Well, if you were to believe the latest MSM headlines and too-big-to-fail ("TBTF") Wall Street press releases, it's business as usual on Wall Street.
That's "business as usual" as long as you ignore the latest warnings from Nobel Prize-winning economist Joseph Stiglitz (and ignoring Stiglitz is certainly par for the course on Wall Street and in Washington D.C.) regarding quantitative easing.
And, like every memorialized work of fiction (i.e.: formal document) originating from Wall Street, it's certainly business as usual as long as you do NOT read the fine print, in which case you'd be under the impression that things are returning to "normal" as far as the foreclosure fraud crisis is concerned, too. Or, is that returning to our "new normal?" Well, as normal as it gets these days, considering that we're now seeing all-time, record-breaking levels of foreclosures being filed throughout the country as I write this.
We're being told in today's news cycle that Bank of America, GMAC and Citi are all resuming (and/or never really suspended) their foreclosure activities:
Bank of America Resumes Foreclosures In 23 States," Naked Capitalism; "
Foreclosure-Gate: GMAC resumes some foreclosures," Calculated Risk; "
Citigroup Says Its Foreclosure Processing Is 'Sound,'" Dow Jones/Wall Street Journal.
The problem with that meme is that they forgot to include the rest of the sentence: "...as it relates to refiling foreclosure-related affidavits for a significant portion of their respective mortgage portfolios." Indeed, large portions of their portfolios are, still, indefinitely on hold until further notice.
But, here are a few of the latest, conveniently overlooked tidbits from our current news cycle obfuscated by many of these "quick recovery" stories.
First, there's the reality that the biggest portion of this story (which appears to be getting bigger with every passing day), from a sheer dollar-liability perspective, as far as Wall Street's concerned, is the intensive litigation that's now ramping up as far as investor claims against the TBTF firms now accumulate. (Much more about that, farther down, below.) Then, running a (very) distant second, is the financial liability to the banks and taxpayers, as far as fraudulent title and foreclosure documentation problems continue to mount throughout the financial community and among the general public.
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My, oh, my! What do we have here? MORE foreclosure fraud?! MORE government deception relating to MORE scheduled Wall Street pillaging of Main Street? MORE Wall Street bailouts packaged, at least in part, as MORE "quantitative easing?"
"I'm shocked! Shocked, I say!"
Truly, these stories are just getting MORE outrageous by the day, IMHO!
(I have a colleague in the automotive finance vertical who regales me with fraud stories he hears from time to time. One common--but rather heinous--scam at some of the more unethical car dealerships that he's mentioned to me, more than once, occurs when a sleazy dealer simultaneously finances the same car with two different lenders. Looks like this is happening, a lot more than we may realize, in the wholesale mortgage investment community, too!)
(NOTE: Diarist has received written authorization from Naked Capitalism Publisher Yves Smith to reprint her blog's diaries in their entirety for the benefit of the Daily Kos community.)
First, from a post filed over the past 90 minutes at Naked Capitalism, by blogger George Washington: "Guest Post: Mortgages Were Pledged to Multiple Buyers at the Same Time."
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Guest Post: Mortgages Were Pledged to Multiple Buyers at the Same Time
By George Washington
Naked Capitalism
Tuesday, October 19, 2010 3:16AM
Bank of America alleged in a court filing this June:
It appears as though many loans and other mortgage-related assets have been double and even triple-pledged to various constituencies.
Boa Answer to Freddie Objection in Re Taylor Bean & Whitaker Mortgage Corp.
April Charney - a consumer lawyer with Jacksonville Area Legal Aid - and CNBC's Dennis Kneale noted in February 2009 that courts have found that some mortgages have been sold again and again to different trusts, when they should have only been sold once.
Kneale explained that that is the reason that two different banks sometimes try to simultaneously foreclose on the same home [see video link in original post].
And today, Chris Whalen told CNBC's Larry Kudlow that Bear Stearns will be exposed as having sold the same loan to different investors on numerous occasions (see 6:45 into video) [see video link in original post].
