Crashing the Subprime Party

[coolgeee]

The subprime mortgage crisis has led to foreclosures.
As the federal government scurries to prevent the subprime mortgage crisis from sending the economy into a deep recession, many of us are asking why it waited so long to intervene. As it turns out, the government wasn't exactly sitting on its hands. Instead, for reasons that now appear hopelessly shortsighted, an obscure federal agency torpedoed legislation from a handful of states that would have made institutional investors far charier of buying mortgage loans that were likely to go belly-up. If the legislation had been permitted to go into effect, the crisis we now face would probably look a lot less grim. The right question, then, is not why the feds did so little. It's why they did so much.

more great information here:
Bush Junta Created the Subprime Mortgage Scam

 

[waltky]

Granny says it's not dat dey underestimated it - dey just didn't know what dey was doin'...

Transcripts show Fed underestimated crisis in 2007
Jan 18,`13 WASHINGTON (AP) -- Federal Reserve officials in 2007 badly underestimated the scope of the approaching financial crisis and how it would tip the U.S. economy into the deepest recession since the Great Depression, transcripts of the Fed's policy meetings that year show.

The meetings occurred as the country was on the brink of its worst financial crisis since the 1930s. As the year went on, Fed officials shifted their focus away from the risk of inflation as they slowly began to recognize the severity of the crisis. Beginning in September 2007, the Fed cut interest rates and took extraordinary steps to try to ease credit and shore up confidence in the banking system. Throughout the year, the housing crisis deepened. Home prices weakened. Subprime mortgages soured.

As foreclosures rose, banks and hedge funds that had invested big in subprime mortgages were weighed down by worthless assets. Many had trouble getting credit to meet their expenses. The damage reached the top echelons of Wall Street. Fears rose that the U.S. banking system could topple. At the Fed's Oct. 30 policy meeting, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, noted that the economy faced increased risks. But she didn't foresee anything dire. "I think the most likely outcome is that the economy will move forward toward a soft landing," Yellen said then.

Yellen was hardly alone in feeling hopeful about the economy in October. At the same meeting, Chairman Ben Bernanke noted that housing was "very weak" and manufacturing was slowing but sounded an optimistic note. "Except for those sectors, there is a good bit of momentum in the economy," Bernanke said. Earlier that October, the Dow Jones industrial average closed at an all-time high of 14,164 - nearly 4 percent above where the Dow stands now.

At the October meeting, Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury secretary, said: "Developments of financial markets on balance since the last meeting have been reassuring. The panic has receded." By December, the economy had plunged into the recession, which would officially last until June 2009. Five years later, the economy has yet to fully recover. The Fed declined Friday to comment on the discussions revealed by the transcripts.

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[waltky]

Fed offers BoA back room deal...

Promises, Promises at the New York Fed
March 2, 2013 - TWO weeks ago, I wrote a column about a secret agreement struck in July 2012 by the Federal Reserve Bank of New York and Bank of America. The existence of the confidential deal was disclosed recently in court filings, which showed the New York Fed releasing Bank of America from all fraud claims on mortgage securities the Fed had bought as part of the government’s rescue of the American International Group in 2008.

A.I.G., which is suing Bank of America to recover losses it suffered on those securities, has calculated the value of the fraud claims at $7 billion. Late on Thursday, a copy of the actual agreement came to light. It was filed by Bank of America in a California court that is hearing the matter of who owns those fraud claims — A.I.G. or the New York Fed. The agreement was also filed by the New York Fed in a related lawsuit in the Southern District of New York, where the New York Fed asked that the court keep the agreement under seal. A reading of the document makes it clear why.

The agreement spells out the terms of a deal in which the New York Fed received $43 million from Bank of America’s Countrywide unit. The money changed hands to settle a narrow dispute involving cash flows on several mortgage securities held by an investment vehicle, known as Maiden Lane II. That vehicle was created by the New York Fed as part of the rescue of A.I.G., which had held the Countrywide securities. The previously confidential agreement released Bank of America from all litigation claims on the securities held by Maiden Lane II. But in exchange for that $43 million, the New York Fed did something else for Bank of America. It agreed to testify on behalf of the bank in its legal battle against A.I.G. over fraud claims.

In that matter, Bank of America has argued that A.I.G. has no right to sue it for fraud because A.I.G. sold the securities to Maiden Lane II and so transferred the litigation rights to the New York Fed. A.I.G., however, maintains that the Maiden Lane agreement never specified the transfer of the right to sue for fraud and that an explicit transfer is required by New York law, which governs the agreement. The New York Fed provided Bank of America with two affidavits supporting the bank’s view of who owned the mortgage securities’ fraud claims. Two weeks ago, it was unclear why the New York Fed gave Bank of America the affidavits. But now, its promise to testify “as needed,” shown in the formerly confidential settlement, addresses that oddity. It was a contractual obligation.

Interestingly, the New York Fed did not tell the California court that its affidavits came about because of its deal with Bank of America. The affidavits came from James M. Mahoney, a vice president at the New York Fed, and Stephanie A. Heller, its deputy general counsel. But those affidavits differ from the position taken earlier by Thomas C. Baxter Jr., the New York Fed’s general counsel. In a letter to A.I.G. in October 2011, Mr. Baxter said that he and his colleagues “agree that A.I.G. has the right to seek damages” under securities laws for the instruments it sold to Maiden Lane II.

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