(1) “Foreclosuregate” and the too-big-to-fail banks: The blogosphere is abuzz about the trouble the big banks seem to be in with respect to foreclosures. What’s gotten people going is the scandal that has been called “foreclosuregate” and “the Robo Signing Scandal,” wherein the big banks have evidently falsified or fabricated missing paperwork in order to foreclose on properties when the associated mortgages had long since been bundled and sold off as mortgage-backed securities. Bank of America, JP Morgan-Chase, and GMAC have suspended foreclosures for the time being. Ellen Brown has an informative article on how serious this is likely to become at Huffington Post.
But what is really interesting is how this scandal is revealing the poor financial health of the big banks, and how it is reviving talk of breaking up the big banks as a way to avoid another massive financial crisis.
The picture above accompanied one of the blog posts that’s been getting some attention (and from which I got lots of the links I’m providing); it’s from Washington’s Blog; the post starts out thus:
We’re the fish.
The giant “too big to fail” banks are the bird. They’ve got their talons in the American consumer and the economy.
The only way out for us – the fish – is if someone “shoots” the bird … or at least captures it and removes its talons from our hide.
In other words: Unless the mega-banks are broken up and reined in, we’re in quite a pickle.
As I’ve previously noted, virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won’t be able to recover, and that smaller banks actually lend more into the economy than the mega-banks. [The blogger links to an earlier post listing the experts calling for the banks to be broken up.]
The financial future of tens of millions of US households is getting grimmer and grimmer; default rates are rising fast for all types of borrowers, half of all mortgagors are predicted to be underwater, and many of them are falling for numerous financial and employment scams. A similar financial state can be observed for states and non-financial businesses and we argue that the Obama Administration has failed to grasp the source and the size of the problem. Like the Bush Administration, the current policymakers have focused most of their efforts on helping the financial sector in the hope that the “liquidity crisis” would go away. As a consequence, tens of trillions of dollars of financial assistance has been committed to deeply insolvent financial institutions that have used the funds mostly for their sole benefit. Financial institutions are now back to business as usual and have provided limited help to the non-financial sector. In fact, some of them are clearly committed to worsen households’ financial position and have oriented their activity toward this end in order to maximize their profitability. On the other side, households and other non-financial institutions, whose dire finance is at the heart of the crisis, have received very limited help. Loan modifications programs and fiscal measures to raise their income and restore their creditworthiness have been too small to deal with the massive size of their financial problems. We argue that it is time for the Obama Administration to implement a radical shift in its framework of analysis and policy implementation. We need massive loan modifications to make loans truly affordable for the length of the loan, we need large scale employment programs that restore households’ capacity to pay, we need to deal with the over-supply of homes and to help households to stay in their houses, and we need swift and cheap bankruptcy procedures that provide a fresh start to the households who cannot afford to keep their houses. At the same time, we need to establish a Pecora-like investigation of the financial sector that ruthlessly investigated all financial institutions, even those that are not under the jurisdiction of the federal government. Financial frauds have been left unpunished for too long and are continuing to this day. Finally, we need a profound restructuration of the financial system away from the trade-and-fee model and toward a system that focuses on carefully evaluating creditworthiness and on limiting the growth of ponzi processes over an enduring period of economic growth.
Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.
Nassim Nicholas Taleb, author of “The Black Swan,” said investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories he said brought down the global economy.
“I want to make the Nobel accountable,” Taleb said today in an interview in London. “Citizens should sue if they lost their job or business owing to the breakdown in the financial system.”
Taleb said that the Nobel Prize for Economics has conferred legitimacy on risk models that caused investors’ losses and taxpayer-funded bailouts. Sweden’s central bank will announce the winner of this year’s award on Oct. 11.
Taleb singled out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.
Why did he stop there, when there’s a whole pantheon of free-market apologists that the committee has honored? It was for this reason that the Real-World Economics Review, aka the Post-Autistic Economics Review, nominated Assar Lindbeck, who chaired the committee that gave the economics Nobel, for its “Dynamite Prize” in economics, awarded to “the three economists who contributed most to enabling the Global Financial Collapse (GFC), or more figuratively, to the three economists who contributed most to blowing up the global economy”:
By working to make the Riksbank Prize in Economic Sciences (“Nobel Prize in Economics”) almost exclusively a prize for neoclassical economists, this Swedish economist has contributed significantly to the conversion of the economics profession and of world public opinion to market fundamentalism.
(He didn’t win. That honor went to Alan Greenspan, Milton Friedman, and Larry Summers.)
Hat-tip for the Bloomberg article to Ted Schmidt of Buffalo State College, who posted this to the list of the Union for Radical Political Economics, and asked: “I wonder if students can get in on this for cruel and unusual punishment?”