Aren't Geithner and Bernanke eerily quiet about the Foreclosure Crisis?
Sunday, October 10, 2010 at 10:31PM Maybe I'm missing something, but it strikes me there's been a deafening silence emanating from Treasury Secretary, Tim Geithner, and Federal Reserve Chairman, Ben Bernanke, on the foreclosure front. It’s as if they a) don’t read the news or b) are afraid someone will notice their incompetence. While Senator Harry Reid, Nancy Pelosi and other Congress people are dispensing irate pre-election sound-bites, Attorney Generals across the country are gearing up for investigations and lawsuits, and banks are announcing foreclosure moratoriums because it’s quarterly earnings season and uncertainty is bad for stock prices, (plus they are afraid their REO customers (private equity funds, asset managers, etc) will fear future legal repercussions, so they’ll have nowhere to dump all the properties they can’t sell), Geithner spent last week defending TARP (again) and talking up the merits of global economic coordination and the dollar. Meanwhile, the Fed is gearing up to buy more Treasuries (in addition to its $300 billion program) because no one else wants them, like some kind of alien that spawns offspring so it can eat its own progeny.
Foreclosure fraud is not new, many sane people and organizations have been talking about it for years, plus you don’t manufacture $14 trillion worth of mortgage backed securities in all their permuted and over-leveraged glory out of $1.4 trillion worth of subprime loans in 5 years without cutting a lot of corners. But the reason this situation is hairy for Geithner and Bernanke is that the government owns or is backing trillions of dollars worth of assets predicated on the same suspicious loans that were defaulting into the 2008 crisis period they did nothing to stop, while lavishing the banks that promulgated them with the biggest bailout and subsidization in US history.
The Fed owns nearly $1.5 trillion toxic assets that already have no bid (actual buyer), and will have less of a bid the more uncertainty there is about the loans that fill them. The Treasury is directly backing $400 billion of GSE securities, and is behind another $6.8 trillion of indirect backup to the GSE's. Both entities are desperately hoping the financial market doesn't seize up (yes the market, they don’t seem to be bothered about individuals and their homes), so they don't become the only bid again (well, actually still) behind any securitized asset. That would ruin their story – that the bailout worked even though it did absolutely nothing to help borrowers at the loan level, or by extension the general economy.
Reader Comments (4)
Go Girl! Er, Ms. Prins!! GREAT insight into that 'elephant in the living room'! One of the notions that I am left with is that our economy & our dollar is absolutely doomed and condemned - the 'Dead Man Walking'! I guess that it will have to collapse before any of these crooks are brought to justice ... time for food, gold & guns. Man, who would have thought ..... Thanks Nomi for this post. I'm going to re-read it three more times!
The Fed owns nearly $1.5 trillion toxic assets that already have no bid (actual buyer), and will have less of a bid the more uncertainty there is about the loans that fill them.
I don't get this. The Fed's agency MBS purchases were made on the open market and there is a big market in agency mbs that is really far from zero bid. Since the public was volunteered to guarantee these things anyways, the Fed purchase just has the effect of getting the public in on the upside. What do you mean "no bid" in this context?
I think I might have to be more careful on literal vs. figurative phrasing next time around :) ....kind of like if you'd say it's raining cats and dogs, the idea is it's raining hard.
By "no bid", I mean no viable bid. If the Fed and Treasury were to dump all the securities they are holding into the open market, there might be buyers interested in them at some level, but it's highly unlikely they would bid for them at the level at which the Fed / Treasury are holding them, which is why they are still holding them. Plus such a large and sudden sale would push the prices of other MBS/ABS downward. If to compound that situation, there were questions as to the integrity of the loans lining those securities, the bid would be lower still.
So what you mean is that if the Fed dumped $1.5T of assets on the market at once, it would cause prices to collapse. I guess, but that's true of any asset held in such volumes and reflects the tendency of the financial markets to panic more than anything else. Those assets are not really toxic - there's an active market in them and prices are strong. To me, the Fed got a good deal for the taxpayer: it printed money to purchase bonds at panic prices and is now collecting revenue from them. And those bonds were insured by the GSEs, so they essentially took $1.5T of liability off the Federal books and captured the revenue. The only cost was some devaluation of the dollar - which is not bad for us either.