Looming losses from the mortgage scandal dubbed “foreclosuregate” may qualify as the sort of systemic risk that, under the new financial reform bill, warrants the breakup of the too-big-to-fail banks. The Kanjorski amendment allows federal regulators to pre-emptively break up large financial institutions that—for any reason—pose a threat to U.S. financial or economic stability.
Although downplayed by most media accounts and popular financial analysts, crippling bank losses from foreclosure flaws appear to be imminent and unavoidable. The defects prompting the “RoboSigning Scandal” are not mere technicalities but are inherent to the securitization process. They cannot be cured. This deep-seated fraud is already explicitly outlined in publicly available lawsuits.
First, let’s call the Black Thing From the Center of the Earth (now there’s a good movie title, no?) what it should be called. It’s not an “oil spill.” This is not the Exxon Valdez, with a very large but ultimately known and quantified amount of heavy crude oil spoiling an important but distant and self-limited piece of valuable land and seascape. It’s not an “oil slick,” although that is a side feature of it in the places where the oil layer on the surface of the ocean is relatively thin. It’s not some simple “oil leak” (as British Petroleum [BP] likes to characterize it), like the one that dripped regularly from the oil pan of my aged-by-the-time-I-got-it 1956 Jaguar XK150.