Tag: banks

Walk away, walk away, banks will crumble:

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

If you own a property that is underwater, it is financially insane for you to continue paying the mortgage if it is less expensive to rent a similar place. There is no “moral” aspect to the situation since the contract clearly delineates the limits of your responsibility. So long as you give up the property, you have abided by the contractual terms specified as part of the deal. While it’s very important to confirm that you have no more liability than the loss of the property before taking such an action – the debtor’s liability varies on a state-by-state basis – that’s the only decisive factor.

As for fears of how a mortgage default will impact your credit score, were you not paying attention for how the banks have behaved over the last ten years? During the expansion phase, banks will loan to anyone who will take their money and during the contraction phase they’re not going to loan to anyone who would find themselves underwater, so in practical terms it’s a non-issue. Keep in mind that 90% of the 4.5 million homeowners who are more than 25% underwater haven’t defaulted yet. But most of them will, and the impact of that wave of defaults is not going to improve your home equity position.

The Baseline Scenario recommends PAUL KRUGMAN for the Fed. And with a straight face, no less:

The danger here is uncertainty – the markets fear a prolonged policy vacuum. Fortunately, there is a way to address this. Ben Bernanke should withdraw and the president should nominate Paul Krugman to take his place.

The ironic thing is that although Krugman is a willfully ignorant Neo-Keynesian who couldn’t correctly predict the sun rising tomorrow, he would still be a better choice than permitting Ben Bernanke to destroy the tattered remnants of the American economy in order to delay the liquidation of the zombie banks.

I don’t care if Bernanke is reconfirmed or not. Should he be? Of course not. He’s been an unmitigated disaster; only Greenspan was worse. But as Calculated Risk correctly points out, it’s not really a question of the right man for the job, but the right man for the job in the eyes of the bankers and politicians who created the current mess. You can count on one thing regardless of whether Bernanke is kicked out or not; anyone capable of being confirmed is not the right man for the job.

He can come back in a big way if he is really going to take on the banks. But the Market Ticker’s enthusiasm for Obama’s so-called “declaration of war” notwithstanding, that’s a pretty big if. However promising his populist rhetoric sounds, I strongly suspect this is nothing more than another smokescreen fired out of the Federal extend-and-pretend Nebelwerfer. Nor am I alone in these suspicions:

Senior staff at the investment banks themselves were determined to play down the significance of the speech. “What you are witnessing it a political panic,” said one. “Obama lost a crucial vote and is now trying to win back political ground by some serious bank bashing. This has to go through a long and complicated political process before it gets anywhere near being law.”… Last night, David Viniar, Goldman’s chief financial officer, showed the first sign that President Obama faces a fight. “To put rules in place that roll back the financial system by 10 years is going to be a very, very hard thing to do,” he said.

Translation: we will fight in the boardrooms, we will fight in the Congressional offices, we will fight in the Senatorial backrooms, we will never roll over and surrender our fraud, our theft, or our ill-gotten gains! While Obama’s political survival instincts are leading him to take the right tack, Barney Frank has already made it clear that Congress, being largely owned by Wall Street, isn’t about to play ball. When one considers the way Harry Reid and Nancy Pelosi rolled Obama last year, I wouldn’t bet the housing market against them doing it again, especially when they’ll have a lot of support from idiot Republicans defending the “free market” right of banks to collect federal subsidies, enjoy federal protection against competition, commit massive amounts of open fraud, and get bailed out when they still somehow manage to bankrupt themselves despite all those advantages.

There is an easy way to determine if Obama is genuinely declaring war on Wall Street or not. If he fires Geithner and Summer, withdraws his support for Ben Bernanke, and promotes Paul Volcker to the Treasury, it’s on. If he gets behind Ron Paul’s bill to audit the Fed, it’s nuclear. But if he leaves all the usual suspects in place, and I have seen no indications that he will not, then this is just a bit of populist window dressing meant to alleviate his plunging poll numbers.

