Roubini Bad

I’ve tried to document in my posts on economics what a dismal position the United States is in.  I’ve tried to explain what Keynesian/Samuleson analysis predicts.  I’m Neo-Classical.

But now I’m going the full Roubini.

Title Fraud, let’s call it what it is, casts a question on the entire United States housing market- the single largest economic asset in the world financial system and leveraged up the wahzoo.  We are talking about vanishing tens of trillions of paper profits from the portfolios of the ‘stakeholders’.

This is going to cause massive economic disruption.  Easily the equal of 2008.

Welcome to shotgun and private fire department America.

Not that I’m in favor of either of those policies,  I think that even if people had minimum wage government jobs digging holes and filling them that would be about as good as anything except Food Stamps which also benefit billionaire ‘family farmers’.

There’s a ‘Jobs not Food Stamps’ program for you.

This is big.  Really, really big.

And whither CRE?  Et tu Brutus?

Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security, and it’s not optional.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.