“SITTIN’ AROUND DRINKIN’ WITH THE REST OF THE GUYS, SIX ROUNDS BOUGHT, I BOUGHT FIVE…”

2/24/11

Page A1 of today’s Wall Street Journal bears news of a proposal by the Bush/Obama Administration to take advantage of the foreclosure fiasco by forcing a settlement whereby loan servicers, primarily big banks like Bank of America, Wells Fargo, and JP Morgan Chase, would pay to have balances of underwater mortgage loans reduced to a level more in line with the values of the underlying collateral. The article stressed that “the costs of those write downs won’t be borne by investors who purchased mortgage-backed securities.” Instead, according to the proposed settlement, the banks that originated and/or who are currently servicing the loans will come up with $20 billion to bear the costs of the write-downs.

Hmm…

The presumption by the Bush/Obama Administration has to be that the banks are financially healthy enough to absorb another $20 billion in such charges. The presumption may very well be correct; after we bailed them out, the banks seem to be on their feet again and many, if not most, have repaid the loans extended to them when the Bushites, and the markets, assumed that the world would end if every counterparty were not made completely whole, no questions asked. But maybe, just maybe, the banks have solved their income statement problems; i.e., they are earning healthy profits, admittedly not much of a feat with the Fed keeping rates low and the yield curve steep. However, they may not have cleared up their balance sheet problems; i.e., the asset sections of such statements remain largely black boxes, still stuffed with assets that are hard to value but remain dependent on continuing recovery, and perhaps a heavy dollop of inflation, to be worth anything. If this is indeed the case, can the banks absorb another $20 billion of charges, as the Bush/Obama people seem to presume? And, if not, who will bail them out? (That last question is completely rhetorical.) So could we see, in this proposed settlement, a situation in which the holder of mortgage backed securities are made whole and the banks are made whole but the taxpayers are, again, left holding the bag? Given the Bush/Obama administration’s track record in such matters, don’t completely discount the possibility.