A business editor at the Atlantic (apparently a real one) elaborated a bit today on what could happen if the banks screwed up property titles as bad as we think they did. Homeowners don’t seem to figure in much, but apparently Goldman’s screwup may give the fool investors who bought up incomprehensible mortgage-backed securities (MBS’s) a chance to take a mulligan.
The investors who hold that MBS might be able to claim that the bonds they hold were not created properly, contracts were breached, and the bank that originated the mortgages needs to buy back the bonds. This, of course, would require many billions of dollars in capital in excess of that banks have lying around. And remember these aren’t pretty bonds. They are mostly toxic and full of losses. Those losses would then be passed on to the banks.
That would be pretty sweet justice for, say, pension funds and more gullible municipalities, at least the ones that didn’t already use their MBS certificates for cigarette paper and scarecrow stuffing. However, as I recall the or at least a major buyer of MBS’s was the banks themselves. In a truly happy world the banks that got themselves deepest in this mess would spend bajillions of lawyer hours suing each other and the gains/losses will more or less cancel out.
Or maybe not.
If this problem turns out to be real, and the worst-case scenario that Rosner imagines come to be, then it’s hard to see how the government could fix it simply without tramping over contract law. Instead, more aggressive approached would be required.
For example, it could recapitalize the banks through a sort of TARP II so they could afford to repurchases these bonds. Another possibility might be to get Fannie and Freddie involved and having them buy the MBS from these investors instead, which would cause the GSEs to incur more big losses. Finally, the Fed could get involved, perhaps by purchasing those MBS as part of a new quantitative easing effort — a sort of two-birds with one stone approach. Of course, losses would again likely result — this time for the Fed. In all scenarios, taxpayers would ultimately suffer.
Just imagine the political optics of that. Permanent Republican Majority here we come.
kommrade reproductive vigor
I myself favor the approach that involves tumbrils, guillotines and seizing these suckers’ assets.
Scott P.
Maybe we should replace E Pluribus Unum with the above motto.
bk
Yahoo has just crashed (perhaps a “sympathy crash”). We are all doomed.
mikefromArlington
Republicans would overwhelmingly vote for TARP II, claim bi-partisanship, terrify the teabaggers that the world will collapse if it isn’t passed then 5 months down the road everyone will have selected amnesia and blame Obama for bailing out the banks again.
WyldPirate
This is why the Fed is about to turn on the printing presses to do another several trillion dollars of money-printing for “quantitative easing”.
So, courtesy of the American Taxpayer, we get to buy up more of the great big “shitpile” as Atrios so accurately calls it.
gotta bail the banksters out yet again, donchya know. Then the banksters can sit on it the profits from the worthless securities that the government purchased from them so the housing market doesn’t really fall off a cliff.
jacy
You’re trying to get me to believe there’s a real business editor at the Atlantic. What kind of rube do you take me for?
Citizen Alan
If the Democrats, including Obama, go along with some hair-brained scheme to get tax-payers to pay the banks back for losses incurred solely because the banks committed fraud and got caught then the Democrats, including Obama, deserve to be tossed onto the ash heap of political history. Of course, since Timmeh is in charge of all things financial, I imagine that is exactly the route we will go.
Comrade Dread
Not one more f***ing cent to these f***s.
Let them burn.
MattR
I really am thinking of taking Greg Giraldo’s advice that investing in tequilla and strippers might not be that bad an idea.
Bill White
I just love the Coldwell Banker Real Estate Google ad next to this story.
“A move in real estate never looked this good”
followed by
“Dream on” in the click here box.
Don
Nah, MBS buying investors won’t recoup in any major way. Might seriously enrich some class-action lawyers tho.
wengler
Since the banks have much less leverage than they did when they ransomed the economy for 700 billion(those CDOs rolled down the hill a lot quicker), I would advocate the approach that doesn’t give the richest man in the room the most money. Of course my strategy is diametrically opposed to what will be the Conventional Wisdom created in the coming week, so I am well aware that anything that helps people without millions of dollars is clearly off the table.
Obama would be well advised to appoint an economic team that doesn’t suck and especially doesn’t come out of the University of Chicago. I can only imagine that these people coming up with an idea like an “augmented foreclosure” where a private firm is given contract to foreclose on people no matter the faulty underwriting and then ownership of the property is determined through some sort of byzantine legal process. At the end of the day, the billionaires gotta get paid.
dan
“In all scenarios, taxpayers would ultimately suffer.”
