ForeclosureGate Could Force Bank Nationalization

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.”

Profs. William Black and Randall Wray are calling for receivership for another reason — the industry has engaged in flagrant, widespread fraud.  “There was fraud at every step in the home finance food chain,” they wrote in the Huffington Post on October 25:

[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 agreement 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 a model, Congress can look to the nation’s only state-owned bank, the Bank of North Dakota.  The 91-year-old BND has served its community well.  As of March 2010, North Dakota was the only state boasting a budget surplus; it had the lowest default rate in the country; it had the lowest unemployment rate in the country; and it had received a 2009 dividend from the BND of $58.1 million, quite a large sum for a sparsely populated state.

For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com. Read other articles by Ellen, or visit Ellen's website.

8 comments on this article so far ...

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  1. PatrickSMcNally said on November 8th, 2010 at 7:54am #

    There’s nothing wrong with advocating bank nationalizations per se, and any socialist agenda would have to include such. But there’s also a bit of a fetish spreading around this as of late. The Bank of England was formed in 1694 and nationalized in 1946. In either circumstance, the Bank of England has remained an instrument of the class-dictatorship of the bourgeoisie in England. Merely nationalizing the BoE in 1946 did not alter that function. Neither would something like a nationalization of the member banks in the Federal Reserve System alter class-rule in the USA. A sector of paleocon-artists likes to frequently imply that bourgeois class-rule is non-existent in the USA but that merely the formation of the Fed in 1913 somehow gave power to a mysterious cabal which exists outside of class. In fact, the formation of the Fed in 1913 was a needed bourgeois reform which was for the betterment of the public interest. But it didn’t alter the system of class-rule. Since Reagan we’ve seen a steady rollback of bourgeois reforms leading to more deregulation. But the heart of the issue remains which class shall rule.

  2. hayate said on November 8th, 2010 at 10:53am #

    Nationalising the banking industry in the usa would be a step forward, but a lot more needs to be done, since essentially the same (majority zionist) crooks would run it – only through quislings they set up in government, rather than through their various boards of directors. I wouldn’t that the current crop of guv stooges would act in the people’s interests, rather than corporate ones, so like with any major reoranisation of the political/economic structure, for the changes to be meaningful, the organisers need to be reorganised themselves first – and most preferably jailed.

  3. hayate said on November 8th, 2010 at 10:54am #

    “I wouldn’t that the current crop of guv stooges”

    Should have been:

    I wouldn’t expect that the current crop of guv stooges

  4. Don Hawkins said on November 8th, 2010 at 12:33pm #

    “welfare for the rich.” So the rich are on welfare and virtually the whole securitized mortgage industry might have to be put behind bars. Wait work camps not behind bars work camps where you can keep an eye on them.

  5. Deadbeat said on November 9th, 2010 at 4:37am #

    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.

    “Nationalization” is NOT the same as Socialism. All it means is that the State Zio-Capitalists will use the power of the government for their own ends. What you now have is KEYNESIANISM for the Rich. Notice how the Liberal are fully in compliance with the “Socialism for the Rich” rhetoric because what you have is Keynesianism exclusively for the elites.

    The whole bailouts and the quantitative easing is about maintaining asset demand and inflated asset prices while deflating demand for everyone else. The Zio-rulers are all about the FIRE (finance, insurance, real estate) and LEAP (law, entertainment, academia, publishing) sectors. All they care about are assets and workers AIN’T assets.

    Until people wake up from the Zio-Capitalist matrix, nationalization and privatization makes no difference.

  6. Deadbeat said on November 9th, 2010 at 4:51am #

    More Keynesian nonsense …

    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.”

    IT’S OVER. Don’t you get it. Keynesianism failed and was buried by the mid-1970’s. The government is owned by the Zio-Capitalist class. And all Stiglitz, a former CLINTON & World Bank hack, is advocating is the use government power to further fleece workers under the guise that it’ll help everyone. Did Stiglitz help working people when he was in government — hell no. During his tenure Clinton ushered in NAFTA and welfare reform and locked up more women. That’s Stilitzonomics.

    The interest of the banks ARE aligned with the “national interest” all right since the banks are CHARGING the “interest”. The banks OWN the government so naturally “nationalization” means more public largess going into the pockets of bankers. In other words we already have nationalization with the bailout of AIG, Citibank, and Goldman Sachs.

  7. Don Hawkins said on November 9th, 2010 at 5:23am #

    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. Ellen

    So let’s say it again the rich are on welfare the kindness of strangers and TARP part two maybe for the King’s and Queen’s or the little God’s. Oz sure is different the little God’s are on welfare but of course don’t call it that and pay no attention to the man/women behind the curtain. I see the angle, Palin said yesterday to Ben Bernanke Federal Reserve Chairman in Oz to “cease and desist” the “Fed’s pump priming addiction.” Heck let’s do a blackboard Glenn Beck style I mean does Palin think this stuff up by herself with maybe the help of one of the God’s floating in space probably not more like one of the little God’s on welfare here on Earth here’s where we need the blackboard maybe the Koch brothers call’s Forbes then Forbes call’s Murdoch then a call to Armey then Murdoch call’s Beck and Beck call’s Palin with some talking point’s for the day in Oz. While this is going on more solders of the little God’s on welfare are doing there part like what I saw and heard on the Capitalist New’s Broadcasting Company yesterday a program called Power Lunch. Has a real ring to it Power Lunch like at maybe the Four Seasons in New York City and yes most of the people in that restaurant on any given day are on welfare. Oh the name of that restaurant on this present path might have to be changed to the three seasons then the two seasons anyway on this power lunch program yesterday they said electric car’s will not work as Americans like big car’s they did get part of that right as to produce the electricity with coal it will not work out to well. Oh and after saying this they all smiled at one another like they had just done something great and I was waiting for the secret hand shake but I guess they use that later in the day. Well it’s Tuesday and yes am an hour behind in space and time and wonder what talking point’s we might hear today in the land of Oz? Maybe we the people the stranger’s could have a power lunch the wife can make one mean potato salad.

    Nonviolent resistance (or nonviolent action) is the practice of achieving socio-political goals through symbolic protests, civil disobedience, economic or political noncooperation, and other methods, without using violence. Wiki

    How do you like that potato salad with or without egg.

  8. Don Hawkins said on November 9th, 2010 at 6:05am #

    It sure does seem the talking point’s from the few in the land of Oz is to forget you know forget you have a mind forget you even matter forget the last few years about a 100 just a figment of your imagination forget you can make a difference forget about the Amazon forget about the Arctic just forget because we are now in control of your TV we are in control of everything you see and hear, really.