During the period leading up to the collapse of the economy that reached a crescendo in the fall of 2008, we got trapped into thinking bad credit decisions could be overcome with good collateral. Those of us tied to the mortgage industry saw the poor loan underwriting that added , or maybe even created, the housing bubble.
Lately, more and more there is a discussion that banks are too big to fail in that it could cause a repeat of the financial crisis of 2008. On March 17, 2013 in the New York Times GRETCHEN MORGENSON wrote an article titled, JPMorgan’s Follies, for All to See wherein she discusses a trade executed by Chase bank that resulted in a loss close to $6-billion. She reports that we already know such banks are too big to fail and raises the question whether they are too big to manage.
On March 13, 2013 the New York Times reported
“Attorney General Eric H. Holder Jr. responded to a question at a Senate Judiciary Committee hearing last week about the failure to prosecute multinational banks for various transgressions by saying, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.”
I can see accepting the premise that some of these banks may be too big to fail at the present time. However, I do not accept that the CEO’s, CFO’s and other senior officers are not too big to fire and stick in jail. There is plenty of talent in the world and markets are likely to cheer if this happened as opposed to panicking.
Let’s do it! If it is not done it means that politicians are also dirty.
While the banks were bailed out little was done to help the homeowner. The banks made substantial progress in getting on a healthy footing since the bailout. Now, per an article in the New York Times, http://nyti.ms/OY2Of1 , it is expected that the banks will receive a large boost in profits due to an expected refinance boom brought about by a new round of quantitative easing by the Federal Reserve .
This expected “gift” to banks should be used to pay retribution to the homeowners that were brutalized during the last decade by the very same Wall Street and banking industries. The recovery of net worth of the consumer is paramount to the recovery of the economy.
Here is what needs to be done…. http://bit.ly/MMrfm
This is exactly what is being done by JP Morgan Chase and Bank of America.¹ They are notifying borrowers who have completed bankruptcy, or the bank has already provided for a loss reserve, that their debt is forgiven. The banks are getting credit towards the $25 billion they agreed to pay back in February as retribution for contributing to the mortgage meltdown of 2008.² Further, the government is getting credit for coming down on the banks. These losses should be already recognized on the banks books; therefore, banks are getting credit for something they would have done anyway without the government settlement mentioned above. To make matters worse, this forgiveness of debt by the banks could result in negative tax consequences for the debtors. The government should consider passing a law that would exempt such loss forgiveness as a taxable event.
The one benefit that is accruing to the mortgagor is the debt owed to the bank is eliminated from his credit record. This is significant, but let’s not pretend that this settlement cost the bank anything that was not already incurred and recognized.
“A bit of recent history: none of the institutions that toppled like dominoes in 2008 — the investment banks Bear Stearns and Lehman Brothers, the mortgage-finance giants Fannie Mae and Freddie Mac, the insurance company American International Group — were commercial banks.” Regulate, Don’t Split up Large Banks, New York Times, July 31, 2012
Another result of free markets would be salaries of the top executives and board members would be lower because of the need to keep costs down to fight off competition.
The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist who is quoted most often when conservatives are praising free markets and capitalism.
“But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire. These then are the basic roles of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game.”
Yes, everyone missed the housing bubble coming, except maybe Goldman Sachs, and guess what; we will also miss the next one. The market is always ahead of regulators. The Glass-Steagall Act should be updated and banks should not be allowed to be too big to fail. More