From Volume 38, Issue 3 of EIR Online, Published Jan. 21, 2011

U.S. Economic/Financial News

Threat of Mortgage-Backed Securities Collapse to the Big Banks

Jan. 14 (EIRNS)—Financial columnists were already working overtime, interviewing mortgage bankers and assuring readers that the landmark Jan. 7 Massachusetts Supreme Judicial Court ruling, that mortgage securitization has been done illegally on a vast scale, "would affect very little," at least outside Massachusetts. Mortgage-backed securities (MBS) are claimed to represent $5 trillion in assets on the books of the four biggest U.S.-based banks alone. But in fact, their market value is unknown, and they would have collapsed entirely had not Bernanke's Federal Reserve bought and held $1.25 trillion in MBS's at the banks' claimed face value.

Now the challenges to Wall Street's toxic MBS are multiplying. On Jan. 10 a coalition of public pension funds from six states, investors in both bank shares and MBS's, sent a letter to the biggest mortgage banks, telling them to investigate and change their mortgage practices. Financial columnists again went to work—on CNBC, for example, sneering that these particular pension funds could only pull $6 billion out of the big banks' $600 billion in core capital.

But on Jan. 13, there was another shot across the banks' bow on foreclosures. A more general grouping of MBS investors, called the Association of Mortgage Investors (AMI)—hedge funds, mutual funds, state pension funds, charitable endowments, etc.—issued a "white paper" proposing a settlement between the banks and the state attorneys general. The shift here is that up to now, in "foreclosuregate," MBS investor groups have stressed just one thing—get the foreclosures going again across the country, and speed them up. But the AMI's white paper referred to the "broken mortgage servicing model" and "equity for responsible borrowers, distressed homeowners, mortgage servicers and the mortgage investors." It supported principal forgiveness and "total debt realignment," i.e., modifying second mortgages along with the first, and said homeowners "are being victimized by the servicers' past and ongoing actions."

The Congressional Oversight Panel estimated in November, after the "foreclosuregate" scandal broke, that even moderate demands from investors that banks buy back their illegally issued MBS would wipe out the regulatory capital of the likes of Bank of America and crash them.

The plunge in U.S. housing values is now worse than in 1928-33. They have fallen for 53 straight months, by a total of 26-33% (according to the study) since their peak in June 2006, worse than the nearly 26% decline seen during the Depression years between 1928 and 1933. And home values—and MBS values—are expected to continue to slide as inventories pile up. There is evidence, for example, that foreclosures in Massachusetts have largely stopped since the Supreme Court's decision.

Bloomberg News quoted the New York Fed president, William Tracy, that the "worst case" could be another broad collapse of real estate and MBS values. Tracy cited the "growing incentive to default" among millions of homeowners, with 11 million homes underwater and 3 million more "near underwater" (out of 50 million mortgaged homes).

Pension Funds Go After Banks on Mortgage Fraud

Jan. 11 (EIRNS)—In the first publicly reported fallout of the precedent-setting Massachusetts ruling Jan. 7, invalidating foreclosures, Bloomberg News is reporting that a group of "public-sector pension funds" has now sent letters to four major banks—including Bank of America, Wells Fargo, CitiGroup, and JPMorganChase—demanding a "review" of foreclosure practices. Representing over $430 billion in pension investments, the coalition of pension funds includes two funds from the embattled states of Illinois, six funds from New York, and retirement funds from North Carolina, Oregon, and Connecticut.

According to CNBC, the organizer of the effort was John Liu, New York City Comptroller for the New York City Pension Funds.

The letter to Bank of America, posted on the CNBC website, charges:

"Reports in fall 2010 of widespread irregularities in the mortgage and foreclosure processes at the nation's largest banks have exposed Bank of America Corporation to intensive legal and regulatory scrutiny. Despite management's assurance that the concerns are overblown and will be resolved quickly, preliminary findings by top federal regulators suggest that internal control failures at the banks are in fact widespread....

