FedUpUSA

Archive for September 2nd, 2011

All I can say is No, really?

The Federal Housing Agency, which oversees U.S. mortgage giants Fannie Mae and Freddie Mac is preparing to file suit against “more than a dozen” big banks, the New York Times reported..

The suits — which seek billions in compensation — allege that lenders including Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank inaccurately represented the mortgage securities they put together and sold during the housing bubble.

The report sent Asian and European equity markets lower and was weighing on U.S. stock futures. Shares in Deutsche Bank fell more than four percent in Frankfurt, dragging the German DAX 30 index down 2.7 percent, MarketWatch reported.

• Why now?  Specifically, I have repeatedly pointed out that Citifinancial’s former chief risk officer testified under oath before the FCIC that the firm knew in 2006 that the majority of the loans it was packaging up and selling did not meet their own stated quality standards and written evidence of communication of this knowledge (emails) to the upper levels of the organization was presented to the committee.  So why sit on this until the ability to sue is about to expire?  What are the political considerations?
• Who knew yesterday about this and was shorting bank stocks?  They were ridiculously weak yesterday and the fact that Goldman is spinning off Ocwen and similar and had reached a settlement on similar issues with state regulators hardly accounts for the broad, across-the board sell-off in the banking sector.  To go with this series of lawsuits I’d like to see some insider trading ones.

The amount in question – $30 billion according to reports – is not particularly large, when one looks across a dozen banks.  But the precedent may be important.

I have long argued that until and unless the institutions responsible for knowingly selling off bad paper are brought to justice and forced to eat their cooking – that is, absorb the losses due to them for their conduct – we cannot claim that “market discipline” has returned in any meaningful way.  This is a non-trivial problem, because as of today banks, especially in Europe, are running with very thin capital irrespective of their protests that everything is fine.  It is not, as evidenced that there is no mark to the market and if there were they would all be instantly rendered insolvent.  As such they are insolvent whether they wish to admit it or not, as the only value that any asset has is that which someone is willing to pay you.

Pretending otherwise may be politically expedient but it is factually bankrupt.