Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Banks Will be Seeking Another Tax Payer Bailout

Politics / Credit Crisis Bailouts Nov 11, 2010 - 01:04 PM GMT

By: Peter_Schiff

Politics

John Downs writes: As a mortgage broker during the manic years of the housing boom, I witnessed reckless financial practices on a wide scale. As a result, I was not surprised by the "robo-signing" mess that now threatens the mortgage sector. Unfortunately, the scandal is only a small tip of the iceberg that threatens to take down the entire US banking system.


The "too big to fail" (TBTF) banks that acted as middle men in the mortgage machine knew that the mortgage-backed securities (MBS) they packaged and sold to investors didn't meet the standards they claimed. In essence, MBS buyers were sold Ferraris but took delivery of PT Cruisers. Because of these material misrepresentations, TBTF banks could be forced to repurchase hundreds of billions of MBS that they sold to investors. Since they don't have that kind of cash lying around, it's likely they will turn to their federal benefactors for another bailout.

If the Treasury is solvent enough to offer such a bailout, there might never be a proper investigation of how the mortgage market blew up. As a former industry insider, I hope I can shed some light.

Historically, real estate prices in the United States were driven by supply and demand, and generally tracked the rate of inflation. Securitization changed that. Mortgages no longer remained with the lender extending the loan, but were sold to an investment bank that would, in turn, create MBS and sell them to investors. During the housing bubble, trillions of dollars of these securities were churned out. When banks found themselves with loans that did not conform to minimum requirements for securitization - rules meant to protect MBS investors from the risk of widespread defaults - their response was to sprinkle these "subprime" loans into other MBS bundles. Auditors only sampled about 5-10% of the loans making up any one MBS, so if a particularly egregious loan was rejected, it could simply be shuffled into another MBS. In the rare case that the loan was spotted a second time, it was shuffled again.

Meanwhile, the banks largely didn't share the poor audit results with potential MBS investors. They were savvy enough, however, to use the poor showing to negotiate lower prices from wholesalers who sold them raw mortgage loans. This is like a grocery store demanding refunds from farmers who supply E. coli-tainted spinach, but selling the produce to consumers anyway - with no warning, and at full price!

Emboldened by recent auditor testimony of such practices, and citing failure to properly service mortgages according to signed contracts, a group of investors has filed suit to force the banks to repurchase their toxic MBS. In response, the banks have publicly stated that servicing problems are "contained" and present no broad systemic risk, even while it becomes increasingly clear their problems extend far beyond technical breaches of procedure. As more information concerning the extent of potential bank fraud comes to light, more such lawsuits are a certainty. The situation presents lawyers with a once-in-a-lifetime opportunity.

As a result, I expect uncertainty and headline risk to haunt US banking stocks for some time. Housing prices will likely fall much further as foreclosure sales are delayed and homeowners increasingly decide that strategic default is their best decision. As I mentioned, I don't believe the banks can withstand this tidal wave without a flood wall of federal funds.

Which brings us back to the great question of this economic crisis: should we consider these banks "too big to fail"? Or, rather, is it time that they must fail?

As recently as April 2006, I was still an optimistic mortgage broker. If I had heard of Peter Schiff or the Austrian School of economics, I may have thought twice about signing a three-year commercial lease and spending thousands on office equipment. But, like most people at that time, I couldn't see how real estate prices could ever fall. By 2007, my business was floundering. As cracks in the housing market started to show, small brokers were vilified in the media and squeezed out of the market as banks raised their underwriting guidelines to eliminate "unscrupulous" external loan brokers. So, small shops like mine closed one after another. Meanwhile, the big banks continued to purchase and underwrite billions in loans, even while they were aware of declining underwriting standards and fraud within their ranks. I vividly recall that as my business was drying up, my only option to continue my trade was to return to a big bank. They were the only ones still making money as the market collapsed.

Fortunately, my ultimate perception (aided by Peter's analysis) that the housing market would not improve any time soon led me to make a pragmatic decision: get out and move on. I took the losses, and I lived to fight another day. Nobody bailed me out, and nobody is bailing out the individual homeowners across the country faced with upside-down mortgages. The much touted Homeowner Assistance Modification Program (HAMP) has proven to be a bust, a byzantine maze of red tape and frustration awaiting any homeowner who seeks its aid.

An increasing number of homeowners are making their own pragmatic decision: stop paying the mortgage, save money, stay in the home as long as possible, and, eventually, get out and move on. The moral hazard created by the Wall Street bailouts has encouraged business-as-usual from the TBTF banks, who have largely refused to restructure underwater mortgages, and has promoted more foreclosures as homeowners orchestrate their own private rescue packages. Over the next few years, I imagine it will be increasingly clear to Americans that when it comes to the big banks, it's time to cut our losses, get out, and move on. Take it from someone who has done so, and never looked back.

Click here for a description of Peter Schiff's best-selling, just-released book, How an Economy Grows and Why It Crashes.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in