Turn On The Lights, Watch The Roaches Scatter, Part 32

So it seems after roaring forward full steam, Foreclosuregate has drifted off the front pages a bit.  The banks appear to be in a holding pattern and the media of course is covering next week's election.  But what about the banks?  Why aren't the banks urinating themselves to the point of dehydration right now?

Chris Whalen asks that question over at Tyler Durden's place and the answer he comes up with is our old friend counterparty insurance.

That's right.

The banks are betting on the housing market to collapse again...and this time it's the mortgage underwriters who will need to be bailed out, AIG-style. TD:

Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time.

Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium.  Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent."

The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...

In other words, if the banks have bet enough on the mortgage insurance guys to go under, it's AIG all over again when the underwriters have to default and somebody has to pay up.  That somebody of course will be the taxpayer, and we get yet another scenario where the real threat of a systemic cascade failure leads to TARP 2: Economic Boogaloo.

It'll be awesome.  And by awesome, I mean the Old Testament usage where things got destroyed and turned to salt and eaten by locusts.