Wednesday, October 20, 2010


I've taken a bit of flak over the last several days from people suggesting that I'm over-focused on banks.  Yes, I look at them, and yes they are important, but I need us to be on the same page regarding the concerns I have and where I think we are in general.

Ok, I've written about how dirty this whole process has been where banks have tried to forge documents and attempt to create titles where they have been lost.  These are juicy details and this is exactly the kind of item that makes a good story for a blog, but this is not really why this issue is such a big one.  The more important issue is that when the big banks were wrapping these mortgages into huge pools and securitizing them (slicing and dicing them into parts so different pension plans and investors could buy based on credit rating), they represented to them that they actually had recorded all of the documents for clear title and guaranteed or warranted that the MBS buyers were getting a solid legal claim to mortgage backed assets. 

What the sub-prime collapse and the subsequent real estate implosion has shown us is that the banks and their clearing system (MERS) did not actually do what they promised they would do by filing all the paperwork and ensuring that the MERS trust actually owned the notes and had a claim as a lien holder on the real estate asset.  By NOT doing what they promised in the prospectus or security documents, they committed fraud.  In addition, they firms are claiming that the securitizers that packaged up the deals didn't actually put the quality of loans in the deals that they promised.  This is the issue, and this is the big problem.  What this means is that the buyers of the MBS now potentially have a claim to get 100% of their money back on the investment because the trustee or the servicer, or the originator didn't actually create the MBS in the manner that they stated.  Remember, the buyers of these securities are not Joe 6 Pack.  The buyers of these MBS securities were insurance companies, mutual fund companies, hedge funds, governments, and private equity funds.  The buyers of these deals were big money players that then often leveraged these bets 10:1 or 30:1.  The total amount of mortgages wrapped up in these deals is numbering in the trillions!  So, are any of the buyers of these asking the originators to take them back?  Yes!

I hope this provides some clarity regarding the view of the banks.  In addition, it is important to look at the chart for a technical view.  It is so interesting to me as I look at this 200 day view of XLF (big banks) that it simply cannot push through $15.00.  Look at the 5 or 6 attempts since June of 2010 to go higher.  Even in the last week we could just touch $15.00 only to be rejected.

As I am typing this, the market is ripping higher after yesterdays 165 point Dow thrashing.  This is the environment we live in now.  I truly believe that the market will not be allowed to decline for more than a day or two until after the elections.  If there were a string of 5 or 6 down days that would certainly ensure a resounding Democratic defeat.  The ability of the market to stay positive gives the incumbents a chance to retain a glimmer of hope to retain power.  Please note, that if Republicans do win, I actually believe banks will rally as the street will believe it will be business as usual and the Republicans will assist the banks in getting through this mess.  Hopefully that belief is misguided as I'm sick of the corruption and bailouts at taxpayer expense.

Be careful!