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07 November 2010
By Ellen Brown
For two years, politicians have danced around the
nationalization issue, but ForeclosureGate may be the
last straw. The megabanks are too big to fail, but
they aren't too big to reorganize as federal
institutions serving the public interest.
In January 2009, only a week into Obama's presidency,
David Sanger reported in The New York Times
that nationalizing the banks was being discussed.
Privately, the Obama economic team was conceding that
more taxpayer money was going to be needed to shore up
the banks. When asked whether nationalization was a
good idea, House speaker Nancy Pelosi replied:
"Well, whatever you want to
call it . . . . If we are strengthening them, then the
American people should get some of the upside of that
strengthening. Some people call that nationalization.
"I'm not talking about
total ownership," she quickly cautioned — stopping
herself by posing a question: "Would we have ever
thought we would see the day when we'd be using that
terminology? ‘Nationalization of the banks?' "
Noted Matthew Rothschild in a March 2009 editorial:
[T]hat's the problem today. The word "nationalization"
shuts off the debate. Never mind that Britain, facing
the same crisis we are, just nationalized the Bank of
Scotland. Never mind that Ronald Reagan himself
considered such an option during a global banking
crisis in the early 1980s.
Although nationalization sounds like socialism, it is
actually what is supposed to happen under our
capitalist system when a major bank goes bankrupt.
The bank is put into receivership under the FDIC,
which takes it over.
What fits the socialist label more, in fact, is the
TARP bank bailout, sometimes called "welfare for the
rich."
The banks' losses and risks have been socialized but
the profits have not. The bankers have been feasting
on our dime without sharing the spread.
And that was before ForeclosureGate – the uncovering
of massive fraud in the foreclosure process.
Investors are now suing to put defective loans back on
bank balance sheets. If they win, the banks will be
hopelessly under water.
"The unraveling of the ‘foreclosure-gate'
could mean banking crisis 2.0," warned
economist Dian Chu on October 21, 2010.
Banking Crisis 2.0 Means TARP II
The significance of ForeclosureGate is being
downplayed in the media, but independent analysts warn
that it could be the tsunami that takes the big
players down.
John Lekas, senior portfolio manager of the Leader
Short Term Bond Fund, said on The Street on
November 2, 2010, that the banks will prevail in the
lawsuits brought by investors. The paperwork issues,
he said, are just "technical mumbo jumbo;" there is no
way to unwind years of complex paperwork and
securitizations.
But Yves Smith, writing in The New York Times
on October 30, says it's not that easy:
The
banks and other players in the securitization industry
now seem to be looking to Congress to snap its fingers
to make the whole problem go away, preferably with a
law that relieves them of liability for their bad
behavior. But any such legislative fiat would bulldoze
regions of state laws on real estate and trusts, not
to mention the Uniform Commercial Code. A challenge on
constitutional grounds would be inevitable.
Asking for Congress's help would also require the
banks to tacitly admit that they routinely broke their
own contracts and made misrepresentations to investors
in their Securities and Exchange Commission filings.
Would Congress dare shield them from well-deserved
litigation when the banks themselves use every minor
customer deviation from incomprehensible contracts as
an excuse to charge a fee?
Chris Whalen of Institutional Risk Analytics told
Fox Business News on October 1 that the government
needs to restructure the largest banks.
"Restructuring" in this context means bankruptcy
receivership. "You can't prevent it," said Whalen.
"We've wasted two years, and haven't restructured the
top banks, but for Citi. Bank of America will need to
be restructured; this isn't about the documentation
problem, this is because [of the high] cost of
servicing the property."
[T]he appraisers were
paid to overvalue real estate; mortgage brokers were
paid to induce borrowers to accept loan terms they
could not possibly afford; loan applications
overstated the borrowers' incomes; speculators lied
when they claimed that six different homes were their
principal dwelling; mortgage securitizers made false
reps and warranties about the quality of the packaged
loans; credit ratings agencies were overpaid to
overrate the securities sold on to investors; and
investment banks stuffed collateralized debt
obligations with toxic securities that were handpicked
by hedge fund managers to ensure they would self
destruct. Players all down the line were able to game the
system, suggesting there is something radically wrong
not just with the players but with the system itself.
