New York Fed faces ‘Inherent Conflict’ in possibly forcing banks to buyback mortgages

October 22, 2010 by · Leave a Comment
Filed under: Industry News 

This saga is getting much more interesting and the stakes are rising by the day.  We talked about this last year when the Federal Reserve was buying all these “toxic” assets from the banks in an effort to re-capitalize them.  Much of the paper was fraudulent by my standards, stated income loans are ripe for abuse and we created trillions of dollars of this stuff and it was sold off as “AAA” to investors around the world.

Now we are finally coming to grips and not only are more major losses expected but there were many possible mis-representations in the prospectuses given to investors of the bonds that were funded with payments of home mortgages.  The Federal Reserve is a holder of this type of paper.  The problem comes that when material facts were not what they were claimed as, you can force the originators (like the banks) to re-purchase back the bad bonds in exchange for cash.   Now that these facts are coming to light we will truly see who our central bank (The Fed) is looking out for.  This they use financial system stability as the reason not to force these losses on the banks even when fraud has been committed then they are working for the banks.   If they do force the losses even if it means some large banks need to fail to clear this bad paper out of the system then we can be more hopefully they are looking out for the American people.

All along I have said it is all about what precedent we set for future generations will determine how people will act.  This was not some mistake that no one saw coming or didn’t purposely find ways to profit.  Billions were made and some not legally so we a society that is suppose to stand for the rule of law even if its painful, we need to do the correct and just action in this situation.  That will truly restore confidence in our capital markets and bring on a real recovery.  After that we need to deal with trade, entitlements, taxes and debt.  All in a decades work!

Bloomberg – The Federal Reserve Bank of New York’s effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system.

The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., joined a bondholder group including Pacific Investment Management Co. that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities, people familiar with the matter said this week.

Concern that Bank of America may be forced to buy back soured mortgages helped send its stock down almost 5 percent in the last two days, wiping out $5.92 billion of its market value. The decline runs counter to the Fed’s goal of strengthening the banking system after the worst crisis since the Great Depression.

“This is an inherent conflict,” said former Atlanta Fed research director Robert Eisenbeis, now chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “They’re transferring the loss from what would have been Bear Stearns through the Fed to the originators of the mortgages. That’s an odd chain, and I don’t know how you manage that.”

Click Here to Continue Reading

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!