U.S. Mortgage fraud reaches critical

Something extremely serious is going to have to happen and rather soon to avert an all out crisis in the U.S. mortgage industry.

Not only are the costs of halting their foreclosures, processing the investigations and then fighting law suits brought against them going to cripple the defendants – the banks – BUT we are getting to the point where it may start to make sense for other major financial institutions to turn against the implicated US banks.  And THAT would be the end.

As an aside, what no one yet knows is if and if so how many and which European banks will get caught up on the wrong side of this as well.  Deutsche may be one.

How could this be true?

The allegations of fraud in mortgage sales and securitization are piling up and getting more serious by the day. We are fast reaching the point where virtually every aspect of the entire sales to securitization process is now the object of a law suit.  Taken together they comprehensively argue that NONE of the securities constructed, then pooled together and transferred into trusts was done legally.  If this is the case then none of those trusts ever actually legally or financially existed. Even though they were sold AS IF they did. You see the colossal unbridgeable chasm that opens? Moreover  the mortgages themselves and therefore the securities based upon them may have been systematically and intentionally over-valued.  These are just SOME of the allegations being brought in law suits.

If it is found that the securities and trusts were NOT set up in accordance with the law, and therefor never actually existed, then those who were sold them will claim that since there never was any legal sale in the first place, the banks have to return ALL the money because what they ‘sold’ to their clients was  non-existent.

The sale was a fraud because the banks never had any legal right to sell what they did not have. THAT is a 100% total disaster for the banks if it is allowed to stand.  IF there is any chance it could stand, the banks will have to get someone to essentially set the law aside, ‘in the national interest.’ Otherwise ALL the banks will die. That is how serious this could get.

That sounds and is very serious. But as we all know from this crisis already, the banks can and already have had various laws set aside, suspended and ignored.  They can do it again.  The massive political and social fall out is another matter.  I think it would be enough, finally to move the American public from acquiescence to outrage.

BUT before that there is another perhaps more serious danger for the Big Banks. The real and present danger for the banks is that they may start to turn on each other.

So far the financial institutions have stuck more or less together. But that sort of solidarity is ephemeral.  Remember how at the start of this global melt down Gordon Brown and the others made a great show of ‘standing shoulder to shoulder? Then frictions and disagreements between Europe and America started to surface. As did tensions between China and America. And then, at Jackson Hole, earlier this year, the pretence fell apart. Since then it has rapidly deteriorated to where we are now in an all out currency war.  Everyone knows it is now every nation for itself.

The banks are approaching the same point where it could become every bank for itself.  Or at least two big groups of financial institutions with opposite needs

So who will turn on who?

Basically there are those who originated and sold the securities and those who bought them.  In the U.S the Big Banks will face pension funds and insurance companies. They will face also states looking for a chance to gut the banks and get some cash with which to balance their budgets and save themselves from political annihilation.

The Big Banks should also face the truly gargantuan disgorging of putrid and fraudulent securities from the larges t holders of them all, Fannie and Freddie.  But here the banks can get their political friends to save them. Because those political friends are the ones who also control F&F.  On the one hand there is the interests of the big Banks. Their very survival in fact. On the other the defrauding of the tax payer to the tune of at least 1.5 trillion dollars.  I know who I think the US politicians will protect.

BUT a danger the US banks cannot so easily buy-off may lie over here in Europe. Because it was European banks, the Landesbanks and maybe others, like RBS, who bought hundreds of billions of these securities.

What happens if Germany, says, let’s go get our money back shall we?  Can you  imagine the political consequences?

Of course it is never that simple is it? The problem for European nations is that while some of their banks holding the worthless and fraudulent securities, suddenly have a way of saving themselves, by forcing the worthless assets back on to  the banks who sold them and in so doing gutting those banks,  those same European countries ALSO have banks who were selling them.  The question becomes one of which banks break ranks and sue, in a last ditch attempt to save themselves and which banks die as a result.

The answer will not be simple. But it could be very bloody and draw sovereign powers into direct conflict.