2 Big 2 Foreclose--Is The Subprime End Game Approaching?

williambanzai7's picture



After a bad opening, there is hope for the middle game. After a bad middle game, there is hope for the endgame. But once you are in the endgame, the moment of truth has arrived. - Edmar Mednis (Grandmaster)  


I have one central thought of where this fraudclosure fiasco could lead, and this is why everyone should watch very carefully how the various players move their pieces in this subprime middle game.

Up until now, the banks have been making sweeping statements that this all reflects a "technical" glitch in foreclosure processes.

Well, having a posse of State AGs band together to commence a joint investigation is no longer a minor "technical" glitch. Allegations of masses of forged signatures, falsified or fabricated notarized documents,  back dating etc., if true, collectively amount to an institutional pattern of criminal behavior. Having the Justice Department announce it is opening a preliminary investigation raises the stakes even higher.

Being forced to suspend all foreclosures has obvious "material" economic consequences to the CDO note holders.

But having title companies pull out of the residential real estate market because they no longer trust the veracity of bank provided documents presages claims by mortgagors who lost their properties as well as the subsequent purchasers of same. The only way to conclusively cure that kind of problem is to get waivers, and releases from the various claimants wherever they may be or pass retroactive curative laws or laws doing things like creating a bailout fund to indemnify those who are injured (yikes!). You cannot simply say this is immaterial, sprinkle in the word MERS and hope this will all go away.

The CDO note holders will have potential claims stemming from the interruption of non-performing loan processing. Think breaches of the trust servicing agreements and allegations of "gross negligence or willful misconduct", the latter being magical legal hurdle in these types of agreements. However, the much more troubling aspect, is the growing realization that the various pools of securitized mortgages may never have been properly assigned, transferred and recorded at inception. If this turns out to be the case, game over--the noteholders will have to be made whole (here we will be expanding into the universe of securities "underwriter" liability).

How these problems are all handled in public disclosure documents is another key area to watch. The standard for "materiality" is whether a reasonably prudent investor would consider an item of disclosure important in making an investment decision. What would you say is important?

Remember that RICO is what brought down Drexel. RICO claims can be brought by the state or by private parties. Private RICO actions have apparently already been filed by certain litigants. This is a securities and white collar crime litigators wet dream.

Over and above the criminal and civil liability issues, are the regulatory and reputational risks. The damage to the reputation of a bank caught defrauding its customers is serious indeed. However, think of all the regulatory detonators that can be potentially triggered by all of this. 

The list goes on and on.

What this means is that Jamie Dimon and his 2Big2Fail CEO brethren can no longer pretend that this is just a minor technical hiccup. These developments constitute material risk factors threatening the very 2Big2Fail existence of their banks. That's not hyperbole.

They cannot pretend not to know what happened. They no longer have the luxury of taking the high road. It is now clearly their fiduciary duty to find out what happened and to take whatever corrective measures are necessary to protect the shareholders.

Any fatal mistakes at this point are more than likely to constitute "good cause" for termination. Moreover, as we all know and Messrs Nixon and Clinton will attest, it is often how one behaves in the post facto spin and damage control operation that can lead to ultimate ruin.

They are all spending their Columbus Day weekend lawyering up.

Someone is going to suggest a forensic/legal examination of the documentation. This will take months and months, particularly if they have to look at fraudclosures already processed. 

The good news? Here is a new job class created under Obama, Mortgage Fraud Forensics Specialist. This is not something an accountant is trained to do. This is a legal exercise. Unemployed real estate lawyers take heart. Work is on the way.

The end game may not be here quite yet, but it is approaching very soon, because they will all have to start thinking seriously about how to re-mark these toxic loan portfolios given the stark new market and legal reality.

So where is this great game leading?  Talk of a TARP II rescue would lead to torches, pitchforks and political suicide in Tea Party America.

No, this could very well lead to a 2Big2Fail checkmate. We shall see...

WilliamBanzai7, Esq.


