Bank of America Asks Congress for a $739 Billion Bailout: Who's to Blame?

The New York Times is writing A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered.

Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

My Comment: The attempt to blame the free market for this mess is galling. The blame lies with Congress, the Fed, and the SEC. If the Fed had not reduced interest rates to 1% and held them there, the bubble would never has gotten as big.

Tax breaks by Congress and things like "the ownership society" helped drive up prices. GSEs were created to promote affordable housing and now the limit on "affordable" has been pushed to $730,000.

It was an act of the SEC that created the nightmare at the rating agencies. See Time To Break Up The Credit Rating Cartel for more on the rating agencies.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

My Comment: The reason they are at "high risk" is twofold. Prices are too high and Congress and this administration is spending too much money weakening the dollar. Home prices need to come down, the war in Iraq needs to be stopped cold turkey, and Congress needs to stop bailing out banks and homeowners when they do something stupid. While we are at it, we need to abolish the Fed.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s.

My Comment: Everyone would view it as a bailout of banks and Wall Street for one simple reason: It would be a bailout of banks and Wall Street.

The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

My Comment: Precisely

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

My Comment: Taxpayers could be stuck or would be stuck? I think the latter. No one entity or agency can value these things, certainly not Moody's Fitch, and the S&P. For recent evidence, please see Evidence of "Walking Away" In WaMu Mortgage Pool.

The only proper way of establishing the worth of these securities is by the free market, not guesstimates by bureaucrats who cannot find their asses with both hands at one time, nor by banks willing to sell the government a bill of goods at taxpayer expense.

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy.

The House Financial Services Committee is working on various options, including a government buyout. The Bush administration may be softening its hostility to a rescue as well. Top officials at the Treasury Department are hoping to meet with industry executives next week to discuss options, according to two executives.

“There are a lot of ideas out there,” said Scott Stanzel, a spokesman for President Bush, when asked at a White House press briefing on Friday about a possible buyout program. “There are many different ways in which we can address this problem and we continue to look at ways in which we can do that.”

My Comment: There are indeed a lot of ideas out there and every one of them but one is a horrid idea. The only good idea is to let this play out naturally over time without the government making matters worse.

Supporters contend that a government rescue could be the fastest and cleanest way to force banks and investors to book their losses from bad mortgages — a painful but essential first step toward stabilizing the housing market.

My comment: Those supporters are socialist fools.

The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.

My Comment: This just gets sillier and sillier. If the Government buys them at "True Value" then why don't the banks just hold them at "True Value", or sell them to someone else at "True Value"? Clearly the idea is to dump them on the government at a price far above "True Value".

If the government took control of the bad mortgages, supporters of a rescue contend, it could restructure the loans on terms that borrowers could meet, keep most of them from losing their homes and avoid an even more catastrophic plunge in housing prices.

My Comment: A plunge in home prices should not be catastrophic. It should be welcome. Property taxes would drop and housing prices would be more affordable. Where are all the affordable housing clowns hiding out now anyway?

“Every citizen has a dog in this hunt,” said John Taylor, president of the National Community Reinvestment Coalition, a community advocacy group that has developed its own mortgage buyout plan. “The cost of spending our way out of a recession is something that everybody would have to bear for a very long time.”

Mr. Taylor estimated the government might end up buying $80 billion to $100 billion in mortgages. But he said the government could recoup its money if it was able to buy the mortgages at a proper discount, repackage them and sell them on the open market.

My Comment: Mr.Taylor is clearly a complete buffoon. How the hell is the government supposed to be able to package this garbage and sell it on the free market if the banks can't?

Surprisingly, the normally free-market Bush administration has expressed interest. Treasury officials confirmed that several senior officials invited Mr. Taylor to present his ideas to them on Feb. 15. Mr. Taylor said he had also received calls from officials at the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which is part of the Treasury Department.

My Comment: Bush knows Republicans are going to get slaughtered in the upcoming election so he is vote pandering like everyone else.

But even supporters acknowledge that a government rescue poses risks to taxpayers, who could be left holding a very expensive bag.

