Foreclosures Poised to Take Down the U.S. Banking System and even entire economy, says Whalen. (Ya think?)

Chris Whalen of Institutional Risk Analytic’s presentation at a conference in early October of 2010,  showed those in attendance a terrifying picture of where our too-big-to-fail banks are headed in 2011… they’re headed towards failing, in case you didn’t realize… as a result of nothing being done to stop the foreclosure crisis from spreading and threatening “the financial foundations of the entire U.S. political economy.”

The presentation is technical and not easy for the average person to understand, but I thought in addition to providing a link at the end of this article, I’d also provide a few key snippets that anyone can understand:

“The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults.  We are less than ¼ of the way through the foreclosure process.”

You got what he meant there, right?  Yeah, I thought so.  Not good.  And we’re less than ¼ of the way through the foreclosure crisis.  I said that another way some months ago when I said we are only at the beginning of the foreclosure crisis, but for those that figured I was exaggerating, well… now someone else is saying it.

Now check this out…

“Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.”

Now just a minute here… you’re not saying that one out of five people with mortgages are “irresponsible sub-prime borrowers who never should have bought homes to begin with,” are you?  Gee, that seems like an awful lot of irresponsibility for one country, don’t you think?  It makes me wonder whether they were always that irresponsible, and we just never noticed it before, or whether there was something put into the water supply, starting right around 2003.

What I really want to ask Laurie, and I’m going to try to reach her tomorrow, is why hers and other similar forecasts, always have such a well-defined stopping point.  Like, they reach the 20% mark and that’s it.  All done.  What causes them to stop?  And will there be an announcement on CNBC: “Ladies and gentlemen, today the last foreclosure occurred at 3:00 PM Eastern Standard Time in Frog’s Breath, New Jersey.  The unlucky couple, the Jorgensens told CNBC reporter Diana Olick, who was on the scene gloating:

“Man, this really sucks!  I can’t believe this… one more day and it would have been over.”

I mean… I don’t know how many times I can say this… obviously quite a few… but foreclosures breed foreclosures.  Every time a house is lost to foreclosure, it reduces the value of the homes around it, right?  And since America’s middle class has most of its wealth in its homes, as the value of homes drop, people spend less.  And as people spend less, corporations and small businesses make less money, which leads to higher unemployment as they layoff workers or higher fewer workers.  And as people earn less or remain unemployed longer… more foreclosures, right?  Which lowers the value of the surrounding homes, right?

Lord, that makes me feel like there’s a song comin’ on… this one’s dedicated to my very good friend Max Gardner, who’s from North Carolina, and as I’m learning every day… very likely the smartest consumer lawyer that ever lived.  Come on, Max… you know how this one goes…

Sing it with me…

(Open the link above in a new window, and the music will accompany the words.)


Will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.


We’ve spent trillions, on the bankers,

Though they were the ones that erred.

While round our necks, homes hung like anchors,

But politicians were too scared.


Will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.


You can see now, what a problem,

Leaving homes, without a dime.

It should be clear soon, that our crisis,

Was not caused, by the sub-prime.


‘Cause 20 million, homes we’re losing,

Will cause great pains, for everyone.

By the time of, this crisis’ ending,

Our whole nation, will come undone.


And the bankers, up on Wall Street,

Think they’re the smartest, in the room.

But if we follow, how they’re thinking,

The middle class, will be consumed.


So I keep warning, all my neighbors,

It’s long past time, for you to know.

It was the bankers, not the borrowers,

That destroyed, the status quo.


If we don’t all, soon come to realize,

Foreclosing homes, they harm us all.

If we don’t stop them, they’ll continue,

To make our climb back, one long haul.


And so I beg you, tell your neighbor,

That you know, it’s not his fault.

Write to Congress, tell the White House,

You don’t want him to default.


Then we can start, to come together,

Rebuild our country, day by day.

Because our children, they deserve to,

Live in the great, old U.S.A.


Oh, will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.


Okay, so back to work… why would they stop?  Why only one out of five?  They say negative equity is the number one cause of foreclosures, so as long as foreclosures keep happening, and keep lowering the homes around them, won’t negative equity keep happening as the next foreclosure ratchets down the values of home after home?

Last year, if you recall, Secretary Geithner spoke at some kind of G20 type meeting in Japan, and he said in his remarks that the world couldn’t depend on the American consumer to pull the rest of the world out of the global recession this time around.  I remember writing about it, and I found it a very telling remark.  It was like he was saying that he knew he and the Obama Administration weren’t going to do anything to stop the crisis on Main Street.  They were going to let the damn thing burn to the ground, and we couldn’t be counted on to have any money to spend this time around, so the world should look elsewhere for the cure for their economic ills.

