The best short characterization of the current banking/foreclosure mess that now threatens us with another episode of “shock doctrine” capitalism is Randy Wray’s. Here it is:
We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud. Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers–who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud.
Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.
This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.
In responding to this, the Administration seems incapable of using the word “fraud,” just as it has so far been incapable of exposing it, prosecuting it, and stopping it. All it can express is concern that the banks may again soon be viewed as insolvent, and that this may prevent economic recovery. The problem Americans must now face is bigger than bank insolvency. We have resolution authority to cope with that. We have a Government sovereign in its own currency to make good losses of victims of fraud, whether they’re homeowners or investors.
The bigger problem we have is the problem of the rule of law and the problems of justice and equity that the foreclosure fraud crisis raises. Randy Wray has advice for handling problems of justice in his prescriptions for the crisis as well: His recommendations are:
The President needs to try a different approach, consisting of the following series of steps:
1. Declare a national bank holiday that would close the biggest financial institutions—say, the top dozen or so. Send in the supervisors to examine their books to uncover fraud. Determine which ones are insolvent and resolve them. While resolving them, net their claims on one another (including derivatives). Do not allow any insolvent institutions to reopen, and do not use the resolution process to merge institutions (we don’t need even bigger “too big to fail” banks). Prosecute the crooks and jail the guilty.
2. Stop all foreclosures. Investigate and prosecute all institutions that have been selling or buying fake documents to be used in foreclosures. Prosecute the crooks and jail the guilty.
3. Announce that all homeowners who occupied their homes on October 1, 2010 will be allowed to remain in their homes indefinitely. Create a national mediation board to adjust all mortgage payments to “owner’s equivalent rent”—the fair value of rent for the home. Establish a fund to provide rental assistance to keep low income homeowners in their homes.
4. Give purported mortgage holders 30 days to produce the original notes; if they cannot find them, hand the homes over to the owner-occupants—free and clear of debt.
5. Create a process to allow securities holders to sue for recovery of value. This must be national—state courts will not be able to handle the case load.
6. Direct the GSEs to refinance mortgages at a low fixed rate. Mortgages would be provided against real estate appraised at fair market value to any borrower for a primary residence. The GSEs would pay holders of existing mortgages only current fair market value. Those holding these mortgages can seek redress through the process outlined in step 5. Only in the case of borrower fraud would the homeowner be held responsible for losses attributed to the refinancing.
7. There will be fall-out from losses. It is better to deal with the collateral damage directly than to prop up the control fraud banks. For example, pension funds hold toxic waste securities as well as equities in the control fraud banks, and by all reasonable accounting the Pension Benefit Guarantee Corporation is already insolvent. But it is better to directly bail-out pensions than to maintain the charade that fraudulently created securities have value.
It is. And it is better to end the frauds and the criminal institutions that have created them. What’s most amazing about the Obama Administration is that in each area of its activity the theme of short-run political pragmatism, always outweighs the need for Justice. The aphorism that “the perfect is the enemy of the good,” and then proceeding to do things that are neither perfect nor very good reflects this priority perfectly. As Tom Hickey has said, “it is the institutionalizing of criminal behavior” and the determination to deal with it by “looking forward and not backward.” Unfortunately neither people nor democratic political systems can live forever without Justice. It is time for it now, because injustices have a way of accumulating and sticking in everybody’s craw, and people respond to that feeling by getting angrier and angrier.
The Obama Administration has reached another turning point. What kind of anger will be loosed if it again bails out the big banks from their foreclosure mess at the expense of Main Street, allows obscene bonuses to be paid to those who are playing games with our economic future and committing fraud while they do it, and goes through with the coming recommendations of the Catfood Commission, reportedly providing ways in which all Americans will be called upon to pay the cost of the mess that was created by Wall Street high-flyers? What kind of anger will there be if he continues to call for “fiscal responsibility” and sacrifice from working people, while he maintains the conditions that allow the banksters to walk off with hundreds of billions of dollars every year that are, evidently, the product of fraudulent practices.
More and more people are pointing to the double standard in the laws being applied to wrongdoing by working people and poor people, and the lack of any law enforcement directed against the wealthy, and privileged, and, especially, large corporations. This highly selective enforcement of the law has to stop.
The President’s constitutional oath requires him to fairly enforce all of our laws. When he doesn’t do this it violates his oath of office and is an impeachable offense. The President needs to turn from his so-called pragmatism, and fulfill the need for Justice in the foreclosure fraud area NOW, and then he must move on to seek justice in the other areas he has left behind. Or if he can’t fairly enforce the laws, then he must resign and give Joe Biden a chance to serve the American people.
(Cross-posted at All Life Is Problem Solving and FireDogLake).