A second bank bailout, larger than the first, would be required just to cope with the foreclosure crisis, but would one even be feasible? The Obama Administration has always assumed it's best to keep existing banks afloat, but it may be better, after all, to simply decimate them and start over:
White House advisor David Axelrod's attempt over the weekend to minimize the foreclosure mess as mere paperwork "mistakes" was a massive misrepresentation of what's really going on. With Democratic politicians across the country calling for a nationwide foreclosure moratorium, Obama's reluctance to get out in front of the issue, so far, is yet another public relations disaster. Even if a national moratorium is not the right solution to an incredibly complex problem, the White House needs to be articulating, now, exactly how it intends to tackle this monster.
...But the key facts are these: In the process of making mortgage loans, transferring ownership of those loans, slicing and dicing them into securities and, finally, initiating foreclosure proceedings on loans in default, banks, lenders and mortgage servicers engaged in illegal activity on a large scale. The legally mandated procedures put into place to ensure that no errors are ever made with respect to the transfer of property simply weren't followed. Key documents necessary to prove ownership -- to prove that a bank, for example, has the legal right to begin foreclosure proceedings, cannot be located and may not even exist.
Whether you want to dismiss this debacle as a concatenation of paperwork errors made while seeking economies of scale, or out-and-out calculated fraud by the mortgage industry against homeowners, is in some ways an irrelevant game of semantics. When legally mandated procedures aren't followed, courts get upset, investors start wondering if they've been sold a bill of goods, and the litigation floodgates fly open. Bank of America and GMAC and other lenders have declared their own foreclosure moratoriums because they have suddenly realized that they are looking at potentially devastating legal liabilities.
Progressives can be excused for feeling an almost unlimited sense of schadenfreude at the suddenly scrambling banks. For many people, on the left and right, there would be nothing more pleasurable than the sight of, say, Citigroup, bankrupted by a sea of mortgage-related lawsuits. It is also of course enormously important to take advantage of this opportunity to completely rethink the government's approach to the foreclosure crisis, and find a way to keep people in their homes with mortgages that are more appropriate to their current financial wherewithal. By itself, however, a national foreclosure moratorium isn't going achieve that -- it will just postpone resolution of the problem, and in the process conceivably create some dangerous new risks.
And here's where Obama's problem lies. The foreclosure crisis isn't just about banks playing fast and loose with people's homes. The recklessness with which banks and mortgage servicers handled their business has thrown into question the entire architecture of securities assembled from mortgages. All that toxic waste just turned a Hungarian sludge shade of bright flashing orange. If and when the owners of those securities start their own legal actions or demand that the issuers of the securities take them back, the biggest financial institutions in the United States will once again teeter on the brink -- and threaten to bring all the rest of us down with them. There are systemic risk implications to this "paperwork" lollapalooza.
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