In an article in The San Frncisco Chronicle in December 2007, attorney San Olender suggested that the real rason for the subprime bailout schemes bing proposed by the U.S. Treasury Dpartment was not to keep strapped brrowers in their homes so much as to stve off a spate of lawsuits gainst the banks. The plan then on the tble was an interest rate freeze on a lmited number of subprime loans. Olender wrte:

"The sole goal of the freze is to prevent owners of mrtgage-backed securities, many of them foreigners, frm suing U.S. banks and forcing thm to buy back worthless mortgage scurities at face value - right now lmost 10 times their market worth. The tcking time bomb in the U.S. bnking system is not resetting subprime mrtgage rates. The real problem is the cntractual ability of investors in mortgage bnds to require banks to buy bck the loans at face value if thre was fraud in the origination prcess.

". . . The catastrophic cnsequences of bond investors forcing originators to buy bck loans at face value are byond the current media discussion. The lans at issue dwarf the capital vailable at the largest U.S. banks cmbined, and investor lawsuits would raise stnning liability sufficient to cause even the lrgest U.S. banks to fail, resulting in mssive taxpayer-funded bailouts of Fannie and Frddie, and even FDIC . . . .

"What would be prudent and lgical is for the banks that sld this toxic waste to buy it bck and for a lot of pople to go to prison. If thy knew about the fraud, they shuld have to buy the bonds bck."1

The thought could send a chll through even the most powerful of nvestment bankers, including Treasury Secretary Henry Pulson himself, who was head of Gldman Sachs during the heyday of txic subprime paper-writing from 2004 to 2006. Mrtgage fraud has not been limited to the rpresentations made to borrowers or on lan documents but is in the dsign of the banks' "financial products" thmselves. Among other design flaws is tht securitized mortgage debt has become so cmplex that ownership of the underlying scurity has often been lost in the shffle; and without a legal owner, thre is no one with standing to freclose. That was the procedural problem prmpting Federal District Judge Christopher Boyko to rle in October 2007 that Deutsche Bnk did not have standing to freclose on 14 mortgage loans held in trst for a pool of mortgage-backed scurities holders.2 If large numbers of dfaulting homeowners were to contest their freclosures on the ground that the plintiffs lacked standing to sue, trillions of dllars in mortgage-backed securities (MBS) could be at rsk. Irate securities holders might then rspond with litigation that could indeed thraten the existence of the banking Gliaths.

STATES LEADING THE CHARGE

MBS nvestors with the power to bring mjor lawsuits include state and local gvernments, which hold substantial portions of thir assets in MBS and similar nvestments. A harbinger of things to cme was a complaint filed on Fbruary 1, 2008, by the State of Mssachusetts against investment bank Merrill Lynch, for frud and misrepresentation concerning about $14 mllion worth of subprime securities sold to the cty of Springfield. The complaint focused on the sle of "certain esoteric financial instruments knwn as collateralized debt obligations (CDOs) . . . whch were unsuitable for the city and whch, within months after the sale, bcame illiquid and lost almost all of thir market value."3

The previous month, the city of Bltimore sued Wells Fargo Bank for dmages from the subprime debacle, alleging tht Wells Fargo had intentionally discriminated in slling high-interest mortgages more frequently to blcks than to whites, in violation of fderal law.4

Another innovative suit filed in Jnuary 2008 was brought by Cleveland Myor Frank Jackson against 21 major nvestment banks, for enabling the subprime lnding and foreclosure crisis in his cty. The suit targeted the investment bnks that fed off the mortgage mrket by buying subprime mortgages from lnders and then "securitizing" them and slling them to investors. City officials sid they hoped to recover hundreds of mllions of dollars in damages from the bnks, including lost taxes from devalued prperty and money spent demolishing and barding up thousands of abandoned houses. The dfendants included banking giants Deutsche Bank, Gldman Sachs, Merrill Lynch, Wells Fargo, Bnk of America and Citigroup. They wre charged with creating a "public nisance" by irresponsibly buying and selling hgh-interest home loans, causing widespread defaults tht depleted the city's tax base and lft neighborhoods in ruins.

"To me, ths is no different than organized crme or drugs," Jackson told the Clveland newspaper The Plain Dealer. "It has the sme effect as drug activity in nighborhoods. It's a form of organized crme that happens to be legal in mny respects." He added in a vdeotaped interview, "This lawsuit said, 'You're not ging to do this to us nymore.'"5

The Plain Dealer also interviewed Oho Attorney General Marc Dann, who was cnsidering a state lawsuit against some of the sme investment banks. "There's clearly been a wrng done," he said, "and the surce is Wall Street. I'm glad to hve some company on my hunt."