Would it be sufficient just to throw the culprits in
jail? And which culprits? One reason there have been
so few arrests to date is that "everyone was doing
it." Virtually the whole securitized mortgage
industry might have to be put behind bars.
The Need for Permanent Reform The Kanjorski amendment to the Banking Reform Bill
passed in July allows federal regulators to
preemptively break up large financial institutions
that pose a threat to U.S. financial or economic
stability. In the financial crises of the 1930s and
1980s, the banks were purged of their toxic
miscreations and delivered back to private owners, who
proceeded to engage in the same sorts of chicanery all
over again. It could be time to take the next logical
step and nationalize not just the losses but the banks
themselves, and not just temporarily but permanently.
The logic of that sort of reform was addressed by
Willem Buiter, chief economist of Citigroup and
formerly a
member of the Bank
of England's Monetary Policy Committee,
in The Financial Times following the bailout of
AIG in September 2008. He wrote:
If financial behemoths like
AIG are too large and/or too interconnected to fail
but not too smart to get themselves into situations
where they need to be bailed out, then what is the
case for letting private firms engage in such kinds of
activities in the first place?
Is the reality of the
modern, transactions-oriented model of financial
capitalism indeed that large private firms make
enormous private profits when the going is good and
get bailed out and taken into temporary public
ownership when the going gets bad, with the tax payer
taking the risk and the losses?
If so, then why not keep
these activities in permanent public ownership?
There is a long-standing argument that there is no
real case for private ownership of deposit-taking
banking institutions, because these cannot exist
safely without a deposit guarantee and/or lender of
last resort facilities, that are ultimately
underwritten by the taxpayer.
Even where private deposit
insurance exists, this is only sufficient to handle
bank runs on a subset of the banks in the system.
Private banks collectively cannot self-insure against
a generalised run on the banks. Once the state
underwrites the deposits or makes alternative funding
available as lender of last resort, deposit-based
banking is a license to print money. [Emphasis
added.]
Nearly all money today is
created as bank credit or debt. (That includes the
money created by the Federal Reserve, a bank, and lent
to the federal government when it buys federal
securities.) Credit or debt is simply a legal
agreements to pay in the future. Legal agreements are
properly overseen by the judiciary, a branch of
government. Perhaps it is time to make banking a
fourth branch of government. That probably won't happen any time soon, but in
the meantime we can try a few experiments in public
banking, beginning with the Bank of America, predicted
to be the first of the behemoths to be put into
receivership. Leo Panitch, Canada Research Chair in comparative
political economy at York University, wrote in The
Globe and Mail in December 2009 that "there has
long been a strong case for turning the banks into a
public utility, given that they can't exist in complex
modern society without states guaranteeing their
deposits and central banks constantly acting as
lenders of last resort."
Nationalization Is Looking Better
David Sanger wrote in The New York Times in
January 2009:
Mr. Obama's advisers say
they are acutely aware that if the government is
perceived as running the banks, the administration
would come under enormous political pressure to halt
foreclosures or lend money to ailing projects in
cities or states with powerful constituencies, which
could imperil the effort to steer the banks away from
the cliff. "The nightmare scenarios are endless," one
of the administration's senior officials said.
Today, that scenario is looking less like a nightmare
and more like relief. Calls have been made for a
national moratorium on foreclosures. If the banks
were nationalized, the government could move to
restructure the mortgages, perhaps at subsidized
rates.
Lending money to ailing projects in cities and states
is also sounding rather promising. Despite massive
bailouts by the taxpayers and the Fed, the banks are
still not lending to local governments, local
businesses or consumers. Matthew Rothschild, writing
in March 2009, quoted Robert Pollin, professor of
economics at the University of Massachusetts at
Amherst:
"Relative to a year ago, lending in the U.S. economy
is down an astonishing 90 percent. The government
needs to take over the banks now, and force them to
start lending."
When the private sector fails, the public sector needs
to step in. Under public ownership, wrote Nobel Prize
winner Joseph Stiglitz in January 2009, "the
incentives of the banks can be aligned better with
those of the country. And it is in the national
interest that prudent lending be restarted."
For our newly-elected Congress, the only alternative
may be to start budgeting for TARP II. |
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