It's all there in Friday's NY Times. The lede atop today's business section of the gray lady tells us: "
Mortgage Mess May Cost Big Banks Billions." And, it sure is beginning to look like this was the week when the ongoing U.S. foreclosure fraud crisis pivoted from bad to worse. In fact, while the "retail" side of this matter is what's capturing all the headlines; and, that chapter of the foreclosure mess will certainly cost the banks many billions, the
real, "big money" story, IMHO, is about what's slowly (and much more quietly)
unfolding in the Wall Street investment community.
I used the word,
"unfolding," in the opening graph, but the proper word, IMHO, is
"unwinding." (In fact, I think I'll refer to it as
"The Great Unwinding.") Because that's what is, apparently, likely to happen as far as our nation's markets are concerned, with regard to Wall Street-issued,
mortgage-backed securitizations (MBS'), as well as a significant amount of the paper created, sold and/or held by our
government-sponsored enterprises, a/k/a the "GSE's" (a significant chunk of the many trillions of dollars in mortgages currently held by Fannie Mae, Freddie Mac, et al). Much of it stands a good chance of being "unwound," wherein banks will be forced to take back, and/or provide "refunds" for, significant amounts of paper (a report--see blockquote, below--was widely-circulated on Wall Street on Thursday, indicating that this could cost Bank of America, alone, more than $70 billion) that they had originally sold to investors and the GSE's.
This process could take up to a decade to fully play out, according to one of the quotes in the Times' business lede.
The paper does a better job of explaining this--and Krugman tops it off in his op-ed column, "The Mortgage Morass," today--than I ever could.
But, in-between, today's edition of the NYT doesn't stop there. There's a fiery editorial, "The Foreclosure Crises," which tells us:
The Foreclosure Crises
Editorial
New York Times
October 15, 2010
...What we've already learned is chilling -- and suggests that bankers have learned little since the 2008 implosion and taxpayer bailout.
Major banks -- including Bank of America, JPMorgan Chase and Ally Bank, which is owned by GMAC -- have suspended foreclosures after admitting they had submitted tens of thousands of affidavits to the courts, attesting to facts about the defaulted loans that had not been verified by the bank employees signing the documents.
--SNIP--
The problems may go far deeper. The banks' procedures for keeping track of mortgages may also be seriously flawed. If there are problems in establishing a chain of title, it could -- again -- call into question the value of mortgage-backed securities. That would mean litigation, which would harm bank profits, and in a worst case, risk another economywide disruption.
As important, and dismaying, as all this is, it must not obscure the underlying problem: potentially millions of foreclosures that could and should be avoided...
--SNIP--
...This latest foreclosure crisis should settle one issue once and for all. The banks that got us into this mess can't be trusted to get us out of it. The administration and Congress need to act.
Meanwhile, late Thursday, William D. Cohan, over at the Times' Opinionator blog, points to the Financial Crisis Inquiry Commission's yeoman's work (and the NYT's Gretchen Morgenson's coverage of it) on this entire matter, in: "How Wall Street Hid Its Mortgage Mess." Cohan reminds us it was testimony over at the FCIC, just a few weeks ago, which started this snowball's roll down the proverbial hill...
How Wall Street Hid Its Mortgage Mess
By WILLIAM D. COHAN
New York Times' Opinionator Blog
October 14, 2010, 7:30 pm
...And while we await the Financial Crisis Inquiry Commission's answers, the good news is that the news media have begun to pick up on the outrageous behavior its hearing revealed. The Times' Gretchen Morgenson reported on that Clayton Holdings had in fact offered to make its data available to the three ratings agencies that rated mortgage-backed securities, but that each rejected Clayton's offer. It seems they feared that if they revealed the flaws in the underwriting of the mortgages, they would lose other business from the investment banks that put the mortgage-backed securities together.
On Monday, Eliot Spitzer, the former New York governor turned talk-show host, called the inquiry commission's revelations "fraud, plain and simple," and said there is "a basis without any question for the most rigorous examination" of why Wall Street failed to disclose this valuable information to investors. His guest on CNN's "Parker Spitzer"show that night was Joshua Rosner, a managing director at Graham Fisher & Co., an independent research firm. Mr. Rosner agreed with Spitzer's assessment and said, "This is what happens when the children are in charge." On Wednesday, Felix Salmon, a business columnist at Reuters, wrote that "if I was one of the investors in one of these pools, I'd be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can't imagine they'll like what they find."