[I recommend you read the other ZH posts on this subject as well as other excellent Blogs like Yves Smith's Naked Capitalism. The above is my humble attempt to distill my view of the current state of play for the reader. No one should under estimate the magnitude of this emerging crisis. Particularly, Team 0. File this post under: "A Momentary Lapse of Banzai7 Seriousness"]

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shawnlee's picture

Which is not to say they can't disappear in an implosion. The quadrillion in derivatives listed over several diverse pages of BIS reports show that there are so many derivatives that no GDP in the galaxy's local group can provide workout coverage. So the repudiation of all of Earth's current fiat moola is almost a given in any time-frame. Precious metals are the best solution for the individual or family office.350-001 \ VCP-410 \ 640-802 \ 70-680 \ 646-205

AssFire's picture

  Written shared thoughts good

Nice change to both read and see 

       Something to ponder


williambanzai7's picture

Aha! Glad you liked it ;-)

Buck Johnson's picture

You are so correct, spot on.  The banks have caught themselves along with the govt. in a very intricate web.  They can't have a foreclosure halt because it enables them from not only not getting money from the mortgage payments but it also stops them from getting money from the sale of the house in foreclosure.  Which in turn makes it impossible for the people and institutions holding MDO's/CDO's to get their contracted payments and getting them on time.  Which essentially makes the issuer of these bonds in contractual default.  And once this happens they issuer is required to pay the full amount on the bond (not the marked to make believe) plus any penalties to the bond holder.  The banks don't have the money to pay full price on the bonds because they are insolvent.  Also if they have to pay the people who have been foreclosed on the price of their house (if a judgement is to have them make the people whole), then they would be paying the full price of what they have that asset marked as.  So if a 200,000 dollar mortgage is in default/foreclosed on and it's a mistake, the court may make the bank pay them the amount on the house and/or the bank forgives the loan.  Either way that is 200,000 dollars that the bank doesn't have and less money to pay on the traunches that this mortgage may be on, even if the house is worth 100,000 dollars in mark to market.

They are a victim of their own lies and manipulations.  Now they either have to live by their lie's or die by their truths.  Even the Whitehouse is in a quandry, they are coming out using Axelrod to say that their shouldn't be a stoppage on foreclosures is a farce.  They know that this will force the truth on these assets and such and it will stop the whole market.  Is Obama and company in the congress going to allow this protection from the govt. and make law to protect the banks, if they do it is horrible.

williambanzai7's picture

The more you think about this situation the more it resembles a chess match. You have so many scenarios and inventing moves to consider and it is all happening for the first time.

I don't know who the banks have working on this, but they better get the best strategists money can buy them. This game is really a death match.

MrSteve's picture

Yo! Buck! did you miss the Frannie takeover or FDIC coverage ratio at -.38%? The banks are already working under the full faith and credit umbrella and don't care who knows it. The FASB return to mark-to-model showed that banks would not be allowed go down.


Which is not to say they can't disappear in an implosion. The quadrillion in derivatives listed over several diverse pages of BIS reports show that there are so many derivatives that no GDP in the galaxy's local group can provide workout coverage. So the repudiation of all of Earth's current fiat moola is almost a given in any time-frame. Precious metals are the best solution for the individual or family office.

Notice that all the Central banks stopped selling gold in the past 30 days, even the US Mint! I suggest we follow their obvious strategy and get "heavy".

williambanzai7's picture

Yes that is a quote for our times

Rodent Freikorps's picture

"When a government becomes powerful…it is an usurper which takes bread from innocent mouths and deprives honorable men of their substance for votes with which to perpetuate itself."


Nothing new under the sun.

Cognitive Dissonance's picture

It never gets old. Never.

The clip works in any mad man crisis situation you care to dub English words into.

williambanzai7's picture

Well it all depends on how decisive the mate is. Financial apocalypse is entirely possible, given Ben's lunatic binge.

If they are cornered like fools, I suppose someone will pull the knife and cut them apart. Throw them to William Black so to speak.

