Mortgage modification program contains new Wall St. bailout

It didn't take long for Wall Street to figure out how to game Obama's new mortgage modification program, did it? The plan was hyped as help for "struggling homeowners", but it turns out, it's just another stealth bailout for pudgy bank-execs....already, bigtime speculators are rifling through their filing cabinets looking any garbage paper they can find to dump on Uncle Sam.

Subprime securitizations, which had been worth next to nothing, are now the hottest trade on Wall Street. It's a subprime bonanza! The investment sharpies are scarfing up all the crummy MBS they can get their hands on, because they know they can trade it in for Triple A FHA-backed loans when the program get's going. It's another swindle cooked up by Treasury Secretary Timothy Geithner to keep the brokerage clan in the clover. Here's how a Wall Street veteran explained it to me:

"It looks like the investors in securitizations will be swapping underwater real estate for govt-insured paper... I think the scam here is just to provide some cover so the hedge funds and other high net worth individuals can trade their low grade paper for Triple AAA mortgages insured by the FHA at the taxpayer expense."

This is how it works: The new program offers incentives to banks and other deep-pocketed investors (in mortgage-backed securities) to slash the principal on underwater mortgages which keeps people from strategic default or foreclosure. Sounds good, right? But here's the catch: When the mortgage is refinanced, it's converted into a FHA-backed loan which provides an explicit gov-guarantee. So, for a slight loss on the face-value of the MBS, the investors (ie--investment banks, hedgies, etc) are able to resuscitate their moribund securitizations (MBS) and reap hefty gains.