Sunday, January 02, 2011

Looking Back At America - Part VI

This is Part VI in the Looking Back At America series, which presents the perspective of what today's America might look like to historians 100 years in the future. This series of articles is most easily understood by starting with the first installment.


It was in 2010 that another problem manifested for the banks. This was dubbed “Foreclosuregate” by the media, and came to light as a result of a rash of lawsuits by people who felt they were being foreclosed upon illegally. These people alleged that the banks could not prove they had the right to foreclose, because they didn’t possess the required documentation; indeed, in some cases, multiple banks were trying to foreclose on the same property at the same time. The reason for this is because the banks, in their haste to originate loans, securitize them, and sell the securities, had ignored well-established property title laws regarding the transfer and notarization of “wet signature” documents when the loan moves from one “interested party” to another. In hundreds of thousands of instances, perhaps even millions, the notes had not been properly transferred, but yet the securities had been sold, and the issue of who actually owned the loan became very opaque indeed.

In an attempt to cover up their fraud, the banks used law firms as “foreclosure mills” to process the foreclosure legal paperwork. The law firms employed people who did nothing but sign legal affidavits all day long. Some individuals signed as many as ten thousand affidavits a month. These people were given the title of “Vice President”, as the documents had to be signed by an officer of the bank, and it was later revealed that many of these people, employees of the law firms, were listed as officers for multiple banking institutions at the same time. The affidavits they signed attested to the fact that the original “wet signature” documents were unavailable but that the representations made in the foreclosure documents were true and accurate. The people who signed these thousands of documents did not in fact know that the representations were true and accurate because they had not even glanced at the contents of the documents. This amounted to perjury in a court of law. When this story broke in the news, these people were dubbed “Robo-signers”.

When the “robo-signing” scandal erupted, the banks began to panic. The robo-signing of fraudulent affidavits was the banks’ attempt to cover up their fraudulent business model. In September, 2010, most of the major banks instituted a moratorium on foreclosures in the 27 states that require a court procedure to foreclose. This received some attention in the mainstream media, but it was spun as merely a pause to confirm that their processes were legal, though perhaps a bit sloppy. They took down the moratorium weeks later, to give the appearance that the problem no longer existed; it was all an over-reaction to sloppy paperwork.

The problem for the banks was three-fold. First, the originations of the loans were fraudulent, because they made loans to people knowing, at the time of origination, that these borrowers would not be able to afford the loan once the teaser rate expired and the interest rate reset higher. They told the borrower that it was no problem, they could refinance in two years because their property would appreciate in value so much that they would have enough equity in two years to do so. This was illegal, as it constituted “fraud in the inducement”. And people signed up for that scam. By the hundreds of thousands. The mortgage industry had turned into one huge, unbridled Ponzi scheme.

The banks gave loans to people who had no business taking out a mortgage, even people who were unemployed or marginally employed. These loans became known as “liars loans”, and it is estimated that by 2005, “liars’ loans” constituted 80% of the mortgages being written each year. The banks attempted to cover this fraud with the illegal affidavits, as they did not want the original paperwork to come to light and expose their fraudulent business model. In fact, in many cases the original documents had been intentionally destroyed.

Second, the banks were packaging the liars’ loans into pools and dividing them up into securities that somehow received AAA ratings, and selling these loans to the institutional investors. The problem here was, the securities were actually worthless because the securitizers had not followed the legal procedures required to transfer the mortgage into the trusts from which the securities were sold. Essentially, the investors had been sold empty boxes. Because the banks had misrepresented the quality of the contents of the securities, they could now be on the hook for all of the securities they sold. The investors could put back trillions of dollars worth of securities on the banks. This would blow them out of the solar system.

The third problem for the banks was the HELOC loans. If the first loan was in default, the HELOC was completely worthless. It is estimated that the three remaining major commercial banks (Citigroup, Bank of America, and Wells Fargo) had upwards of $350 billion in HELOCs outstanding. If only 30% of these loans were behind defaulted first mortgages, it would be enough to render these banks insolvent many times over.

Still, the full realization of the insolvency of the institutional banks had not reached a critical mass of the population. The main stream news media colluded with the banks to downplay this story, spinning it as mistakes in documentation, mere technicalities, rather than a full-on cover-up of the disaster they had created. But the bank officials knew they had a problem. They knew they would need a lot of help from the media (from whom they purchased millions of dollars of advertising every year), from their political puppets in Congress, and especially from their key accomplice, the Federal Reserve Bank.

Both Alan Greenspan and Ben Bernanke share the blame for the monetary policy that allowed the credit explosion to occur. But it was Bernanke who, when his policies failed to stimulate the economy, redoubled his efforts to pump liquidity into a system that suffered from insolvency. He was trying to pump up the credit markets by holding interest rates low, but this policy was doomed to fail because the credit markets needed to void the bad debt before they could absorb any new debt.

He also instituted “Quantitative Easing”, a euphemism for the monetization of the massive debt held by the government after bailing out the banks. Still, We the People failed to see it for what it was. And in 2010, he implemented the second round of Quantitative Easing, or QE2, a policy that would pump another $600 billion into the system if it ran its full course.

The problem here was, even as Bernanke tried to force credit into the system to get the economy moving again, there were no borrowers left to whom to lend. In order to lend, there must be a willing borrower, and all potential suspects were already soaked in debt.

It was apparent to all but the most obtuse observers that The Fed’s policies ultimately served only to bail out the insolvent financial institutions at the expense of the American taxpayer. Although Bernanke’s policies led to a reflation of the stock market for almost two years, and let him claim that TPTB had saved the world from a total collapse of the global financial system, in reality it was only a temporary fix.

The economy had not improved, though in the summer of 2010 the media did its best to convince the American public that a recovery was underway. A massive PR campaign – “Recovery Summer” – was launched by the spin doctors in the Federal government. By this time, however, a larger percentage of the population refused to accept this spin, and there was growing unrest among the natives. As 2010 drew to a close, there were many indicators of what was to come in 2011, but even so, very few people understood the gravity of the situation.

Not only had the banks, on a historically unprecedented scale, perpetrated a Ponzi scheme on the American public through their fraudulent business model, but this reality was finally dawning on the public. And now the powerful unions were aligning against them, as well. As 2010 came to a close, this confrontation was quietly manifesting.

Entering 2011, the American economy was contracting again. The government and the media continued to skew the unemployment numbers, but even with their manipulations unemployment was over 10%. The real numbers were far worse, with actual joblessness running at well over 20% of the working age population. Over 14% of the US population was on food stamps. Homelessness was on the rise and becoming a middle-class problem.

Global disruptions were also manifesting. European nations were struggling with their own sovereign debt, and the European Union was showing signs of fracture. North Korea was rattling its saber. China was fragile, going through its own credit expansion, inflation, and housing bubble. Mexico had seen an explosion in violence as the drug cartels feuded with each other and the government. Al Qaeda and similar terrorist groups continued their random attacks on America and other western countries. The worldwide landscape was simmering, seething, and approaching a boil.

And it was then, as a critical mass of Americans finally awoke to the hubris and rapacious greed of the men in power, and the nefarious nature of all their schemes, that the shit truly hit the fan…


Part VII concludes the series.

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