by Ellen Brown
Whoa!
Did the banksters just meet their match?
For years, homeowners have been battling Wall Street in an attempt
to recover some portion of their massive losses from the housing Ponzi
scheme. But progress has been slow, as they have been outgunned and
out-spent by the banking titans.
In June, however, the banks may have met their match, as some equally powerful titans strode onto the stage.
Investors led by BlackRock,
the world’s largest asset manager, and PIMCO, the world’s largest
bond-fund manager, have sued some of the world’s largest banks for
breach of fiduciary duty as trustees of their investment funds. The
investors are seeking damages for losses surpassing
$250 billion. That is the equivalent of one million homeowners with $250,000 in damages suing at one time.
The
defendants are the so-called trust banks that oversee payments and
enforce terms on more than $2 trillion in residential mortgage
securities. They include units of Deutsche Bank AG, U.S. Bank, Wells
Fargo, Citigroup, HSBC Holdings PLC, and Bank of New York Mellon Corp.
Six nearly identical complaints charge the trust banks with breach of
their duty to force lenders and sponsors of the mortgage-backed
securities to repurchase defective loans.
Why the investors are only now suing
is complicated, but it involves a recent court decision on the statute
of limitations. Why the trust banks failed to sue the lenders evidently
involves the cozy relationship between lenders and trustees. The
trustees also securitized loans in pools where they were not trustees.
If they had started filing suit demanding repurchases, they might wind
up suedon other deals in retaliation. Better to ignore the repurchase
provisions of the pooling and servicing agreements and let the investors
take the losses—better, at least, until they sued.
Beyond the
legal issues are the implications for the solvency of the banking system
itself. Can even the largest banks withstand a $250 billion iceberg?
The sum is more than 40 times the $6 billion “London Whale” that shook
JPMorganChase to its foundations.
Who Will Pay - the Banks or the Depositors?
The
world’s largest banks are considered “too big to fail” for a reason.
The fractional reserve banking scheme is a form of shell game, which
depends on “liquidity” borrowed at very low interest from other banks or
the money market. When Lehman Brothers went bankrupt in 2008,
triggering a run on the money market, the whole interconnected shadow
banking system nearly went down with it.
Congress then came to the
rescue with a taxpayer bailout, and the Federal Reserve followed with
its quantitative easing fire hose. But in 2010, the Dodd Frank Act said
there would be no more government bailouts. Instead, the banks were to
save themselves with “bail ins,” meaning they were to recapitalize
themselves by confiscating a portion of the funds of their creditors –
including not only their shareholders and bondholders but the largest
class of creditor of any bank,
their depositors.
Theoretically,
deposits under $250,000 are protected by FDIC deposit insurance. But
the FDIC fund contains only about $47 billion – a mere 20% of the Black
Rock/PIMCO damage claims. Before 2010, the FDIC could borrow from the
Treasury if it ran short of money. But since the Dodd Frank Act
eliminates government bailouts,
the availability of Treasury funds for that purpose is now in doubt.
When
depositors open their online accounts and see that their balances have
shrunk or disappeared, a run on the banks is likely. And since banks
rely on each other for liquidity, the banking system as we know it could
collapse. The result could be drastic deleveraging, erasing trillions
of dollars in national wealth.
Phoenix Rising
Some pundits say the global economy would then come crashing down. But in a thought-provoking March 2014 article called “
American Delusionalism, or Why History Matters,” John Michael Greer disagrees. He notes that historically, governments have responded by modifying their financial systems:
Massive
credit collapses that erase very large sums of notional wealth and
impact the global economy are hardly a new phenomenon . . . but one
thing that has never happened as a result of any of them is the sort of
self-feeding, irrevocable plunge into the abyss that current fast-crash
theories require.
The reason for this is that credit is merely one
way by which a society manages the distribution of goods and services. .
. . A credit collapse . . . doesn’t make the energy, raw materials, and
labor vanish into some fiscal equivalent of a black hole; they’re all
still there, in whatever quantities they were before the credit
collapse, and all that’s needed is some new way to allocate them to the
production of goods and services.
This, in turn, governments
promptly provide. In 1933, for example, faced with the most severe
credit collapse in American history, Franklin Roosevelt temporarily
nationalized the entire US banking system, seized nearly all the
privately held gold in the country, unilaterally changed the national
debt from “payable in gold” to “payable in Federal Reserve notes” (which
amounted to a technical default), and launched a series of other
emergency measures. The credit collapse came to a screeching halt,
famously, in less than a hundred days. Other nations facing the same
crisis took equally drastic measures, with similar results. . . .
Faced
with a severe crisis, governments can slap on wage and price controls,
freeze currency exchanges, impose rationing, raise trade barriers,
default on their debts, nationalize whole industries, issue new
currencies, allocate goods and services by fiat, and impose martial law
to make sure the new economic rules are followed to the letter, if
necessary, at gunpoint. Again, these aren’t theoretical possibilities;
every one of them has actually been used by more than one government
faced by a major economic crisis in the last century and a half.
That
historical review is grounds for optimism, but confiscation of assets
and enforcement at gunpoint are still not the most desirable outcomes.
Better would be to have an alternative system in place and ready to
implement before the boom drops.
The Better Mousetrap
North
Dakota has established an effective alternative model that other states
might do well to emulate. In 1919, the state legislature pulled its
funds out of Wall Street banks and put them into the state’s own
publicly-owned bank, establishing financial sovereignty for the state.
The Bank of North Dakota has not only protected the state’s financial
interests but has been a moneymaker for it ever since.
On a
national level, when the Wall Street credit system fails, the government
can turn to the innovative model devised by our colonial forebears and
start issuing its own currency and credit—a power now usurped by private
banks but written into the US Constitution as belonging to Congress.
The
chief problem with the paper scrip of the colonial governments was the
tendency to print and spend too much. The Pennsylvania colonists
corrected that systemic flaw by establishing a publicly-owned bank,
which
lent money to farmers and tradespeople at interest. To
get the funds into circulation to cover the interest, some extra scrip
was printed and spent on government services. The money supply thus
expanded and contracted naturally, not at the whim of government
officials but in response to seasonal demands for credit. The interest
returned to public coffers, to be spent on the common weal.
The result was a system of money and credit that was sustainable
without taxes, price inflation or government debt
– not to mention without credit default swaps, interest rate swaps,
central bank manipulation, slicing and dicing of mortgages,
rehypothecation in the repo market, and the assorted other fraudulent
schemes underpinning our “systemically risky” banking system today.
Relief for Homeowners?
Will the BlackRock/PIMCO suit help homeowners? Not directly. But it
will get some big guns on the scene, with the ability to do all sorts of discovery, and the staff to deal with the results.
Fraud
is grounds for rescission, restitution and punitive damages. The
homeowners may not have been parties to the pooling and servicing
agreements governing the investor trusts, but if the whole business
model is proven to be fraudulent, they could still make a case for
damages.
In the end, however, it may be the titans themselves who
take each other down, clearing the way for a new phoenix to rise from
the ashes.
