Monday, December 10, 2007


Must-Read of the Day

The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC. —Sean Olender writing in "Interest rate 'freeze' - the real story is fraud"

Attorney Sean Olender doesn't think Bush's announcement last week of a plan to reschedule the rise in interest rates on subprime mortgages, maintaining them at their current levels for the next five years, is quite what it is advertised to be. In brief, Olender argues that the plan is not about keeping hapless homeowners in their homes but about keeping fraudulent financiers out of jail.

Along the way, Olender makes a number of observations about the mortgage debacle that are "beyond the current media discussion." For instance,

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

Secretary Paulson: What did he know and when did he know it?

As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know....

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

To be sure, there are other opinions as to what lies behind this new plan, which almost everyone agrees will not avert the crisis and will help as few as 145,000 homeowners. Elizabeth Warren says it may be a tactic to head off Democratic proposals for changes in the bankruptcy laws that would greatly empower threatened homeowners.

While economic ideology was undoubtedly considered before proposing this "plan," staying out of jail and saving the banks would be the priorities—and in that order.

Related posts
Many in finance found to be SIV-positive (10/30/07)
Must-View of the Day (11/17/07)


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