Simple Solution .. Decriminalise crime

In the ongoing story that is the US housing debacle we noted on the weekend that the banking analysts have decided the best outcome for everyone is to decriminalise any crimes that the banks or their agents may perpetrated.

There is also a persistent concern that the crisis could cast a pall over the fragile housing market, derailing any recovery and damaging the broader economy, still struggling to emerge from the worst recession since the 1930s.

The KBW Banks index was down two per cent in early afternoon trading on Friday, after falling 2.6 per cent on Thursday.

Attorneys general in all 50 US states are looking at allegations that for years banks failed to review documents properly or submitted false statements in support of foreclosure applications.

Credit Suisse analysts said demands by investors for banks to repurchase loans was likely to remain elevated and lead to continuing high costs, but they expected Washington to step in to resolve the documentation issues.

“We find it difficult to believe that after all of the costs and efforts that have been brought to bear to help stabilise the housing market that there would not be action by the administration or Congress to ‘fix’ a procedural issue,” they said in a note to investors.

Hmmm.. And let’s not forget who is wearing all those costs? Who bailed out the banks when they almost destroyed the economy? And guess who is going to have to do it again because the government made deals with an industry that decides it doesn’t have to care about the law if it is getting in the way of making money. The US should just pass a law to let them do what they want, because creating dodgy laws for moral hazards sounds like a great outcome.

However that is not the real problem, this is a point of law and therefore a point of trust. Imagine what sort of legal precedent you are setting if you signed away the legal right of someone to challenge a contract. Who would ever trust one again?


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Comments

  1. The US federal government is in a bind.
    It could I imagine, pass legislation to rule that the banks don't need to have all the paperwork in place for a foreclosure to be valid. This would allow the bank to foreclose and sell-off the home to at least recover some of the debt.
    But is that something any politician would vote for? Voting in favor of the banks to put potential voters out on the streets. Maybe not.

    However, the other side of the coin isn't much better. If borrowers can legitimately walk away from their debt obligations it means the value of those debt securities will take a hammering.

    The write-downs will be huge. Rather than the bank recovering some of the debt, it would recover nothing. Not a single dollar. It would have to write the value of the asset down to zero.

    And not only that, but who in their right mind would buy these securities from the banks without first checking that each and every mortgage that makes up the security has valid paperwork? Or if they did buy them then they'd surely want a steep discount as a pay-off for the risk.

    Considering there are thousands of these securities each containing thousands of mortgages, checking the validity of each mortgage would be a monstrous and impossible task.

    Which we guess means the US government and Federal Reserve bringing back TARP 2. They're in the process of rolling out the second round of quantitative easing (QE II), so why not TARP II.
    How much would TARP II cost?
    The entire US housing stock – from what I understand – is valued at around USD$45 trillion.

  2. "Considering there are thousands of these securities each containing thousands of mortgages, checking the validity of each mortgage would be a monstrous and impossible task."

    Perhaps mortgages shouldn't be tied up by the thousands into 'securities'……

  3. Economic Delusion

    >Which we guess means the US government and Federal Reserve bringing back TARP 2. They're in the process of rolling out the second round of quantitative easing (QE II), so why not TARP II.
    How much would TARP II cost?
    The entire US housing stock – from what I understand – is valued at around USD$45 trillion

    Anthony, these are my exact thoughts, I am actually penning this exact post as we speak.