Current Bank Plan Is Same as $10 million Interest Free Loan for Every American

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“I wonder how many audience members know that Bair’s plan is more or less exactly the revenue model for all of America’s biggest banks. You go to the Fed, get a buttload of free money, lend it out at interest (perversely enough, including loans right back to the U.S. government), then pocket the profit.” Matt Taibbi

From Rolling Stone’s Matt Taibbi on Sheila Bair’s Sarcastic Piece

I hope everyone saw ex-Federal Deposit Insurance Corporation chief Sheila Bair’s editorial in the Washington Post, entitled, “Fix Income Inequality with $10 million Loans for Everyone!” The piece might have set a world record for public bitter sarcasm by a former top regulatory official.

In it, Bair points out that since we’ve been giving zero-interest loans to all of the big banks, why don’t we do the same thing for actual people, to solve the income inequality program? If the Fed handed out $10 million to every person, and then got each of those people to invest, say, in foreign debt, we could all be back on our feet in no time:

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Every time I watch a Republican debate, and hear these supposedly anti-welfare crowds booing the idea of stiffer regulation of Wall Street, I wonder how many audience members know that Bair’s plan is more or less exactly the revenue model for all of America’s biggest banks. You go to the Fed, get a buttload of free money, lend it out at interest (perversely enough, including loans right back to the U.S. government), then pocket the profit.

Considering that we now know that the Fed gave out something like $16 trillion in secret emergency loans to big banks on top of the bailouts we actually knew about, you might ask yourself: How are these guys in financial trouble? How can they not be making mountains of money, risk-free? But they are in financial trouble:

• We’re about to see yet another big blow to all of the usual suspects – Goldman, Citi, Bank of America, and especially Morgan Stanley, all of whom face potential downgrades by Moody’s in the near future.

We’ve known this was coming for some time, but the news this week is that the giant money-managing firm BlackRock is talking about moving its business elsewhere. Laurence Fink, BlackRock’s CEO, told the New York Times: “If Moody’s does indeed downgrade these institutions, we may have a need to move some business around to higher-rated institutions.”

It’s one thing when Zero Hedge, William Black, myself, or some rogue Fed officers in Dallas decide to point fingers at the big banks. But when big money players stop trading with those firms, that’s when the death spirals begin.

Morgan Stanley in particular should be sweating. They’re apparently going to be downgraded three notches, where they’ll be joining Citi and Bank of America at a level just above junk. But no worries: Bank CFO Ruth Porat announced that a three-level downgrade was “manageable” and that only losers rely totally on agencies like Moody’s to judge creditworthiness. “A lot of clients are doing their own credit work,” she said.

• Meanwhile, Bank of America reported its first-quarter results yesterday. Despite that massive ongoing support from the Fed, it earned just $653 million in the first quarter, but astonishingly the results were hailed by most of the financial media as good news. Its home-turf paper, the San Francisco Chronicle, crowed that BOA “Posts Higher Profits As Trading Results Rebound.” Bloomberg, meanwhile, summed up results this way: “Bank of America Beats Analyst Estimates As Trading Jumps.”

But the New York Times noted that BOA’s first-quarter profit of $653 million was down from $2 billion a year ago, and paled compared to results of more successful banks like Chase and Wells Fargo.

Zero Hedge, meanwhile, posted an amusing commentary on BOA’s results, pointing out that the bank quietly reclassified nearly two billion dollars’ worth of real estate loans. This is from BOA’s report:

During 1Q12, the bank regulatory agencies jointly issued interagency supervisory guidance on nonaccrual policies for junior-lien consumer real estate loans. In accordance with this new guidance, beginning in 1Q12, we classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. As a result of this change, we reclassified $1.85B of performing home equity loans to nonperforming.

In other words, Bank of America described nearly two billion dollars of crap on their books as performing loans, until the government this year forced them to admit it was crap.

ZH and others also noted that BOA wildly underestimated its exposure to litigation, but that’s nothing new. Anyway, despite the inconsistencies in its report, and despite the fact that it’s about to be downgraded – again – Bank of America’s shares are up again, pushing $9 today.

Don’t Ask, Just Cram: It’s Time to Put Mortgage Modifications Back into Judges’ Hands

Don’t Ask, Just Cram: It’s Time to Put Mortgage Modifications Back into Judges’ Hands

By Abigail Field Posted 12:00PM 04/06/11 Columns, Real Estate, Credit

Many state attorneys general, federal law enforcers and regulators say they want big banks to pay for their fraudulent foreclosures and abusive mortgage servicing practices by reducing what borrowers owe them by some $20 billion. That’s the amount the banks allegedly saved by doing a lousy job servicing troubled mortgages. (That math is questionable at best, Yves Smith noted when that figure began making the rounds.)

But the solution to this problem is not a settlement with the banks that mandates principal write-downs. Principals on these loans should be reduced, but it should be done in the most efficient, effective way: Congress should give bankruptcy judges back a power they once had — the right to reduce the principal on a mortgage to the home’s current market value. In other words: Bring back the cram down.

Reducing mortgage principals to homes’ current market value is critical step to healing our economy. First, it would stop many foreclosures because borrowers would be able to afford to keep their homes. Reducing foreclosures would preserve property values and cut back on a big source of the oversupply in the housing market. Moreover, after cram downs, people could more easily sell their homes and move to where jobs are. Sales wouldn’t be “short” anymore. Finally, in a post-cram-down America, people would have more disposable income, which would allow discretionary consumer spending to rise.

