After wasting three hours watching the self-servicing masturbatory fantasies put forward by both the GSE and banking regulators yesterday in the “Foreclosure” hearing in The Senate’s banking committee, I have to say I’m underwhelmed – and that’s being polite.
Speaking to the Senate Banking Committee at a hearing on the national foreclosure debacle, Fannie and Freddie executives emphasized that they are not responsible for managing payments by borrowers on home loans or foreclosing on homeowners when they default.
These tasks, executives say, are the responsibility of mortgage servicers and law firms with which the companies contract.
Right. It’s just a matter of contract. Of course these same enterprises don’t pull their servicing when contracts are violated, even though they have a monstrous bully position in that regard. Nor do they take any responsibility for the bottom line when it comes to HAMP, even though they are now fully-owned government enterprises – that is, they’re under government conservatorship.
The fantasy games played yesterday in that hearing were truly amazing. Nobody took responsibility, even though everyone was at the table – OCC, the FDIC and of course the GSEs.
The problem of course is that the inherent conflicts of interest when it comes to the banks are not being dealt with honestly. That’s no surprise. The banks have surmised (correctly so) that we will allow them to rob us, and they have. Repeatedly. They have determined (again correctly) that we will not indict or shut them down even when they engage in blatantly criminal conduct such as money-laundering for drug gangs in Mexico, bid-rigging in municipal debt auctions and other similar schemes. Oh, and let’s not forget the banks that intentionally altered international money transfer instructions to hide the fact that they were going to and from prohibited entities – yet they still have their US banking licenses. All of this The Ticker has reported on over the last couple of years.
So it should not surprise anyone that as the desperation level increases they would reach for more and more ways to bilk people. Indeed, as I pointed out yesterday there’s a very valid question that was raised by The Fed’s “data dump” (and which explains why they tried like hell to hide it and evade a full audit): The Fed took a hell of a lot of collateral for loans during the crisis that they valued at 10 to 20% of it’s claimed “face” value, and yet these were all taken for short-term loans – a “repo” in effect – and thus was “given back” to these banks.
WHERE ARE THOSE ASSETS NOW AND AT WHAT VALUE ARE THEY BEING CARRIED?
What we do know is this: The banks have not taken these hundreds of billions (each) of “claimed” assets and written them down by 90%.
In fact at no meaningful time during or after this crunch did the banks ever declare provisions – that is, loss reserves – amounting to these haircuts or any reasonably-defensible percentage thereof.
The reason for this is clear: Had they done so they would have been instantaneously declared insolvent.
Unfortunately our so-called “regulators” have never answered the question to this day about what happened to those boxes of dog-crap. Since nobody has taken and written them off it can only be presumed that they’re still on the banks’ balance sheets and being carried at some ridiculous valuation compared to how The Fed saw their worth.
One of the arguments over “mark-to-market” accounting is that an asset intended to be held to maturity shouldn’t be subject to market risk on any given day. That may or may not be fair but once that asset is exposed to market risk by being pledged as security this argument falls apart.
That is, if you don’t like the mark that someone (including The Fed) gives you on an asset in a security pledge you might be permitted to not pledge that security, but if you do continue with the repo transaction there is no defensible argument against being forced to recognize that as the current value for book purposes, since that is a market price – thus, the argument that these are “impossible to value” has just been voided by your own voluntary act!
Everyone who wants to argue that we’re “recovering” has to answer the key question: Where are these assets and what’s the current market price?
See, I can make all sorts of “recovery” claims for an economy, or for any firm and institution within an economy, if I never have to recognize losses. But that’s not how reality works. Cash flow always wins, and the distortions that we’re seeing now in various market segments, including loan servicing, are blatantly about covering losses somewhere that haven’t been admitted to.
Unfortunately what this does is exactly what it did in Japan. It serves as an excess tax yet is not funneled to government to provide social program spending, but rather is used to cover up previous frauds and schemes – to fill holes that were created and maintained by bogus accounting practices. Since the cash flow always ultimately wins these fights the demand for such schemes increases as the cash flow deficit rises.
Three hours yesterday were spent without one hard question being asked of these people. The key question is in fact not about loan servicing at all – it is about the fact that there are obviously monstrous fees and costs being larded into these servicing programs that are inuring to the benefit of these banks – and they’re using that money for something.
The question goes back to the value of these so-called “assets” and where those assets are now.
Sorry Dodd, but three hours of masturbation behind the dias did exactly nothing to bring enlightenment to this question, and further, the weasels I saw behind the witless table in the form of the FDIC and OCC, not to mention the GSE representatives, served only to further obfuscate reality.
Unfortunately for The Senate and our economy the mathematics of cash flow do not abide Senatorial whitewash endeavors. They’re just a cold, hard calculation of the amount of cash required every month to cover all the current liabilities that must be cleared by a contemporary cash flow from somewhere.
The crisis is not over and will not be until reality is faced and the disposition of these securities is both determined and the damage from their deterioration in value admitted to and absorbed.