Eating big shitpile

By Dave Anderson:

Numerian at the Agonist looks at the machinations of Freddie and Fannie as they go back through their  "prime" mortgage portfolios and find mass errors, fraud and incompetence by the big banks that originated the mortgages.  He traces the bag-holders and the consequences:

In a February regulatory filing with the SEC, Fannie Mae and Freddie Mac, now owned by the federal government, say they intend to return $21 billion in home mortgages to banks in 2010. Four commercial banks now dominate the home mortgage market: Citigroup, JP Morgan Chase, Bank of America, and Wells Fargo, and they will receive the bulk of these repurchases. Since the banks sold these mortgages to these agencies for full value, they must buy them back at full value, but at least one bank, JP Morgan Chase, says these mortgages will then be immediately written down by 50%.

If only $10 billion is successfully passed back to the banks for false representations and warranties, and half of this is written off, each of the four big banks will be facing $1 billion at least in losses. This is double what they experienced last year in repurchase losses, and the number should be heading higher for the next few years.

Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, commented on the position the banks are in. �It�s a fine line you�re walking, because the government�s trying to recapitalize the banks, not put them in bankruptcy, and then here�s Fannie and Freddie putting more pressure on the banks through these buybacks �If it becomes too big of an issue, the banks are going to complain to Congress, and they�re going to stop it.�

And now he moves onto the Federal Reserve being the systemic garbage dump:

if only 10% of the portfolio is impaired, that is $100 billion in losses, and if the good mortgages in default are worth only 50% of their original value, think how much higher the losses must be on $1.2 trillion of garbage. The mighty Fed, which has the power to print money, doesn�t have the power to absorb losses on its balance sheet, because it has no capital other than what the Treasury gives it through taxpayer dollars. The losses, in other words, ultimately will find their way back to you and me. We will know this is beginning to happen when the Fed misses its usual annual dividend payment to the Treasury and starts asking, very, very quietly, for its own bailout.

Ian Welsh notes that Greece will undergo shock therapy to pay for the confidence of the foreign debt markets:

Somehow progressive tax increases never seem to occur.  Somehow a pan-European Tobin tax never happens.

The interesting question though is this: how many European governments played the exact same games Greece did?  How many are concealing their true fiscal picture, which is much worse than people think?

The answer, dear friends, is most of them.  Including the Germans, who have been acting very high and mighty.

We can't actually make the elites take responsibility, they might throw a temper tantrum and stop being vampires.  Instead, the other 99% of the population will be paying with higher taxes, fewer services, shorter and poorer retirements. 

The entire point of the past three years has been a mad scramble to replicate the previous social-economic order when the underlying factors that propped that regime up made no long term sense to begin with. When there is extreme concentration of wealth at the top of the pyramid, only debt can fund the middle class standard of living.  That debt could only be supported by a systemic reduction in interest rates and lending standards.  Restarting the economy so it replicates 2005 is a loser's game anyway, but it could buy another good year or two before we have to sort through the even larger mess.  But doing anything else would mean upsetting the current social-political order, and that is too scary.