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MORTGAGE-BACKED SECURITIES FRAUD 4 DUMMIES! (aka the Cliff Notes version)By Michael Rivero
The American media has been remiss (intentionally) in reporting on the mortgage-backed securities fraud, even though it is the initiating event in the economic disaster which continues to engulf the world. But while the government can pretend none of this ever happened, the civil suits will drag the scandal into the public eye, and well it should!
For the newer readers, here is a summary of how DC and Wall Street got us all into this mess.
After the last Depression, Congress enacted a law, Glass-Steagall, which forbid banks, insurance companies, and investment houses to be in the same institution, to deter reckless speculation with depositors' money, which was seen as a major contributor to the stock market instability of the time. Then in 1999, at the height of the "Deregulation" craze, Citigroup and Travelers merged, a clear violation of Glass-Steagall. But rather than enforce the law, Congress repealed the prohibitions of Glass-Steagall with the passage of the 1999 Financial Services Act.
That opened the floodgates for runaway financial speculation. Wall Street knew that if they made money they would be allowed to keep it, but if their investments lost money, the US Government would step in to transfer the losses to the American people, because that is what had been demonstrated during the S&L debacle of the 1980s.
Starting about in 2005, Wall Street started bundling mortgages together into investment bundles. The initial offerings were greeted with great success, and soon everybody wanted to get in this new "product." So great was the demand for Mortgage-backed Securities (MBS, also called Collateralized Debt Obligations) that Wall Street started running out of mortgages to front-load the system! This led to the creation of the "sub-prime" mortgage; granting mortgages to people who normally would not qualify. Congress, themselves invested in the Wall Street firms that were profiting from selling MBS, passed an $8000 first-time homebuyer tax credit (actually a loan repaid in future taxes) to lure more buyers in which helped front-load the process even faster. This sudden surge in new homebuyers increased demand and home prices skyrocketed! This made investors and homebuyers even more confident, demand for homes and MBS soared even higher and a genuine bubble was being formed.
Demand for MBS was so great that as the supply of available mortgages began to dwindle, brokers started taking 'shortcuts'. Bear Sterns was pledging the same mortgages into multiple investment bundles; a clear case of fraud. Other brokers were blending mortgages into the bundles that were already in foreclosure. As the returns from the MBS failed to materialize evidence surfaced that the earlier earnings had not been genuine, but were "ponzi" payoffs, using money collected from new investors to send dividends to older investors.
The whole scam started to unravel in 2008 and here is where things took a dark turn. Because Congress had their own fortunes invested in the companies at the heart of the fraud, Congress decided to prop up the scam with taxpayer money and block any efforts to investigate or prosecute. That is why TARP was passed by the Congress despite 90% popular opposition. Congress were saving themselves at the expense of the taxpayers. The phrase "toxic asset" was DC-speak for the fraudulent mortgages backed securities, which were being repurchased in order to avoid investors seeking to jail the Wall Street criminals, which would have brought all of Wall Street down. Despite claims that the US taxpayer would be refunded when the "Toxic Assets" were resold at some point in the future, the reality is that none of those assets will ever see a penny of repayment, because they are all the product of the biggest financial swindle in history. Bigger than Tulip mania. Bigger than the Great South Seas Company disaster.
These fraudulent mortgage-backed securities were being given triple-A ratings by the Wall Street ratings agencies, which were supposed to provide independent analysis of the value of investments. But as we saw with Arthur Anderson and ENRON, the supposed independent authority colluded to make the swindle look better than it was. Because the ratings agencies were giving triple-A ratings to the mortgage-backed securities, even as they reeled from losses, pension funds and retirement funds were allowed to purchase them, which is the real reason why public pensions for teachers, police, and firefighters have gone broke.
Together with having to cover the credit default swaps sold with those mortgage backed securities, it is estimated that the swindle has cost the nation $27 trillion, at least $16 trillion admitted to by the Federal Reserve in "loans" and "bailouts" (actually buy-backs) from foreign investors such as Credit Suisse, Deutchebank, the Bank of Libya (boy, did THEY get hosed; 98% of their sovereign wealth fund destroyed by Goldman Sachs aka Gold In My Sacks!), etc. Globalism took a major swindle in the US financial system and turned it into a global cataclysm from which we are all still reeling.
But while the "Too Big To Fail" banks were being bailed out by the US Government, smaller banks caught in the mess were struggling to stay solvent as cash poured out of their coffers to buy back all that bad paper they had sold to investors. Those monthly payments made by home-owners were not sufficient to cover the losses; the whole value of those homes needed to be returned to the banks' balance sheets to keep the banks technically solvent. So again, starting in 2008, Washington DC sent out a private message to banks and mortgage companies that DC would look the other way if foreclosures to home loans were "short-cutted." This kicked off the "Foreclosuregate" scandal in which phony foreclosure paper mills, bogus notaries, MERS were all used to facilitate a massive land grab from the American people. As Damon Slivers put it during Congress' hearings into the foreclosure mess, "We can have a realistic discussion of the foreclosure mess, or we can preserve the capital structure of the banks. We cannot do both. Which shall we do?"
In hindsight, it is obvious which choice the government made. We are seeing wealth confiscation, no different than when FDR confiscated the gold from the American people to save the banks, only this time, done in a covert way to trick Americans into thinking it was their own fault they lost their homes. But again, this was the result of official US policy which gave tax credits to corporations that actually encouraged offshoring of American jobs. In short, the US Government took their jobs to make it easer for the banks to take their homes, to save themselves from going to prison over the mortgage-backed securities fraud.
Iceland had the right solution. They tossed the crooked bankers in jail and fired the government that tried to loot the people to save those bankers and Iceland's economy is already on the rise. (Which is why you don't see much mention of them any more in the American media)
That is it in a nutshell!