Smart Borrower Blog

BOA and Big Brother


Feb 23rd, 2008 @ 4:27 PM by Alden Smith


No one has screamed more about Big Brother than the banking industry.  They feel that business belongs to them, and that the government should keep their noses out of banking business, and give them freer rein with financial innovations.  It’s pretty obvious to me that you should be careful what you wish for.

Now, Bank of America is circulating a confidential proposal amongst members of Congress, in effect saying that, now that the waters are thoroughly muddied, that they are in trouble and want Big Brother to give them a hand.

No one on the Hill with any hope of pleasing his constituency will touch this with a ten foot pole, but it is certainly a way to get things back in order.  What is needed is a combination of business as usual, but a clear demonstration of accountability on the part of the banking industry.

Bank of America feels it is a good proposal as long as it isn’t seen as a bailout of the bond market by the American people. Basically what BOA proposes is the formation of a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount.  The government would then forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.  They use the excuse that $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years.  People would be put in the streets over this.

All well and good.  A fine plan, depending on your point of view, I suppose.  But it truly amounts to a bailout of bankers that are in trouble.  They get rid of useless paper, their shareholders are happy, and everyone can live happily ever after.  To me, it looks like the $200 billion bailout of the savings and loan industry in the 1990s.  The government would effectively be buying up these poor risk loans, and in the final analysis would end up getting stuck with a great deal of them.  And as we all know, it comes down to the taxpayer taking the hit.  Not such a good idea, in my humble opinion.

Banks, investors, and people dying for a piece of the American dream have created this mess.  I feel sorry for them, I really do.  But I see no reason that the taxpayers of the United States should bail out anyone, regardless of who they are or what their social status, for poor judgment or “creative financing”.  Let the chips fall where they may…

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