetic: For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run.

And here are the Goldman testimonies. On the first panel are Daniel Sparks, former head of the mortgages department, Joshua Birnbaum, former managing director in structured products, Michael Swenson, managing director in structured products, and Fabrice Tourre, indicted in the Securities and Exchange Commission civil fraud case against Goldman Sachs and executive director in structured products. On the second panel are David Viniar, Goldman’s chief financial officer, and Craig Broderick, the chief risk officer. And on the third and final panel is Lloyd Blankfein, chief executive officer.

Tourre argues, “I deny — categorically — the SEC’s allegation. And I will defend myself in court against this false claim,” and goes on to detail that he made full disclosures about the structure of the mortgage-backed securities deal to the client who took the losing half of the bet.

And Blankfein’s testimony is largely conciliatory, though he says that Goldman has done nothing illegal or unethical with its mortgage products: “While we strongly disagree with the SEC’s complaint, I also recognize how such a complicated transaction may look to many people. To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky.”

The lineup is full of heavy hitters, including Treasury Secretary Timothy Geithner, Fed Chairman Ben Bernanke, former Lehman Chief Executive Officer Dick Fuld and Securities and Exchange Commissioner Mary Schapiro. And several of the prepared testimonies are online in advance of the hearing. Most notably, Fuld’s. The former Lehman head makes some rather extraordinary claims.

First, he argues that Lehman was appropriately capitalized before its collapse: “The world still is being told that Lehman had a huge capital hole. It did not. … Using the Examiner’s analysis, as of August 31, 2008 Lehman therefore had a remaining equity base of at least $26 billion. That conclusion is totally inconsistent with the capital hole arguments that were used by many to undermine Lehman’s bid for support on that fateful weekend of September 12, 2008.” But then again, the examiner’s report does state: “The Examiner concludes that there is sufficient evidence to support a finding of undercapitalization of [Lehman Brothers] as of August 29, 2008.” I am not sure how Fuld squares that circle.

Fuld also argues that he had no knowledge of Repo 105: “Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105 transactions. The first time I recall ever hearing the term ‘Repo 105′ was a year after the bankruptcy filing, in connection with questions raised by the Examiner.” There is probably no way to know whether Fuld knew about Repo 105 or not — but regardless, it is now abundantly clear that he should have known.

He also argues that, in contravention of the Valukas finding, Repo 105 was acceptable accounting: “As I now understand it, because Lehman’s Repo 105 transactions met the FAS 140 requirements, that accounting rule mandated that those transactions be accounted for as a sale. That was exactly what I believe Lehman did. Lehman should not be criticized for complying with the applicable accounting standards.”

Valukas’ testimony is interesting as well. For one, he goes after Lehman’s regulators, including the SEC and the New York Fed: “We found that the SEC was aware of these excesses and simply acquiesced. With no regulator in place that required Lehman to adhere to its risk limits, … Lehman’s risk limits became meaningless.” He later says, “So the agencies were concerned. They gathered information. They monitored. But no agency regulated.”

It seems that might not be the only allegation the bank will have to deal with. Michael Hirsch at Newsweek reports that Sen. Carl Levin (D-Mich.), who heads the Permanent Subcommittee on Investigations, believes there is “another big shoe to drop on Goldman,” without specifying any more details. The panel has been investigating investment banks’ role in the boom and bust in detail, and is due to hold hearings with Goldman executives next week. The unnamed source in Hirsch’s article says Levin plans to reveal the nature of the allegations as soon as tomorrow.

To help explain the legal issues — particularly in light of the upcoming push for regulatory reform in Congress — I spoke with Jennifer S. Taub, a lecturer at the Isenberg School of Management at the University of Massachusetts, Amherst, and a member of the Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform. She formerly worked as an associate general counsel at Fidelity and as assistant vice president for the Fidelity Fixed Income Funds.

I lightly condensed and edited the interview for clarity.

