Guest Post: Why Is the White House Against Freezing Foreclosures? A Look At The Fed's Suddenly Worthless Trillions In MBS Holdings

Tyler Durden's picture

Submitted by Nomi Prins, first posted on AlterNet

Why Is the White House Against Freezing Foreclosures in the Face of Rampant Fraud?

At first, there was a deafening silence from Treasury Secretary Tim
Geithner and Fed Chairman Ben Bernanke on the foreclosure front. It was
as if they: 1) didn’t read the news; or 2) were afraid someone would
notice afresh their incompetence in dealing with the ongoing housing
crisis and deteriorating economy, while convincing everyone that the
bank bailouts and subsidizations were good for us.

Last week, while Senator Harry Reid, House Speaker Nancy Pelosi
and others in Congress were dispensing irate pre-election sound-bites,
attorneys general across the country were gearing up for investigations.
Banks were reluctantly announcing foreclosure moratoriums because it’s
quarterly earnings season and uncertainty is bad for stock prices, and
Geithner was defending TARP
and mixing it up with China over the dollar. Meanwhile, the Fed was
gearing up to buy more Treasuries, like some kind of rapacious alien
that eats its progeny, because no one else wants our debt.

that changed when Geithner came out of hiding yesterday with a stance.
(Bernanke is still in hiding, but will support Geithner’s view soon.)
Unsurprisingly, Geithner chose to side with the likes of conservatives
and CNBC. Thus, his response to Charlie Rose when asked whether he
supported banks in declaring a foreclosure moratorium was: “No, I
wouldn’t say it that way.”

Why? Geithner’s logic follows the
pattern, coupled with old-style fear-mongering: if you wait and analyze
what’s really going on, it might be bad for the housing recovery. And,
what housing recovery is that? The one in which 25-30 percent of homes
being sold are REOs (bank owned real-estate, a.k.a. foreclosed
properties). On a trading floor, that’d be considered "churning," not
new value.

The free-market, let the banks do what they do
mentality was what allowed them to create a $14 trillion mountain of
securities backed by precarious mortgages to begin with. Don’t look at
what they’re doing, that might hurt the boom. Don’t ask them for
anything in return for bailouts -- that might clog the system. Don’t
stop them from churning foreclosed properties -- that might stop the

But the real reason for Geithner’s reluctance about a
foreclosure moratorium is that he’s scared stiff about those securities –
because even if he won’t admit it, he knows that the bailout wasn’t
just about TARP and Bernanke isn’t just an economic savior.

The government owns or is backing trillions of dollars worth of assets predicated
on the same or similar suspicious loans that defaulted during the 2008
crisis period, which they did nothing to stop (or force banks to

Instead, the Fed now owns nearly $1.5 trillion of
toxic assets that have no bid (meaning no one but the Fed wants them).
They would have less of a bid if there was even more uncertainty about
the loans that fill them. The Treasury is directly backing $400 billion
of government-sponsored entity (GSE) securities, and is indirectly
backing another $6.8 trillion. If foreclosed homes couldn’t be sold
because of fraudulent paperwork or had to wait for more detailed
inspections, you can imagine how difficult selling assets stuffed with
faulty loans might be. If it’s tough to find a title for a foreclosed
home, think how tough it is to back the related loan out of a pyramid of
securities sitting on top of it.

See, the loan that might be analyzed in a foreclosure situation could
be part of a chain connecting the underlying home to 20 or 50 different
securitized assets, all depending on it for either the interest
payments the loan was supposed to provide, or the value of the
foreclosure property if those payments stopped (in Wall Street speak,
the "recovery value"). If a foreclosed property isn’t selling, it’s not
recovering any money back to any asset waiting for it. Think what that
can do to the value of toxic assets living at the Fed and the Treasury
Department. Kill it.

The reason TARP and all the other subsidies
happened was that Hank Paulson, Ben Bernanke, Tim Geithner (the pillage
gang) and the most powerful Wall Street CEOs were scared. Banks had
stopped trusting each other (no one cared about the person who couldn’t
pay their mortgage, or had their home taken, whatever the reason). When
there is no confidence in the market, there is no bid for securities, no
matter what the reason.

