Did the Other Shoe Just Drop? Big Banks Hit with Monster $250 Billion Lawsuit in Housing Crisis

Wicked Witch of the East

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.

___________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://EllenBrown.comhttp://PublicBankSolution.com, and http://PublicBankingInstitute.org.

 

29 Responses

  1. […] Source WebOfDebt  July 16 […]

  2. The Dow Jones Industrial Average (The Dow) is an index showing an averaged value of stock prices for thirty large US corporations traded on the stock market. Theoretically, the higher The Dow, the better our economy. So why is The Dow at record high levels as our economy dies? Because much of the stock market purchases are by members of banking crime syndicates like the Federal Reserve (FR), the People’s Bank of China (PBoC), and their proxies. They are literally buying our businesses, industries, real estate, jobs, and resulting economic and political freedoms, with worthless currency they counterfeit out of thin air on their keyboards. The FR criminals lie about it, but the PBoC criminals are open about it. Both also “loan” us their worthless currency through their US government accomplices who then tax and enslave us to pay the resulting fraudulent national debt. This RICO operation is also used against most nations and requires immediate and intense law enforcement — this is not an economics issue. The illegal debts must be disavowed, the guilty must be severely punished, their assets must be forfeited, and we must fund our federal operations with debt-free, interest-free, and tax-free federally issued currency — just like we have several times in America’s history. Or we can continue allowing criminal psychopaths to control our currency, and commit national suicide. Our monetary system is only as good as the morality of those administering it, and of the citizens holding them accountable.

    • Well said ernest. Unfortunately the people who own the Banking industry, have also ‘bought’ the government, and are able to control the legal system to their advantage. The USA particularly is in mortal danger, from within.

    • “Anyone that attempts to predict a future event is a fool. If by chance the prediction is correct,
      that fool is just a lucky fool, albeit still a fool.”(?)
      The banks will settle and make a profit from the settlement; they need only to issue new MBSs which will contain a fix of the flaw of the ‘old’ ones, that is , they will retain the sole right of service of the assets (loans). This will enable them to honor their ‘guarantees’.
      Until and unless we cure the disease:
      “To allow it (money) to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”

      Private For Profit Banks issue sovereign money via loans. As a result of their issuance (creating money at 30 or 40 times leverage) , the Fed has no choice but to honor that issuance or suffer a ‘systemic failure’, a collapse of the faith and credit of the dollar.

      Thank you for hearing me out.Read more by Justaluckyfool ( http://bit.ly/MlQWNs )
      ( “You are always welcome to share, copy, plagiarize, improve, etc..any comments.)
      Thank you for at least considering the challenge.

      May I sign off with a Frederick Soddy quote, from the Preface of “The Role Of Money”:
      ( Please read “The Role Of Money” (Free full download) http://archive.org/details/roleofmoney032861mbp
      Written in 1921,- 1934, Frederick Soddy not only explains the “systemic flaw” (allowing an entity other the the sovereign government the right to ‘print’ and ‘tax’ the sovereign currency; but also explains the unintended consequence of this awesome power.)

      Quote Soddy, “It was recognized in Athens and Sparta ten
      centuries before the birth of Christ that one of the most vital prerogatives
      of the State was the sole right to issue money. How curious that
      the unique quality of this prerogative is only now being re-discovered.”
      “… It is concerned less with the details of particular schemes
      of monetary reform that have been advocated than with the general principles to which, in the author’s opinion, every monetary system must at long last conform,
      if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”

  3. […] By Ellen Brown 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 […] …read more […]

  4. […] Ellen Brown Web of Debt  […]

  5. […] Did the Other Shoe Just Drop? Big Banks Hit with Monster $250 Billion Lawsuit in Housing Crisis … […]

  6. […] by Ellen Brown EllenBrown.com […]

  7. this is hilarious! BlackRock is owned mainly by BANKS. So basically what we have here is a bank owned fund suing banks? why would they do that? SIMPLE! The new laws drafted all over Europe, North America, and more make DEPOSITORS responsible for BANK FAILURES! So now you will have Banks suing banks to be paid with YOUR money. The biggest swindle in world history is about to take place.

