There is Only One Way Out of the Foreclosure Crisis

George Washington's picture

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We're the fish.

The giant "too big to fail" banks are the bird. They've got their talons in the American consumer and the economy.

The
only way out for us - the fish - is if someone "shoots" the bird ... or
at least captures it and removes its talons from our hide.

In other words: Unless the mega-banks are broken up and reined in, we're in quite a pickle.

As I've previously noted, virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won't be able to recover, and that smaller banks actually lend more into the economy than the mega-banks (and see this).

Unless we break up the mega-banks:

  • The big banks will continue to dominate American politics, destroying any chance of restoring a representative form of government

And now there's the foreclosure crisis.

You've probably heard about it. Even Jon Stewart is talking about it.

We're in tough spot, alright.

As Yves Smith notes:

The
problems facing deals where the notes were not properly conveyed
(which we think are pervasive) are not easily remedied. As we have
discussed, the “fixes” for the note conflict both with the provisions
of the pooling and servicing agreement and New York Trust law.

Breaking up the giant banks is the only way out.

As Congressman Grayson wrote to Geithner, Bernanke, the SEC, FDIC, and the rest of the financial overseers:

The
liability here for the major banks is potentially enormous, and can
lead to a systemic risk. Fortunately, the Dodd-Frank financial reform
legislation includes a resolution process for these banks.

The
Dodd-Frank legislation is the recently-passed "financial reform
legislation" that lets regulators force insolvent banks - no matter how
big - into bankruptcy.

Banking analyst Chris Whalen wrote on Thursday:

The
U.S. banking industry is entering a new period of crisis where
operating costs are rising dramatically due to foreclosures and
defaults. We are less than ¼ of the way through the foreclosure
process.

***

The largest U.S. banks remain insolvent and must continue to shrink. Failure
by the Obama Administration to restructure the largest banks during
2007?2009 period only means that this process is going to occur over
next three to five years
–whether we like it or not.

The issue is recognizing existing losses ?? not if a loss occurred.
Impending operational collapse of some of the largest U.S. banks will
serve as the catalyst for re?creation of RFC?type liquidation
vehicle(s)
to handle the operational task of finally deflating the subprime bubble.

He
also said that the next three to six months is when things are going
to get out of control, and agrees that Dodd-Frank legislation - the
"financial reform legislation" that lets regulators force insolvent
international banks into bankruptcy - may be used to restructure
banks:

Similarly, Janet Tavakoli says:

This is the biggest fraud in the history of the capital markets.

***

When
we had the financial crisis, the first thing the banks did was run to
Congress and ask for accounting relief. They asked to be able to avoid
pricing this stuff at the price where people would buy them. So no one
can tell you the size of the hole in these balance sheets. We’ve thrown
a lot of money at it. TARP was just the tip of the iceberg. We’ve
given them guarantees on debts, low-cost funding from the Fed. But a
lot of these mortgages just cannot be saved. Had we acknowledged this
problem in 2005, we could’ve cleaned it up for a few hundred billion
dollars. But we didn’t. Banks were lying and committing fraud, and our
regulators were covering them and so a bad problem has become a
hellacious one.

***

In order to make the financial system
healthy, we need to recognize the extent of our losses and begin facing
the fraud. Then the market will be trustworthy again and people will
start to participate.

***

This can be done with a resolution trust corporation, the way we cleaned up the S&Ls.

And Ellen Brown points out:

Karl Denninger ... writes:

Those
who bought MBS from institutions that improperly securitized this
paper can and should sue the securitizers to well beyond the orbit of
Mars... [I]f this bankrupts one or more large banking institutions, so
be it. We now have "resolution authority," let's see it used.

The resolution authority Denninger is referring to is in the new Banking Reform Bill,
which gives federal regulators the power and responsibility to break
up big banks when they pose a "grave risk" to the financial system -
which is what we have here.

 

***

 

Financial analyst Marshall Auerback ... writes:

Most
major banks are insolvent and cannot (and should not) be saved. The
best approach is something like a banking holiday for the largest 19
banks and shadow banks in which institutions are closed for a
relatively brief period. Supervisors move in to assess problems. It is
essential that all big banks be examined during the "holiday" to uncover
claims on one another. It is highly likely that supervisors will find
that several trillions of dollars of bad assets will turn out to be
claims big financial institutions have on one another (that is exactly
what was found when AIG was examined--which is why the government
bail-out of AIG led to side payments to the big banks and shadow
banks)... By taking over and resolving the biggest 19 banks and netting
claims, the collateral damage in the form of losses for other banks and
shadow banks will be relatively small.

What we need to
avoid at all costs is "TARP II" - another bank bailout by the
taxpayers. No bank is too big to fail. The giant banks can be broken
up and replaced with a network of publicly-owned banks and community
banks, which could do a substantially better job of serving consumers
and businesses than Wall Street is doing now.

Either the giant banks' talons are removed from us, or the economy is not going to make it.

For details on the foreclosure crisis, see this, this, this and this.