The banks couldn’t pay for all their leverage and they
were facing bankruptcy if the system remained seized up. So the gang
paid to keep the securitization market going, by finding a home or
back-up home for the assets. They did not propose any remotely effective
plan to help individuals at the loan level (a far cheaper solution, as I
outlined in It Takes a Pillage).
They merely enabled the worst practices and excesses to keep going in
the name of saving the country from a greater depression, by shifting
them to Washington and providing the illusion of demand for them.

fraud is not new. Many sane people and organizations have been talking
about fraud for years -- you don’t manufacture $14 trillion worth of
mortgage-backed securities and all their permutations and mega leverage
out of $1.4 trillion worth of subprime loans in five years without
cutting a lot of corners. Banks knew that. But when the value of their
assets plummeted, unlike individual borrowers, they got to dump them on
the Fed and the Treasury department, while receiving cash injections and
guarantees, and cheap money subsidies in return.

stance is a sad reminder of how much things have resumed to business as
usual. Back while he was campaigning for votes, President Barack Obama
advocated a foreclosure moratorium, as did Senator John McCain. That
notion of halting the ejection of people from their homes seems so –
election 2008. When he first won the presidency, Obama continued to
advocate for a 90-day moratorium. But, that’s when things were still bad
for the banks and the markets. That was before profits, and bonuses and
stock prices came chugging back, along with bank power.

The Bank
of America didn’t quiver in its federally subsidized boots because Harry
Reid asked (not even demanded, because really, he can’t), for a
moratorium on foreclosures last week. It capitulated because it owns a
bunch of REO properties it wants to dump (and lawsuits are generally
time-consuming and messy). It’s not alone. JPM Chase’s REO portfolio
last quarter was double in size vs. its earlier quarter and nearly 30
times what it was last year. Wells Fargo’s REO portfolio also nearly
doubled, and Citigroup’s REO pool last quarter was up 81 percent over
the prior year. The GSEs, Fannie Mae and Freddie Mac are sitting on a
record number of REOs on their books they haven’t been able to sell.

Selling REOs to hedge, private equity and asset management funds in
bulk is the hot new business. (Small now, but so were CDOs when I first
warned about them in my 2004 book, Other People's Money.) Banks
aren’t being nice to those deadbeat borrowers who were too dumb to
foresee a housing and financial market collapse due to the overzealous
fee-seeking attitudes of securitizing and trading banks. No, having
gotten a multi-trillion dollar federal life raft, the big banks are
prudently trying to salvage a growing business.

Geithner and Bernanke are helping them, desperately trying to maintain
the illusion of recovery and the narrative that their previous efforts
worked, amidst the stockpile of crap they own and the slew of ongoing
loan-level problems they will steadfastly do nothing to address.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Gully Foyle's picture

Because it is BEFORE the election.

Give it a month.

midtowng's picture

Washington will do nothing about this before January, and by that time the full effects will be on us.

I had forgotten that the Fed owns $1.5 Trillion of this shit (and counting).

djrichard's picture

I had forgotten that the Fed owns $1.5 Trillion of this shit (and counting).

Yes, can you imagine the anguish after they risked $1.5T of their hard earned money on this "shit".  It must have taken them forever to collect that $1.5T after loaning it out after they created it out of thin air.  Or if they were impatient, they may have just cut to the chase and loaned it to themselves (after printing it) - but still, I'm sure we can all feel their pain.

To the Fed, "this shit" is worth more than the $1.5T they created out of thin air.  They swapped paper notes for assets.  How can they lose?  They could care less about pushing it back on the banks, unless there's a better swap to be made down the road with that play. [Edit: At the end of the day, the Fed doesn't want its counterfeit issue back.  It wants the assets that were collatoralized against its counterfeit issue.]

Otherwise, they'll play us taxpayers for stupid rubes as usual and add any "losses" they incur on the assets as increased debts we need to work off.  To compensate them for all the risks they took you see.  What a sick joke they perpetrate on us.

Reishi-self's picture


By: Edward Thomas, Executor of the


h/t to David Clarence



NOTW777's picture

its election time

Sophist Economicus's picture

They aren't worthless!  

Many Danielle, Jims and their baseball team sized families will have $1,000,000 home to live in now, along with the $300K worth of furnishings/other neat stuff...You cannot put a price tag on the look of joy on those 11 smiling faces

This is the stuff dreams are made of....


Thanks Uncle Bennie

Bob's picture

Sounds like the Private Fed's argument that they must be "above the reach of politics" should now be honored . . . too bad it's not in their interests and against everyone else's this time. 

As for the toxic mortgages at the GSE's, according to Ratigan and others many of these were "purchased" by the GSE's from the banksters on the condition that they were "conforming" assets.  Since cursory examination will reveal that they don't conform to the basic conditions under which they were aquired, they should be returned to those banks. 