So far, not a soul on Wall Street has been found to be criminally liable for the practices that led to the financial crisis. But thanks, in part, to the Financial Crisis Inquiry Commission, we are getting closer than ever to the day when the culprits will pay for what they did.
So, here's the latest big story, the business lede from Friday's NYT, with all of the bloody details which point out that this week--just like that week in mid-September 2008--may very well end up being another pivotal point (for all the wrong reasons) in our nation's economic history...
Mortgage Mess May Cost Big Banks Billions
By NELSON D. SCHWARTZ
New York Times (Page B1)
October 15, 2010
...After scratching their heads for weeks over how much the foreclosure mess will hurt banks' bottom lines, investors got out their calculators Thursday to tally the potential costs -- and sent bank stocks plunging.
The article notes that the "...share price of Bank of America fell 5.2 percent, while shares of JPMorgan Chase sank almost 2.8 percent."
The story provides the narrative over the past few days...
--market uncertainty, worries about "the financials;"
--everyone thought this would pass quickly, but that's looking "less and less likely;"
--50 state attorneys general joined forces to announce "...they were investigating the practices of the mortgage servicing industry, while Florida's attorney general subpoenaed the nation's largest mortgage processor, L.P.S., as part of a broader investigation."
--foreclosures have ground to a halt in many states; the too-big-to-fail banks are uncertain when the process will resume; in the interim, if the problem continues over an extended period of time--and it will--foreclosed homes will stay on the banks' account ledgers, racking up billions in additional costs for the banks every quarter;
...Inside the investment houses, several traders said nerves were frazzled further by worries that banks could face much bigger mortgage related losses, not from foreclosures, but because of questions about how the money was lent in the first place. If it turns out that mortgages were bundled together and sold improperly, more holders could sue the banks and force them to buy back tens of billions in mortgage-backed securities.
An alarming report on Bank of America, compiled by Branch Hill Capital, a San Francisco hedge fund, circulated widely on Wall Street on Thursday. Branch Hill suggested that the bank, the nation's largest, could be facing more than $70 billion in losses from mortgage securities that it may have to repurchase from Fannie Mae and Freddie Mac, as well as private investors.
"We think this is a very important issue, and the liability will be substantial," said Manal Mehta, a partner at Branch Hill. "There has been pervasive bad behavior throughout the system..."
Bold type is diarist's emphasis.
And, providing the last word on all of this in today's Times, Krugman goes to town on the banksters. (See: "The Mortgage Morass.") And, he's quite bipartisan when it comes to placing the political blame, too. I strongly encourage you to read his post. Here are a few tidbits from it...
The Mortgage Morass
By PAUL KRUGMAN
New York Times
October 15, 2010
...many of the foreclosures now taking place are, in fact, illegal.
This is very, very bad. For one thing, it's a near certainty that significant numbers of borrowers are being defrauded -- charged fees they don't actually owe, declared in default when, by the terms of their loan agreements, they aren't.
Beyond that, if trusts can't produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims -- claims that are now, in many cases, worth only a small fraction of their face value.
Krugman reminds us that the "sponsors" of these trusts are the "...major financial institutions -- the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.
(NOTE: I covered this regrettable bipartisan reality quite extensively, last night, in: "Guess who's going to pay the bill for the foreclosure crisis?")
He observes that the Obama administration doesn't want to "upset the banks." So, the White House has come out against a significant foreclosure moratorium.
...Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that's worked so well in the past, right?
The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at the Wall Street Journal's editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they're saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days...
--SNIP--
...One thing is for sure: What we're doing now isn't working. And pretending that things are O.K. won't convince anyone...
The calendar tells us it's October 15th, but it sure looks like it's Groundhog Day to me.
"The Great Unwinding" has begun.
# # #
Yves Smith has been doing an incredible job--winning accolades from many others in the media--in her coverage of this story over at Naked Capitalism. I've been posting diaries which have included links to significant portions of her commentary about this topic since the third week of September. My most recent posts are here:
Wall Street Spawn Still Spew Spin On TARP/Bailout ... Again! 10/1/10
Plunging Into The Abyss: "America's Deepening Moral Crisis" 10/4/10
Will The Foreclosure Fraud Crisis Undermine Our "Recovery?" 10/5/10
Will Elizabeth Warren Enter The Foreclosure Fraud Fray? 10/6/10
40+/- States' AG's May Announce Joint Foreclosure Probe 10/9/10
Krugman Nails It: Dem's Economic Policy Messaging Failure 10/11/10
Guess who's going to pay the bill for the foreclosure crisis? 10/13/10