On a tangential note, speaking of those who have to go, check out the latest piece of bank-related corruption in the Obama administration: “Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment. Mortgage documents for that 14-room home include a provision, known as a second-home rider, stating that Bair and her husband must keep the house for their “exclusive use and enjoyment” and may not use it as a rental or timeshare. Yet the couple has been renting out part of the house since they left for Washington, with Bair listing income from the “rental property” in Amherst as between $15,000 and $50,000 a year on her most recent financial disclosure form as head of the FDIC.”

These people belong in jail, not running massively influential financial agencies and deciding which corporations will live and which will die. And yet we’re somehow supposed to believe they are capable of salvaging the economic situation?

Wall Street is considering a legal challenge to Obama’s proposed bank tax:

Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter.

In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members.

How very strange! I don’t recall them being overly concerned about the massive violations of the Constitution that were involved in bailing them out of bankruptcy in 2008. These men aren’t merely criminals and fraudsters, their foolishness and hypocrisy simply knows no bounds. And their greed makes even the most staunchly right-wing Republican dream of tumbrils and guillotines.

As Karl Denninger says: “Stop the looting, start prosecuting.”

Given how Congress is already working to preemptively protect the big banks, it sure looks as something large and furry this way comes:

To close out 2009, I decided to do something I bet no member of Congress has done — actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill. Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan….

It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

It would appear Barney Frank and the House Financial Services Committee are expecting Wave 3 in 2010 too.

LP asks a very good question about my five percent failed deposit figure:

I thought your book on the return of the great depression was great. But since the 545 banks in trouble represent 295 billion of assets (ratio of about 55-to-60%), compared to 140 failed banks with 139 billion of assets this year (ratio of about 1/1), would it not follow that the 545 banks have less assets and that the subsequent resultant asset loss would be less than your graph projections show? This I interpret to mean that 5% of the bank failures shown on the graph would represent closer to 3% of the 2010 asset value. This may mean that the 16.8 decline in commercial banks loans would drop closer to about 10%.

Also some of the stronger businesses may be able to transfer barrowing to other banks which may mitigate the credit affect. This may let the govt get away with one or two more stimulus packages in 2010 that would result in a worsening economy than we have now and preserve the total economic catastrophe until 2011. Or a different scenario, maybe the continued economic slump will snowball in 2010 as everyone will continue to curtail their spending when the last half of 2010 shows unemployment still rising with business activity declining. Is my basic reasoning correct?

It’s only when the law isn’t on their side. But there can be no “moral” obligation to a corporation outside of the law, since outside of the law, the corporation doesn’t even exist. It is, by definition, an “artificial” person. Mike Shedlock highlights a little-known aspect of Oregonian law:

Underwater Oregon homeowners find an escape hatch

The strategy works like this: Homeowners must first file Chapter 13 bankruptcy and file a motion asserting their home’s value has diminished to the point that it’s worth less than they owe on the first mortgage. If the motion prevails and the lender doesn’t challenge, the court will then cancel the lien the second-mortgage lender holds on the home. The lender’s secured debt is converted to unsecured debt, which most often is eliminated in full in the bankruptcy process.

It’s not a painless strategy. Filing bankruptcy will significantly damage a consumer’s credit.

And the strategy raises issues of morality, for lack of a better word. Many of these homeowners took out second mortgages to buy ski boats, trendy kitchen upgrades and other luxury purchases. Should they get off without repaying the loans? Oregon has at least six banks on the edge of closure after the mortgage crisis of the past year, and this could add to their risk.

The answer, of course, is yes, they absolutely should. The banks decided to loan homeowners the money in the full knowledge that home prices could go down. Retroactively changing the rules in order to prevent the banks from realizing the consequences of their actions is the only potentially immoral action here. As for “damaging” one’s credit, that’s a laughable concept considering how no amount of bad credit will prevent banks from lending to anyone in during the bubble and no amount of good credit will cause a bank to lend to anyone during the bust.