Clearly pain to the holders of their securities will be involved.

The worst situation would be a draw. Anything less than excising the current crony regime will not be good enough.

gwar5's picture

So what is the end game exactly, for TBTF?  Panic and run on banks?  One national bank? IMF world bank? Free houses? CNBC - time to buy the banks?!

Yeah, we can see the banks going tits up, but how does it unfold and then what? Would like to get there first.

That's got to be positive for makers of camping gear and preserved foods.

Troublehoff's picture

(effectively) Free houses

Banks (still) TBTF

Ongoing monetization (under the auspices of QE2, mark to fantasy and deficit spending)

OK Comrade?


FEDbuster's picture

I have decided that the entire stock market should be examined using "Costanza Logic". In other words, what ever your initial impulse or thinking is, you must do the exact opposite in order to be a successful investor. 

Original thought, foreclosure crisis is bad for big banks, so short the bank stocks.  Wrong!  Buy bank stocks, because the FED (owned and controlled by member banks) will use it's leverage with the government to make sure big banks get bigger and profit at the public's expense.  Let no crisis go to waste.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
- Napoleon Bonaparte, 1815

williambanzai7's picture

This may work as long as the wheels stay on. Once they fly off, all bets are off.

Edwardo's picture

"Could this be the black swan that should take down the current regime?"

It's more like the catalyst for the appearance of a flock of black swans that is going to pulverize what passes for the entire U.S. socioeconomic order. 


williambanzai7's picture

Thats a good name for a band: Flock of Black Swans...We're Flocked!

williambanzai7's picture

This just in from Emptywheel blog:


The Federal Housing Administration Commissioner, David Stevens, has joined David Axelrod in statingthat the Administration sees no reason to halt all foreclosures. That’s not a surprise in itself–it was pretty clear that Axe’s statement reflected official Administration policy.

But I’m particularly interested in how Stevens justified this position in an email sent to the WaPo.

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“We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market,” he said.

With approximately one in four homes sold in the second quarter in foreclosure, administration officials worry that a moratorium could have a significant impact on the economic recovery.

“While we understand the eagerness to make sure that no American is foreclosed upon in error, we must be careful not to over-reach and apply a remedy that will make the underlying problem of foreclosures worse,” he added.


I just know that is Timma talking the little muskrat!

Cognitive Dissonance's picture

WB7, not sure what happened to your cut and paste, but here it is again.

“We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market,” he said.


With approximately one in four homes sold in the second quarter in foreclosure, administration officials worry that a moratorium could have a significant impact on the economic recovery.


“While we understand the eagerness to make sure that no American is foreclosed upon in error, we must be careful not to over-reach and apply a remedy that will make the underlying problem of foreclosures worse,” he added.

williambanzai7's picture

That is bizarre. I've never seen that happen. I just did a simple paste.

williambanzai7's picture

If Ben can do it, why not me!

groucho_marxist's picture

You cannot simply say this is immaterial, sprinkle in the word MERS and hope this will all go away.


It's the whole immaterial belief in making money from nothing, so of course that's the response! I guess MERS is the new abracadabra.

Downtoolong's picture

The foreclosure process is a worse solution for dealing with mass scale consumer credit default than adjustable teaser rate mortgages were as a solution to mass home financing demand. These products and processes were never supposed to be anything but extreme solutions, appropriate for only a small percentage of the market. But, big banks and Wall Street continue to ignore this basic fact and insist they can implement and exploit niche products and processes on an unmanageable scale. That makes them the worst risk managers, and therefore by definition, the worst bankers in the history of banking.


A huge salary and mega bonus for fundamental and absolute failure. Where do I get a job like that?   


williambanzai7's picture

I am thinking of writing something called the Laws of Ponzi Physics.

One of the laws is, make deals to create more banker jobs.

A_MacLaren's picture

Over the weekend, Karl Denninger put together put together a well thought out solution to the problem of mortgage securitization and foreclosure fiasco Gordian Knot.


