Excerpts:
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
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The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.
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What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.
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It is truly amazing that right now everyone in the country is deferring to Paulson [current US Treasury Secy, and former head of Goldman Sachs} and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.
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We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.
3 comments:
Gee, I should definitely close my bank account in the states.
Bee, there's an old saying that may or may not still be relevant, which notes that 'the rest of the world catches a cold when the U.S. sneezes.'
Arun, I can't believe that they still use the term "recession" in context with bank failures, because the "D" word, is much more closely associated to this kind of occurrence.
Me thinks that they'll never tell us the truth... all the way to hell. And guess who will still be left at the top of the pile of crap to put things back together?...
hint: It's the same bunch of greedy criminals that caused it, as usual.
Today's Goldman smells of yesterday's Enron, no doubt!
But while the fraud at Enron was visible on the surface, one must peel back the surface before seeing the fraud at Goldman...
What's worse, the benefactors of mortgage fraud are now in key positions in government as beneficiaries of this fraud. Needless to say, this is akin to the fox guarding the hen house--at its best for the defrauders, but at its worst for the victims of fraud!
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