Banks Change Their Tune
The banking lobby used to sing "My Way" (1969) to get Congress to lighten up on regulation. In 1999, the lobby succeeded -- in the name of financial innovation -- in rolling back the very Glass-Steagall Act (1933) that was created to stop banks from making risky investments.
Now the banks are singing "Buddy Can You Spare a Dime" (1932) again. Their ask this time, however, is for a lot more than a dime. The Bank of America has asked Congress to create a Federal Homeowner Preservation Corporation to buy up and refinance mortgages in default. The BofA estimates that $700 billion in mortgages are at risk of default in the next five years. Could we be looking at a $1 trillion bailout?
Banks have moved from a hands-off attitude toward regulation to a plea for Congress to lend a hand.
The next president of the United States will have to sort out the fiscal and financial fiasco. The proposal for a mortgage buyout fund amounts to a HOLC II, along the lines of FDR's Home Owners' Loan Corporation (HOLC, 1933-1951). It has been supported by Connecticut Senator Christopher Dodd and Professor Alan Blinder. An ingredient in the solution might be a domestic version of the Brady bonds. But there are two caveats:
- A bailout creates the potential for moral hazard by compensating people for imprudent behavior. Individuals and institutions that engaged in fraudulent or speculative mortgage applications should not be made whole. The original HOLC did not keep those who needed the HOLC facility from suffering losses.
- Even more important, along with the HOLC, FDR and the Congress put in place at the same time some constraints on banks such as the Glass-Steagall Act and the FDIC, and they created the SEC.
It may not be possible or desirable to restore Glass-Steagall, but here are some ideas for regulatory reform to make the HOLC more credible (at bottom is a link to a version of this post with hyperlinks to explain acronyms and other references):
1. Establish an Affordable Housing Council. Convene a multi-stakeholder initiative, bringing together all the regulators -- FRB, OCC and OTS, FDIC, SEC, HUD -- and representatives of industry, consumers and local government. A law needs multiple perspectives and input or you get the contention later (as in the case of Sarbanes-Oxley).
2. Stop Predatory Lending. Some state laws aimed at predatory lending have been praised by three Wharton professors. The North Carolina Predatory Lending Law of 1999, for example, applies to mortgages of $300,000 or less that carry a rate of 8 percent above a benchmark U.S. Treasury rate. It prohibits negative amortization, interest-rate increases after a borrower default, balloon payments and other features associated with predatory loans.
3. Stop SIVs. Possibly by simply enforcing existing bank regulatory laws and FASB principles, end the dangerous Structured Investment Vehicles, which can be spun off with no capital and potentially disastrous contingent liabilities to the issuer.
4. Require the SEC to Monitor Wall Street's New Products. Someone has to keep a risk-assessing eye on what is cooking in the Wall Street derivative kitchen. The SEC was missing in action from due-diligence oversight back in 1999 when the dot-com IPOs were cooking and then again when the toxic CDOs were on the stove.
5. Encourage the FDIC to Price Risk More Aggressively. The FDIC has some latitude in requiring higher deposit insurance premiums and it should have more. Introduce the Basel II bank capital-adequacy guidelines ahead of schedule. Financial innovation should never override the original mission of the bank regulatory agencies, which is to ensure orderly markets. The Northeast United States has not had as serious a problem with subprime loans as the rest of the country and the credit for this should go to stuffy Northeast bankers.
6. Raise the Profile of the Fed's HOEPA Consumer-Protection Activity. Make basic financial education a national priority. Free information is available online from places like Fannie Mae, Freddie Mac, and the Mortgage Bankers Association. We need financial counselors in every city whose job it is to look at documents and comment. The Mortgage Bankers Association has promised to work with the U.S. Conference of Mayors to fund such a program. The Affordable Housing Council should seek to ensure counselors are in every city that will look at mortgage terms, provide free advice to would-be borrowers and keep an eye on local credit practices. Just as a buyer of a drug at a pharmacy must sign a waiver of consultation on a prescription that is filled, every borrower should be required to sign a statement saying that they are aware of the availability of local counseling services (with addresses and phone numbers provided). States with counselors at the state and county level have helped ensure that low-income mortgages have default rates below the FHA's.
