A foreclosure settlement
between five major banks guilty of "robo-signing"
and the attorneys general of the 50 states was
pending for Monday, February 6; but late last week
it was still not clear if all the attorneys would
sign. California was to get over half of the US$25
billion in settlement money, and California
attorney general Kamala Harris has withstood
pressure to settle. As of late Monday, she was
among those who had not agreed to the proposal.
That is good. She and the other attorneys
general should not sign until a thorough
investigation has been conducted. The evidence
to date suggests that
"robo-signing" was not a mere technical default or
sloppy business practice but was part and parcel
of a much larger fraud, the fraud that brought
down the whole economy in 2008.
It is not
just distressed homeowners but the entire economy
that has paid the price, resulting in massive
unemployment and a shrunken tax base, throwing
state and local governments into insolvency and
forcing austerity measures and cutbacks in
government services across the nation.
The
details of the robo-signing scam were spelled out
in my last article (see Robo-signing
casts a shadow, Asia Times Online, January 27,
2012. [1] The robo-signing fraud and its
implications are expanded on below.
Why
all the robo-signing? Over half the homes
in the United States are now held in the name of
an electronic database called MERS - Mortgage
Electronic Registration Services. MERS is a
smokescreen behind which mortgages were sold to
trusts that sold them to investors. The mortgages
were chopped into pieces and sold as
mortgage-backed securities (MBS), which traded in
a supposedly liquid market. That meant the
investors could sell them in the money market at
any time on a day's notice. Yale economist Gary
Gorton gives this example:
Suppose the institutional investor
is Fidelity, and Fidelity has $500 million in
cash that will be used to buy securities, but
not right now. Right now Fidelity wants a safe
place to earn interest, but such that the money
is available in case the opportunity for buying
securities arises. Fidelity goes to Bear Stearns
and "deposits" the $500 million overnight for
interest. What makes this deposit safe? The
safety comes from the collateral that Bear
Stearns provides. Bear Stearns holds some
asset-backed securities [with] a market value of
$500 millions. These bonds are provided to
Fidelity as collateral. Fidelity takes physical
possession of these bonds. Since the transaction
is overnight, Fidelity can get its money back
the next morning, or it can agree to "roll" the
trade. Fidelity earns, say, 3 percent. [2]
That is where the robo-signing came
in. Foreclosure defense attorneys armed with the
tools of discovery have discovered that
robo-signing - involving falsified signatures
assigning mortgages back to the trusts allegedly
owning them - occurred not just occasionally or
randomly but in virtually every case. Why? Because
the mortgages had to be left free to be bought and
sold on a daily basis in the money market by
investors. The investors are not interested in
making 30-year loans. They want something
short-term with immediate rights of withdrawal
like a deposit account.
Hazards of
borrowing short to lend long The problem is
that when panicked investors all exercise that
right at once, there is no cheap funding available
to back the 30-year mortgage loans, rendering the
banks insolvent. That is what happened on
September 15, 2008, when Lehman Brothers, a major
investment bank like Bear Stearns, went bankrupt.
According to Representative Paul
Kanjorski, speaking on C-SPAN in January 2009, the
collapse of Lehman Brothers precipitated a US$550
billion run on the money market funds. A report by
the Joint Economic Committee pointed to the fact
that the $62 billion Reserve Primary Fund had
"broken the buck" (fallen below a stable $1 per
share) due to its Lehman investments. The massive
bank run that followed was the dire news that
Treasury Secretary Henry Paulson presented to
congress behind closed doors, prompting
congressional approval of Paulson's $700 billion
bank bailout despite deep misgivings.
The
sleight of hand that brought the banking system
down was that the mortgages backing the money
market were supposedly held by trusts that had
lent money to homeowners for 15 years or 30 years.
It was the classic "borrowing short to lend long",
a shell game in which banks have engaged for
hundreds of years, routinely precipitating bank
panics and bank runs when the depositors or the
investors all pull their short-term money out at
the same time.
Shadow banking system
unregulated Periodic bank panics were
averted in the conventional banking system only
when the government agreed to insure the deposits
of individual depositors in 1933. But Federal
Deposit Insurance Corp insurance covered only
$100,000 (now $250,000), and large institutional
investors had far more than that to invest.
The shadow banking system, in which
deposits were "insured" with mortgage-backed
securities, developed in response. But the shadow
banking system is unregulated and is just as prone
to another collapse today as it was in 2008. The
Dodd-Frank banking "reforms" barely touched it. As
noted in an article titled "Risky Debt Use on Repo
Market Hits 2008 Levels" in the Financial Times
last week:
In the repo market, banks pledge
their securities as collateral for short-term
loans from money managers and other investors.
The market played a key role in the build-up to
the 2008 financial crisis. Banks used toxic
assets, such as repackaged subprime loans, to
secure trillions of dollars worth of cheap
funding.
When the US housing bubble
burst, the banks' trading partners refused to
accept such securities as collateral and the
repo market rapidly contracted.
However,
a study by Fitch Ratings says the proportion of
bundled debt being used as security in repo
transactions has returned to pre-crisis levels.
Using the repackaged loans can increase
risk in the repo market, the rating agency says.
This is because the securities may be prone to
sudden pullbacks such as the one experienced in
2008. [3]
We could be looking at
another banking collapse at any time; and to fix
the problem, we first need to know what is going
on. The attorneys general should not agree to drop
the curtain on the robo-signing scandal until all
the evidence is on the table. It is not just a
matter of punishing the guilty; it is a matter of
a banking scheme based on fraud, one that
ultimately does not work and has jeopardized the
homes, savings and investments of the public not
just recently but for hundreds of years.
The way out There is another way
to design a banking system. The deposits of large
institutional investors do not need to be backed
by sliced and diced pieces of our homes to be
"safe" (something that has proven not to be safe
at all). The large institutional investors seeking
safety are largely "us" - the pension funds and
mutual funds in which we have stored our savings
and on which we rely for support when we can no
longer work. Hundreds of years of history have
demonstrated that the only reliable guarantor is
the government itself.
Our pension funds
and mutual funds need a government guarantee just
as much as our individual deposits do. But we
don't want to be guaranteeing the gambling and
derivatives schemes of too-big-to-fail, for-profit
Wall Street banks playing fast and loose with our
money. Banking and credit need to be public
utilities, operated for the benefit of the public
in plain sight of the public.
Ellen Brown is an attorney and
president of the Public Banking Institute, PublicBankingInstitute.org.
In Web of Debt, her latest of 11 books, she
shows how a private cartel has usurped the power
to create money from the people themselves, and
how we the people can get it back. Her websites
are WebofDebt.com and
EllenBrown.com.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
