The Department of Justice filed a civil lawsuit against Standard and Poor's for fraud. Will the DOJ finally nail credit rating agency Standards and Poor's for slapping AAA ratings on rigged CDOs backed by mortgage toxic waste? Or will justice be just another slap on the wrist?
Just when you think Justice will never be done, another civil lawsuit is filed. The FDIC filed three lawsuits against Goldman Sachs, JP Morgan Chase and BoA among others for peddling bad mortgage backed securities stuffed with toxic mortgages to their sucker, Guaranty Bank of Austin, Texas. Guaranty Bank later failed in 2009. Housing Wire:
This week, the regulator filed multiple lawsuits in Travis County (Austin), suggesting Guaranty suffered major losses from toxic RMBS loans sold and packaged by mega banks and other financial institutions.
Defendants named in the multibillion-dollar lawsuits include Countrywide, JPMorgan Chase ($38.04 0%), Ally Financial, Deutsche Bank Securities ($34.07 0%), Bank of America ($8.19 0%) and Goldman Sachs ($105.32 0%) among others.
FDIC, on behalf of Guaranty, claims the banks misrepresented loan-to-value ratios, underwriting criteria and appraisal amounts when selling, packaging and underwriting home loans that became collateral for mortgage securities sold to Guaranty.
The Federal reserve announced Operation Twist, an action from 1961 where the Fed swaps out treasuries of short maturity lengths, for longer ones, all in an attempt to flatten, or twist the yield curve. From the Economist:
Operation Twist has long been considered a failure. Early studies found little impact on yields, vindicating those who argued that the price of a security depends only on expectations—of inflation, for example, or monetary policy—not its relative supply. Eric Swanson, an economist at the Federal Reserve Bank of San Francisco, disagrees. Previous studies, he reckons, didn’t properly isolate the influence of Operation Twist from countervailing factors. By studying the behaviour of bonds right around announcements related to Operation Twist, he concludes the programme lowered yields by 15 basis points in total.
Yes the title is crass, vulgar. Yet the never ending trading of mortgage backed securities, previously titled toxic assets in some game of musical chairs justifies the analogy. Take just this latest revolving door as an example. Did you know a former New York Federal Reserve Official, in charge of overseeing AIG now works for AIG?
American business appears to be hung over on a massive debt fest from before the financial crisis. Debt Overhang to be more specific. It's so bad, it's causing real investment which in turn generates real jobs for the real economy which generates real growth... to be muted. One problem, the declining values of assets, specifically commercial real estate.
The below video explains debt overhang in simple terms, real simple, must watch simple.
Turning to adult versions of crayons, here is Occhino's graph of assets to business debt. Notice the asset to debt ratio historic high. (To read las matemáticas version of the research, pdf here).
America needs bookkeeping we can believe in. This is what the Congressional Oversight Panel Chair said on Morning Joe in talking about the banks toxic assets.
The headlines are ablaze of Geithner's plan. The Treasury Secretary is on CNBC, the cable news, even conference calls with select bloggers (I wonder if Krugman was invited?), are they twittering too? The markets react, the Dow up almost 500 pts! Astounding, magical, we have the cure....or do we?
I already wrote my own overview of the toxic asset plan and believe it fatally flawed with the same assumptions that got us into this mess, home values must drop to be in alignment with income and Americans are tapped out, the great debt fueled Ponzi scheme has collapsed.
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