Tuesday, October 19, 2010

A Death Knell for Over the Counter (OTC) Derivatives?

It's amazing how the Foreclosure Crisis keeps drawing me back, even on a day when the big news story is the Bank of Canada deciding not to raise interest rates today.

Locally most people are completely oblivious to the import of this topic and the impact it can have on EVERYTHING!

As you may be aware, in an attempt to create the illusion that this issue is over, Bank of America plans on resuming foreclosures in at least 23 states starting next week.

Ally Financial Inc's GMAC Mortgage unit is also resuming foreclosures once documents are fixed. Gina Proia, a spokeswoman for Ally, said that "as we review the affected files and take any remediation needed, the foreclosure process then resumes."

Problem resolved, right?

Not quite.

PIMCO (Pacific Investment Management Co.), BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp.

The presence of the NY Fed in this potential litigation says that the Fed is holding paper which does not qualify for holding according to its own indenture.

The New York Fed, Pimco and others are threatening litigation via demand letters to force the Bank of America to buy back $47 billion in OTC derivatives known as securitized mortgage debt.

Because the OTC derivative cannot stand the light of day in court, a demand letter is a powerful first tool.

The pile of OTC derivatives out there is over $2 Trillion and this move, certainly the start of many, is going to have massive reprecussions.

Look for the drop in gold and silver today, a result of the mindless actions of the computer algorithmic programs working their trades, to be quickly reversed.


Email: village_whisperer@live.ca

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  1. My understanding is that the total value of mortgage backed securities(MBS) is $2T. The credit default swaps(CDS) are effectively insurance that is purchased by the purchasers of the MBS's. CDS's can be bought by anyone, not just the MBS debt holder. My understanding is that the CDS market is $60T.
    Please note: I could be wrong on this.

  2. Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.

    What’s wrong with this picture? Nothing, according to the law. Nor would it be illegal for him to tip someone else, say, his largest campaign contributor.

    Laws that criminalize insider trading cover corporate insiders and those they tip, but not specifically Congress. And while scholars differ on whether existing law could be applied on Capitol Hill, it hasn’t been.

    It’s a gap in the law that two members of Congress have been trying for years to plug, to no avail. Congress is famous for telling others what they can and can’t do. When it comes to proscribing its own conduct, it’s a different story.

    This week the Wall Street Journal reported that during the past two calendar years, 72 congressional aides from both parties made trades in companies that their bosses’ help oversee. Among them are top advisers to Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi. Their timely investments proved profitable, but the staffers deny the trades sprung from inside knowledge, the Journal reported.

    Either way, suspiciously timed trading on Capitol Hill isn’t new.

    Companies stuck in asbestos litigation suddenly saw inexplicably heavy trading and a rise in share price on Nov. 15, 2005. The next day, then-Senate Majority Leader Bill Frist announced a breakthrough on a bill to create a government-backed fund to settle asbestos cases. It turned out that political intelligence firms benefitted from a leak in Frist’s office, Business Week reported the following month.


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  4. http://www.nytimes.com/2010/10/20/business/20mortgage.html?_r=1


    will this be all covered up by fines and slaps on the wrist or will people worried about jail expose more layers of the onion?

    What a soap opera..
    To the uninformed many out there, ignorance is bliss.

  5. banks sold the same mortgage over and over to investors...

    lol. BC real estate bubble tactics.