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These socalled Mortgage derivatives do not represent a firewall. Recently some lawyers trying to assign blame have tried to go after the lenders who didn't make the necessary judgements about the borrowers credit rating. What seems to be occurring is a legal struggle about who owns this paper, and legal challenges to the path of foreclosure. It may take years in the legal system to decide who really owns these properties, which is the right to assume first access to the proceeds from the assets, but the legal problems could prevent a resolution any time soon. Blocking the distribution of these assets puts the financial companies involved in a dangerous position, being unable to sell these properties and clear their books, they could be forced to carry this bad paper for years. The Fed can audit the banks balance sheets on a case by case basis. They might be forced to turn a blind eye, but the same thing that happened in the Japanese deflation of the 90's would be the likely result. At the time arrogant Wall Streeters called the Japanese system Crony Capitalism. Right.