Now, I’m sitting here looking at Chris Whalen’s slide show, and Laurie Goodman’s remarks, and I’m thinking about the FHFA preventing Fannie and Freddie from doing any principal reductions, which I just wrote about yesterday…

… and I’m remembering President Obama introducing the Making Home Affordable Program, and the cheers from the throngs of Americans who had waited for him to do something about the free fall in housing prices… and how the politicians had all talked about how we had to get the toxic assets off of bank balance sheets in order to get them lending again… which we never did… and how the banks were doing so well, paying out record bonuses, repaying the TARP funds early so they could pay their oh-so-valuable CEOs untold millions once again…

No, they weren’t small, sir.

But, then I’m looking at the recent disclosures by the Fed… and how we’ve pumped something like $12.2 trillion into our banking system… given the bankers unlimited loans at zero percent… even paid off at 100 pennies on the dollar, foreign bankers and Goldman Sachs with the proceeds of the AIG bailout… all the while spending less than 1/1000th of that amount to stop the foreclosure crisis… because we didn’t want to bail out the irresponsible borrowers who had bought homes they couldn’t afford, implying that it was they who were at the center of our economy’s woes…

But a report published by Core Logic less than two weeks ago, showed that 10.8 million or 22.5% of American homeowners with a mortgage were now underwater, and that another 2.5% drop in home prices, which is an absolute certainty in my view, would put another 2.4 million homeowners underwater… and that doesn’t sound like that would stop there.

And Sen. Ted Kaufman (D-DE) recently lambasted the Treasury Department for failing miserably with its implementation of the HAMP program, saying that his prediction is that only $4 billion of the $30 billion authorized by TARP will be spent.  But then the CBO estimates that Treasury will spend just $12 billion, which they claim is 1/4th of the promised funding on HAMP, but the blog, Firedog Lake shows that…

… the report makes clear that $8 billion of the $12 billion that will ultimately be spent comes from unrelated mortgage-relief programs outside of HAMP itself.  In reality, HAMP will get a $4 billion dollar commitment when all is said and done, just 8% of the total allocated.

Treasury, it should go without saying, continues to say that all of that is nonsense and that the department will spend the entire $30 billion on HAMP… which I thought was $75 billion… and that started at something like $380 billion, after Bush’s Hope-4-Homeowners was slated at $320 billion and modified one loan, as I recall fondly. (Click that last one if you have a minute… it’s an oldie, but it was funny then and it’s funny now.)

But then, apparently, just a few weeks ago, John Taylor, of the National Community Reinvestment Coalition called foreclosures, “the mortal enemy to economic recovery,” and telling CNBC…

“Foreclosures are the mortal enemy to economic recovery. We can keep on pumping money into the system to create liquidity for banks and in the market, but it’s simply not going to succeed until they plug the hole at the bottom of the well!

So what has the Administration done to stem foreclosures? They have put in place a voluntary program, which has done roughly half a million permanent modifications since the program began, but there’s been three and a half million foreclosures during the same time period and seven million foreclosure filings.

That kind of performance merits a failing grade by anyone’s standards.”

(Gee, he said, “hole in the bottom of the well,” and for the last three years I’ve been saying, “we’ve got a hole in the bottom of the boat.”  Maybe I should have used the “well” metaphor, and then I’d be talking to CNBC… oh well.)  (That was funny… to me.)

And I also wonder about things that seemed to change without anyone saying anything about it, like the $30 billion the Administration said would be available for “Small Business Lending Support,” which then just sort of went away, if you read the OMB Report Under the Emergency Economic Stabilization Act, Section 202, dated October 15, 2010.

Actually, the $30 billion, they seem to say, was somehow going to be replaced by something in the Dodd-Frank bill, although I’m not saying it’s not, but I can’t seem to find reference to that anywhere.  And, the Treasury’s commitment of $1 billion for Small Business lending was cut to $0.4 billion… they say “as a result of lower than expected demand,” which if you’re plugged into the small business community at all is another way of saying that no one could qualify because their credit’s shot after living through a 25%+ drop in income as they try desperately to hold onto their homes.

So, back to Chris Whalen’s presentation…

Chris also pointed out that the banks remain insolvent, something else I’ve been harping on for so long that I’ve started to bore myself of late.  I’m actually thinking that perhaps I should just republish my articles from 2009 in 2011… think of the time that would save, and they’d sound so current.

