Geithner, China and Foreclosure-gate

asiablues's picture

By Dian L. Chu, Economic Forecasts & Opinions

Global markets freaked out on Tuesday primarily due to the following events:

  • U.S. Treasury Secretary Geithner’s speech on Monday pledging “The United States and no country around the world can devalue its way to prosperity." 
  • Within hours after Geithner’s statement, China made a surprise interest rate hike—its first since 2007--raised fears that Chinese growth will slow with global implications. 
  • The unraveling of the “foreclosure-gate” could mean banking crisis 2.0

Geithner’s comments, uncertainty over the Chinese economy and worries about the U.S. mortgage market led a flight by investors into U.S. Treasuries, which sent the dollar surging 1.7 percent against a basket of six major currencies on Tuesday, while shifting capital away from equities, gold and other commodities, including crude oil.

Currency Accord?

Some analysts believe that the timing of Geithner comment and China’s interest rate shift--in the context of the G20 meeting days away--may suggest a currency accord.  However, from all indications, China and Geithner appear to be acting under totally separate agendas, however “coordinated” they might seem.

China Primary Directive – Growth

The 25-basis-point increase in China’s one-year lending rate announced by the central bank on Tuesday is aimed to rein in inflation and asset prices. Nonetheless, contrary to the fear of slow China growth crimping global economic recovery, the move suggests Beijing’s confident about its  economy, while the scale indicates its primary directive is to sustain growth.

In fact, due to its huge population, China most likely will need to keep growth at 8% range just to create enough jobs, or the Communist Party could risk another “civil revolution” similar to the one Mao waged some 60 years ago.

8.5% - Slowest Growth in a Decade for China

In its October 2010 East Asia and Pacific Economic Update, World Bank noted,  

“China’s growth prospects over the coming decade continue to look bright, but rebalancing the economy by altering the pattern of growth and investment is becoming increasingly critical to ensure sustainability.”

The bank forecasts China’s real GDP to grow 9.5 percent in 2010 and slow to 8.5 percent in 2011. 

Currency War Still On

In the process of sustaining growth, propping up the yuan is a side-effect, which just so happened to quell global criticism of China’s currency policy. But Beijing is not going to let yuan appreciate as much as Geithner (and the rest of the world) would like. So other countries--including the U.S.—either have to live with that, or the currency war will still be on even after the G20.

Strong Dollar Talk - No Substance

On the other hand, Geithner’s strong dollar talk is more symbolic than substance since Fed’s QE1, the coming QE2, not to mention the ever growing national debt, basically have sealed the fate of the US dollar.

A rapidly sinking dollar, which hit a 10-month low against major currencies last Friday, posts various risks including hyperinflation and even bank runs. This most likely prompted Geithner to break his 8-month silence on dollar.


Meanwhile, the foreclosure-gate mess could cost banks massive sums in losses and lawsuits, i.e., another banking crisis. The scandal spiraled into a major crisis in recent weeks after evidence surfaced that some foreclosures were based on flawed paperwork, i.e., “robo-signing."

Bank of America, Ally's GMAC Mortgage unit, JPMorgan Chase and Goldman Sachs suspended foreclosures to review paperwork. Attorneys general in all 50 states as well as the FBI are currently investigating whether mortgage lenders violated state laws. Moreover, Bloomberg reported that the New York Fed had joined with PIMCO and BlackRock in an attempt to force BofA to buy back $47 billion in mortgage bonds.

Up to $120 Billion in Loss

While most analysts agree that the biggest threat is likely the related law suits, but estimates vary. Banking analyst Dick Bove estimated that under the best-case scenario, banks losses will top $80 billion, over the next three to five years, while Stifel Nicolaus put the total loss figure at $47 billion, with $9.5 billion specifically to Bank of America, and JPMorgan Securities said to be in the range of $55 billion (more likely scenario) to 120 billion (the worst case scenario).

So far, most seem to see this crisis stay contained as banks now are better capitalized and less leveraged than before the financial crisis. Regardless of a total loss of $47 billion or $120 billion, one thing is certain--this will drag on for several years whenever there are mass law suits involved, which will likely sap earnings as well as stock prices in the foreseeable future.

