The Federal Reserve is pumping $200 billion into the financial markets by lending Treasuries to 20 investment firms for a 28-day term. The lucky 20 can, in turn, put up such instruments as triple-A rated mortgage-backed securities as collateral. The move is designed to open up liquidity so that the banks will relax and start lending again.
"Investors have shied away from mortgage backed securities for obvious reasons- their fear of default," explains David Reed, author of "Keeps rates high. The Fed has just bolstered the image of mortgage-backed securities by allowing lenders to use them as collateral … it also frees up more money for banks to lend (as if they would)."
Banks like Citigroup curtailed their mortgage lending by 20 percent, so being able to sell new mortgage loans should make them feel a whole lot better.
It won't help, because banks have a lot more problems than liquidity. They have the FBI, the SEC, the cities of Cleveland and Baltimore and a slew of angry investors breathing down their necks.
The reason mortgage-backed securities have an image problem is because banks and investment firms were in cahoots to load bad loans into securities packages. Subprime loans have no place in triple A-rated securities, but thanks to the crooks in charge, they were. And now everyone is paying the price except the overpaid CEOs who let it happen.
Countrywide, the nation's largest mortgage lender, is besieged with lawsuits that it 'misled investors by falsely representing its loan origination and foreclosure practices and its liquidity. And the SEC is also investigating the lender for alleged improper accounting, based on information obtained from the FBI.
Further, the bank was found to be spending its money on prostitutes that it brought across state lines -- oops, wrong story.
A plaintiff's firm hired by the NAACP has filed a class action lawsuit against a number of mortgage lenders, claiming that African Americans were systematically put into predatory loans by such lenders as Washington Mutual, Citi, Ameriquest, and others.
Cities are angry, too. Baltimore is suing Wells Fargo and Cleveland filed a nuisance suit against 21 lenders for unscrupulous practices that have littered neighborhoods with foreclosures.
Meanwhile, the three blind but very rich mice, Angelo Mozilo, Countrywide's founder, Merrill Lynch Chairman and CEO Stanley O'Neal and ex-Citigrou CEO Charles Prince testified last week to the Oversight and Government Reform committee that their millions of dollars in pay and bonuses were justified, even following a year of horrific losses.
And why did the banks lose money? The Ponzi scheme of worthless mortgage-backed securities fell apart.
Of course, the obvious solution only occurs to the likes of you and me. The SEC needs to clamp down on crooked CEOs so they'll stop goosing numbers and bilking investors in order to receive obscene pay.
