Are we making a mountain out of a molehill? Or, more specifically, a new crisis out of a small legal issue? The story that emerged last week, and will likely dominate this week, has the potential to slow down or even derail a recovery if the worst-case scenario prevails. That's where we'll start on our weekly financial roundup. (Miss last week's article? Catch up with Water Cooler Finance: History's Biggest Rogue Trading Scandal.)

IN PICTURES: 10 Retirement-Wrecking Moves

Who Owns Who?
Economists will tell you that locking up the free flow of capital is just as dangerous as dislocating it. The subprime crisis was the dislocation of capital into the real estate market, heating it up and causing a bubble. The foreclosure issue - perhaps crisis, perhaps not - is all about locking up and neutralizing capital. How? During the real estate boom, innovative ways of spinning out mortgages and their monthly income streams were created that quite simply violate the traditional idea of mortgage lending.

No longer do banks truly own the loan capital they arrange for the borrower to buy a house. And so, if the banks do not own the loan, can they foreclose on the house? Well, to foreclose legally, these paper trails need to be tracked down, summed up and then reviewed and signed by a qualified person. So when news broke of robo-signers doing hundreds of foreclosure cases a day, several banks halted the foreclosures. (For more, don't miss The Fuel That Fed The Subprime Meltdown.)

Now there is a backlog of foreclosure with new ones being added all the time that are going to take months (possibly years) to process. In that time, banks must pay to try and make sure the vacant foreclosed properties are maintained, and also try to get houses sold. (For more information on foreclosures, see The 6 Phases Of A Foreclosure.)

Houses can't be sold if they're caught up in a legal process, and that means housing prices may not be bottoming out. Until the real estate market bottoms and capital is freed up - even if only cents on the dollars on some mortgages - the economy is in a precarious place. For now, the banks are bearing the brunt. It remains to be seen if it will ripple out.

Companies Buying
Outside real estate and banks, the market seems to be gaining some energy. Pfizer (NSYE:PFE) has joined the shopping trip by picking up King Pharmaceuticals for $3.6 billion - all cash. General Electric (NYSE:GE), perhaps with an eye on covering up weak earnings, picked up Dresser (an energy firm) for $3 billion after trying to buy Wellstream for $1.2 billion. And now Yahoo (Nasdaq:YHOO) is apparently up for grabs again after rebuffing Microsoft's offer earlier in the year. Yahoo's suitors reportedly include private equity firms as well as AOL. And, of course, BHP Billiton still has $39 billion on the table for Potash Corp of Saskatchewan (NYSE:POT).

IN PICTURES: Baby Buffett Portfolio: His 6 Best Long-Term Picks

But Buffett Is Selling
At least one important figure is selling. Perhaps it's just sour grapes over getting dragged in front of a congressional committee, but Warren Buffett has been steadily trimming his holding in Moody's (NYSE:MCO). Buffett unloaded another 370,000 shares last week and has reduced his holdings to almost half of what they were last year.

SEC Sees No Evil
In what was apparently a moment of weakness in April, SEC Inspector General H. David Kotz suggested that the timing of the Goldman case was suspicious - coming exactly when Congress was seeking to pass the financial regulation overhaul and settling shortly after the passage.

Despite stating that "It would strain credulity to think it was coincidental," apparently it was just one of those gee-whiz cases of serendipity. The official report from the Office of Inspector General "did not find that the settlement between the SEC and Goldman was intended to influence, or was influenced by, financial regulatory reform legislation." Whew. Glad we cleared that up. For a second, one might have worried that regulatory bodies were being politically influenced.

The Bottom Line
Not the greatest week in our stuttering recovery, but at least companies are still trying to get things moving. The foreclosure issue is definitely worth watching. And, if you really want to delve into the maze of politics and finance, keep an eye on former car czar Steven Rattner's likely settlement with the SEC over a pay-to-play scandal. (For related reading, take a look at The SEC: A Brief History Of Regulation.)

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