As I have repeatedly pointed out, the failure of the mortgage originators and banks to prepare and record proper documentation has led to an epidemic of fraud. The pledging of the same mortgage again and again to different trusts related to mortgage backed securities is just one result.
And as long-time foreclosure investigator Nye Lavalle writes:
On thousands of occasions I stated to regulators, CEOS, banks, Fannie and Freddie that the practices of the banks were that they were double and multi-pledging assets and pledging paid off and refinance notes to securitizations. This is something April, Max [Gardner] and I have discussed for years now. Now, they come and admit that each of my allegations were true. Without analyzing the deal, as complex as they are, you WILL NEVER KNOW IF THE FORECLOSING PARTY HAS "ANY" RIGHT TO FORECLOSE!!!
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As Zero Hedge reminded us on Monday, JP Morgan Chase is now citing in-house estimates for "putbacks"--refunds they're projecting they'll have to provide to investors, for deals gone awry for fraud, etc., over the next few years--that may easily exceed a "manageable" $55 billion (they're posting numbers that actually tell us it could be as high as a$145 billion-plus), once you combine soured residential and commercial mortgage-backed securitizations. It's all right here: "JPM's First Official Spin On Fraudclosure: Manageable, But With $55 Billion Of Risks."
This comes on the heels, late last week, of an independent report that circulated throughout Wall Street concerning an estimate that may exceed $70 billion in "putbacks" that Bank of America may have to provide to their investors just for fraud-related foreclosure claims concerning BofA's residential mortgage portfolio. I covered this story in a diary, right HERE.
As Zero Hedge noted:
...This is basically JPM's way of saying that QE2, instead of being a UST purchasing program, will actually be one where the Fed will buy a new batch of completely fraudulent MBS. This also jives with what Pimco is expecting, based on the firm's recent surge in MBS purchases on margin.
There's also this from Zero Hedge: "Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start."
And, once you read the factual aspects of the JP Morgan post, it makes Professor Stiglitz' quantitative easing commentary, farther down below, all the more timely, as well.
Then again, last Wednesday, I asked the community this rhetorical question: "Guess who's going to pay the bill for the foreclosure crisis?"
So, if you don't accept Zero Hedge's conclusions, maybe you'll see how real this is all about to get once you review Stiglitz' analysis: "Stiglitz Bashes QE."
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Stiglitz Bashes QE
Yves Smith
Naked Capitalism
Tuesday, October 19, 2010 3:54AM
The comment by Joseph Stiglitz in the Financial Times lambasting the Fed's expected move to quantitative easing is certain to have no impact on the central bank's course of action. His article nevertheless is proof of how this idea is not as well received as the officialdom would like you to believe. It isn't merely Stiglitz's stature that makes his critique noteworthy; it's that he is of the left leaning persuasion, and thus believes in government intervention to promote broad social goals, like reducing unemployment, which is something we seem to have in abundance these days.
Note that Stiglitz doesn't see QE as merely unproductive; he contends it might well be detrimental:
In certain circles, it has become fashionable to argue that monetary policy is a superior instrument to fiscal policy...Whatever the merits of this position in general, it is nonsense in current economic circumstances....
....the impact on the real economy of changes in the interest rate remains highly uncertain. The fundamental reason should be obvious: what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. Those variables are not determined by the central bank. The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.
Indeed, in the last US recession, the Fed's lowering interest rates did stimulate the economy, but in a way that was disastrous in the long term. Companies did not respond to low rates by increasing investment. Monetary policy (accompanied by inadequate regulation) stimulated the economy largely by inflating a housing bubble, which fuelled a consumption boom.
It should be obvious that monetary policy has not worked to get the economy out of its current doldrums. The best that can be said is that it prevented matters from getting worse. So monetary authorities have turned to quantitative easing. Even most advocates of monetary policy agree the impact of this is uncertain. What they seldom note, though, are the potential long-term costs. The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers - precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting. But no one should be fooled....
