Looming losses from ForeclosureGate qualify as the sort of systemic risk warranting the breakup of the too-big-to-fail banks under the new Financial Reform Bill. The Kanjorski amendment provides that federal regulators can preemptively break up large financial institutions that -- for any reason -- pose a threat to U.S. financial or economic stability.
Although downplayed by most media accounts and popular financial analysts, crippling bank losses from foreclosure flaws appear to be imminent and unavoidable. The defects prompting the "RoboSigning Scandal" are not mere technicalities but are inherent to the securitization process. They cannot be cured . This deep-seated fraud is already explicitly outlined in publicly available lawsuits.
There is, however, no need to panic; no need for TARP II; and no need for legislation to further conceal the fraud and push the inevitable failure of the too-big-to-fail banks into the future.
Federal regulators now have the tools to take control and set things right. The Wall Street giants escaped the Volcker Rule, which would have limited their size, and the Brown-Kaufman amendment, which would have broken up the largest six banks outright; but the Financial Reform Bill has us covered. T he Kanjorski amendment -- which slipped past lobbyists largely unnoticed -- provides that federal regulators can preemptively break up large financial institutions that pose a threat to U.S. financial or economic stability.
Rep. Grayson's Call for a Moratorium
The new Financial Stability Oversight Council (FSOC) probably didn't expect to have its authority called on quite so soon, but Rep. Alan Grayson (D-FL) has just put the amendment to the test. On October 7, in a letter addressed to Timothy Geithner, Shiela Bair, Ben Bernanke, Mary Schapiro, John Walsh (Acting Comptroller of the Currency), Gary Gensler, Ed DeMarco (FHA) and Debbie Matz (National Credit Union Administration), he asked for an emergency task force on foreclosure fraud. He said:
"The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks. More importantly, these foreclosures are devastating neighborhoods, families, and cities all over the country. Each foreclosure costs tens of thousands of dollars to a municipality, lowers property values, and makes bank failures more likely."