Great Bank Heist!

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.

The mortgage broker did not look beyond his own wallet. The loan he originated smelled but if the loan servicer that he sold the loan to was willing to pay a good price, what did he care. 
The loan servicer had to wear a gas mask to protect himself from the stench of the loan he just purchased, but if Goldman Sachs was willing to purchase it from him at a good price, what did he care. The loan servicer unloaded the risk and made a good profit.
Goldman did not care about the smell of the loan because they were able to buy an investment grade rating from the rating agencies and sell the loans to their clients including wealthy individuals, pension funds and financial institutions around the world. In the process they made a lot of money and were bailed out by our politicians in Washington.
The Washington Politicians did not care because they received big campaign contributions from all entities involved in the transaction and they figured the voter was too stupid to figure out that they were the ones stuck with the resulting calamity.
So far it appears Wall Street and the politicians were right. Their heist worked and we are stuck with the bill.

Bank CEO’s Not Too Big To Fire

Banks may be too big to fail; however their CEO’s are not too big to go to jail!

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.

Wall Street Raped Main Street

Let us hope the President’s appointment of a federal prosecutor, Mary Jo White, to run the Securities and Exchange Commission signals a significant change from the past. Over his first four years as president the culpability of wall street and large banks was barely given lip service. This is the black spot on Obama’s tenor. He caved in to large contributors. Unfortunately, what the S.E.C. will do has little positive direct impact for the homeowner who was bludgeoned.

Any victories that Ms. White may have will accrue to the U.S. Treasury in the form of fines levied against these culprits with little going back to those who were hurt, the homeowner. The banks and wall street look at these fines as the cost of doing business and probably have budgeted for them. No one will end up in prison; however, during the same time period some poor person will be convicted of  stealing $10 in order to feed his family.
The reason we are in a near depression is banks and Wall Street knowingly concocted, and sold sub-prime loans, and made substantial profits doing so. These same assets could have caused many of these financial institutions to fail except for the government bailing them out.

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, , 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….

Forgiving Mortgage That Is Not Debt

If you were a bank and under pressure by regulators to reduce debt owed you by mortgagors coming from the collapse of the housing market in 2008 what would you do? A good strategy would be to “officially” forgive the debt that you have already written off or know is highly unlikely to be repaid. In this manner you comply with an agreement entered into with the government requiring you to provide retribution for partially causing the calamity in the first place.

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.


¹ How to Erase a Debt That Isn’t There, New York Times, September 29, 2012
² The Deal Is Done, but Hold the Applausee, New York Times, February 11, 2012

Large Banks do Not Work

The quote below sounds like it was written by a lobbyist for the banking industry.

“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

That is because they were bailed out and not prosecuted for their wrong doing. Further, and maybe more importantly, they are oligopolies that hinder competition and take advantage of their control of the industry. The five largest banks in the country have more assets than the GDP of our nation. With that kind of size and power, it is naïve to think they cannot effect the price and quality of services and interest rates offered to the public. It allows them to be less efficient than if they had to compete in a free market.

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.”

The best regulator of free markets is free markets. If they are working properly, competition will require the bank be managed efficiently, the best products offered to the consumer, at the lowest price possible. The industry, like all industries, needs a referee. This is especially true in banking since they hold our money and have a huge effect on the total economy if they fail. This is the role of government; make sure that all banks are playing by the rules when they are competing against others in the industry.
Regulators cannot keep pace with free market entrepreneurs and technology. Other entrepreneurs can. You are giving regulators too much credit if you think they can stay ahead of the industry. New regulation tends to be created after the fact; after the cat is out of the bag.

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