Trouble in Bankster Land

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Felix Salmon has a fascinating post today on the ever expanding mortgage foreclosure scandal. His take goes beyond the foreclosure problems themselves, though. The background is this: back in the glory days, when banks bought up mortgages by the millions to repackage into MBS and CDOs, they’d hire a firm (usually Clayton Holdings) to do a spot check of the quality of the mortgages. Typically, Felix says, the spot check would show that upwards of half the mortgages had underwriting problems, but instead of rejecting the entire pool the bank would just reject the mortgages that had been spot checked and then negotiate a lower price for all the rest of them:

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

….Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.

So in addition to investment banks being at risk because they screwed the pooch on title transfer paperwork, which might mean that bondholders can force them to repurchase the mortgages, they might also be at risk because they knew the mortgages were crappy and failed to disclose that to the bondholders. Result: lots of lawsuits and, potentially, lots more crappy mortgages on the books of our biggest banks. Stay tuned.

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Truth #1: The chaos is the point.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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