"As major institutional investors collectively holding 97.1 million of Bank of America common shares, with a December 31 market value of $1.3 billion, we believe it is incumbent upon the Board of Directors to take immediate, independent action to restore confidence in the company's internal controls and compliance. Specifically, we call on the Audit Committee you chair to conduct an independent review of the Company's internal controls related to loan modifications, foreclosures and securitizations and to include a report to shareholders with findings and recommendations in the Company's 2011 proxy statement."

Bloomberg news quotes the letter in its Jan. 9 story, identifying a "fundamental" flaw in the bank procedures, and quotes New York City comptroller John Liu stating that, "The banks' boards cannot continue to pretend the foreclosure mess is the result of technical glitches and paperwork errors. There is a fundamental problem in their procedures that endangers not just homeowners, but shareholders, and local economies." Portending a showdown, the pension funds are demanding that the banks "report their findings" to shareholders, in upcoming proxy statements.

The "coalition" of pension funds writing to BoA includes the following members: the Connecticut Retirement Plans and Trust Funds, the Illinois State Board of Investment, the Illinois State Universities Retirement Systems, the New York City Board of Education Retirement System, New York City Employees Retirement System, New York City Fire Department Pension fund, New York City Police Pension Fund, New York City Teachers' Retirement System, New York State Common Retirement Fund, North Carolina Retirement Systems, and the Oregon State Treasury.

Economic Collapse Equals More Homelessness

Jan. 12 (EIRNS)—This morning, the National Alliance to End Homelessness released its State of Homelessness in America report, the first of what it intends to be an annual series of reports tracking changes in homelessness at the national and state levels. The report documents the correlation between rising homelessness and the economic collapse, by tracking the changes that have occurred in the homeless population and certain economic measures from 2008 to 2009, using data for those years from a variety of Federal and state sources. Among the findings of the report are the following:

* Conditions worsened among all four economic indicators examined in the report: housing affordability for poor people, unemployment, poor workers' income, and foreclosure status.

* The number of officially unemployed increased from 8.9 million to 14.3 million, an increase of 60%.

* Nearly three-quarters of all households with incomes below the Federal poverty line spend over 50% of monthly household income on rent. In Florida, Nevada and California, that figure is over 80%.

* Real wages among poor workers dropped nationally by 2%.

* Foreclosure affected nearly half a million more households in 2009 than in 2008, rising to 2.8 million foreclosures in 2009.

These economic factors help to explain the increase in homelessness. Overall, the homeless population rose by 3%, nationally, from 2008 to 2009. The largest percentage increase was in the number of family households, which increased by 4%. The doubled-up population, that is, people living with family or friends for economic reasons, increased by 12%, to more than 6 million people from 2008 to 2009. Nan Roman, president of the alliance, noted that states with the highest levels of economic distress had the highest increases in homelessness.

As bad as this picture is, it's likely to be worse for 2010, since the data in the report covers the early period in the so-called recession, before the state and local budget cuts started hitting hard. Homelessness is a "lagging indicator," Roman said, so homelessness is likely to continue increasing in 2010 and 2011, and it's likely to be worsened not only by economic factors but also collapsing state and local budgets. In response to a question from EIR, Roman said that the alliance is "very concerned" about the state and local budget situation, a situation which means that communities "are going to have to do much, much more with much, much less...."

Illinois Raises Taxes, Plans To Cut Spending

Jan. 12 (EIRNS)—Faced with an immense budget deficit, the state of Illinois today approved a 66% increase to the personal income tax and a 50% increase in the business tax, even though the revenue generated—about $6.8 billion a year—is less than half of the projected $15 billion budget deficit. To fill the remaining gap, the state intends to drastically cut spending further. Clearly, the only alternative for Illinois and other states to this insanity is to reinstate Glass-Steagall.

The tax increases were approved in close votes in both the state House and Senate. Gov. Pat Quinn is expected to sign the bill.

The hike increases the state's personal income tax rate from 3% to 5%. In real numbers, if your gross income is $50,000 a year, your state income taxes will rise from $1,500 to $2,500 a year.

State Senate president John Cullerton (D) emphasized that the tax hike is only one portion of a solution to the state's budget crisis. The tax hike will be coupled with strict 2% limits on spending growth. If officials spend above those limits, the tax increase will automatically be cancelled.

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