Motley Moose – Archive

Since 2008 – Progress Through Politics

The Socialisation of Risk

The Federal Reserve has bought a ‘staggering’ $1.2 trillion of bad debt since the beginning of the sub-prime mortgage and credit crisis of 2008.  There is considerable evidence that this bad debt was a direct consequence of faulty, if not outright fraudulent, processes which pervaded the securitisation of this debt during the housing boom:

Faulty underwriting appears to be prevalent across the board, with originators complicit in overvaluing both the lender and the collateral at the point of underwriting – and doing so systematically.

Julian Fisher – How the mortgage mess could spread beyond sub-prime Reuters 22 Oct 10

Under the circumstances, with the failure of Lehman Brothers and the imminent collapse of credit threatening major financial institutions, an injection of public capital seemed prudent, perhaps even inevitable.  Yet although these systemic problems were widely suspected there have been virtually no regulatory penalties or criminal prosecutions.  In fact the government has simply absorbed the losses on our behalf:

The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.

They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed’s balance sheet and see the $1.2 trillion in mortgage-backed securities it owns.

Charles Hugh Smith – U.S. Financial Markets: The Well Has Been Poisoned Of Two Minds 23 Oct 10

From Karl Denninger’s chart you can see the debt is still there but it is now the taxpayers’ liability.  The profits, however, have been retained by the financial institutions with the hope that their solvency will be the first step towards our economic recovery.  But what are the consequences for consumers, homeowners and taxpayers?

It is strongly argued that American consumers are responsible for the obligations they accumulated in the last decade, and that defaulting borrowers caused the housing bubble burst and the subsequent decline.  That ‘convenient truth’ ignores the determined effort by financial institutions to dramatically increase the debt pool when debt was the hottest and most profitable commodity:

First [the government] let the banksters literally STEAL people’s hopes, dreams, and money by preying on them with knowingly-toxic exploding loans that they knew in advance would NEVER lead to those Americans owning their own home free and clear.  These loans came in the form of 2/28s and 3/27s for “less fortunate” borrowers, crafted for the singular purpose of turning a free US citizen into a perpetually enslaved debtor who would never own a damn thing except a payment book.

NEXT, [they] allowed those very same banksters to create exploding “OptionARM” and other similar exotic loans including “NINJA” liar loans – “No Income, No Job, No Assets Required.”  Loans with ZERO underwriting, ZERO collateral requirement, ZERO supervision and ZERO truth.  A HUD study years ago uncovered the truth and yet it was intentionally ignored within our government.

Finally [they] let these very same banksters misstate the credit quality of batches of these loans, in active cooperation with the “ratings agencies”, thereby deceiving investors worldwide into believing that utter and complete garbage, much of it utterly WORTHLESS, was “AAA” credit paper.

Karl Denninger – Damnit, Stop the Looting NOW! Market Ticker 10 Aug 09

Sadly, these poorly underwritten and misrepresented investments were picked up by 401(k)s and pension funds, further eroding the assets of many well-intentioned citizens.  And it is not like we weren’t warned at the time:

Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an “epidemic” of financial crimes which, if not curtailed, could become “the next S&L crisis.”

Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.

Terry Frieden – FBI warns of mortgage fraud ‘epidemic’ CNN 27 Sep 04

(Illustration: Nick Timiroas, Jessica Silver-Greenberg and Dan Fitzpatrick Mortgage Damage Spreads WSJ 16 Oct 10)

Needless to say the collapse of the American economy further exacerbates the ability of consumers to service their debt and many Americans now owe more for their homes than they are worth, whether they undertook prudent borrowing or not.  In fact it is tempting to suppose that financial opportunism, having completed the asset-stripping of commercial institutions, turned its attention to assets of individual retail consumers as the next lucrative target.  Whatever their intentions they seem to have done a pretty thorough job:

From the second quarter of 2007 to the second quarter of 2010, household net worth fell by $12.3 trillion.

Since the first quarter of 2006, household equity in real estate declined from $13.5 trillion to $7.0 trillion, a 48% decline.

From the first to the second quarter of 2010, household assets held in corporate equities and pension fund reserves declined by $910 billion and $650 billion, respectively.

