Deutsche Bank Suit, Debt Drivers

The U.S. government is taking Deutsche Bank AG to court over the matter of bum loans made by a part of the German bank--loans that happened to be guaranteed by the Department of Housing and Urban Development.

May 4, 2011
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user ell brown

The U.S. government is taking Deutsche Bank AG to court over the matter of bum loans made by a part of the German bank–loans that happened to be guaranteed by the Department of Housing and Urban Development. The government has accused the bank not only of lying, but “recklessly” lying about the quality of the loans, and wants to recover damages, perhaps as much $1 billion, paid out on the loans when they defaulted.

At issue are loans made by a subprime and Alt-A specialist called MortgageIT back in the no-questions-asked heyday of residential mortgage underwriting in the 2000s. In a moment of possibly poor timing, Deutsche Bank bought MortgageIT in 2007, and now the government is looking to hold the bank responsible for MortgageIT loans that went bad as quickly as two months after they were made. HUD paid out $386 million in claims for those mortgages, and $888 million more in claims were awarded but not yet paid.

“While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars in insurance claims,” the suit alleges. For its part, Deutsche Bank is asserting that MortgageIT merely left it holding the bag when the housing bubble popped.

The Drivers of Public Debt

The nonpartisan Pew Fiscal Analysis Initiative released a report on Tuesday called “The Great Debt Shift” that details how the publicly held federal debt of the United States came to be $10.4 trillion this year, or about 69 percent of GDP, the highest percentage of GDP since 1950. Back in 2001, the CBO predicted that there would be no public debt by now. What happened? Partisans of various stripes will not be happy to learn that the growth in debt has been the accumulative effect of at least a half-dozen factors over the last 10 years, some matters of policy, some not.

The report says that between 2001 and 2011, about two-thirds (68 percent) of the $12.7 trillion growth in federal debt has been due to new legislation. “Forty percent of this legislative growth was the result of tax cuts enacted after January 2001, and 60 percent resulted from spending increases”–such as the wars in Iraq and Afghanistan, the expansion of Medicare Part D, TARP and the 2009 stimulus.

Most of the rest of the growth in the debt tumor can be attributed to the impact of the recession, a category the report called “technical and economic revisions–revenue adjustments.” That is, the government taking in a lot less now because of contraction in the economy. That source of public debt mushroomed beginning in 2008.

Bubble or No Bubble for Chinese Housing?

The famed but so far still putative Chinese property bubble has been in the news lately, with reports of home prices in that country rising for the eighth month in row, according to the private company that now tracks them, China Real Estate System, in conjunction with Soufun Holdings Ltd. The average price uptick between March and April was 0.4 percent. In January, the government quit reporting the national property price index, which had long been suspected of underestimating price inflation in the Chinese property market, and so market-watchers are now following the privately generated figures.

Not everyone believes in the bubble, however. Speaking at the Milken Institute Global Conference in Beverly Hills on Tuesday, Ronnie Chan, chairman of Hong Kong-based real estate company Hang Lung Properties Ltd., called worries over such a bubble “total crap.” (If he works on it, he could be a salty as Trump.) Chan posits that the general run of Chinese housing is so bad that much of it will be torn down and rebuilt “a lot faster than you think.”

Wall Street pretty much broke even on Tuedsay, with the Dow Jones Industrial Average moving 0.15 points upward, which is so small a movement that it counts as 0.0 percent. The Nasdaq likewise didn’t move, but the S&P 500 lost 0.34 percent.