Foreclosure Fraud Destroys Claim of TARP SuccessBy: David Dayen
Friday October 8, 2010 11:46 am
<snip>
Felix Salmon foresees a total moratorium on foreclosures while the next steps of this unfolding crisis get worked out, and I agree. I’d expect one in place in time for the Senate Banking Committee hearing on November 16 which was just scheduled today.
Mike Konczal has put together a primer on foreclosure fraud and what it means:
http://rortybomb.wordpress.com/2010/10/08/foreclosure-fraud-for-dummies-1-the-chains-and-the-stakes/ But if you want the nickel summary, read this interview between Ezra Klein and Janet Takavoli:
Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?
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, and it’s not optional.
If you want to boil it down to its essence, that’s what we’re dealing with. The foreclosure fraud right now is covering up the fraud at the point of origination which Takavoli explains here. And contra Klein, this is something that the economy had to deal with at one point or another, since there’s so much money tied up in this:
EK: Given that our financial system is still fragile, isn’t that a disaster for the economy? Will credit freeze again?
JT: I disagree. In order to make the financial system healthy, we need to recognize the extent of our losses and begin facing the fraud. Then the market will be trustworthy again and people will start to participate.
EK: It sounds almost like you’re saying we still need to go through the end of our financial crisis.
JT: Yes, but I wouldn’t say crisis. This can be done with a resolution trust corporation, the way we cleaned up the S&Ls. The system got back on its feet faster because we grappled with the problems. The shareholders would be wiped out and the debt holders would have to take a discount on their debt and they’d get a debt-for-equity swap. Instead we poured TARP money into a pit and meanwhile the banks are paying huge bonuses to some people who should be made accountable for fraud. The financial crisis was a product of our irrational reaction, which protected crony capitalism rather than capitalism. In capitalism, the shareholders who took the risk would be wiped out and the debt holders would take a discount but banking would go on.
Maybe that will clear up things for those who want to cheerlead for TARP based on some arbitrary numbers about total costs. In fact, TARP needs to be judged on a much broader level. And when you do, you find that it only delayed, or even prolonged, disaster. The same banks that crashed the economy were nursed back to health rapidly, and they kept doing exactly what they do – collecting insane bonuses and maximizing profits while papering over fraud. Nobody has been prosecuted for this fraud, and in fact they’re all still in charge. This breakdown of accountability leads to a breakdown of trust. And in addition, those bankers who got rich the past few years didn’t pay attention to small business lending or keeping people in their homes or creating jobs or any of the elements of a normally functioning economy. What’s more, the crap assets, at the heart of the original crisis and this current crisis, remain basically in place.<snip>
More:
http://news.firedoglake.com/2010/10/08/foreclosure-fraud-destroys-claim-of-tarp-success/Check out that primer:
http://rortybomb.wordpress.com/2010/10/08/foreclosure-fraud-for-dummies-1-the-chains-and-the-stakes/:kick:
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