These are just a few ideas. Their purpose is to recognize that a massive program for buying distressed mortgages will come at a cost to the taxpayer. Therefore, every effort should be made to avoid rewarding those who allowed the current situation to develop and to institute new safeguards. Otherwise we will soon enough be back into yet another cycle of financial excess.
For a version with hyperlinks to definitions and acronyms, click here or here.
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Help them Sort it out ????
Let them take the full hit is whats needed, then regulate them.Are you kidding me. These guys have rigged the system long enough.
Makes a complete mockery of what the US stands for.
People should be going to jail. Then you wonder why teens just don't give a fk about anything. WHy should they, its not like the future is brigth for them. All they see and hear is corruption at the highest levels. yes, our Best anf Brightest are scam artists who make their own rules to fleece anyone they can.
THEY NEED REGULATIONS SO THEY CAN GET PAID BY THE AMERICAN PEOPLE (U.S. GOVERNMENT) FOR BAD INVESTMENTS.
John:
You compliment stuffy northeast bankers for their prudence, however, if you paid attention the investment bankers Merrill et al, the securitizers, the consolidators, the marketers, of all this toxic paper are located right there on wall street of the north east. How could you miss that?
California and Las Vegas speak for themselves. When they are not being "round-tripped" by Enron, they're being "seduced" by the glamour of easy living. When the terminator is your governor, it's all about image.
It would be a monumental mistake to make the FDIC the judge of risk from a pricing of deposit insurance standpoint. They slept right through this. You think somehow if they had a bigger stick they wouldn't sleep right through another. (You know they are political?)
I think the one great improvement would be to make banks local again. Interstate branching of big city banks that are governed by their profit motives misaligns the banks' missions statements with the inherent interest of the respective communities. Face it, all kinds of community banks have made bad loans to help out their communities. It's the community struggle. New York could care less about respeictive communities. All banking should be local. Bank of America needs to be sent back to Italy.
"All banking should be local."
And it was in the Great Depression. Didn't help, in fact, only made things worse due to "unit banking" laws.
Think of this way: if the local bank issues loans to local farmers, and there's a drought or commodity downturn, and no extended spread of risk, that local bank is in trouble. Easy answers usually aren't.
Admittedly, the current problem is, "the bigger they are, the harder they fall (or more expensive to prop up. TBTF is not rational."
Still, put all your risk in the 'local basket' and factor in fractional reserve banking, and the end result is a lot of potential pain.
The banks have obviously learned the "privatize profits - socialize losses" lesson.
Restore the Glass-Steagall Act. Simple. Effective. Introduce increased criminal penalties for wrong-doing. Jail time. And lots of it. While we are at it, make it unprofitable to engage in questionable practices by introducing 100% fines on gross profits earned. Introduce debtor's prison for bankers.
For homeowners who did not seek financial advice, let them flounder. If they did and the advice was faulty by design, give them a hand. Hard to prove thought.
Congress is looking to bail out their paymasters. Simple. And they are using your taxpayer money to do it. You like it. You love that feeling of being repeatedly screwed by the Congress you continously re-elect.
For all those morons out there who think markets can effectively regulate themselves? Well, the sub-prime mortgage crisis is a good example of your faulty thought process.
Greed rules capitalism. For greed, someone has to be taken advantage of, either willfully or not. Greed is good. The more you have, the less someone else has. Screw them.
Get back in the breadline, Citizen!
FIRREA blows! Appraisal regulation assists in pushing up the money supply (by way of helping to increase the value of collateral), economic activity (via higher and higher loan amounts in cash out refinancings), and lender profits. As such, regulation is little more than a ruse designed to shift financial liability for losses from the appraisal client (i.e., the lending industry) to the Federal government who is now responsible for appraisal oversight.
