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