For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren't too big to reorganize as federal institutions serving the public interest.
In January 2009, only a week into Obama's presidency, David Sanger reported in The New York Times that nationalizing the banks was being discussed. Privately, the Obama economic team was conceding that more taxpayer money was going to be needed to shore up the banks. When asked whether nationalization was a good idea, House speaker Nancy Pelosi replied:
"Well, whatever you want to call it . . . . If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.
"I'm not talking about total ownership," she quickly cautioned -- stopping herself by posing a question: "Would we have ever thought we would see the day when we'd be using that terminology? "Nationalization of the banks?' "
Noted Matthew Rothschild in a March 2009 editorial:
[T]hat's the problem today. The word "nationalization" shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s.
Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt. The bank is put into receivership under the FDIC, which takes it over.
What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called "welfare for the rich." The banks' losses and risks have been socialized but the profits have not. The bankers have been feasting on our dime without sharing the spread.
And that was before ForeclosureGate the uncovering of massive fraud in the foreclosure process. Investors are now suing to put defective loans back on bank balance sheets. If they win, the banks will be hopelessly under water.
"The unraveling of the " foreclosure - gate' could mean banking crisis 2.0," warned economist Dian Chu on October 21, 2010.
Banking Crisis 2.0 Means TARP II
The significance of ForeclosureGate is being downplayed in the media, but independent analysts warn that it could be the tsunami that takes the big players down.
John Lekas, senior portfolio manager of the Leader Short Term Bond Fund, said on The Street on November 2, 2010, that the banks will prevail in the lawsuits brought by investors. The paperwork issues, he said, are just "technical mumbo jumbo;" there is no way to unwind years of complex paperwork and securitizations.
But Yves Smith, writing in The New York Times on October 30, says it's not that easy:
The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.
Asking for Congress's help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?