Banks pressuring Washington for big bailout

The banks are making their case, and the government is listening. From The New York Times tonight:  "Prodded in part by some of the nation’s biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses.

Which banks? "Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans. The bank warned that tightening credit conditions were leading to 'escalating levels of delinquency and default among borrowers' and 'an unprecedented number' of homes that would enter foreclosure.' "

Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat tips: BG @ The God Blog, via email, and John, via comments.
Photo credit: Treasury Secretary Henry M. Paulson Jr. by AP

Comments

[arroyogrande]

"Did you guys actually read the article? Breakstone paid for the cost of his short-sale. He's not asking for anything"

It's not so much what Mr. Breakstone is asking for, it's they sympathetic "victim" tone that the reporters (Edmund L. Andrews and Louis Uchitelle) seem to be giving to the story:

"But millions of others are trapped in their homes." versus "have trapped themselves".

"restoring their freedom to sell or refinance" versus "restoring thier ability to sell without bringing money to the table".

"troubled mortgages" vs. "defaulting mortgages".

"Collie Tuttle...is caught in this bind...She put nothing down" vs. "Collie Tuttle, having put nothing down, was taking a risk that she might be caught 'underwater' on her house".

"They needed a bigger house than the one Mr. Breakstone had built." versus "they may have bought too expensive a house for what they could afford, especially considering that they their first house was financially 'under water'".

"Now the Breakstones are saddled with $4,000 a month in house payments" versus "Through their financial decisions, the Breakstones have saddled themselves with $4,000 a month in house payments".

- arroyogrande

[clapclappointpoint]

Did you guys actually read the article? Breakstone paid for the cost of his short-sale. He's not asking for anything, just admitting he got in over his head and had to take a loss. No reason to get upset at him.

Posted by: baruza |

Who's upset? These folks gambled and lost. Nothing to see. But excuse us if we aren't as shocked and appalled as they seem to be.
They say they spend $14000 in fixed outlays...uh huh....Are they fixed? Depends on what your definition of are is. The real question is, are they really burdensome outlays ?

Child support = nah - The family court judge bases those payments on earnings, not what your Christmas shopping budget was or was not. Also: Use a condom.

Car leases = c'mon. They are leasing, MORE THAN ONE, expensive (probably 6 cylinder +) car. They could buy smaller, used, outright and/or downsize to one vehicle. Myriad of options there.

Consumer debt = lol

Utilities = they can wear sweaters.

That, or the United States of America could halt all foreclosures nationwide for 3 months and then until further notice.

[Tombstone Realty]

Has Bank of America just considered not buying countrywide to begin with?

There goes your exposure.

Just say "We had No IDEA of the depth of Countrywide's negative loan balance when we agreed to this"

Yeah, total lie, but I don't see why *I* should have my government subsidize Bank of America's repeated dumb mistakes.

[ValleyResident]

So... people who made prudent decisions and did not overextend themselves now have to bail out the suicide risk-takers with their tax dollars? Something is wrong with this picture and we should not let it happen.... at all cost!!!!!

[TrojanDLA]

COMPLETE STUPIDITY.

Adding liquidity to the market DOES NOT help an underwater homeowner pay his mortgage and DOES NOT save his home. The home will still be foreclosed, except now the bank can make the government buy these loser over priced loans.

[Mike]

Sigh.

[liz]

ANGRY-so ******* angry about this!

The gov. needs to stay out of this.

I don't care if these people end up on the streets (which they will not, you can always rent) there should be no bailout.

These idiots (Banks, Buyers, middlemen) raised real estate prices artificially to the detriment of "real buyers"!

Real Estate is still an asset and why should these people be rewarded for their lies and overspending.

I wish I would have known this I would have bought a house for 2 million, told the bank I can only pay so much and live in it, enjoy it and wait till it goes back up in 5-10years. That's a great deal!!!

[liz]

One more thing---

I too don't understand BofA's logic here:

Oh we're buying a company that is about declare bankruptcy and it's a really bad business decision, but we are doing it anyway, and by the way federal gov. please bail us out.

That is completely irrational to me. At least the sub-prime mess makes sense to me. Bank of America doesn't make any sense.