As ye sow shit, so shall ye eat.  It's time for the banks to gorge themselves, however unhappily, upon the toxic shit they created. 

FEDbuster's picture

The banksters turned the FED into a ginormous zombie, cesspool bank.  Since member banks own and control the FED this wasn't hard to do.  The FED controls the government, so they demanded (ordered) the Treasury to back stop all the crap that was dumped on them.  In the meantime they pulled a couple of trillion out of their ass to give to member banks, so that the year end bounus pools would remain full.  Now they are trying to convert crappy MBS into questionable T-bonds.  The FED will NEVER turn on their owners (member banks) who dumped the crap on them in the first place. 

The first rule of plumbing is "shit flows downhill",  the hill looks like this: Banksters on top, FED below them, Federal government below them, State governments below them, citizens are at the bottom of the hill working hard to keep from drowning in the shit.

Headline at Yahoo, nuff said:

Wall St blames homeowners in foreclosure fiasco

Bob's picture

Let them throw all the shit they've got and we'll see whose Wall it sticks to. 

Miles Kendig's picture

Of course.  All dope dealers say they wouldn't be in the business if there weren't addicts.  Only in this case it's an addiction to an ownership, strike that, a debt society since even the banks cannot prove ownership under the weight of their, and governing societies epic ineptitude.

Goldilocks's picture

... gorge themselves ... upon the toxic shit they created.

Wishful thinking, but that was never the plan. We can sure hope though. In the meantime vote for it by buying gold … make the bankers bleed out their ‘real’ assets.


FEDbuster's picture

"It's time for the banks to gorge themselves, however unhappily, upon the toxic shit they created"

It's just a wafer thin MBS.....

Bob's picture

An elegantly apt depiction!

frankTHE COIN's picture

I once worked for 3 Wall St firms that blew up and went under. Refco being one of them. I feel like that guy in the Snoopy cartoon with the rainy clouds always over his head.

Next stop, i'm going to apply as an intern at the FED.

Apocalicious's picture

I feel like a mere piker with only 2 defunct clown-shops on my resume. Hail to thee, frank!

Silver-Is-Better's picture

Is there not anyone in this administration with even half a brain?

Sophist Economicus's picture

No!   But there are rumors of a head with a fully developed Medulla roaming the halls of the white house

Winston Smith 2009's picture

No, they rent their brains from the people who finance their reelection.

wiskeyrunner's picture

Stock index futures will rise tonight.....MAKE FREE MONEY....BUY THE CLOSE SELL THE OPEN....I think Google reports that should be good for 100 Dow points overnight.

Cammy Le Flage's picture

The "number of foreclosures filed by month" being reported are dead wrong.  100,000 countrywide last month.  LIE.

Look, Miami-Dade County Clerk of Courts has a page for foreclosure filing nos.  Lots of Clerks of Courts do.   Miami lists the nos since is the page   3,206 were filed last month in Miami-Dade County alone.  There are 67 counties in Florida.....let's not forget CA, AZ, NV, etc.   100,000/month?  I cry b.s.   Let's just assume 1,000/month are being filed in each county in Florida.  That is 67,000.   Why is no one reporting the nos. lies??????
RockyRacoon's picture

There are some really desolate and empty counties in Florida.  They are not all like Dade County!  But your numbers are still probably not arguable nationwide.

Turd Ferguson's picture

Now THAT is an impressive. late-day ramp job.

Seems no one...and I mean no one...wants to be short ahead of two straight POMO days!

Mako's picture

I fail to see why anything should stop.  That is what the court is for and process. 

The issue of "standing" or lack of can easily be addressed by the homeowner in the correct forum. 

The law is a severe, severable, separable and prejudicial force.

John McCloy's picture

  Think we may have finally reached the point where the Fed is now near powerless to prevent what is coming. States rights will allow for the moratorium and the Fed is powerless to prevent that even as they try to quell the panic by intervening in the stock market but when it is determined that the Fed cannot prevent a housing collapse the markets will crash and we have ball game. Just look at the attempts today to keep the market cool ..not gonna work for too much longer. 

It is too lucrative to short and entirely too risky to stay long.Meanwhile Liberty tries to spin the plates with a close green god bless them.

MachoMan's picture

states rights do not allow for a blanket moratorium...  they have to narrowly tailor the law so as to allow those persons with the proper paperwork in order to foreclose.  Essentially, these laws are already on the books...

It's called "we want to draw attention away from the fact that we have no ability nor desire to actively police these instruments and are generally completely inept and hold ceremonial positions within the state."

