Thursday, October 21, 2010

FBI Investigating Banking Industry; Justice May Be Served

Despite the banking industry's best attempts to portray 'Foreclosuregate' as a simple matter of clerical errors, most people just aren't buying it. What's most worrisome for the banking industry is that the FBI and all 50 state attorney's general aren't buying that line of bullshit either.

The AP reports that the FBI has begun the initial phase of an investigation into whether the banking industry broke criminal laws.

The Bureau won't have to look far. It is well-established that the Big Banks committed gross fraud at every step of the way: in the loan documentation process, the mortgage-writing process, the mortgage-transfer process, the title-transfer process, and in the foreclosure process.

What the FBI will be looking for, in particular, is criminal intent. Here's a projection that they will find it in spades.

The criminal proceedings aside, the banks have years of legal battles, and absolutely massive legal bills, ahead of them. The civil proceedings alone will be overwhelming. The banks are hoping for quick rulings that lead to quick resolutions, but undoubtedly there will be numerous trials, and they will be lengthy.

Filing false documents simply doesn't go over well with most judges.

Banks, such as the former GMAC and Bank of America, say they have fixed the problems in the foreclosure process. Authorities in most states are highly skeptical, and have said so publicly. There are tens of thousands, perhaps hundreds of thousands, of bad documents. It will likely take extensive time to correct all of them. Bank of America alone has to re-file documents for more than 100,000 foreclosure cases.

But that's the least of the banks' worries. If there was criminal intent, and not just negligence, fixing the documents will be the easy part. Doing hard time will be the hard part.

Officials from the Federal Housing Administration have found clear disparities in how five major lenders have been responding to distressed homeowners after a four-month review of their practices, according to the AP.

At a minimum, the government has the power to fine lenders not complying with FHA guidelines.

And now the federal government is getting involved on multiple levels. Housing and Urban Development Secretary Shaun Donovan, Treasury Secretary Timothy Geithner and other officials met to discuss the issue on Wednesday.

Even the White House has said federal agencies are investigating the allegations of flawed foreclosure documents.

This story is huge and, as much as the banks clearly wish it would, it is not going away any time soon.

The gang of clowns that comprise the House and Senate have scheduled hearings for next month, but that will be nothing more than a dog and pony show and an opportunity for grandstanding.

What the banks truly fear is the FBI and the state attorney's general, who are not led around on a leash by the banking industry.

And what the banks also fear are the enormous losses they have already suffered, but have yet to figure onto their balance sheets. And if they are forced to repurchase tens, even hundreds, of billions in bad (read, fraudulent) mortgage-backed securities, that could be a death blow.

Bank credit has also declined substantially, meaning that banks are making less money from lending these days.

When you combine these factors, the Big Banks may not only be on the verge of bankruptcy, they may already be insolvent.

Since all of the banks' counter-parties — the ones who bought all those toxic "assets" — know this, they will not line up in orderly fashion to be reimbursed. There will be a mad scramble to get whatever money they can, while there is still money to be had. When the music stops, lots of these players will be left without chairs.

The banking industry is used to getting away with all of its high crimes, usually with nothing more than a fine. And even when paying those numerous fines, they are typically allowed to do so without an admission of guilt.

However, the Big Banks' way of doing business — in fact their very existence — is now finally, thankfully, at stake.

May justice be served.

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