I mean… of course the banks are insolvent, we haven’t done anything to fix them, damn it.  Doesn’t everyone remember Treasury Secretary Hank Paulson and the $700 billion in TARP funds that were supposed to buy toxic assets?

… but then he got to the banks and they wouldn’t take anything less than face value, but Paulson said he couldn’t do that, politically speaking, because everyone knew they were closer to worthless than they were to face value…

… and then the bankers said, “Oh well, sorry Hank, can we offer to validate your parking?”

… and then Paulson said, “But if I don’t buy your toxic assets you’re going to go under!”

… and the bankers smiled and said, “Well, that’s true, Hank.  I guess these things happen.”

… and then Paulson said, “ Damn it.”  And started buying preferred shares of stock with the money, because he couldn’t come up with a way to value the toxic assets in time to save the banks from imploding and thus taking our world out in one fell swoop.

… and then Geithner came in and he was going to have some sort of toxic asset auction, but that was too weird, so he was going to try something called a PIP, but that didn’t work, and then a “PPIP” or Public Private Investment Program… (and maybe there was gonna’ be a “Pip, pip, cherie-o…”)

… but then one Monday morning he showed up with the Sovereign Wealth Fund of Singapore at his side and said we were going to put God only knows how many tens of billions into Citibank, but somehow own only 36%?  And I thought to myself… how the heck did he find the Sovereign Wealth Fund of Singapore over the weekend… were they just hanging out in the bar at the Hay Adams?  (That’s a fancy hotel across the street from the White House, in case you weren’t aware.)

Doesn’t anyone remember all of that going on?  Come on, people… I didn’t dream it.

Evil, that’s your name.

And then after that, Geithner had secret stress tests for banks, and many failed but we weren’t allowed to know which ones, and then next thing you knew it annual bonus time again on Wall Street and somehow they were all magically profitable again?

I remember watching the news all the time back then, before I knew that Geithner was so full of shite that there was no reason to try to follow his math, and I kept thinking that the $700 billion in TARP funds seemed like it got spent ten times over.  And I wrote the article titled: “Obama’s Speech Avoids Using the ‘N’ Word,” about the banks being insolvent and which may have been in bad taste, but it was about “Nationalization”?  No?  No one remembers?

Well… we haven’t done anything about the toxic assets that were and are clogging up bank balance sheets, all we did was suspend the FASB regs, FAS 157 & 159, the mark-to-market rules, as they were being called, and that meant banks didn’t have to write down their assets.  And I wrote the article titled: “Geithner is Allowing Banks to Recapitalize on Backs of Homeowners, or… Games Bankers Play.”

And then the commercial real estate market had dropped like 44% and the answer was “extend and pretend” and I wrote an article that I can’t remember the headline of at the moment,  but it was about that too, because Geithner and Bair said that the banks just didn’t have to recognize the losses or acknowledge that the date for refinancing had arrived even though it had?

Well, of course the banks are still insolvent.  We never fixed them, we just papered over the problem and hoped the real estate market would come back, I suppose, and thus make the toxic assets less toxic.  I don’t what else the plan could have been.  Why else would you extend and pretend, unless you thought it would be better in the future?

But there was never any chance of that because we left the hole in the bottom of the boat… I mean “well”… whatever… we let the foreclosures continue unabated… housing prices in a free fall… a condition sure to lead to higher unemployment… and therefore even more foreclosures… and all because, why?

Come on… my regular readers know why, right?  Say it with me… Because we had to punish those irresponsible sub-prime borrowers who had bought homes they couldn’t afford.  Yeehaw!  Damn this is fun, isn’t it?

Let’s sing it again… come on… one more time… just the chorus…

Will the circle, be unbroken,

By and by, Lord, by and by.

More foreclosed homes, we’re creating,

And I can’t imagine why.

Well, alrighty then… I’m going to bed.  Here’s a link to Chris Whalen’s presentation that’s scaring the pants off a bunch of folks these days that obviously have no ability to see around corners.

Check Out Chris Whalen’s Terrifying Presentation On The 2011 Foreclosure Crisis

(And as seems to be the convention these days: “hat tip” to Yves Smith over at Naked Capitalism for bringing Chris’ presentation to my attention.  I just love her… In fact, I’d tip my hat to her anytime.  She’s so hot.)

Ergo bibamus!

Mandelman out.


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