Banker's blues; or, as ye sow, so shall ye reap

So it turns out homeowners who bought on subprime mortgages are't the only ones whose shirts are on the line.  There's a few things the mortgage companies haven't been publicly telling, according to this San Francisco Chronicle article.

You see, there's an awful lot of investors who bought heavily into mortgage-backed securities that turned out to be backed by these subprime mortgages, many of them overseas.  They all have a legal and contractual right to require that the lender buy back the securities — at face value — should it prove that there was fraud in the origination process.  Say, if it should turn out that the mortgagees' income and assets had been massively and systematically falsified in order to float the loans.  (Just hypothetically speaking, of course.  Because that would never happen, would it?)

Those securities are actually worth maybe ten cents on the dollar.  And guess what, the fraud in originating the mortgages they're based on was massive.  (According to the guy who wrote this article, the loans made in the 2004-2006 period that weren't fraudulent are the minority.)  What's more, there's abundant documentation that just about everyone in the industry knew about it, and knowingly looked the other way, because in the strange thinking of the US financial industry, even a bad debt looks good — on paper — as long as the numbers are big enough.  (Where did we get this weird idea that being owed money is good even if the debt is almost certainly uncollectible?)

The basic capsule summary here is, the US banking industry has knowingly exposed itself to what amounts to a run on the bank for all those bad mortgage-backed securities, on which they're legally and contractually obligated to make good.  And if the foreign investors they swindled all line up waving their securities and demanding their money, the US banking industry — including even the largest banks — will collapse.  Unless, of course, the government can figure out a way to bail them out with taxpayer money.  (Most likely borrowed ... yeah, that's right, bail out bad debt with yet more bad debt.  Brilliant!)  The ballyhooed interest rate freeze "to keep working families in their homes" isn't really about families at all — it's an attempt to buy time for the banking industry to sweep the evidence under the rug (or run it through the shredder).

They could, of course, choose to default on the securities and repudiate the debt.  I'm sure the consequences of such an action on the financial standing of the US are obvious without further explanation.  Especially since you just know they won't learn anything from this fiasco — greed will win out, just like it always has, and ten years down the line they'll have dug themselves another hole just like this one.

(Article pointer from bikergeek)