Not if you just let the banks eat each other and stay the f* out of it.
MarkJ
I think the Obama administration should call their bluff. Let the courts tell Goldman et al to buy these things back from investors, and see if the Repubs scream for a bailout of their rich financial backers, or let them go down in flames like they say they want them to.
At the very least I would, if more agressive approaches are needed, really extract some pain. Maybe an anonymous ginormous war chest of “you can’t track where it came from” donations for a democratic run non profit so we can run attack ads ad nauseum over the next election cycle, plus make sure that any bailout only pays them pennies on the dollar so they can’t ante up to their republican backers.
Mojotron
I really am thinking of taking Greg Giraldo’s advice that investing in tequilla and strippers might not be that bad an idea.
How’d that work out for him?
oh.
Davis X. Machina
@mikefromArlington: I would only add the words of that famous British logical-positivist philosopher, Terry Venables:
Dennis SGMM
The tip off came months ago when the banks were allowed to value these assets using mark to book rather than mark to market. They very well knew that they had tons of toxic shit masquerading as assets and they knew that the scenario described in the OP could very well occur.
If the taxpayers would ultimately suffer in all scenarios then the banks should suffer too. Break the motherfuckers up into little tiny pieces and sell off anything of value. To do anything short of that is to set up the next in what will be an endless series of taxpayers footing the bill for the bankers’ insane bets.
In a properly run nation the people who engineered this mess would already be facing indictment. That they aren’t facing indictment and that they continue to pay themselves more in bonuses than any several states spend on education says much, to me anyway, about how the extent of our decline.
Steve M.
Of course, if the Republicans were the great populists they claim to be, and the great believers in the unswerving no-bailout principle they claim to be, they’d do everything in their power — filibustering, noise machine cranking, demonizing of vulnerable Democratic centrists — to block this.
Too bad, on this one issue, they’re going to suddenly, inexplicably turn powerless.
Zandar
Some of us said “Hey, we should have taken over the banks and straightened all this crap out two years ago.”
We were told “Well no you can’t nationalize the banks and fix them because SHUT UP TOO BIG TO FAIL THAT’S WHY.”
We said “OK, but you realize we’re going to be right back in the same mess here pretty quickly and in the meantime the economy’s not going to get any better unless you deal with this root problem.”
We were told “Yeah sure we’ll be fine! TARP MADE A PROFIT LOLWUT!”
Well now here we are, in this strange inexplicable little mess again. Funny how that works.
beltane
@kommrade reproductive vigor: This is the approach which should have been taken in the first place. Almost all of the miasma we are operating under in this country is due to the fact that those who caused this disaster did not suffer any adverse consequences whatsoever for their bad behavior. Every basic tenet of justice has been violated here, and the bankers continue to arrogantly taunt the public by whining about people being mean to them.
During the Great Depression, at least, there were a great many rich people who lost everything and were no longer rich. That didn’t happen this time around. It is like a World Cup final where the referees cheer on as the favored team blatantly cheats their way to victory, oblivious to the boos and catcalls of the crowd.
jl
Permanent GOP majority here we come if the GOP sat back and pretended to obstruct, letting the Dems vote through a bad plan, made worse by incompetent and corrupt conservaDem and GOP changes, with result that a plan very much like the GOP wanted passed, but with public thinking GOP opposed and Dems supported.
But that is such a far fetched scenarios, the Democrats would never be that inept…
Oh.. wait… maybe…
I hope that the problem is not as big as the most pessimistic analysis suggests it is. But, in any case, looks like the DFHs James Galbraith and William Black were right: criminality and negligence needed to be addressed asap, not swept under the rug.
These kind of ‘little complications’ show why the model for resolving the financial crisis should have been a form of society wide bankruptcy proceding, with losses in peoples’ estimated asset value spread equitably, and with a focus on producing as little damage to the real economy as possible.
But that did not happen. The Very Serious Mainstream Consensus was wrong, once again.
Davis X. Machina
@Scott P.: It is already scheduled to be replaced in 2016 with either ‘Sumus Primi!‘ (‘We’re #1!’) or ‘America, Fuck Yeah!’, depending on whether the Buckley/ Kristol wing of the GOP or the Palin/Maese wing wins. The first coin to have it will be the new Reagan dime.
