Why Shrub’s Freeze Should Give You the Shivers by The Other Katherine Harris

The Other Katherine Harris

by The Other Katherine Harris

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Dandelion Salad

The Other Katherine Harris’s blog
Dec. 19, 2007

Shrub’s five-year “freeze” of mortgage interest rates for around half a million subprime borrowers facing foreclosure — accompanied by FHA refinancing for about an equal number (who’ll get socked with prepayment penalties) — leaves at least another million less credit-worthy mortgagees out in the cold. But that’s not the only reason why the plan is wrongheaded, or even the main reason.

It’s essentially a contrivance devised by the banking industry to protect themselves, as California attorney Sean Olender wrote recently for the San Francisco Chronicle. Being an attorney, rather than a journalist, he can be forgiven for burying the lead of his story, which built a case toward this conclusion:

“It is truly amazing that … everyone in the country is deferring to (Treasury Secretary Henry) Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it. I suspect that such a group first … tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as ‘helping working families stay in their homes.’ That’s why these meetings were secret… (W)e’re talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers.”

Olender’s incisive article told us earlier, “The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value …(currently) almost 10 times their market worth.”

Yes, mortgage bond investors, quite possibly including your pension or 401(k) fund, have the contractual right to demand buy-back when fraud was involved in the loans’ origination. And, as Olender stated, “fraud is everywhere. It’s in the loan application documents and … appraisals. There are e-mails and memos … showing that many people in banks, investment banks and appraisal companies — all the way up to senior management — knew about it. I can hear the hum of shredders working overtime…”

If investors okay these new deals that divulge honest wage and asset information, the guilty gain a shield against fraud claims. “The key is to refinance borrowers whose current loans involved fraud in the origination process,” wrote Olender. “The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray …”

Investors also stand to lose by agreeing to defer foreclosures, most of which will happen eventually (unless the “freeze” goes on forever), because additional declines in residential property prices are expected. “In October,” Olender reminded us, “Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years.”

Olender further reminded us that Paulson headed Goldman Sachs until mid-2006. when the brewing debacle was evident to insiders (such as himself). According to a New York Times article published last month, Goldman Sachs Rakes In Profit in Credit Crisis, the firm’s mortgage desk holdings were already down when, in late 2006, they began reducing them dramatically and acquiring costly insurance to protect against more losses. This story adds:

“Even Goldman, which saw the problems coming, continued to package risky mortgages to sell to investors. Some of those investors took losses on those securities, while Goldman’s hedges were profitable. When the credit markets seized up in late July, Goldman was in the enviable position of having offloaded the toxic products… Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, among others, had kept buying… This contrast in performance has been hard for competitors to swallow. The bank that seems to have a hand in so many deals and products and regions made more money in the boom and, at least so far, has managed to keep making money through the bust.”

They’re not just scraping by during tough times, either. Goldman reported $2.85 billion in profit in this year’s third quarter, up 79 percent, and as of mid-November, its stock was up about 13 percent for the year (while that of other leading Wall Street banks had tumbled by almost 40 percent).

Getting back to Olender’s analysis, he asked — reasonably enough: “If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?”

It would also be fair to ask why his firm continued selling the junk, while privately betting heavily against the housing industry — and why Goldman execs are now backing Barak Obama and Hillary Clinton with big money and public endorsements.

In sum, if Shrub’s freeze merely piles fraud atop fraud, is there a genuine solution? I like Olender’s:

“What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic — not five years from now.”

For this scenario to have any chance of playing out — thus forcing those who raked in hundreds of billions off their scam to work out a deal with those they scammed, instead of picking our pockets — I suggest supporting John Edwards.

Huge, huge money is at stake here — enough to finish Shrub’s job of enslaving Americans for generations, if we let ourselves get stuck with the tab. Assuming Olender is right, the chilling truth is that “loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.”

And that would be on top of gigantic interest payments serving the additional national debt run up by Shrub and His Thugs: nearly $4 trillion, which economist Joseph Steiglitz noted will represent “even at 5 percent … an annual payment of $200 billion, two Iraq wars a year.”