And I bank with them---

[JESS]

I think we are biggest hypocrite nation on this planet!
Spent years fighting socialism and communism and yet we are tikering those very ideas. Does anyone else see the problem here! I can care less about a bail out anymore! I think we have bigger problems to worry abt now! Cuz no bail out is going to fix these problems. they may actually compound them in wierd ways. Where the hell are we goin with this. This is going to crumble our economy! Prepare for some dark years comin ahead. Housing is goin down no matter what. what are they gonna do once the very people getting helped out of an upside down position now will be upside down again next year. it will definitely increase the borrowing costs for future home buyers. that would definitely lower the prices. I think we are moving towards a japanese style economy. Inflation will devalue dollar and result in a stagant economy for a long ass time.

[liz]

areles,

How exactly is this going to help the economy by bailing out banks and keeping real estate prices artificially up??

WHO is paying PROPERTY TAXES on these houses???

It is much better to get new buyers into the market who will properly maintain these properties...

If the gov. takes a hit, then our taxes will be raised hurting the economy.

It is much better for the invisible hand to do it's thing. Either way the economy suffers, but one way is healthy while the other is a sham!

[EconE]

Painting a family that makes a quarter million dollars a year is disgusting.

$14,000 per month in "fixed outlays" is something that they got themselves into.

These people are debt whores.

The only bail out they should get is a discount on burlap for clothing

[sheila]

but wait, the plot thickens!

i have asked (and asked) a few times on this blog why on earth lenders are showing such catastrophic losses when they all required MORTGAGE INSURANCE for more than 80% loans. Cal valiantly tried to answer, and we discussed how "second mortgage" lenders were stuck, etc. but it never answered why on earth the
Countrywides and B of As were sucking so much air on these loans, almost all of which were insured for at least the top 20%, and almost none of the properties were dropping catastrophically lower than 20%...

the answer finally came out today - LENDERS WERE CO-INSURING THE MORTGAGES and scooping up 40% of the premiums, those greedy dumbasses!

here's an excerpt from the story (in the RE section):

A captive reinsurance arrangement allows a lender to receive significant pieces of the premiums paid by borrowers who cannot afford to make a down payment of 20% or more. The percentage of the premium shared varies but often is in the range of 40%. The funds flow into a trust structure but are treated by lenders as income.

The arrangement puts the lender into the position of a backup guarantor, should delinquencies and foreclosures on low-down-payment loans trigger claims beyond specified limits.

So, now we know why they need the bailout - they undercut their own damned safety net by front-loading yet another aspect of these deals. unbelievable!

[yinyang]

I wonder who would be more supportive of a bail out in the next administration? The Democrats with their "we need to make sure no one gets foreclosed" or the Republicans "we sleep with the bankers". Looks like a bail out is inevitable unless we vote for Ron Raul (oh wait, he's a Republican!! I hate this two party system)

[ShameandScandal]

So, let's see if I understand. Banks, mortgage banks,investment banks, big banks, and small banks, capture the gains on the upside. The costs of the downside are socialized to everyone. Privatize the upside, socialize the downside. Is this a great country, or what ? The United Socialist States of America, right back in the USSA.

Change the bargain the middle of the dance ? Sure. All the banks gotta do is accept the new Department of Financial Freedom and Goodness (DFFG), the agency that will regulate what businesses they can enter and exit, the rates of return they can earn, their capital structures, salaries (forget bonuses and stock options) earned, and the generic brand of toilet paper they can use to wipe their greedy....I can see the need for at least an initial staffing of 10,000, ramping up to 50,000 in ten years. Put 'em under the Department of Homeland Security, where we can be sure the bureaucrats can totally screw the banks beyond all possible repair with regulations that would make the world's central planners and bureaucrats proud. After this historic scandal, what's the downside ? A financial meltdown accompanied by mild hyperinflation ?

The first problem DFFG can tackle is the process for figuring out who actually holds the mortgage paper, since no one seems to know at this point. Let's set an ambitious goal for the bureaucrats for this one, straighten it out by, say, 2025. Free coffee for a year if they can nail it by 2024.

Banks need to recapitalize ? Easy. Russia wants to buy in, its got a few hundred billion sitting idle, all the USSA needs to do is back off when Russia reacquires Ukraine. Oil exporting Arabs have a few extra trillion at this point, but who's counting, the USSA only has to lighten up on that ridiculous support for the fiction country of Israel. The Chinese now own almost a trillion in Treasury paper, they can trade 'em in and lend to the banks, all USSA needs to do is stop bugging them about human rights abuses and environmental catastrophes. Even the nation's nicest loan shark, Warren Buffett, can cough up a few billion, at a compelling price of course.