Now that the Nation is experiencing another serious financial 'adjustment' just like the S&L Crisis, lenders and GSEs will be able to point to Federally mandated appraisal regulation as their free pass to escape a Congressional inquisition (where property valuations may be called into question). They will have the appearance of having done everything according to 'the book'. The investor groups suffering damages from having purchased loan packages (with this designer gift wrap) will have to seek a bail out from the government - the ultimate underwriter and overseer of lending and appraisal regulation. The government will not accept blame, but it will go looking for a villain. Guess whom they will find? -from "The Fraud of Appraisal Regulation" by Larry Levy 2004
Once the banks were able to consolidate they argue that they are too big to be allowed to fail. No more corporate socialism. No bail outs for big capital. The Savings and Loan bail out and the subsequent lack of regulation. It's all crony capitalism.
Doolittle and Pombo bailed out their friends by calling off the FDIC.
The Federal Reserve Board is a pro-banking cabal of crooks. Time to have the Federal Government regulate and issue currency as it plainly states in the U.S. Constitution.
Deregulation and lack of enforcement have caused the baking meltdown. This is a bipartisan fraud.
Unfortunately, the system is rigged against us poor people. We have a ruling class. Get used to it. Get used to being a slave, economically speaking.
After all, voters keep re-electing partymembers.
NO BAILOUTS WITHOUT REGULATIONS!!!
And this time, put some teeth in the damned things.
I like it.
It's a start. Then, we fire the Fed, put the US Government back in the money business, back it all up with gold, silver, and somehow, make the Treasury Department more directly accountable to the People, perhaps through the House of Representatives. Oh, and reinstate the regulations that guarded our economy--Glass Steagall, repeal of NAFTA--from the vertical integration of the Financial Sector that has led to this emptying of our Treasury and virtual enslavement of the people with monetized debt.
Heresy. The Democrats and Republicans in Congress will not do so. You know it. I know it.
NAFTA. A Democrat as President. A Republican Congress.
Reagan, a Republican. Democratic Congress. Huge deficits.
Get the picture, voters?
I'm all for regulation ... but it is nonsense to "borrow" to cover the bad-debts of corporations who so-willingly abused their fiduciary duties to their shareholders and account-holders alike. Such a plan would merely double or triple the national debt ... as though that number really had any meaning anymore.
Oh, they will be borrowing the money from The Fed. And you will be paying that money back to The Fed. Catch-22.
You and I get screwed. They laugh at us and go dine on caviar and wine.
Do you like it?
Banks and mortgage lenders need MAXIMUM REGULATION. They cannot regulate themselves and we should not expect them to do so.
The job of government is to regulate such industries whose potential greed can crash our financial markets and economy. And turn the "American dream" into a nightmare.
The banks and mortgage lenders have already done that. it's time for THEM to PAY THE PIPER.
In 1970, one person could support his family.
Today? Good luck.
Ask yourself: Are you better off after 37 years of Republican and Democratic misrule?
We , the American middle class need to tip the unlevel playing field away from Wall Street.
We will not find it in the Republican party. Bernie Sanders has some of the best ideas on this stuff. Obama should think of Bernie for Veep. Barack/Bernie 08. And bring back the McCarren-Ferguson Act also. Get Mayor Bloomberg into the act. Johnathan Kozol to flush out NCLB. Barnie Frank for Treasury.
Ramble, Ramble....
Hmmm...... see my previous comment. Obama will throw some big bones the middle-class way. But only enough to keep us happy. Anyone elected President in 2008 would be wise to do so.
But, what happens after that? 2012? 2016?
The Democrats and Republicans have run this country into the ground. Neither could have done what we see today without the consent of the other.
Keep deluding yourself.
Thank you for posting this!
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