Joel
The MBS the banks bought themselves are not an issue in regards to this scandal. The banks were aware of the problems with the securities they were selling. So the scandal is that a) they didn’t pass along that information to investors and b) actually traded on that information at the expense of the investors.
bkny
it will be interesting to see what happens if those mofos go thru and award themselves the year end billions in bonuses that is being written about.
Dennis SGMM
@Zandar:
And of course the bankers having been richly rewarded for using the taxpayers as asswipe would never, ever again pull a similar stunt.
Sad_Dem
Dennis SGMM: “That they aren’t facing indictment and that they continue to pay themselves more in bonuses than any several states spend on education says much, to me anyway, about how the extent of our decline.”
I keep hearing that historian when I read the news now–you know, the soft-spoken academic who presents charts on agricultural maintenance spending versus tribune compensation during the reign of Humbert the Magnificent XIV…
WaterGirl
I see a new BJ tag in our future:
Zifnab
The banks own the GOP. If the banks need a bailout, you’ll see the GOP turn on a dime to bail them out.
After all the slow rolling the GOP has done to demonize bank bailouts, they’re going to – once again – be stuck between a rock and a hard place as they try to rush back and bail everyone out again.
Honestly, another bank catastrophe wouldn’t be a bad thing at all. It would incite bedlam in the Tea Party wing, while Obama gets another opportunity to pass a second stimulus.
@bk: If by “crashed” you mean “is up 4%”. What are you smoking?
futzinfarb
…and in other news, it turns out that John Galt is actually Barney Fife.
wengler
I think people gotta learn something about buying houses in America. You buy a house to live there. Not to ride on top of a bubble. Not to see it go up 100 percent in value in 2 years. To live there.
Also rich people have too much money. A small elite with all the spending power distorts real estate prices, lending practices, and the availability of employment. And of course in a democratic republic they distort the politics, for their rapacious greed knows no bounds.
I’m sick of tired of electronic pitchforks. Ye peasants will wait until you are on the breadline, and by that time it will be too late.
BR
I hate to be doomery, but is anyone else feeling like things are heading for another 2008 situation? Combine this unresolved mega-mortgage-mess and the GDP growth (or lack thereof) we’re likely to see this quarter and unemployment ticking up and etc…
Mark S.
There isn’t going to be TARP: The Sequel. I could see the Fed doing a bunch of shenanigans to ensure no Master of The Universe has to give up one of his seven mansions.
BR
@Dennis SGMM:
Wasn’t there some amendment – that the “deficit hawks” and GOPers shot down – to do this? (Something to the effect of ensuring that no single bank held more than 1% of assets.)
Tonal Crow
How about we nationalize the insolvent banks, then operate them as public entities until we figure out how to re-architect banking so that bankers don’t destroy the economy?
Perry Como
Wait until someone brings up the CDSs that were written to hedge against all of the garbage MBSs. Again.
Dennis SGMM
@Sad_Dem:
Heh! I’m an amateur historian and my area of greatest interest begins with the Roman Principate and ends with the Renaissance so you’re not far wrong. It’s been my hobby for more than forty years.
The words, “Why the fuck couldn’t they see that coming?” occur to me at times. It was ever thus.
wengler
@Zandar
It was always going to be tempting for Obama to just paper over the problems and move along. It really was sad to see it done with the cases of Bush crimes. And now this.
It’s going to be pretty damn ironic when Obama is impeached by Republicans for essentially adopting a lite version of Bush era policies concerning economic regulation. In the end, the further down the rabbit hole we go, the more radical actions are going to have to be taken to either screw the American people on behalf of the banksters or vice-versa. And you gotta believe that any seizure of banks is going to cause the rightwingers to become even more apoplectic than they already are.
Bullsmith
The bankers and the Fed and Treasury are a cartel that can print it’s own money and control who it’s lent too. If they go broke they’ll print themselves more. They’re not terrifically shy about it, even.
BombIranForChrist
Thankfully, all the bank executives will still get bonuses.
wengler
I’m sure this can all be paid for by privatizing Social Security and public sector pensions. Hell, that amount of money will buy about 5 years in the Great Casino no problem.
Dennis SGMM
@Bullsmith:
It’s not printing money, it’s “quantitative easing,” silly. Printing money is that bad thing that nations like Zimbabwe or post-WWI Germany did with the result that their currency was worth dick. Quantitative easing, on the other hand, couldn’t possibly result in such an outcome.
Right.
Juicebaggers, ho!
Nope. You are all wrong and we are fine. This is the best of all possible worlds.