Ellen Seidman, a former director of the Office of Thrift Supervision and now a senior fellow at the moderate-to-liberal New America Foundation, said the government’s first challenge is to buy mortgages at their true current value. If the government overpaid or became caught by an even further decline in the market value of its mortgages, taxpayers would indeed be bailing out both the industry and imprudent home buyers.

My Comment: The first and only challenge is to do nothing.

“It’s not easy, but it’s not impossible,” Ms. Seidman said. “There are various auction mechanisms, both inside and outside government.”

My Comment: With that Ms. Seidman proved she is a complete buffoon too.

A second challenge would be to start a program quickly enough to prevent the housing and credit markets from spiraling further downward. Industry executives and policy analysts said it would take too long to create an entirely new agency, as Bank of America suggested. But they expressed hope that the government could begin a program from inside an existing agency.

My Comment: We are in deep trouble if we start addressing the second challenge. The first and only challenge should have been to do nothing.

But even if the government did buy up millions of mortgages and force mortgage holders to take losses, the biggest problem could still lie ahead: deciding which struggling homeowners should receive breaks on their mortgages.

My Comment: See how this has already morphed into a third challenge. And they did not even say so. There will be 88 challenges, all of them butchered, if we go beyond the first challenge of doing nothing.

Administration officials have long insisted that they do not want to rescue speculators who took out no-money-down loans to buy and flip condominiums in Miami or Phoenix. And even Democrats like Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, have said the government should not help those who borrowed more than they could ever hope to repay.

My Comment: Instead they want to rescue the banks who were equally stupid, if not more so.

But identifying innocent victims has already proved complicated. The Bush administration’s Hope Now program offers to freeze interest rates for certain borrowers whose subprime mortgages were about to jump to much higher rates. But the eligibility rules are so narrow that some analysts estimate only 3 percent of subprime borrowers will benefit.

My Comment: Innocent victims are easy to spot. Those who stayed out of the mess but saw property taxes soar to the moon anyway. The second set of innocent victims were those on fixed incomes who got paid a lousy 1% in their money market accounts while the Fed blew the biggest credit bubble the world has ever seen.

Bank executives, meanwhile, warn that the mortgage mess is much broader than people with subprime loans. Problems are mounting almost as rapidly in so-called Alt-A mortgages, made to people with good credit scores who did not document their incomes and borrowed far more than normal underwriting standards would allow.

My Comment: Finally a true statement. The mortgage mess is indeed very broad. But notice how the blame was shifted to those who did not document their incomes, from banks who knowingly looked the other way while it happened.

Borrowers who overstated their incomes are not likely to get much sympathy. But industry executives and consumer advocates warn that foreclosed homes push down prices in surrounding neighborhoods, and a wave of foreclosures could lead to another, deeper plunge in home prices.

My Comment: Most of those who overstated their incomes are not looking for sympathy. They are simply walking away. It is banks who are looking both for sympathy and handouts.

Right or wrong, the arguments for rescuing homeowners are likely to be blurred with arguments for rescuing home prices. At that point, industry executives are likely to argue that what is good for Bank of America (BAC) is good for the rest of America.

My Comment: There is no blur here. The arguments for rescuing homeowners and rescuing home prices are both equally stupid.

What's good for Bank of America is to learn a very painful lesson. What's good for America is Ron Paul.

Comments

[Buffer:]

Let the banks and wall street take care of their on problems not the US tax payer. They are the problem let them solve it not us

2008 Feb 27 04:20 PM

[Capitalist:]

I completely agree. The government should NEVER engage in any policy making that is aimed at price control. The ego of this government and especially the Bush administration is getting in the way of letting the free market do its job. We can't just keep printing money to pay back losses by large corporations. It creates no new wealth, and just hits every day people like you and me with higher prices through increased inflation. What good is a 20% return on your BofA stock when have to spend 30% more money to live?

2008 Feb 27 04:55 PM

[prfssr:]

Outstanding comments. I live in a very high housing cost area. I do not own a home. I don't get the benefits of home ownership, but I get to subsidize home owners, in that I pay a greater percentage of my income in taxes than they do, because I don't get a deduction for what I pay to live in my domicile. So now I'm being asked to further subsidize those who either bought what they could not afford or expected a great return on their investment with no risk. I have one question: where do I go to recover the more than $50K I lost in the stock market because I made an investment that went bust?

