The financial industry knows how to help itself to public money, and it has an insider, Tim Geithner, to make it happen. Despite the anger over the insignificant (compared to the bailout) bonuses at AIG, Geithner wants to solve the toxic waste problem by throwing enormous amounts of money at hedge funds. The idea is to set up funds called the Public-Private Investment Partnership, and use the money to buy junk from banks. Here is a description from the New York Times:

To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

The part about how we share in the vast profits to be made is unavailable at the time of this writing. But good to know that we still have enough money to throw at the rich, who seem to think a 25% return is just about right. We are lucky to have Professor Galbraith to explain why this idea stinks.

Individual homeowners? In what cannot be a surprise to anyone familiar with the power of money, the WSJ reports that the bankruptcy cramdown bill is in trouble in the Senate.

Financial institutions strongly oppose court-ordered mortgage workouts, saying they would increase risks for lenders, raise mortgage rates and clog courts.

The reasons cited by industry are nonsense. There is no increase in risk to lenders. The amendment only applies to existing loans, which are totally at risk now. It won’t increase mortgage rates on future loans, since it won’t be available on future loans. And it certainly won’t clog bankruptcy courts: what it will do is give the American people leverage to bargain with the financial giants.

Why should the rich take a hit? With their servant/cowards in Congress, they simply refuse to acknowledge the role of the financial industry in the disaster, including the massive rise in mortgage fraud, hammered home in two recent reports. First

The number of mortgage fraud reports among loans made last year grew 26% from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.

The Mortgage Asset Research Institute, Inc., is a Lexis-Nexis company with software to sell, software designed to help banks ferret out mortgage fraud. Their web page opens with this sentence:

Mortgage fraud perpetrated by industry insiders accounts for 80 percent of all reported mortgage fraud losses.

They base that unsurprising assertion on another report, now updated, from the Financial Crimes Enforcement Network, or FinCEN. Financial institutions have to report suspicious transactions to FinCEN. The reports are called Suspicious Activity Reports, SARs, and institutions must have systems to monitor their operations looking for reportable events. This is the one thing in the War on Terror that actually has worked. It is primarily designed to find potential terrorist activities, and we all hope it is working. However, the range of financial crime is greater than terrorism. It ranges from check-kiting to Ponzi schemes, and on into more interesting things, like mortgage fraud.

FinCEN reports that in 2007, there were 52,868 SARS based on mortgage fraud, compared to 37,313 in 2006. The rise in reports of mortgage fraud is greater than the increase in any other area reported in SARs. And remember, this is just regulated financial institutions. Mortgage brokers, the main source of mortgage funding, aren’t covered by the FinCEN regime. FinCEN sampled a group of SARs and tells us:

Narrative details in the reviewed SARs identified mortgage brokers as the loan originators for the majority of the suspected fraudulent loans; 1,025 of 1,769 narratives (nearly 58%) disclosed that the loans were originated by mortgage brokers.

And of course, the Mortgage Bankers Association, the trade group for the fraud industry, is lobbying to defeat cramdown. They can count on the support of their Republican Senatorial Vassals.

In the meantime, who represents us taxpayers? The patsies at Treasury? The frightened ConservaDems? Larry Summers? Robert Rubin? It’s scary.



I read a lot of books.