So it was that Henry Paulson came up with an idea... the 'teaser freezer' plan. The ARM teaser freezer is being sold to the public as a way to protect homeowners. But it has another purpose, says a reporter from the San Francisco Gate, to help save the banks from their own bad judgment.
"The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates," says an article at SF Gate about the ARM teaser freezer plan. "The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
"And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
"The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
"The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.
"Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time. As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.
"Paulson became the U.S. Treasury Secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.
"Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.
"It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it."
Hmmm... does this sound like another government official that we know? If our dear readers will recall, Dave, over at the Desidooru Saloon reported a similar story - about the Vice President of the United States.
Apparently, Kiplinger's magazine had done some digging around in the financial disclosure forms that Cheney and his wife filled out in 2006 and found some pretty interesting stuff.
Kiplinger's reports: "Vice President Dick Cheney's financial advisers are apparently betting on a rise in inflation and interest rates and on a decline in the value of the dollar against foreign currencies."
"Let's examine just that first sentence in light of recent events," says Dave. "The Vice President's own investment portfolio is structured in a way to benefit from the rampant inflation and precipitous drop in the dollar brought about in part by his own stated economic philosophy that 'deficits don't matter.'"
Looks like there's a new "Tricky Dick" in town...
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.