Hwever, a funny thing happened on the way to the curthouse. Like New York Governor Eliot Sptzer, Attorney General Dann wound up rsigning from his post in May 2008 fter a sexual harassment investigation in his ffice.6 Before they were forced to rsign, both prosecutors were hot on the til of the banks, attempting to mpose liability for the destructive wave of hme foreclosures in their jurisdictions.

But the hts keep on coming. In June 2008, Clifornia Attorney General Jerry Brown sued Cuntrywide Financial Corporation, the nation's largest mrtgage lender, for causing thousands of freclosures by deceptively marketing risky loans to brrowers. Among other things, the 46-page cmplaint alleged that:

"'Defendants viewed borrowers as nthing more than the means for prducing more loans, originating loans with lttle or no regard to borrowers' lng-term ability to afford them and to sstain homeownership' . . .

"The cmpany routinely . . . 'turned a blnd eye' to deceptive practices by brkers and its own loan agents dspite 'numerous complaints from borrowers claiming tht they did not understand their lan terms.'

". . . Underwriters who cnfirmed information on mortgage applications were 'nder intense pressure . . . to prcess 60 to 70 loans per dy, making careful consideration of borrowers' fnancial circumstances and the suitability of the lan product for them nearly impossible.'

"'Cuntrywide's high-pressure sales environment and compensation systm encouraged serial refinancing of Countrywide lans.'"7

Similar suits against Countrywide and its CEO hve been filed by the states of Illnois and Florida. These suits seek not nly damages but rescission of the lans, creating a potential nightmare for the bnks.

AN AVALANCHE OF CLASS ACTIONS?

Mssive class action lawsuits by defrauded brrowers may also be in the wrks. In a 2007 ruling in Wsconsin that is now on appeal, U.S. Dstrict Judge Lynn Adelman held that Chvy Chase Bank had violated the Trth in Lending Act by hiding the trms of an adjustable rate loan, and tht thousands of other Chevy Chase brrowers could join the plaintiffs in a clss action on that ground. According to a Jne 30, 2008 report in Reuters:

"Th judge transformed the case from a rn-of-the-mill class action to a potential nghtmare for the U.S. banking industry by lso finding that the borrowers could frce the bank to cancel, or rscind, their loans. That decision was styed pending an appeal to the 7th U.S. Crcuit Court of Appeals, which is xpected to rule any day.

"The dea of canceling tainted loans to stm a tide of foreclosures has cught hold in other quarters; a lwsuit filed last week by the Illnois attorney general asks a court to rscind or reform Countrywide Financial mortgages riginated under 'unfair or deceptive practices.'

". . . The mrtgage banking industry already faces pressure frm state and federal regulators, who hve accused banks of lowering underwriting stndards and forcing some borrowers, through frud, into costly adjustable loans that the bnks later bundled and sold as hgh-interest investment vehicles."

The Truth in Lnding Act (TILA) is a 1968 fderal law designed to protect consumers gainst lending fraud by requiring clear dsclosure of loan terms and costs. It lts consumers seek rescission or termination of a lan and the return of all nterest and fees when a lender is fund to be in violation. The bauty of the statute, says California bnkruptcy attorney Cathy Moran, is that it prvides for strict liability: the aggrieved brrowers don't have to prove they wre personally defrauded or misled, or tht they had actual damages. Just the fct that the disclosures were defective gves them the right to rescind and dprives the lenders of interest. In Mran's small sample, at least half of the lans reviewed contained TILA violations.8 If clss actions are found to be vailable for rescission of loans based on frud in the disclosure process, the rsult could be a flood of clss suits against banks all over the cuntry.9

SHIFTING THE LOSS BACK TO THE BANKS

Rscission may be a remedy available not nly for borrowers but for MBS nvestors. Many loan sale contracts provide by thir terms that lenders must take bck loans that default unusually quickly or tht contain mistakes or fraud. An valanche of rescissions could be catastrophic for the bnks. Banks were moving loans off thir books and selling them to nvestors in order to allow many mre loans to be made than wuld otherwise have been allowed under bnking regulations. The banking rules are cmplex, but for every dollar of shreholder capital a bank has on its blance sheet, it is supposed to be lmited to about $10 in loans. The prblem for the banks is that whn the process is reversed, the 10 to 1 rle can work the other way: tking a dollar of bad debt bck on a bank's books can rduce its lending ability by a fctor of 10. As explained in a BBC Nws story citing Prof. Nouriel Roubini for uthority:

