Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Why the AGs Must Not Settle: Robo-Signing Is
Just the Tip of the Iceberg
By Ellen Brown
Al-Jazeerah, CCUN, February 6, 2012
A foreclosure settlement between five major banks guilty of
“robo-signing” and the attorneys general of the 50 states is pending for
Monday, February 6th; but it is still not clear if all the AGs will sign.
California was to get over half of the $25 billion in settlement money,
and California AG Kamala Harris has withstood pressure to settle.
That is good. She and the other AGs should not sign until a
thorough investigation has been conducted. The evidence to date
suggests that “robo-signing” was not a mere technical default or sloppy
business practice but was part and parcel of a much larger fraud, the fraud
that brought down the whole economy in 2008. It is not just distressed
homeowners but the entire economy that has paid the price, resulting in
massive unemployment and a shrunken tax base, throwing state and local
governments into insolvency and forcing austerity measures and cutbacks in
government services across the nation.
The details of the robo-signing
scam were spelled out in my last article,
robo-signing fraud and its implications are expanded on below.
All the Robo-signing?
Over half the homes in the country are now
held in the name of an electronic database called MERS—Mortgage Electronic
Registration Services. MERS is a smokescreen behind which mortgages
were sold to trusts that sold them to investors. The mortgages were
chopped into pieces and sold as “mortgage-backed securities” (MBS), which
traded in a supposedly liquid market. That meant the investors could
sell them in the money market at any time on a day’s notice. Yale
economist Gary Gorton gives
Suppose the institutional investor is Fidelity,
and Fidelity has $500 million in cash that will be used to buy securities,
but not right now. Right now Fidelity wants a safe place to earn interest,
but such that the money is available in case the opportunity for buying
securities arises. Fidelity goes to Bear Stearns and “deposits” the $500
million overnight for interest. What makes this deposit safe? The safety
comes from the collateral that Bear Stearns provides. Bear Stearns holds
some asset‐backed securities [with] a market value of $500 millions. These
bonds are provided to Fidelity as collateral. Fidelity takes physical
possession of these bonds. Since the transaction is overnight, Fidelity can
get its money back the next morning, or it can agree to “roll” the trade.
Fidelity earns, say, 3 percent.
That is where the robo-signing came
in. Foreclosure defense attorneys armed with the tools of discovery
have discovered that robo-signing -- involving falsified signatures
assigning mortgages back to the trusts allegedly owning them -- occurred not
just occasionally or randomly but in virtually every case. Why?
Because the mortgages had to be left free to be bought and sold on a daily
basis in the money market by investors. The investors are not
interested in making 30 year loans. They want something short-term
with immediate rights of withdrawal like a deposit account.
The Hazards of Borrowing Short to Lend Long
The problem is that when
panicked investors all exercise that right at once, there is no cheap
funding available to back the 30 year mortgage loans, rendering the banks
insolvent. And that is what happened on September 15, 2008, when
Lehman Brothers, a major investment bank like Bear Stearns, went bankrupt.
According to Representative Paul Kanjorski,
speaking on C-SPAN in January 2009, the collapse of Lehman Brothers
precipitated a $550 billion run on the money market funds. A report by
Economic Committee pointed to the fact that the $62 billion Reserve
Primary Fund had “broken
the buck” (fallen below a stable $1 per share) due to its Lehman
investments. The massive bank run that followed was the dire news that
Treasury Secretary Henry Paulson presented to Congress behind closed doors,
prompting Congressional approval of Paulson’s $700 billion bank bailout
despite deep misgivings.
The sleight of hand that brought the
banking system down was that the mortgages backing the money market were
supposedly held by trusts that had lent money to homeowners for 15 years or
30 years. It was the classic “borrowing short to lend long,” a shell
game in which banks have engaged for hundreds of years, routinely
precipitating bank panics and bank runs when the depositors or the investors
all pull their short-term money out at the same time.
Shadow Banking System Is Still Unregulated
Periodic bank panics were
averted in the conventional banking system only when the government agreed
to insure the deposits of individual depositors in 1933. But FDIC
insurance covered only $100,000 (now $250,000), and large institutional
investors had far more than that to invest. The shadow banking system,
in which deposits were “insured” with mortgage-backed securities, developed
in response. But the shadow banking system is unregulated and is just
as prone to another collapse today as it was in 2008. The Dodd-Frank
barely touched it. As
noted in an article titled “Risky Debt Use on Repo Market Hits 2008
Levels” in today’s Financial Times:
In the repo market, banks pledge
their securities as collateral for short-term loans from money managers and
other investors. The market played
a key role in the build-up to the 2008 financial crisis. Banks used
toxic assets, such as repackaged subprime loans, to secure trillions of
dollars worth of cheap funding.
When the US housing bubble
burst, the banks’ trading partners refused to accept such securities as
collateral and the repo market rapidly contracted.
However, a study
by Fitch Ratings says the proportion of bundled debt being used as security
in repo transactions has returned to pre-crisis levels.
the repackaged loans can increase risk in the repo market, the rating agency
says. This is because the securities may be prone to sudden pullbacks such
as the one experienced in 2008.
We could be looking at another
banking collapse at any time; and to fix the problem, we first need to know
what is going on. The AGs should not agree to drop the curtain on the
robo-signing scandal until all the evidence is on the table. It is not
just a matter of punishing the guilty; it is a matter of a banking scheme
based on fraud, one that ultimately does not work and has jeopardized the
homes, savings and investments of the public not just recently but for
hundreds of years.
The Way Out
There is another way
to design a banking system. The deposits of large institutional
investors do not need to be backed by sliced and diced pieces of our homes
to be “safe” (something that has proven not to be safe at all). The
large institutional investors seeking safety are largely “us” – the pension
funds and mutual funds in which we have stored our savings and on which we
rely for support when we can no longer work. Hundreds of years of
history have demonstrated that the only reliable guarantor is the government
Our pension funds and mutual funds need a government
guarantee just as much as our individual deposits do. But we don’t
want to be guaranteeing the gambling and derivatives schemes of
too-big-to-fail, for-profit Wall Street banks playing fast and loose with
our money. Banking and credit need to be public utilities, operated
for the benefit of the public in plain sight of the public.
Ellen Brown is an attorney and president
of the Public Banking Institute, http://PublicBankingInstitute.org.
In Web of Debt, her latest of eleven books, she shows how a private cartel
has usurped the power to create money from the people themselves, and how we
the people can get it back. Her websites are
http://WebofDebt.com and http://EllenBrown.com.