Besides, Obama’s got this shit!
vtr
You know, it’s almost like they’re doing this on purpose.
Juicebaggers, ho!
I’m excited about the midterms, how ’bout you?
Perry Como
@Dennis SGMM: And all of that easing sure isn’t moving the dollar on the FX markets!
Corner Stone
@Tonal Crow: I’ve never understood why we don’t treat them as regulated public utilities.
They take money in trust, pay out a certain amount X% for the privilege, and loan money out at Y%.
Easy peasy, allocation of capital. Booyah.
Nobody needs to be leveraged at 80 to 1, or make $700M a year shuffling paper.
Tokyokie
We’ve had a group of criminal enterprises committing systematic fraud across state lines. I believe under the RICO statute, the feds can seize all their assets and send them all to prison, and I see no persuasive argument not to do so.
debbie
What about the trillions that banks and corporations are sitting on, refusing to invest, make loans, or otherwise help the country’s economy recover? Let them use that to pay for this mess.
JGabriel
Question: If Goldman went bankrupt and was decommisioned in a controlled manner, who, outside of employees and shareholders, would miss it?
I may well be wrong, but I can’t think of a single thing that Goldman produces, or service that they provide in an honest fashion. At least in the days of “What’s good for GM is good for America,” we knew that GM made cars. Does Goldman Sachs do anything but invent and implement new ways to rip people off?
.
ruemara
@JGabriel:
They have increased the market for indigestion pills & cardboard boxes.
Omnes Omnibus
@ruemara: This is all going to be very interesting, interesting in the Chinese curse sense.
Sasha
They’re waiting to see which political party they’re going to have to deal with before spending money.
Dems: Grudgingly help.
Repubs: Grudgingly pretend to help.
catclub
“it is hard to see how the government could fix it simply without tramping over contract law”
Now the worries about contract law. Must be a large powerful entity involved. Union contracts, public employees pension contracts, no worry about contract law then. Force it down their throats.
breaking contracts with homeowners using fraudulent documents and fraudulent statements to courts: – “mistakes were made, they will have to suck it up” – but no concern there
about contracts.
JR in WV
These guys are committing fraud on the grandest scale in the history of the world, in public. Tokyo… is correct, it is the biggest un-prosecuted RICO crime ever, and everyone connected to it should be jailed until they cough up all their assets to the prosecutors’ office, and that can be their bail until they’re tried for a whole list of financial crimes, which I attempt to list herein:
1.) Complete lack of Due Diligence in determining who can repay
huge real estate loans made to used car salesmen so they can live in faux Roman estates; making the loans with false documentation, no docs, incorrect docs that actually go with some other borrower…
2.) Complete lack of honesty in repackaging loans (from step 1) into security instruments with various fancy names. (My very good CPA can’t even explain it because he doesn’t un derstand it! My financial advisor can’t explain it either, thank god she won’t let clients invest in things she doesn’t understand when there are so many good investments she DOES understand!!)
3.) Fraud (again!) in bribing supposedly neutral 3rd party rating agencies (Moodys et al) to certify that the so-called securities are AAA+ when in fact all in the biz know they are – to quote a Lehmen’s executive – “Shit!”
4.) Additional fraud in selling these AAA+ (but really SHIT) securities to OUR PENSION PLANS!!!!
5.) Taking billion-dollar bonuses for doing a great job when in fact see 1-4 above, so accepting any money from their companies (actually our companies, they were just managers with fiduciary duties to us owners) was fraud because they didn’t do the job they claimed to be doing, and were obligated by law to actually do.
6.) Now that the loans are busted, and the construction business is dead, and itn’s time to take the mega-houses from the used-car salesmen the loans were made to, the wall-street gods can’t tell who actually owns the note that allows them to foreclose on the bad loans… so they attempt to foreclose on people’s property without due process.
Now here’s mhy list of people who should be in jail, trying to remember where their assets are:
Real estate agents who allowed clients (buyers) to apply for loans the agents had cause to know they couldn’t repay while living in the homes.
Appraisers who used a bubble as evidence for a price increase, as opposed to the cost plus price of a house of such a standard.
Title agents who insured the titles of these homes.
Bank loan “officers” who approved loans with no proof of income.
Bank Corporation officers who made funding (borrowing , selling bank stock or “securities”, available for loan programs subject to any of the conditions I mention above.
Bank employees who worked with rating agency staff to ensure that bogus loans remained AAA+ until they were sold to OUR PENSIONS!!!