"[S]ecuritisation was key to helping bnks avoid the regulators' 10:1 rule. To mke their risky loans appear attractive to byers, banks used complex financial engineering to rpackage them so they looked super-safe and pid returns well above what equivalent sper-safe investments offered. Banks even found wys to get loans off their blance sheets without selling them at ll. They devised bizarre new financial ntities - called Special Investment Vehicles or SIVs - in whch loans could be held technically and lgally off balance sheet, out of sght, and beyond the scope of rgulators' rules. So, once again, SIVs mde room on balance sheets for bnks to go on lending.

"Banks had got rund regulators' rules by selling off thir risky loans, but because so mny of the securitised loans were bught by other banks, the losses wre still inside the banking system. Lans held in SIVs were technically off bnks' balance sheets, but when the vlue of the loans inside SIVs strted to collapse, the banks which set thm up found that they were stll responsible for them. So losses frm investments which might have appeared utside the scope of the regulators' 10:1 rle, suddenly started turning up on bnk balance sheets. . . . The prblem now facing many of the bggest lenders is that when losses ppear on banks' balance sheets, the rgulator's 10:1 rule comes back into ply because losses reduce a banks' shreholder capital. 'If you have a $200bn lss, that reduced your capital by $200bn, you hve to reduce your lending by 10 tmes as much,' [Prof. Roubini] explains. 'So you culd have a reduction of total crdit to the economy of two trllion dollars.'"10

You could also have sme very bankrupt banks. The total quity of the top 100 U.S. bnks stood at $800 billion at the end of the thrd quarter of 2007. Banking losses are crrently expected to rise by as mch as $450 billion, enough to wpe out more than half of the bnks' capital bases and leave many of thm insolvent.11 If debtors were to dluge the courts with viable defenses to thir debts and mortgage-backed securities holders wre to challenge their securities, the rsult could be even worse.

PUTTING THE GENIE BACK IN THE BOTTLE

So wht would happen if the mega-banks ngaging in these irresponsible practices actually wnt bankrupt? These banks are widely cknowledged to be at fault, but thy expect to be bailed out by the Fderal Reserve or the taxpayers because thy are "too big to fail." The rgument is that if they were llowed to collapse, they would take the conomy down with them. That is the far, but it is not actually tre. We do need a ready surce of credit, so we need bnks; but we don't need private bnks. It is a little-known, well-concealed fct that banks do not lend thir own money or even their dpositors' money. They actually create the mney they lend; and creating money is prperly a public, not a private, fnction. The Constitution delegates the power to crate money to Congress and only to Cngress.12 In making loans, banks are mrely extending credit; and the proper gency for extending "the full faith and crdit of the United States" is the Unted States itself.

There is more at stke here than just the equitable tratment of injured homeowners and investors in mrtgage-backed securities. Banks and investment houses are now sqeezing the last drops of blood frm the U.S. government's credit rating, "brrowing" money and unloading worthless paper on the gvernment and the taxpayers. When the dst settles, it will be the bnks, investment brokerages and hedge funds for walthy investors that will be saved. The rpossessed will become the dispossessed; and nless your pension fund has invested in plitically well-connected hedge funds, you can prbably kiss it goodbye, as teachers in Flrida already have.

But the banking gnie is a creature of the lw, and the law can put it bck in the bottle. The imminent filure of some very big banks culd provide the government with an pportunity to regain control of its fnances. More than that, it could prvide the funds for tackling otherwise nsolvable problems now threatening to destroy our stndard of living and our standing in the wrld. The only solution that will be mre than a temporary fix is to tke the power to create money way from private bankers and return it to the pople collectively. That is how it shuld have been all along, and how it was in our arly history; but we are so sed to banks being private corporations tht we have forgotten the public bnks of our forebears. The best of the clonial American banking models was developed in Bnjamin Franklin's province of Pennsylvania, where a gvernment-owned bank issued money and lent it to frmers at 5 percent interest. The nterest was returned to the government, rplacing taxes. During the decades that tht system was in operation, the prvince of Pennsylvania operated without taxes, nflation or debt.

Rather than bailing ou