Still more reasons for outrage toward banks

When I began this blog in early 2009, I argued repeatedly that the government should not reward major banks with bailouts for causing a massive artificial housing bubble that inevitably crashed. I argued that government should instead take over the failed banks — i.e., place them in receivership as required by law (because banks with negative net worths are liable to make massive heads-we-win-tails-taxpayers-lose gambles with their government guarantees) — until the government could assess the banks' assets and liabilities, culpability, and tangled web of obligations to one another.

Instead, the Fed and the Bush and Obama administrations shoveled trillions in cash at major banks in all kinds of ways hidden from public view, including, basically, free money and the purchase of toxic bank debt at absurdly high prices, enabling banks to “earn” — at least on paper — their way out of their negative net worths.

But we keep learning that the banking mess is even worse than anyone imagined back in early 2009. Banks failed to keep millions of official mortgage documents required by courts in most states before banks can press claims on defaulting debtors. In many cases, those documents have been lost; in many cases, those documents were willfully shredded to save a few bucks on storage costs. Banks have since resorted to falsifying and lying about those documents to trick judges into enabling them to foreclose on homes they had no legal right to foreclose on. And other mortgages, which were supposedly packaged into “collateralized debt obligations” (CDOs), were never properly transferred. On a massive scale, banks failed to carry out the most basic of operations: holding onto sheaths of paper worth hundreds of thousands of dollars each.

Beyond stupidity, there’s also all kinds of criminal culpability. To mention just one, a strong case has been put forward that Countrywide (now owned by Bank of America) engaged in a massive fraud, systematically inducing millions to buy homes they could not afford by lying about their income, assets and debts. Why lend money to people Countrywide knew couldn’t pay it back (unless house prices continued rising forever)? To inflate their short-term “profits,” even at the potential cost of destroying their firm’s long-term viability.

Worst of all, the Federal Reserve and our government has systematically enabled banks to get away with basically whatever illegalities they desire. Insolvent banks are pretending they’re solvent in part by not marking down the value of their toxic debt to reflect market reality. This should be and, until recently, was illegal. But government now lets banks fake their financial health through such lies.

I could go on and on. Instead, I recommend you read this impressive series of articles:

Posted by James on Monday, November 08, 2010