    • If, and when this “Bail In” law takes effect, it will cause the greatest Bank run in history, which will ensure that the current Banking system won’t survive.
      Who is going to leave their money in an institution that can legally steal it?…………..By the way, has this law already been enacted, but we haven’t been told yet?

      • Since banks can legally steal your money now, I find no need to keep my money in banks.

        • Technically speaking, I don’t think it’s presently legal to steal your money, although, they seem to have gotten away with blatant theft, so I can’t argue, but when it does become legal, you can bet that somewhere down the track, they will call on depositors to pay their bad debts. I will be leaving very little in my account.
          During the 1960’s older people who had lived through the Great Depression used to warn us youngsters, “you cannot trust the Banks”. At the time I thought they were silly, but I now know their warnings were based on bitter experience.

          • It certainly does open the door to a unique defense against a charge of bank robbery: “I was simply arranging a bail-out.”

        • Silly question, perhaps, but where should one keep their cash money for safekeeping?

          • Good question. I used to work for a major Bank, and purchased a very heavy old Safe which I defy any burgler to open, but keeping money at home can be risky. Safe deposit box perhaps?

          • USAA Savings Bank: they know that their average depositor has been trained to kill with his bare hands

          • I heard an interview in which the speaker (can’t recall who it was, but he sounded well-informed) recommended opening an account at local credit union. Or, open an account at a local or community bank. Do not bank with any of the big names.

  8. Be careful what you don’t wish for…talk about government guarantees of bank deposits being undercapitalized just caused panic banks runs in Bulgaria…
    “…According to the Bulgarian National Security Agency (see here, for a reporting in English), an investment company that “built a network of associated companies for marketing services” that was used to diffuse panic by means of an alert, uncomfortably titled “Information Bulletin of on the Risk of Deposits in Bulgarian Banks”. The “bulletin” claimed – Bloomberg reports – KTB was undergoing a liquidity shortage. The message apparently also said that the government deposit guarantee fund was under-capitalised to meet possible repayments, that banks could go bankrupt and that the peg of the currency with the euro could be broken.”
    from How A Spam Newsletter Caused a Bank Run in Bulgaria at http://www.nakedcapitalism.com/2014/07/fact-week-spam-newsletter-caused-bank-run-bulgaria.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

  9. […] more detail at Did the Other Shoe Just Drop? Read the article, there’s a lot of good detail there and some alternatives to the present […]

  10. […] More… […]

  11. […] This article was originally posted on Ellen Brown.com […]

  12. Reblogged this on BLOGGING BAD w/Gunny G ~ "CLINGERS-AMERICA!".

  13. […] public banking models historically and globally. Her websites are http://EllenBrown.com, where this first apperaed, http://PublicBankSolution.com, and […]

  14. […] Did the Other Shoe Just Drop? Big Banks Hit with Monster $250 Billion Lawsuit in Housing Crisis | WE…. […]

  15. “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.”

    Let’s call it what it is “The GSE Business Model”. Called “fatally flawed” by every credible scholar on the subject.

    See my letter to Stasia circa 1998:

    The “whole Model” has been a fraud from day one!

  16. As you report, it’s the Titans arguing amongst themselves. If BlackRock owns shares in certain of the target banks, which it does, then it may be wishful thinking to hope that fraud facts will emerge that will assist the average homeowner….

  17. […] Web of Debt:by Ellen […]

  18. Reblogged this on Critical Fantasies and commented:
    The next credit crisis will be much larger than 2008, how we will distribute goods and services without a free-flowing credit/debt creation machine (in the banks) will likely determine the type of society we will have in the near future.

  19. […] http://ellenbrown.com/2014/07/16/did-the-other-shoe-just-drop-black-rock-and-pimco-sue-banks-for-250… […]

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