So, on Friday, the Journal reported that a number of major Wall Street investment banks, including Goldman Sachs and Bank of America, are routinely using repo transactions to lower their debt and leverage levels before making their quarterly reports. And I think everyone’s question is: Isn’t that fraud?

That is the question. Thus far, it seems that this is lawful. However, we just don’t have enough facts about what they were actually doing. The SEC is in the midst of an investigation into repurchase agreement-financing transactions at these firms, and we haven’t seen the SEC report yet. These investment banks say that they were not performing any Repo 105 transactions — the kind Lehman Brothers was performing — and that they recorded their repo transactions on their books properly. It seems clear what was going on in Repo 105 is criminally actionable, for example, under the Sarbanes-Oxley Act, which requires that periodic reports fairly represent in all material respects the company’s financial condition. And the question at Lehman is whether this was fair reporting.

Right — looking as an outsider with not much understanding of securities law, looking at Wall Street from Main Street, it seems that even if this wasn’t fraud, it should have been.

Yes, it definitely seems off, even if it was legally OK. I think you can take two paths looking at these transactions. You can say: Is this criminal or not? We can’t determine that yet, we just don’t have enough facts. But then you can say: Even if it is perfectly legal, it still seems that this is an issue because there is the question whether investors were being misled and whether this business model threatens the entire financial system.

These transactions involve very short-term borrowing to finance long-term, illiquid assets. Even Lloyd Blankfein, the head of Goldman Sachs, has described this maturity mismatch as very dangerous. This is especially the case, where prior to the crisis, the investment banks were using short-term, often overnight loans to finance up to 50 percent of the assets they held.

That is why I think that we should not focus exclusively on the question of whether or not this was illegal, but on the point of fact that it is dangerous, because of the magnifying effect of leverage. This was the problem during the financial crisis. If any one firm loaning to you starts to get nervous that you aren’t creditworthy, they pull their financing, all of a sudden, you can’t get loans, you have to sell assets, then everyone is doing the same — you have the same death spiral that seized the credit markets.

To me, in the interest of fairness and deterrence, securing convictions is important. However, I don’t want us to get distracted by what’s criminal and ignore whether what’s “perfectly legal”  makes us unstable.

And you’ve done some work describing how these repo transactions came to be a systemic risk problem — describing their dramatic growth around 2005, as possibly due to a change in the U.S. bankruptcy code. Could you explain that?

This is a hypothesis, and I need to dig deeper. But, my initial sense is that there is a connection between a recent change in the bankruptcy law and the growth of repo transactions.

Say that you are on the investment side of a repo transaction — you’re the cash-rich investor who is going to loan money overnight or for a week to an investment bank, who will give you Treasuries or other collateral. If you’re the investor, you want to make sure that if the other side can’t give you back the cash the next morning or next week, you can keep the collateral. Investors are also concerned that even if they hold onto that collateral, if the bank goes into bankruptcy, they might not be able to keep it.

When a company files for bankruptcy, something called the “automatic stay” comes into effect. The trustee (or the debtor-in-possession) stops all transactions. He can freeze almost anything. But, that isn’t actually true for everybody. If you’re a “secured creditor,” the freeze does not apply to you. In addition, the ability for the trustee to claw back your collateral is prevented. And one way to be a secured is to be in possession of collateral whether directly or through a custodian bank. That means that investors who loan through repo are in a better position than other kinds of unsecured lenders.

But if I loaned to you through repo — say I gave you $1 billion in cash, and you gave me $1.01 billion in collateral — I get to keep that collateral. If you’re a secured creditor you feel comfortable lending, even in really bad circumstances. And repo transactions are secured.

But it wasn’t always like that? Something changed to make repo a secure way to lend?

Right. Before 2005, where the bankruptcy code covered repurchase financing, it was only clear that some kinds of repos, backed by a limited list of collateral types, were secured. Only Treasuries, agencies, and a few other types were. If I were going to loan to you overnight, and you gave me Treasuries, then the bankruptcy code said, “Yes, you’re secured and if your business goes under, you get to keep it.”

