In the end, the banks found that
they could claim legal title while funding in the short term money. It really worked on their good faith that the
title truly belonged to them and was assignable as claimed. The only problem of course was that the
process of securing title was never meant to operate at the rate the banks
needed to work the system and it did not.
When the music stopped the bag
holders were to discover they owned title all right provided that they can put
together the legal paper trail such title system demands. And just how do you go back to homeowners to
ask them long after the fact to approve a string of transactions he had no say
in creating.
The solution, of course, is to
operate a document mill producing papers trails to allow foreclosures to
proceed. It is out right fraud to cover
a previous covert series of transactions that endangered the home holder whose
permission was required but never acquired.
Suddenly the whole underpinning
of the modern credit system is been debased.
Signing off on a settlement now
is nonsense. The real costs are easily
approaching a trillion dollars and the perps are attempting to wiggle out from
under.
Why the AGs Must Not Settle: Robo-signing Is Just the Tip of the
Iceberg
by Ellen
Brown
A foreclosure settlement between five major banks guilty of
“robo-signing” and the attorneys general of the 50 states is pending for
Monday, February 6th; but it is still not clear if all the AGs will sign. California was to get over half of the $25 billion in
settlement money, and California AG Kamala Harris has withstood pressure to
settle.
That is good. She and the other AGs 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, here. The robo-signing fraud and its implications are
expanded on below.
Why All the Robo-signing?
Over half the homes in the country are now held in the name of an
electronic database called MERS—Mortgage Electronic Registration Services. MERS
is a smokescreen concealing the fact that these 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.
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.
The 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. And 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 $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 form of 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.
The Shadow Banking System Is Still 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 FDIC 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 Friday’s Financial Times:
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
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.
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 AGs 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 developed her research skills as an attorney practicing
civil litigation in Los Angeles
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