Although a few analysts including Bove think bank stocks are oversold, and thus present good investment opportunity, I will err on the side of caution due to the high degree of uncertainty involved as Jim Rogers said,

"Nobody knows what book value at BofA is, including BofA." 

Related Reading - IMF: U.S. Real Estate Sectors Could Bring Banking Crisis 2.0

Dian L. Chu, Oct. 20, 2010

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Geoff-UK's picture

The bigger risk isn't delayed foreclosures or lawsuits from people being foreclosed's mortgage backed securities (MBS) fraud.


So ask yourself:  why would a bank SHRED a wet note mortgage contract that's worth $250k???  Could they need to hide the fact that they issued multiple securities against the same mortgage?  And now they're worried about putbacks?  What's that word for what they did?  Oh yeah, "fraud."


That is what's WOULD drive the banks under.  If Congress wasn't going to bail them out with our tax dollars...which, trust me, they're gonna do.


We are doomed.--John Derbyshire 

f16hoser's picture

Banks keep 2-sets of books. They also move massive quantities of debt around from bank to bank depending on when each bank files their financials. Peek-a-Boo accounting or collusion, which ever trips your trigger.

Sad really. Rule of Law and Accounting standards are a fucking joke in America and the other countries are laughing their collective asses off!

non-anon's picture

I remember when the $60bn seemed like and is a lot of money for the SnL bailout just a couple of decades ago.

With trillions of dollars in vogue nowadays, billions seems miniscule by comparison but really isn't.

Personally, I don't think this will stretch out to years down the road. I believe either we have a class war and/or default on our national debt in a year or two.

Djirk's picture

Agreed, if people are not paying a debt they should lose the assets. Assets still have value, even in below the mortgaged amount.

Lawyers will win and some clever bankers are going to arb this thing. Panic = opportunity.

Could very well be a smoke screen that allows banks to take another paper hit while the FED pumps up the liquidity?

eatthebanksters's picture

And people who break te law should go to jail...the fuckers who started and continue this mess go scott free with bazillions of money from the sucker who are bought into their bullshit.  Yes, people who can't pay their loans back will lose their homes under the law.  But the assholes who melted the market down will profit handsomely and never do a day of time.

covert's picture

the americans are not nearly ambitious enough. what happened to we the people?


dantes1807's picture

Foreclosure gate won't amount to much. Bank of America is proceeding. There have been no cases of any borrower not being in default getting foreclosed upon. And even if they did, the courts are there to stop wrongful foreclosure. Move along. Nothing there.

eatthebanksters's picture

Dante, either you don't read much or you're a dumbshit.  There is a documented case in Florida of a couple who owned a house, free and clear, no mortgage...and yet they were foreclosed on, by guess who?  BAC!!!   BAC  actually got the house, was sued, found out the foreclosure was a result of forged documents and gave the house, with some apologies and some coin, to the couple who were wronged.  By the way, its reassuring to know if you are wrongfully forced out of your house that the courts canhelp you get it back.  You're either a fucking MORON or a banker!

Bartanist's picture

The amount of money that the banks suck out of the economy every year is massive.

Pez's picture

“China’s growth prospects over the coming decade continue to look bright..."

Compared to what? Oh, you must mean all the street lights they're going to shut down in the US to pay for the bankster kleptocracy, or the Interstates they're going to sell off to China so we can pay tolls on them.


NotApplicable's picture

Not only are the street lights shut off here, they are removed in order to keep people from reporting them as broken or complaining once they find out the truth.

As for China buying the interstates, I thought that's what was Spain was doing.

merehuman's picture

No factory in the USA makes light bulbs. Government made the light bulbs we are used to ..illegal. ! Thanks a bunch, and there went GEs last plant on the East coast now moving to mexico. gee Thanks a bunch, DC + GE

SheepDog-One's picture

'Currency accord' yea I wouldnt bet on it, and Im also giving this market pump until Nov 3rd at latest. Mission accomplished already, no further need to pump the garbage.

ATG's picture

Chinagate = deliberate policy by corporate government to defraud Americans of their wealth...

SheepDog-One's picture

What do you mean? Biggest wealth transfer in world history is ALREADY complete! What are they going to steal now, the beans out of your beanbag chair? WTF?