A final argument invoked by critics of fiscal policy is that it is unfair to future generations. But monetary policy can have intergenerational effects every bit as bad. There are many countries where loose monetary policy has stimulated the economy through debt-financed consumption. This is, of course, how monetary policy "worked" in the past decade in the US. By contrast, fiscal policy can be targeted on investments in education, technology and infrastructure. Even if government debt is increased, the assets on the other side of the balance sheet are increased commensurately. Indeed, the historical record makes clear that returns on these investments far, far exceed the government's cost of capital. When, as now, there is excess capacity in the private sector, such public investments increase output and tax revenues in both the short term and the long. If markets were rational, such investments would even lead a country's cost of borrowing to fall.
Yves here. One seldom mentioned issue in analyzing government spending is that no private business keeps books like the government does. Government budgets are cash flow based. Proper accounting would differentiate real investments (balance sheet items) versus expenses (income statement items). For instance, a jet fighter lasts more than a year; it should be put on the balance sheet and depreciated like any other capital asset. That presentation would highlight the difference between current period expenditures and investment, and would hopefully encourage greater emphasis on investments.
John Hussman argued the same point in his newsletter, that QE would be ineffective:
A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate objective of increasing U.S. output and employment.
Economics is essentially the study of how scarce resources are allocated. To that end, one of the main analytical tools used by economists is "constrained optimization" - we study how consumers maximize their welfare subject to budget constraints, how investors maximize their expected returns subject to a various levels of risk, how companies minimize their costs at various levels of output, and so forth. To assess whether QE is likely to achieve its intended objectives, it would be helpful for the Fed's governors to remember the first rule of constrained optimization - relaxing a constraint only improves an outcome if the constraint is binding. In other words, removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back.
On the demand side, it is apparent that the U.S. is presently in something of a liquidity trap. Interest rates are already low enough that variations in their level are not the primary drivers of loan demand. Loans are desirable when businesses see opportunities to make profitable investments that will allow the repayment of the loan, without too much uncertainty. Similarly, loans are desirable when consumers see opportunities to shift part of their lifetime consumption stream toward the present (or to acquire durable items such as autos or homes which provide an ongoing stream of benefits), and where they also believe that their future income will be sufficient to service the debt.
Broadly speaking, neither businesses nor consumers are finding attractive borrowing opportunities, or have sufficient confidence that they will be able to repay the loans and end up better off. A few years ago, individuals did have the confidence to shift a portion of their lifetime consumption to the present because the values of their homes and other financial assets gave them the impression that their future consumption needs were well covered. Lax lending standards created a feedback loop of soaring mortgage debt, consumer debt, home values, and consumption. At the corporate level, the return on equity capital was progressively boosted by taking on increasing leverage, which eventually reached catastrophic levels in the financial sector. The subsequent collapse forced the recognition among consumers and businesses that their ability to service debt, based on expectations about the future value of their assets, was not as strong as they previously believed.
Instead, businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?
On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present. U.S. commercial banks already hold $1.066 trillion of reserves with the Fed, and another $1.626 trillion in Treasury and agency securities.
The distressing thing about the Fed is the fact that is has come to be dominated by monetary economists. That's a comparatively recent development. Shortly after Bernanke was appointed, I had lunch with a former Fed economist who in his next job could take credit for having invented swaps but refuses to do so. He remarked drily, "The record of academic economists as Fed chiefs is poor." His forecast looks better by the day.
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Bold type is diarist's emphasis.
So, were you wondering why all the folks on Wall Street and in Washington have been trivializing this "technical," foreclosure fraud problem? (You know, the one where investors are suing Wall Street for what is now projected to be many hundreds of billions of dollars in fraud?) (Heh.) That's because the powers that be already know how this is going to end! It's projected that "Quantitative Easing, Round Two" (i.e.: "QE2") will be announced shortly after November 2nd. Perhaps as soon as November 3rd.
Damn, I hate reruns!
P.S.: For the record, last I checked, Joseph Stiglitz was definitely a liberal progressive Democrat, and Ben Bernanke's a registered Republican.