Friday, February 10, 2012



As you might guess, I have plenty of problems with the deal reached between the AGs (Most people think that “AG” stands for “Attorney General,” but, in reality, “AG” stands for “Aspiring Governor,” but I digress.) of 49 states and five big banks, Bank of America, Citi, Wells Fargo, Chase, and Ally, to settle a suit regarding supposedly nefarious mortgage underwriting and foreclosure practices.

First, I certainly hope there is something in the provision allowing a principal reduction for borrowers who are behind on their payments that disincentivizes everybody with a mortgage loan from simply skipping a few payments and demanding that his creditor reduce his or her principal balance. If not, one can imagine the consequences. There has to be something in this deal to stop such havoc from being wreaked on our financial system…right?

Second, there is something horribly unfair about people who were foreclosed on getting maybe a couple thousand bucks out of the deal if, as this deal does, we are going to allow those who skipped some payments to get their principal reduced in amounts, one supposes, vastly in excess of a couple thousand dollars. Those who were foreclosed on have to be thinking “Damn; if I could just have held out a little while longer, I could have stiffed these guys at the bank, just like my neighbors can do now!”

Third, there are some portions of this agreement that might make sense, such as allowing borrowers who are underwater to refinance at currently very attractive rates. However, if this is such a good deal with such salubrious consequences, one would think the banks would pursue such a course of action without the government’s forcing them to do so.

Fourth, the banks were bailed out by the federal government; this fact was cited by President Obama when he was congratulating himself and his staff on reaching this deal. Most people seem to think the banks are in the financial clear, that the point of danger has been passed. That probably is the case; the banks as a group, and the aforementioned banks, are certainly better capitalized than they were going into the “crisis.”

But perhaps we should not be so confident about the banks’ ability to weather this storm. The left hand sides of the banks’ balance sheets are still jammed with assets of questionable value, which may be why the banks’ stocks are trading at such paltry multiples of book; i.e., book value may indeed be overstated because banks’ assets are not worth what the accountants say they are worth. Should substantial dollar amounts of these assets come a cropper, an apparent overcapitalization can rapidly become an undercapitalization. And where will the banks turn when they get into trouble? Of course…to us, the taxpayers or, as is the fashion of late, to the Fed, the printer of last resort.

Even if the banks are as healthy as appearances indicate, the politicians and their henchmen smell blood. For example, the SEC yesterday notified big banks that it will sue those banks over their securitization of loans. Once these sharks start to gather, even strong banks can be crippled by lawsuits, forcing them into the rescuing grasp of the government. So we may be seeing here a situation in which the federal government winds up suing itself (See my 9/4/11 post, “HE’S EITHER IN ON IT OR HE’S AN IDIOT; EITHER WAY, I HAVE TO LET HIM GO.”), achieving its goal of letting borrowers stiff lenders on the taxpayers’ dime but doing so under cover of suing the banks whose bills will ultimately be picked up by the federal government.

I would feel more comfortable with deals of this sort if we allowed big banks to fail in this country, but, unfortunately, we don’t and so I am not.

Fifth, the housing market will recover more quickly if we just let the market run its course, let housing prices fall to a natural bottom from which they will recover, probably more rapidly than most people think. Such maladroit machinations as these deals only prolong the discomfort.

For all that is wrong with the deal between the AGs and the Big 5, it does have one very salubrious aspect: It should make mortgage loans more difficult, perhaps much more difficult, to obtain. Even those legions who don’t agree that making such loans harder to get is a good thing do agree that this deal will make such loans more scarce. Most argue that we will see the decreasing availability of mortgage loans manifest itself in rising spreads between treasury yields and mortgage loan rates. While we have seen such quantitative tightening, and probably will see more of it, yours truly believes that the declining availability of mortgage loan money will manifest itself most saliently in a qualitative sense, in tightening credit standards for such loans; i.e., banks will lend at perhaps only slightly wider spreads to treasuries but will loan money only to very creditworthy borrowers. So we will see a tightening of the mortgage loan market in a more qualitative than quantitative sense. Either form of tightening would be a very good thing, but the more qualitative the tightening, the better the consequences will be.

In considering my contention that a tightening mortgage loan market is a very good thing, consider, though, that I think very perversely. I actually think that banks should be careful in lending out the money provided by their shareholders, depositors, and other lenders. I further am guilty of the apostasy that people should live within their means, save money, and avoid borrowing money but, when forced to borrow, should do so only in amounts they can pay back. I also do not think that everyone has a constitutional right to own a home and that, indeed, people are better off renting until they can actually afford, rather than just want, a home.

The rest of the world, including most of the political and financial worlds, believes that banks, as a matter of public policy, should lend willy-nilly in order to inflate and support asset bubbles, resting assured that, should trouble come their way, the sap taxpayer will always be there to keep them from such ignominy as having their executives and traders forced to sell off portions of the west coast fleet of Ferraris. Further, as the world sees it, everyone is entitled to borrow whatever he or she deems necessary not only to buy the home of his or her dreams but also to indulge any silly whim that strikes him as even transitorily worthy. Should trouble come his or her way, he or she should rest comfortably knowing he can always stiff his creditors who in turn will find solace at the bosom of the taxpayer.

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