Should fraud and other laws be enforced , and how, or should banks be bailed out?

originally posted 2008-03-09 12:04:24 -0500

This is material on some of the different ways in which people are approaching the question of how to deal with the fall out from the housing and mortgage crisis. There's quite a few links here, and not so much comment. I hope you have time to work through the links

There are two basic approaches represented. One involves criminal and regulatory agency investigation and enforcement. Headlines in the last couple of days feature the FBI’s investigation of Countrywide plus 15 other lenders, and the Illinois AG’s suit against the same Countrywide and other lenders.

There is one proposal on the enforcement side which seems quite workable. It is a recommendation to start seizing the stock and assets of corporate executives, liquidate them, and hold them in escrow, and then go back to reserve based lending in a draconian way. This was detailed by SeriousBull in this post to his blog, Enforcement Measures Needed. His view of what ought to be done is at the end of the piece. This seems to be learning the lessons of the Enron collapse in a meaningful and potentially useful way.

The other option would be to continue with Bernanke’s bailout of what the FBI and state authorities seem to be beginning to look at as possible criminal enterprises. Michael Shedlock published this piece on the SeekingAlpha collection place on the 5th.
Is it the tax payers job to bail out the banks?

There are a lot of other things going on today. Some of them are chronicled at this site
What’s going on today? You can choose your own time frame if you want to.

The news on the Countrywide investigation by the FBI was reported by the Wall Street Journal this way. WSJ on Countrywide investigaton. The Illinois AG suit was reported here on the housingwire.com
Illinois AG suit. This week Bernanke proposed that banks negotiate “foregiveness” of a part of homeowners’ mortgage debt. His proposal was floated at about the same time the report came out that banks own more of Americans’ housing than the owners do for the first time since World War II, or perhaps ever. The issue was discussed this way by SeriousBull.
Bernanke’s “forgiveness” proposal

This discussion about "just desserts" seems to provide the backdrop to what has been featured as a dispute about the two of the companies MBIA and Ambac which “insure” corporate and municipal bonds against default. This discussion will no doubt seem arcane. The subject in the background is whether there is fraud and misrepresentation going on between the Fed, the big banks, the bond insurers and the rating agencies. Or wherever, if they are breaking laws to save banks, such activity is justifiable in the broader public interest of defending banks. The two companies, which are quite small, representing less than $6 billion of paid in capital perhaps, are insuring between them approximately $2 trillion of debt. How such a mis-match could come about is one of the wonders of where this country appears to be ending up.

What the Bureau types seem to be investigating appears to be supported by the Federal Reserve which seems to be prepared to lend Citibank and others money (they don’t have their own) so Citibank can bail out MBIA or Ambac to maintain their credit rating with Standard and Poors and Moodys so that Citibank and others will not have to downgrade holdings of debt which MBIA and Ambac have insured and take more write-offs.

It seems that these insurers, losing money on their corporate bond portfolios, are racking up the rates the charge municipal governments whose bonds are often voted on in referenda and backed by tax payers. The municipal bond insurance rip-off is profiled here The Muni Bond Insurance Rip Off. Even a country like Iceland has found its insurance costs rising dramatically. Cost of Insuring Iceland’s Debt Skyrockets.

This older review of the rating cartel by Michael Shedlock provides some background Rating Cartel Background. This report, which is a detailed study of the mortgage crisis provides a case study documentation of what the likely default rates are on the product the rating agencies are advising investors it is safe to buy. Whitney Tilson Report on the Mortgage Crisis (75 pages of Graphics you need to sign in with an email address)
Mortgage Crisis has a lot further to go

There are a number of regional and local challenges to what the banks have been doing, and various organizations which have emerged to get others involved. These links will take you some of them where more information can be found. It would be worthwhile compiling a collection of such. Cleveland Ohio is suing Mortgage Lenders
Copy of Cleveland’s Suit. Baltimore Md is suing Wells Fargo
Baltimore suit. The California Reinvestment Coalition has a campaign going to stop Bank of America’s takeover of Countrywide
CRC Letter on Bank of America and Countrywide. The same organization is also working with activist groups around the country
Activists around the country.

Just shows there's more than one way for an avalanche to go down

Story of the Avalanche and Forest
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to read all of the articles that are linked here. My initial thoughts are that a lack of enforcement bares a good portion of the responsibility for the current crisis.

I'm not sure enforcement bares that much responsibility, but it would sure help. People get them selves in credit card debt pretty easily so it's no surprise how many people took these loans without a second thought about what they could and couldn't afford. I'm sure they got talked into them etc so everyone i think shares the fault.

Thanks for posting the link (there’s a double ‘aitch in there you know). I think there are at least three related issues involved here. The first is the collapse of people’s living standards as the economy has been transformed into a kind of Darwinian survival of the “fittest” as measured by financial assets accumulated from and out of the pockets of the rest of us. Making good the shortfall is an implicit job creating investment program. As property values continue to collapse it ought to be possible to start thinking about urban redevelopment with mass transit thrown in. Shedlock on Foreclosures and Tax Assessments . I doubt Shedlock would agree with that.
Second is the spread of consumer indebtedness. And third is what is called securitization. That is what happens to the debt once it has been incurred and some financial agency can look forward to the income stream as a discountable and re-sellable asset value, and source of fee income. The third aspect is dealt with in a series of reports by Reggie Middleton which he has begun to release
Reggie Middleton’s blog. You can find his account of consumer debt in the second part of his series. Scroll down to the picture of the bull. You won't be able to miss it.
Have you noticed that resale values of SUV’s have collapsed? The biggest by the most. How are the mighty fallen?
The continued decline in housing prices is demonstrating the futility of the Federal Resrve’s efforts to bail out banks etc. at public expense. They have tried to shore them up at around 90% of the book value of what they call their assets. While they were doing that book values have fallen into the low eighty per cent range so that Bernanke and company will shortly be called on to contribute as much again from our wallets and purses to the bankers if not more. No problem though.