Thursday, October 14, 2010

Financial crisis, round two?


Smart financial writers are sure giving the impression that the fraudulent dealings of the big banks that enabled them to make mega-profits from the housing bubble are unraveling right now. The real economy, the activity involving money that most of us work in, is about to take some new hits. This might be as drastic a blow as the financial collapse in September 2008 if they are right.
  1. During the middle of the 2000s, bankers and their various intermediaries were so hot to rush more housing loans into existence so they could cut them up and resell them, that they neglected make sure that the legal steps that create ownership of real property were carried out. Now that the loans have gone bad, it's nearly impossible in many cases to figure out who has the legal right to foreclose because titles are not clear. That's why Attorneys General in all 50 states are looking into the mess and why Bank of America has suspended foreclosures. How can they demand the house back from a delinquent borrower if they can't show they own it? And if this sort of evasion of legal processes was going on all over the country, how can anyone know that "their property" is really "their property"? Our economy depends on that confidence. According to financial journalist Barry Ritzholz,

    We are not discussing economic problems of too many homes for sale and falling prices. What is being discussed here is a full blown crisis underlying home titles, foreclosure procedures, and securitized mortgages. The rampant, epidemic and systemic abuse of legal property protections is now reaching a crisis.

    ...What this discussion reveals are a series of short cuts, (il)legal fictions, and an utter disrespect for the mechanisms of legal property transfer that underlies our entire system of Capitalism.

  2. After the banks rushed these messed up mortgages through, they cut them up, turned them into bonds and sold them to investors. They never let on to investors that they were selling mortgages they knew were unlikely to pay off and on which they could not even vouch for the legal ownership of the underlying property. For the banks, this led to a bonanza of fees. They could make money selling what they knew was partially worthless and also something they couldn't honestly swear they owned. And they hid all this from the investors. The investors belong to the class of persons that have good lawyers. They'll be coming after the banks and the banks could owe them billions because of the fraud. As Andrew Leonard observes at Salon

    There's probably never been a better time to be an experienced securities litigator.

If this situation is as bad as financial journalists are saying, there is very little most of us can do to protect ourselves from the fallout. The banks will act catatonic because, once again, they'll be effectively bankrupt unless Uncle Sam bails them out. An aroused people will go ballistic if bailout is attempted -- and suffer however the crisis plays out. With vast uncertainty about property ownership and lawyers coming out of the woodwork, businesses aren't going to make the bets on the future that would get employment going again. Hunkering down by the business class means misery for people who need economic expansion and good jobs.

The Service Employees International Union (SEIU) and a bevy of community organizations have launched one useful defensive initiative. At the website Where's the Note? they've created an online tool that anyone who owes on a mortgage can use to demand of the bank that you pay the loan to that it show it has the "note" to the property. That's the paper you signed when you closed on your house. One of the horrors of the current situation is that, too often, banks that lent in the last decade can't produce the note.

There are a lot of people writing about all this, some of them even in a prose that approximates everyday English. Some who have helped me to understand a little, in addition to the two cited above, include Gretchen Morgenson -- a financial journalist at the New York Times, Felix Salmon who finance blogs for Reuters, Emptywheel at FireDogLake and Mike Konzai at Rortybomb.

1 comment:

Parag said...

No one variable can cite the financial crises. All the countries of the world are dependent on each other for some reason. Therefore if one is under pressure regarding money, others too are affected. The volume of investments have increased which is why money is stucked at one place. Banks do not hold enough liquidity to circulate around the economy.
Banks and financial crisis

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