But, what happens to those little interest rates when the Chinese do the trade in ? How much junk paper can the Arabs be fooled into buying ? Will they go for the special shiny paper you think ? Who will buy this newly packaged junk ? At what price ? Fannie and Freddie are already fading. Even the Arabs are starting to figure that they're throwing money down rat holes. Oopsie.

Nope. I've got the ultimate fix. Simple. Let's just use the Social Security Trust Fund !!! Why hasn't anyone thought of this yet ? The nation's special rainy day fund !!! The USSA's sovereign wealth fund !!! Think of it --- imaginary assets buying property with no value at a massively subsidized interest rate. Perfect. Only a country as strong as the USSA can afford it.

But remember, this path comes at a price --- your personal economic future will depend mightily on your ability to accept designer cat food as a primary food source, if you believe that Social Security will ever be able to pay out, anything.

Vote out the old bums, all of 'em, the R bums, the D bums. Keep voting them out, just keep voting them out, they're just too outrageously stupid to understand anything else. Don't discriminate, they certainly don't when it comes to screwing the public, while shamelessly professing their pursuit of fairness.

Vote out the old bums.

[areles]

Liz, I believe your view is overly simplistic. If it were as easy as home prices dipping to affordability, your logic would make a certain sort of sense.

But the problem is that even if home prices dip all the way down to 1999 levels, when you have banks in crisis, with tighter lending standards and increasing longterm interest rates (due to the fact that banks have less capital with which to lend money at all), who is going to buy them?

Did you read the "other point of view" by msprompt? It's not enough to earn six figures, have a solid credit score, and 20% in the bank. People are not qualifying. I personally know two couples in this position.

Meanwhile, inflation is at least 9% - no matter what the feds are saying - and 14% by some calculations, savings are disappearing, commercial real estate is plummeting, jobs are being lost (expect at least 7% unemployment), bond insurers are going belly up, and local governments are losing fortunes due to foreclosures and falling property taxes.

My suggestion was never that the government *should* bail the banks out - frankly, I think the only solution is to hunker down and let the flush happen. Rip the bandaid off, so to speak.

But to suggest that it's as easy as letting home prices fall and banks fail is to vastly understate what is happening here.

[pist off]

"An economic flush needs to happen, and WILL happen, no matter what the government tries to do. But to watch you all cheer it on out of jealousy and spite is, honestly, disgusting."

Areles, who's cheering it on out of jealousy and spite? Not me. I'm cheering it on because I want things to return to normal based on fairness. What isn't fair you might ask? Middle class America being bilked out of hundreds of billions of dollars at the hands of the corrupt, greedy folks who created this mess.

And I'll tell you what's disgusting- seeing Mozilo jump out of this airplane heading toward a mountain with his golden parachute, while the middle class on the plane paid for it. How many other CEOs on Wall Street have bailed with golden parachutes? Plenty.

That's what is disgusting. That's what infuriates us bitter folks on this blog. How about all those Wall Street bankers give back their hundreds of millions in bonuses back to help out? Nope, all the help is going be on the backs of the middle class.

[sunsetbeachguy]

The angry Cassandra's are at least partly pissed because we warned all the rest of you people.

You scoffed at us.

Now that our predictions have come true you are scoffing again and we are even angrier.

Maybe it is better to be a debt serf.

I would support the bailout if every corporate office and sr. exec of the mortgage firms that the Feds are bailing out digorged all of their ill-gotten gains since 2001 and paid 10 years of restitution.

I could get behind a bailout in a big way.

Oh yeah and give Hilary free rein to design their new regulatory climate.

[Michael Snyder]

sunsetbeachguy,
You were doin' alright until you got to Billary. You REALLY need to scratch the paint on that one. Ron Paul scares the beegeebers out of the establishment. Probably because he's actually read the Constitution. You might also note his conspicuous absents from newscasts although he's raised funds to rival the "chosen few" over the internet. Rupert & the boys are at least as scared of him as they were of Ross Perot. Hillary's bought & paid for by Rupert Murdoch & Co. and her real-time experience is limited to a term and a half in the Senate and two terms in the Presidential bedroom. In either case, her attendance has been dismal.