In 2005, the code expanded to list a whole bunch of other types of collateral such as mortgage loans and interests in mortgage-related securities were. This encouraged the purchase of these assets, because financing through the repo market was more available. That meant, if I have a lot of money to park overnight, I’m willing to take not just Treasuries but these other riskier assets as well. I am exploring whether there is a connection between this legal change and the growth of repo transactions from approximately $4.9 trillion in 2004 to $7 trillion by the first quarter of 2009. That’s a preliminary take, though. And I need to dig deeper.

The law at issue, an amendment to the Wire and Mail Fraud Act of 1988, makes it illegal for public or private employees to “deprive another of the intangible right of honest services.”

What exactly does that mean?

The Washington Post reports today that former newspaper tycoon Conrad Black is arguing that the government should have had to prove that he caused economic harm to his company, in addition to diverting company funds to himself.

Former Republican Alaska state representative Bruce Weyhrauch, meanwhile, argues no state law required disclosure of his private communications with an oil services firm, so he shouldn’t have been prosecuted for it, even though the firm was simultaneously lobbying him on a proposed tax bill.

And former Enron CEO Jeffrey Skilling claims the government failed to prove that he was trying to enrich himself, rather than just save the company, by his fraudulent accounting scheme that ultimately brought Enron down.

Justice Antonin Scalia has said that the law in dispute “invites abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators and corporate C.E.O.’s who engage in any manner of unappealing or ethically questionable conduct.”

If the law is struck down, it could call into question other high-profile fraud convictions. The law was key to the prosecutions of former lobbyist Jack Abramoff, former Illinois governor George Ryan (R) and former Enron executives.

The same law is also central to the government’s plans to prosecute another former Illinois governor, Rod Blagojevich (D), who is accused of trying to auction off President Obama’s former U.S. Senate seat.

Black v. United States and Weyhrauch v. United States will be heard on Tuesday.  Skilling v. United States is scheduled for argument in 2010.

George Washington Law Professor Orin Kerr at The Volokh Conspiracy speculates that the couple is likely to be hit with a charge under 18 U.S.C. § 1036: “Entry by false pretenses to any real property, vessel, or aircraft of the United States or secure area of any airport or seaport.”

That could be coupled with trespass charges and charges for whatever misrepresentation was involved in their sneaking into the dinner. 18 U.S.C. § 1001, notes Kerr, would be one good option, as it’s so broad that it essentially criminalizes lying to the federal government. The law goes after:

Whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully–
(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;
(2) makes any materially false, fictitious, or fraudulent statement or representation; or
(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;shall be fined under this title, imprisoned not more than 5 years . . .

The Salahis will presumably try to get around all that by saying they didn’t actually lie but somehow just left the impression that they were on the president’s guest list. I still think it’ll be tough to get around section (1) of that law, and Kerr explains how the various charges could all be bundled together to make one big fat felony.

Even if the exact criminal violations remain unclear, Kerr notes one thing that’s evident at this point: “Crashing a White House state dinner, and then bragging about it on Facebook, is really really dumb.”

TAPPER:  President Obama last month in Pittsburgh said, of the Afghan elections and the aftermath, “What’s most important is that there’s a sense of legitimacy in Afghanistan among the Afghan people for their government.”  Is there a sense of legitimacy in Afghanistan among the Afghan people for the Karzai government?

GIBBS:  Well, I have no reason to believe there’s not.

Gibbs’ answer actually gets worse from there!

To be clear: there’s a good meta-point here, but it’s slathered underneath this nonsense. Americans should not substitute our judgments about the election for Afghan judgments. It’s the Afghans’ perspective that matters when it comes to the crucial question of governmental legitimacy, not ours. But at the same time, Gibbs has every reason to believe there isn’t a sense of legitimacy about Karzai among the Afghan people, because a full third of his votes were thrown out due to fraud concerns. Hundreds of thousands of ballots!

It will help to have a credible poll taken in the coming weeks to determine what Afghans think about Karzai’s legitimacy. That will actually determine the issue. But please — let’s not act like we’re without common sense.