There is a template for resolving this sort of problem, and The States can implement it right now.  It was used in large part in Florida to resolve the "swampland" mess that arose during the 1920s, and with minor changes we can adapt it to what we face now.


The correct, just, and only way to resolve these problems is to force a clearance of the chain of title, which in turn forces proof of provenance of the indebtedness claimed to be owed by the homeowner. 


This is no different than what is required in a bankruptcy or any other civil collection action where the person alleging that you owe a debt, and who wishes to obtain a judgment to collect it through garnishment or seizure, must first prove they are the actual beneficial holder of said debt.

Since there can only be one actual beneficial holder of said debt, this provides the necessary and appropriate judicial determination and forces recordation of the chain of title and security interest that should have been done all along.


To implement this we must do the following:


(details at the link)

I do not know if this path will be taken, it seem to me to be the correct one.  Having been on the creditor side of a number of bankruptcies as a corporate credit manager for over 15 years, and the securities side adds a whole lot of additional complexities.  But the correct solution is to untie the knot, repair the frayed and flawed bits of cord, and recinch the knot.

The expense for this costly set of actions should fall upon those the in paper chain who failed to tie the knot correctly. 



williambanzai7's picture

Eureka! I think you just created another Obamaland job: Real Estate Claims Examiner!

Imagine the bottleneck. Everyone filing proofs of claim on residential real estate.

This is proof the geekism is not automatically a productive pursuit. Look what the quants have done to us!

FEDbuster's picture

Obama could hire ACORN to do it!

williambanzai7's picture

Then we can get the Columbian hooker and the pimp to come in and do another expose!

tamboo's picture

this week's peoplenomics report from george ure's urbansurvival.com:

Now on our premium content site:  Peoplenomics.com

Globalism Makes Its Play

Will the foreclosure crisis be used as a steppingstone to global government? We can now begin to see the outlines of a moderately probable future shapes up as the US and Europe are heading into another round of financial calamity in November, conveniently at the time of the G20 meetings.  What's becoming more and more likely is the evolution of a 'global currency' which will be used to strip individual nations of their founding independence and force them to demur to a non-elected global government which will not only seize the monetary system, but rule our food with Codex Alimentarius as Agenda 21 which will usurp national planning, land use, and energy agendas.  But first the fun stuff - the banking/foreclosure crisis which will be used as the 'set-up' event.


and speaking of columbus:


i rather doubt he was catholic, more likely another jew getting out of spain due to the 1492 inquisition but jew msm huffpo never mentions the usual suspects.


granolageek's picture

Dude, Columbus was from Genoa. No one has ever claimed he was Spanish, whether Christian, Moor or Jew.

MrSteve's picture

Mr. October 11 spent 15 years trying to get the Portugese King & Queen to fund his cruise to the Indies via Sunset Strip but they weren't springing for it. Ferdy and Isabella bought it almost instantly and started a huge inflation in the gold and silver supply money system. All the Inca gold really kicked up land prices, etc.

Giovanni Cavotti, John Cabot of English history, was another great explorer, under contract to the English.

When Portugal wanted to oppose Spain's land grab in the New World, they produced a NASA-quality aerial view map of South America for their petition to the Pope for a Line of Demarcation in 1494. They got the dead-on accurate map of S.A. from Guinea gold traders on the west coast of Africa. Those mighty traders had been all over South America's coast long before Columbus ever set sail.

williambanzai7's picture

Until this subprime fiasco hit 2 years ago, I always thought of the "Globalist Agenda" theory as fringe. Not any more. There are too many pieces leading back to Davos ;-)

As for Columbus, everyone from NY knows that the world is one big Ray's Pizza. 

Cognitive Dissonance's picture

"I always thought of the "Globalist Agenda" theory as fringe. Not any more."

Isn't it interesting that so many people are forced to reassess "fringe" as suddenly plausible once their worldview has been repeatedly bloodied by reality. I applaud your honesty. Keep going, you're headed in the right direction.

