Posts Tagged ‘secondary mortgage market’

Last week the U.S. Department of Justice announced the formation of the new Financial Fraud Enforcement Task Force. Among other things, this task force is charged with bringing to justice those individuals who caused the worldwide economic collapse. Ummm… OK.  So…does that mean that nobody was minding the store before this? Does this mean that until now there were no laws governing the financial industry or does it just mean that the Department of Justice just wasn’t paying any attention to those existing laws?  Well, let’s see…if they are planning to find and prosecute those people who created the meltdown by deliberately misrepresenting the value of mortgages on the resale market, or if they will be going after the people who deliberately gave out “liar loans”, knowing full well that the people who were being granted the loans could never pay them back, or if they will be going after the people who fraudulently misrepresented their ability to pay for the mortgages in order to play “buy and flip”, I guess that means that there were already laws against these practices. Otherwise they would have to create new laws outlawing past practices, which I believe is frowned upon.

So…if there were already laws on the books that made it illegal to do all the things that led to the meltdown, I have a small question. What were the agents of the Department of Justice doing while the world was collapsing?  What were they doing in the years leading up to the collapse?  Come to think of it, what were all those guys over at the Securities and Exchange Commission doing while the world was hurtling toward the cliff edge?  I think we all know.  They weren’t doing anything to prevent it. Which is why when several people reported Bernie Madoff’s Ponzi scheme to the SEC they were ignored.  Of course, when Bernie’s scheme collapsed and a bunch of rich people lost everything, well…the government had to step in.  Didn’t they?

OK. So how many of those people at the SEC who deliberately ignored Bernie Madoff’s practices over the years have lost their jobs? Better still, how many have been prosecuted for allowing a massive Ponzi scheme to exist when it was their sworn duty to prevent such things from happening?  Or are we saying that no one had the duty to protect us from this sort of fraud? Or are we just that we’ll overlook this dereliction of duty this time?

OK, since we are on the subject…how many people at the Department of Justice are being investigated for doing nothing to prevent the worldwide economic collapse when it was their job to detect and prevent all the sorts of fraud that led to the meltdown?

And, if we want to start looking within the government for people who are culpable (and why shouldn’t we?) should we just confine our investigation to the ranks of the Department of Justice? Does that make sense?  Let’s face it.  This was a truly massive exercise in deception. Our big banks (the ones we saved because we can’t live without them) were selling billions (trillions?) of dollars worth of worthless mortgages to any sucker in the entire world who would be foolish enough to invest in them. Now, I find it hard to believe that there weren’t a lot of people higher up in the former administration who knew exactly what was going on. I expect that most of the wealthy bankers knew too.  All the rich folk were playing a sort of real estate roulette via misrepresented values of U.S. real estate and the mortgages that encumbered these properties.

So, now we have a new Task Force.  Oh, good.  But somehow, I just sort of feel that this small effort is not going to clean out the Augean Stables of Washington or Wall Street.  More likely, it will be more of the usual Washington window dressing.  Oh sure, they’ll probably nail a few unfortunate suckers who were stupid enough to get caught, but the big racketeers who were behind this gargantuan fraud? I don’t think so.  The oligarchs are too deeply embedded, the invisible wealthy have too much power. The real perpetrators will not only get away with the destruction of the world’s economy, they will retain the profits they made at our expense.  It’s just how our system works.

So, to the newly rejuvenated DOJ, I say, “Give ’em Hell!”

But for me, frankly, I feel a bit like poor Vladimir and Estragon, waiting endlessly for Godot.


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Now that we have the job stimulus bill about to be signed, I expect our attention will soon turn to some sort of bank stimulus. Wait a minute, didn’t we already bailout the banks? Indeed we did. The problem is that, even though they received billions of dollars and even though the bankers all gave themselves fat bonuses, it’s still really hard for the average citizen to get credit, i.e. a mortgage or a car loan.  The question of course is why? Why won’t these recently replenished banks lend money? They answer they give is that they are lending, but their ability to lend money for mortgages is limited because of a lack of interest in the secondary mortgage market.

The secondary market? What’s that? Well, if we take a step back in time, you recall that when the economy was surging full speed ahead and the Real Estate Ponzi Scheme was in full swing the big U.S. banks had developed a strategy of dealing with high risk mortgages (now called toxic assets). The strategy can be succinctly referred to as “flipping”, mortgages that is.  The banks sold these hot potatoes to investors after telling them that they were AAA rated by their buddies in the securities rating game. Of course they should have been  ZZZ rated, but that’s just a little detail we can overlook. Right?

Well, these ZZZ mortgages were sliced and diced and sold off by the banks who made up the primary mortgage market to the “savvy” investors who made up what is called the secondary mortgage market.  By selling (dumping) these toxic assets immediately, the banks were able to replenish their money supplies and then turn right around and give out some more mortgages!  Isn’t that fabulous?  The whole economic miracle of the housing boom could go on forever and the original banks had almost no liability!

Then, you may recall, everybody stopped paying their mortgages because they were only planning on flipping their houses anyway. So who got burned? It was the guys holding the ZZZ rated mortgages – the secondary mortgage market. They had their own game going of buying and selling ZZZ securities too. Of course they insured themselves with credit default swaps, but that was a scam because the companies that issued them, like AIG, couldn’t cover the losses if they all defaulted at once.  So people got burned, really bad. Sure the big banks took a hit, because they always had some ZZZ rated stuff on their books that they hadn’t unloaded yet, but the secondary guys, the guys we never hear about, our ghost banking system, really took the brunt of the loss – along with the insurance guys who issued the credit default swaps, of course.

So, just who are these people who buy mortgages on the secondary market? Ultimately, they are individual investors and pension funds and so forth who bought Real Estate Investment Trust (REIT) funds and other derivatives.  The people who were buying this stuff were ultimately just us!  We were scamming the banks by buying houses we couldn’t afford and then the banks were scamming us by selling our own mortgages back to us as AAA rated securities that were actually our own toxic mortgages!  That’s called a real estate-based economy.

So, anyway, now we have a problem. The banks have been bailed out by former Secretary Paulson, and they say they want to lend money, but the secondary mortgage market has dried up. They can’t flip any new mortgages and they are not foolish enough to hang onto any mortgages they provides these days, so they’re just not providing mortgages.  The solution from Secretary Geithner seems to be that the government will help buy up these “securities”, which is a way of saying that you and I will be paying for our own mortgages again (by our taxes) via the secondary mortgage market.  This, of course, is in addition to us making our regular mortgage payments anyway.

The heart of the problem is that our banks don’t hold mortgages any more.  They flip them to a ghost banking system that is riddled with misrepresentation and speculation.  Ultimately, the ghost banking system is just us, you and me, either via our 401k plans, other investments, or our taxes.  We essentially wind up buying our own mortgages! Meanwhile, the big banks make huge profits by being nothing but middlemen!  This secondary mortgage market ghost banking system provided the circular linkage that created our worldwide real estate Ponzi scheme. The way to remedy this is simple: make sure the primary banks are well capitalized and then forbid them from reselling mortgages on the secondary market. A bank should be content with making its money from the interest and up front fees it charges for a mortgage and not be allowed to go for quick profits by flipping toxic assets.

Meanwhile, we need to either completely eliminate or very strictly regulate our ghost banking system.

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