MuadDib's picture

It's not just the Fed that is loaded with toxic garbage, so too is the Federal govt in addition to the backstops and gurantees through the FDIC and the GSEs.

What we have here is a scenario for hyperinflation -- a total loss of faith in the currency.

The market could easily *skyrocket* in nominal terms, if Zimbabwe is any example.  Afterall, all of the money in US paper will have to flow somewhere.  Gold and silver to infinity in nominal terms and significantly higher in real terms.

B9K9's picture


A deflationary collapse was always the predictable outcome. There are just too many structural impediments - state's rights being one of them - to solve these broad issues at a federal level.

Ben, Timmy, Hank, the whole lot of them, knew the only possible way out was to re-blow another bubble, anywhere and at almost any price before this shit pile caught up with everyone. The intention was always targeted at rolling the paper to cover up the sins of the past.

They had their two years to pull off a miracle - it's all over. The recent jaw boning about QE2 is nothing more than crazy mumblngs, similar to Hitler ordering out 'phantom divisions' during his final days in the bunker.

MachoMan's picture

You're far too generous, the FED never had the tools/capacity to fix the problem...  and its/treasury's efforts to do so were nothing less than golden parachutes for the principal actors of this whole mess.

Duuude's picture



Aaaaand the FDIC was gonna pay them



"Don't go thinking that banks are getting the short end of the stick on this deal.  It is, as always, the little guy, and, of course, his next door neighbor who just lost $150,000 in equity because of the low price fever confronting the real estate market in many states. Unfortuneately, we do not know at this time which banks have Shared Loss Agreements in place with the FDIC. We do know the profits realized by OneWest is only the tip of the iceberg. Your local 'big bank' will celebrate behind closed doors as 'we the people' continue to give them our money! Who do you think the banks are that hold the other 93%?"



Dr. No's picture

Thats one way to shrink the balance sheet.  If Bernake doesnt want to do it, the market will!!

csmith's picture

Bennie has $1.5T in MBS (@par) and $55B in equity. Therefore a 3.7% haircut wipes out the equity line.


Turd Ferguson's picture

Two minutes to go. Down down 9. Can they make it? Brian Williams desperately wants to report that "on Wall Street today, stocks closed slightly higher".

LibertyIn2010's picture

How about we give them a taste of their own medicine?  Let's give them the ol' Dick Fuld treatment. 

Sorry, Ben, but we're not going to save the Fed.  Instead, we're going to break it up and sell it off for whatever it's worth on the open market. 

Payback, bitchez! 

MachoMan's picture

we're going to break it up and sell it off for whatever it's worth on the open market.

Fail.  Go to the back of the class.  The "market" clearing price for these assets will be literally nothing, but given the volume, the only persons with enough wherewithal to foot the tab are either other sovereigns (who would be left standing?) or the principal actors of this mess (the beneficiaries of the wealth gap).  Remember, they'll be sold en masse, behind closed doors...  think what happens to the sale of banks...  if you sold each individual security on its own, you might get a vastly higher price...  but that's not efficient, hence giant haircuts and the introduction of the possibility for profit/fiefdom.

This was baked in from the start...  we bought it hook line and sinker.

Ragnarok's picture

The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with.


NO, corruption did.

Pants McPants's picture

Yes.  The distinction between a free market and corruption cannot be repeated often enough.


Sadly the overwhelming majority have been taught to lump the two together.

MachoMan's picture

just spitballing here, but maybe it's because the inevitable conclusion of representative democracy + mixed capitalism is farcism.  In other words, it's not necessarily very presumptuous.

Dr. No's picture

Come to think about it, the MBS will be like the FEDs gold.  Perminatly valued (i.e. $42.xx/oz) and unaudited.  Perhaps they will lease out the MBSes?

Raptor.Handler's picture

What a convoluted mess.

Turd Ferguson's picture

So close... -2.19

Heads should roll on this one. How could this be allowed????

Oops spoke too soon -1.89

HelluvaEngineer's picture

No one even cares how obvious the invisible hand is now...

Cognitive Dissonance's picture

Which is a sign of either arrogance or desperation.

deadhead's picture

It's desperation, my good friend CD!


It is desperation.  I think I see small beads of perspiration beginning to form as the arrogance wanes and the panic takes hold, once again.

The Fed has threatened to use Paulson's bazooka yet again and at this point in time has painted itself into a corner for the Nov 2/3 coffee klatch.  They will fire it, in my view, and then find that the arsenal is bare.