Notice that nothing changed here other than your point of view. Meaning that it was never fringe except in your mind. The outrageous behaviour didn't suddenly happen, it was happening all along. And you're begrudging acceptance of it for what it really is and always was over time was where the change happened.

We dress up the despots and sociopaths in fine dinner wear and extended pinkies so we don't need to reassess our worldview and belief system. So much easier to see the world the way the sociopaths tell us it is rather than accept the fact that either we live in a world that's completely contrary to the myth we were taught and so dearly wish to believe in or the game is rigged on every level and we've been taking it up the rear end willingly for decades.

Pass the denial please, it's getting a little hot in here.

williambanzai7's picture

On the other hand, those who know me would never say Bill has been a cog in the wheel all his life.

I am still not sold on a centralized evil conspiracy. I think its like a collective crowd sourced elitist conspiracy. Lets join hands together to rule the world.

MayIMommaDogFace2theBananaPatch's picture

Lets join hands together to rule the world.

Did they send you an invite?  No?  Oh.  Me neither.

Cognitive Dissonance's picture

WB7 my comment wasn't a personal attack. My apologies if it came across that way.

And I wasn't speaking to a central conspiracy, just that we stop adding to or modifying our world view by the time we hit 25 or 30 and switch to defending that world view at every corner and at all costs. Rigid thinking is our Achilles Heel and the social and economic control system spends the vast majority of its time reinforcing our rigid thinking and static worldview.

This is why our leaders lie to us. The purpose of the public lie is to defend the public myth at all costs. When they can no longer do so, they modify, obstruct, deny and lie again, all for one purpose, to keep us hamsters on our wheels and completely distracted, demoralized and defeated. And we participate in this dance much more than we realize or are willing to admit.

ella's picture

From the Big Picture "Our system of private property has developed due to the rule of law. The ability to demonstrate ownership, pass clear title, resolve disputes has worked for 100s of years. The recent frauds we have seen from law firms, process servers, bank legal departments, even drive through RE courts has put the nation at risk of becoming a lawless banana republic."  http://www.ritholtz.com/blog/2010/10/truth-consequences/

Cognitive Dissonance's picture

".....has put the nation at risk of becoming a lawless banana republic." 

Nope, there's no risk of that any more. We are a banana republic. We're just in denial about it and quite a bit more sophisticated in hiding the fact as well as hiding from the fact. Plus we have plenty of enablers hiding under the sheets with us.

Our huge national ego and swollen pride is preventing the average Joe and Jane from recognizing that banana republics come in all sizes and shapes and aren't restricted to Africa and South America.

Maybe it's just a marketing issue? We should approach this like we would when selling a Big Mac. How about an orange republic or apple republic or radish republic?

MayIMommaDogFace2theBananaPatch's picture

Injection-molded Plastic-Banana-Republic.

made in china

JohnKing's picture

he he..I was watching Fareed Zakaria yesterday go on about how South Africa is in decline because the public union workers have the country in a spending vice grip...

I wonder how many Americans watched that segment with a sense of smugness as in "those dumb bastards". He may as well have been talking about USA.

Of course, twits like Fareed have already been figuratively guillotined in the court of public opinion, he looked like a deer caught in the head lights when he began discussing the Tea Party, as if it just popped up last week. What a fuckin douche.

The elites are beginning to get the revelation that their shit stinks and things are overdue for a major flush.



FEDbuster's picture

How about a "Plantain Republic"? 

Plantains are longer than bananas and they have thicker skins. They also have natural brown spots and rough areas.   As the peel changes to brown or black, it has a sweeter flavor and more of a banana aroma, but still keeps a firm shape when cooked.

williambanzai7's picture

This sounds like an ad in Hustler Magazine.

Cognitive Dissonance's picture

Are you talking about a fruit or the promo for your next porno movie because I honestly can't tell. :>)

williambanzai7's picture

Those banana republicos all over the world are laughing at us under the breath.