Today the Federal Home Loan Bank of Chicago will file complaints against several defendants regarding some of the private-label mortgage-backed securities (MBS) they sold us between 2005 and 2007. We contend that the quality of the loans that comprise the pools of securities cited in today’s complaints was inconsistent with the description in the pre-purchase documents prepared by the underwriters and issuers of the securities. Relying on the pre-purchase documents, we invested in these securities with the understanding that we were purchasing higher-quality instruments than turned out to be the case. After careful consideration, we have concluded that we have an obligation to you, our members, to do everything we can to recover the value lost from investing in these securities.
Sold a box of chocolates, with a nice certification that it was in fact “AAA” chocolate.
What was actually in the box was dogcrap formed into the shape of chocolate, and coated with just enough chocolate so that on routine visual inspection and a quick sniff, all appeared to be in order.
It was only when a bite was taken later that the truth was discovered…… in this case, to the tune of a half-billion dollars out of $4.3 billion originally invested – in losses thus far.
Now that’s not a huge amount of money…. but then again, $4.3 billion is a tiny slice of the more than $1 trillion in the private-label securities out there, and an even smaller piece of the whole, including GSE paper that may also be contaminated.
We force the seller of eggs with a few that have salmonella in them to recall all of them and eat the expense of doing so. Why is it again that the Federal Government does not force all of this crap back on the securitizers?
Oh, and as for “systemic risk”? The Kanjorsky Amendment to the Dodd/Frank bill, which is now law, provides for prospective seizure and resolution of systemically-important financial institutions that would impose a risk on the system should they collapse, if there is a plausible reason to believe that such an outcome could be in the offing.
It’s time to use this authority and fix this problem.