Why Voluntary, Bank-Run Modification Programs Fail

So why shouldn’t regulators simply include write downs in the settlement between law enforcement and the banks? Because the Home Affordable Modification Program has shown that any system that relies on banks to chose among borrowers and design their modifications will fail. Back in the 1980s, this country experienced a similar failure of voluntary programs to solve a huge problem with underwater mortgages triggered by the popping of an agricultural real estate bubble.

As the Federal Reserve Bank of Cleveland explained in its analysis of what happened then to family farms:

“Many farmers, like many homeowners now, were in danger of losing their primary residences, with little prospect of relief under the bankruptcy options available to farmers at that time….

Moratoriums on foreclosures in a number of farm states slowed the rising tide of farm foreclosures somewhat, but they provided only a temporary reprieve as the fundamental economic factors … left many farmers unable to service their existing debt and with almost no possibility of renegotiating their secured loans with creditors….

…voluntary modification efforts, even when subsidized by the government, did not lead agricultural lenders to negotiate loan modifications.”

That phrase “with little prospect of relief under the bankruptcy options available” is key. Our current bankruptcy laws allow debtors in bankruptcy to force banks to reduce the principal on most loans secured by property to the current market value of that property, but not all.

For example, if a debtor owes $500,000 on a yacht that’s now worth $300,000, the debtor can keep the yacht by paying every penny of the $300,000, and as much of the rest as the bankruptcy process allows. Ditto for a limo. More to the point, bankruptcy judges can “cram down” the principal on mortgages securing vacations homes and investment properties — but for the most common mortgage of all, the one securing the loan on a person’s primary residence, they cannot.

A Solution That Has Worked Before

At least, not anymore. Home mortgages could be crammed down nationwide until 1978, when Congress changed the rules. Even after that, thanks to disagreement among courts on how to interpret the rule change, they could be crammed down in some parts of the country until a 1993 Supreme Court decision ended the practice completely.

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In the 1980s, the Cleveland Fed explained, the bankruptcy code didn’t let allow family farm mortgages to be crammed down either. But when voluntary programs failed, Congress created special bankruptcy law provisions to authorize farm cram downs. Then, as now, reported the Cleveland Fed, the banks warned of financial doomsday, saying cram downs “would flood bankruptcy courts, permit abuse by borrowers who could afford to pay their loans, and reduce the availability of credit, among other things.” None of those things happened.

Instead, the cram down law “worked without working”: It was rarely used actively, but banks sustainably modified mortgages anyway. As soon as borrowers had leverage — negotiating with the threat of a cram down behind them — banks started cutting meaningful deals.

To be fair to then-Speaker Nancy Pelosi’s House of Representatives, it passed a cram down bill in 2009. But the Senate failed to get the job done, as President Obama and some powerful groups like MoveOn.org and labor unions largely sat that fight out.

How Banks Beat Back Cram Downs

What was the argument that the banking lobby used to kill the bill?

Surely it wasn’t the claptrap about “moral hazard.” Unlike the banks and their executives bailed out by the taxpayers, homeowners aren’t “encouraged” by a principal reduction “bailout” to make increasingly risky, self-interested decisions, secure in the knowledge the the government will save their bacon if it falls in the fire again. That’s behavior by bankers is a real and present hazard to our financial system.

The only specific “hazard” the anti-principal mod lobby mention is that borrowers who are current will default to get mortgage modifications. There’s one big problem with that claim: Mortgage servicers have routinely been telling borrowers who are current that they will have default before they can get help. These are borrowers who were blowing through their savings struggling to stay current on their underwater mortgages, and were reaching out before default to work something out with their banks — responsible borrowers.

The practice of telling these people to default before a modification could even be discussed has become so common that both the state attorneys general’s proposed settlement with mortgage servicers and the banks’ much weaker counteroffer address the issue. This alone makes a mockery of any potential argument about the bad moral consequences of allowing judges to make principal modifications.

And doing the reductions via the bankruptcy code also reduces any incentive to default to get help. Borrowers don’t — and shouldn’t — take bankruptcy lightly.

Fears of Another Financial Industry Meltdown

So what was the argument the bank lobby really used to kill the cram down bill in 2009? I don’t know, but one type of financial doomsday lurks in the background now that didn’t in the 1980s: Bank Bailout II. Mortgage principal write downs in large numbers could push some big banks over the edge — or force them to reveal their present insolvency.

The question is whether enough consumers to bring on that dreaded scenario are willing to face the long, punitive process that is bankruptcy to get mortgage principal write-downs. That begs a second question: If large numbers of write downs led banks to demand another bailout, would they get it? Both are impossible to answer, but the gains are well worth the risks.

If restoring the cram down induces a consumer-bankruptcy-driven financial system failure, that’s an important reality check. The nation would have to face the fact that TARP had failed to get the job done, and that it was time to either fix the big banks’ balance sheets for real, or shut them down. It would prove that we can’t continue to engage in policy theater such as HAMP or leaving mortgage modifications to the discretion of lenders.

Whatever the outcome for banks, Washington needs to suck it up and start instituting good policy.

See full article from DailyFinance: http://srph.it/gagyj1

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