Tuesday, October 12, 2010

Have the Fed's Toxic Assets Just Gotten A Lot More Toxic?

By now many of you have heard the story of how a lot of foreclosures were done illegally. Many of the big banks have suspended foreclosures in the 23 states where they actually have to show evidence to a judge that they followed the law before they take people's homes away.

The big banks are in a panic. They no longer make money loaning money to businesses, they make it trading speculative securities back and forth to one another. When those instruments blow up, whichever of the banks is holding them takes them to the Federal Reserve Discount Window in exchange for T-bills. Are the instruments heavily discounted to reflect their loss of value? We don't know. The fed won't tell Congress and there has never been a full audit of the institution that controls the nation's money supply.

At the end of a few months they are supposed to swap the Tbills and the assets back, but I suspect a lot of banks have just walked away from the deal, kept the bonds, and stuck the fed with the bad paper. Since the people that run the big banks and the people who run the fed are the same people, they all go along with this arrangement which eventually shifts all of their bad bets onto the backs of the taxpayers.

Many of those instruments are backed by bundles of mortgages. When people don't pay the mortgages, they are supposed to be backed by repossessing the homes. Except with a lot of these deals the property has been transferred and sliced and diced so much that no one can tell who really holds the mortgages anymore. Its a disaster. The toxic debt was toxic because once the mortgage holders quit paying there was nothing backing the paper except the real estate which had lost much of its value. Now it turns out that not even devalued real estate may back that paper. It is not clear that what the holders of those instruments bought was title to the properties.

That means a couple of things. One, the toxic assets on the Feds books that are based on real estate is now even more toxic, and they can't even think about unloading them anytime soon. Two, if the Fed keeps allowing the banksters to use the Fed discount window as a place where they can redeem all of their losing bets for face (fantasy) value, then their is going to be a mad rush bu the favored banks to trade their trash for treasure (Tbills). Of course, if too much trash is on the fed's books, it will speed the day when the dollar itself becomes trash. It's Fed paper that bakcs our paper currency, and the quality of that paper is getting rather toxic.

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