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For more than two years, I have been tracking the fraud being committed on an ongoing basis by America’s largest banks. As I described in a June column titled “The bank-failure recovery,” all of America’s largest banks have been inaccurately reporting the value of their assets. Based on the information revealed by the FDIC regarding the 129 bank failures this year, it is safe to conclude that around 45 percent of the value of the financial assets reported by the banks are, in fact, completely worthless.

That means that the $7.5 trillion in assets reported by America’s four largest banks, Bank of America, Citibank, JP Morgan/Chase and Wells Fargo are actually worth closer to $4 trillion. More than $3 trillion on their collective books is simply fictitious, created by the crude artifice of claiming that an asset, such as a home mortgage, that can currently be sold for $x is worth $1.82x on their books. This is what financial cynics term “mark to fantasy,” which means that the accounting values are whatever the bank deems them to be, as opposed to “mark to market,” which is the price that someone has been willing to pay for a comparable asset in the real world.

This was the situation as of June. But new revelations of even more shenanigans on the part of the greatest beneficiaries of the TARP bailout indicate that things are much worse than nearly anyone had realized.

It had been widely believed by economists that banks have been holding off on foreclosures on the millions of homes with mortgages in default to avoid being forced to write down the value of the mortgages, which were marked to fantasy rather than to market. However, it appears that another reason is that the banks often do not have the necessary title to foreclose on the properties in default.

A major title insurance company has stopped insuring homes foreclosed by JPMorgan Chase, another sign that the controversy over the legal practices of the big lenders is starting to influence the housing market. … The title insurer, which is based in Minneapolis, said earlier in the week that it would not write policies for properties that had been foreclosed by another big lender, GMAC Mortgage.

As GMAC and Chase try to deal with questions over their legal methods, they have halted all foreclosures in the 23 states where they need a court’s approval. Late Friday, Bank of America said it would stop all its pending foreclosures in those states as well.

– New York Times, Oct. 2, 2010

This is a scandal of potentially epic proportions for several reasons. First, it proves that the largest banks have been knowingly engaged in large-scale criminal activity for several years, possibly with the tacit approval of the regulatory bodies. Second, it indicates that despite the billions of taxpayer dollars that have been funneled toward the banks by Republicans and Democrats in Congress alike, they are still completely insolvent. Third, it underlines the complete ingratitude and insufferable arrogance of the financial sector, which has left the American consumer prostrate like the victim of an economic vampire.

Finally, it demonstrates that the corruption of the banking system has now reached the point that it is far beyond the ability of any reform, no matter how serious or well-intentioned, to fix it. The fraudulent criminality of the banks has been too complex for the average American to understand, which is why the rising fear and rage of the people that has taken political shape in the tea-party movement has remained amorphous and unfocused. But being a fair-minded people, Americans will understand very well what it means to steal homes from the poor and the middle-class to resell them for the benefit of the rich. And they will not approve.

The Obama administration is already engaged in an active attempt to sweep this under the rug and claim that it is merely a minor issue of incorrect procedures being followed. It is doing so because if the banks are unable to foreclose on homes in default or provide clean titles to foreclosed homes they are selling, this will put heavy downward pressure on real-estate prices. But it cannot be permitted to do so.

The recent rally in the stock market had been getting very long in the tooth, to the point that one can only conclude that a serious crash is overdue. I had been wondering what might serve as the trigger, so the breaking news of this scandal serves should be taken as a warning that it is going to be an ugly autumn on Wall Street.

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