Bond rating staff who failed to ask if these loans underlying the “securities” will be paid back and rated the “securities” AAA+ regardless.
Stock brokers and investment advisors who recommended to the general public, OUR PENSION PLANS, or any other purchaser that they should buy these “securities” because they were a great investment.
Government regulators like Federal Reserve, SEC, Freddy and Frankie (or whatever those real estate entities are really named, you know who I’m talking about) Saving and Loan regulators (although those S&Ls don’t seem to have been drinking the Koolaide this time).
Government prosecutors who decided that this huge cascading pile of SHIT wasn’t even the tinyest bit illegal, and that there was no way we could recover any of the billions and trillions of OUR PENSION money.
Last, but not least, Politicians who accepted campaign contributions from any of the above categories of felons, or consulting positions with the above felons, or in any way profited from the real estate bubble, or the shinanigans under way more recently as the banks try to re-monetize their bad loans that started this mess using illegal knee-breaker techniques.
All of these people should have the choice of coughing up their funds, including the airplanes, yachts, island estates, wine collections, Renoir collections, Mercedes collections, pension funds, 401s, stamps, stocks, savings bonds their gramma gave them when they were little. Or staying in jail until we get around to their case, and deciding whether to use the pitchforks, hot tar, and feathers, or the noose, or whatever, and then taking the assets that we can find.
Cause all those trillions of or dollars, those are OURS, not theirs!
Scamp Dog
@Dennis SGMM: That kind of history sounds interesting to me. What are some good places to start reading?
Dan
Or we could modify every single loan underlying the bonds.
Force the banks to get neutral appraisals, write the loans down to market value (maybe market value +10% if you want to give the banks a bone) and put them all at 4%, fixed rate, 40 year loans. Forgive up to 24 months of arrears.
All of a sudden those non-performing assets would be performing. And you would have a nice, tidy cash flow coming in. Sure, you wouldn’t be making oodles of profits, but if you manage it right you would be making something.
Dennis SGMM
@Scamp Dog:
For a start, I’d read Barbara Tuchman’s A Distant Mirror: the Calamitous 14th Century. Tuchman has a gift for making history personal and human. For a good view of how events in the Middle Ages affected subsequent history and the eventual rise of Western European civilization I can’t recommend a better book than The Civilization of the Middle Ages, by Norman F. Cantor. Reading these two books will give you a great start, as wellas being good reads, and you can proceed from them in any direction that you choose.
danimal
Hey, this debacle’s predictable. It seems like the Dems can get ahead of the issue, form a game plan and hang the problem on the newly energized GOP. They can sit back and watch the banks fail while the GOP cannibalizes itself between its practical side (the financiers own us) and its political side (tea party opposition to bailouts). Let the fcukers twist in the wind this time. If we’re going to have a crappy economy until this unravels anyway, we may as well go full throated progressive and let the banks fail and let the GOP own the problem.
Oh, we’re talking about Dems. Like Ben Nelson and Joe Lieberman. Bend over, America.
Francis
How ’bout this? The Rs take the House in 3 weeks. On November 3, President Obama goes on national TV, congratulates Speaker-to-be Boehner and says “I look forward to reading the legislation he proposes to solve this crisis.”
Hey, the Americans want a Republican house; let’s see what they can do! Put them in the spotlight for once.
grumpy realist
For the history buffs, if you want to really blow your minds, read anything by Frances Yates. I highly recommend “The Art of Memory” and her book on Giordano Bruno. (expect a lot of footnotes in Latin in the latter.)
chopper
assuming these CDOs and the CDSs written on them get rotten enough to necessitate unwinding the whole shebang, this is what i think will end up happening. ben’s been gassing up the helicopter anyways.
Joshua
In 2008, know-nothing me without an economics PhD, a McMansion in the Village, or a blog with the Atlantic, said we should just let the banks burn and sell off the useful scraps. Propping them up wouldn’t save the economy – it would just gave them cover for their lawbreaking, which they would resume with impunity, because they would have no incentive not to. We’ll be right back to where we were before long. Of course I and others like me “just didn’t get it.”
Oh so what do we have today? It sounds like propping up the banks didn’t save the economy. All it did was give them cover for their lawbreaking, which they resumed with impunity because they had no incentive not to. We are right back to where we were before.
If I say, today, that we should let the banks burn and sell off the useful scraps, will anybody listen to me?