Sherle R Schwenninger and Samuel Sherraden – A Recovery At Risk New America Foundation Oct 2010

The foreclosure fraud crisis has lifted the lid on some of the arguably fraudulent ‘short-cuts’ employed to rapidly transition homeowner debt to corporate profits but so far no prosecutions have ensued, though it is early days yet.  However it is clear that the Federal governments of both the Bush and Obama administrations chose to shoulder the losses on our behalf and leave the profits and capital in the hands of the same actors who perpetrated this mess:

The reality here is that what we have is a bunch of piranhas in a tank that have been feasting on Americans for two decades.  Now the Americans are down to bare femurs, tibia, fibula and ribcages – they’re out of assets to strip and out of payments to poach.  

Karl Denninger – Weekend Roundup: Foreclosuregate Status Market Ticker 23 Oct 10

In subsequent diaries we will have a look at what financial institutions are doing with what was formerly our capital and explore why this is not a partisan issue.  In fact, how ‘bread and circuses’ political partisanship seems a distraction while our prosperity and collective assets at the state and municipal level are further eroded for short-term, private profit.

Cross-posted at Daily Kos and Red State


  1. Shaun Appleby

    As a little 21st century thought experiment I posted this at Daily Kos and Red State.  Heh.  Total comments?  Nada.  Maybe it’s just a crap diary, eh?

    But in the meantime someone’s beaten me to the underlying ethos, in classic You Tube fashion.  For the Hitler rant connoisseurs among you:

  2. fogiv

    You compile the best info, and provide the most insightful commentary, on this particular subject as well or better than anyplace on the ‘net.

  3. creamer

    As opposed to the Fed buying up theese assests?

    I get the anger. But bulk prosecutions? I’m not sure that would have had a positive affect. We seemed to be fully intertwined in this finacial beast wether we like it or not. (As Shauns diary lays out.)

     The thing that troubles me the most is the inability of many americans to see the link between the current state of sffairs and the economic philosophy of the GOP and to a lesser extent the Dems.  

  4. creamer

    and if they did would not understand it.(I’m still partially in the latter group.) Politically I’m not sure anyone wants to touch this.You can make some short term hay by attacking bankers, but if the economy suffers then whoever is seen as pulling the strings will be held responsible.

     We just watched Reganomics finally put the country in the ditch, and look who is taking the blame. I’m less sure then I was two years ago that Americans are capable of looking past their precieved short term intrest to address the economic issues that face this country. I think the Deficit Commision’s report is due out late this year. It will be ineresting if anyone takes notice.

  5. Shaun Appleby

    Another apparently trustworthy politician, Congressman Brad Miller NC-13(D) on 8 Oct 10:

    Attorney Neil Garfield:

    That $5 trillion surplus left when Clinton was in office was just too darn tempting for Wall Street.  They just had to have it.  And they got it.  So the paperwork was carefully created and crafted to cover the tracks of theft.  Most of the securitization paperwork remains buried such that it takes search services to reach any of them. The documents that were needed to record title and encumbrances was finessed so that they could keep their options open when someone made demand for actual proof.  The documents were not messed up and neither was the processing.  They were just keeping their options open, so like the salad oil scandal, they could fill the tank that someone wanted to look into.

    The Obama administration is making a giant error in relying on the existing finance infrastructure to fix itself.  This fraud runs so deep that practically everyone at their kitchen table feels it.  The loss should fall on those who created it and the victims should be made whole, not because it is a reward but because that is what we do in a nation laws – take people who were victims of wrong behavior and get as much restitution as can be reasonably accomplished.

    Neil Garfield – Why the Paperwork Appears “sloppy” Living Lies 19 Oct 10

    Matt Taibbi:

    By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs.  Instead, Wall Street now serves, in the words of one former investment executive, as “Lucy to America’s Charlie Brown,” endlessly creating new products to lure the great herd of unwitting investors into whatever tawdry greed-bubble is being spun at the moment: Come kick the football again, only this time we’ll call it the Internet, real estate, oil futures.  Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.

    Matt Taibbi – Wall Street’s Naked Swindle Rolling Stone 15 Oct 09

    Former Goldman Sachs Managing Director Nomi Prins:

    …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 restructure).

    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.

    Nomi Prins – Why Is the White House Against Freezing Foreclosures in the Face of Rampant Fraud? Truthout 14 Oct 10

    This isn’t going away anytime soon, methinks.

  6. spacemanspiff

    … on this piece of news. It’s about the measures taken by the governor of P.R. to “jumpstart” the economy. He’s a Republican governor although that doesn’t make much difference on the island. Still I’d like to know your thoughts (or anybody elses) on it.

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