2008 Feb 27 07:40 PM

[User 158017:]

The greedy B------- (banks) should get what they deserve, forclosure of their property to pay for the mess they got themselves in.

2008 Feb 27 07:44 PM

[ballsschweaty:]

Mish, your years long forecast for Deflation now looks laughable. The dollar is crashing and prices for everything are skyrocketing.

Will you ever apologize and admit that you are wrong?

LOL!!!

2008 Feb 27 11:09 PM

[User 121464:]

First the people failed on the banks, and we had the great depression,
Today the Banks are failing the people.

I live by the words, "It is what it is".

2008 Feb 28 08:41 AM

[Augustus:]

Shedlock exhibits his complete "buffoonery" by refering to Taylor as one.
Of course the Federal Govt. can repackage it and sell it. GNMA securities are sold every day. Even a Shedlock Buffoon should know that. Well, maybe not. He has been predicting a deflationary crash for years and years.
As to banks "looking the other way", don't fault the banks. Fault the discrimination laws. When you filled out your financial statements for a loan, did you have to give them pictures of your share certificates?
Standard cut and paste butchery from Shedlock.

2008 Feb 28 09:51 AM

[User 157527:]

prfssr - right on! I completely agree. Governments should get out of subsidizing and bailing out. Let the market work. Banks, and other business should learn to manage greed/fear/exposure ratios which is what management is all about (not to be confused with leadership).

Weak are looking for someone to assign a blame - Strong look at a mirror.

2008 Feb 28 11:54 AM

[jarrinjack:]

Ditto User 157527 on 2/28/08.

2008 Feb 28 03:13 PM

[Jim Odell:]

By the time the federal government gets around to doing something about the mortgage problem it will be well on its way to a free market resolution.

2008 Feb 29 05:49 PM

[jupiters_crown:]

As an employee in one of the nation's top 15 banks, I completely agree with prfssr. It simply boils down to people making bad investments and certain banks and mortgage brokers holding their hand and helping them do it. When I look at how the sector's stock prices have fallen, it's difficult to swallow when I work for a bank that doesn't do 40 year amortizing mortgages, reverse mortgages, negative amortizing mortgages, or many of the other crazy products these other institutions have touted as an excellent way for the average joe to look like they live the high life because they live in a home they can't really afford. It boils down to integrity and doing what is right for your client. BofA (and the rest of them) needs to swallow the pill they were so happy to put into their mouth 2 years ago, even if it chokes them.

2008 Mar 02 11:24 AM

[User 160118:]

Let B of A and all the banks who lent consumers 600K on 30K worth of income deal with the consequences. No income checks, inflated appraisels and greed by the banks, mortgage originators & appraisers have tanked this economy. They should be personally held accountable for their actions.

2008 Mar 04 03:10 PM

[Retired Ken...:]

One thing I would like to say about the article on Bank of America's "sudden change" in it's attitude towards big government it this - over the years, the federal government put banks under tremendous pressure to make loans to the "disadvantaged." Banks were punished for "discriminating" against lower income, marginal-credit borrowers. These people were poor risks for the banks to lend to. The government, under pressure from consumer advocate groups, the ACLU, the NAACP, and numerous other banner-carriers for the poor and downtrodden, put the squeeze on banks so it would be able to tell all the "pressure" groups that it was doing something about those big, old banks and their discriminating ways. To that I say "POOF!" Now we are all seing the results of something that should never have been forced on the banking industry to begin with. Now, having said that, banks should have had the courage to do what was "right," and not what was "socially-responsible,... AND PROFITABLE AT THE TIME. The banking industry must share in the responsibility for what is happening today. But, the underlying cause rests with the good, ole government and its weak spine when pressured by the consumer advocates and civil rights whiners. May God bless us as we try and get out of this mess.

2008 Mar 05 01:50 PM

[longtermstocks:]

WoW this sounds familiar!!!

2008 Sep 29 09:47 AM