Yet another sorry chapter in the banking crisis. Remember: we need banks and bankers, but why we kept these banks and these bankers in business still perplexes me. Now, in an attempt to retain faux integrity of their balance sheets, banks are refusing their contractual obligations to buy back certain loans they sold to Fannie and Freddie Mac (and with Fannie and Freddie essentially owned by you and me, guess who will get stuck with the bill?):
Among the more glaring bookkeeping fictions on big banks' balance sheets today are the values they assign to all of the bounteous second mortgage loans. doled out during the mortgage bonanza. As any realist will attest, many of these loans are worth little, and yet there they sit, at fantasy levels, on banks' ledgers.
Refusing to face reality on second liens ultimately hurts shareholders. But taxpayers are the ones holding the bag when institutions try to avoid losses by refusing to buy back problem loans they have sold to Fannie Mae and Freddie Mac, the mortgage finance giants that are wards of the state.
Fannie and Freddie helped grease the nation's housing machinery before and during the boom years, scooping up loans from all corners of the country. The more of these that Fannie and Freddie bought, the easier it was for banks to write new mortgages.
To protect themselves from getting piles of garbage loans shoveled their way when they buy mortgages, Fannie and Freddie require lenders or loan servicers to sign contracts requiring those firms to repurchase loans that don't meet certain standards relating to borrower incomes, job status or assets. Loans that were extended fraudulently, or deemed to have been predatory, are also candidates for buybacks.
Surprise, surprise: banks don't want to repurchase these loans.
Too fucking bad. We're talking about billions of dollars of loans taxpayers will have to eat. Every quarter. The Obama Administration should tell them if they don't pay back the loans, they lose FDIC protection. And if these banks can't handle the loans, then let FDIC eat them. Gretchen Morgenson concludes:
Throughout the credit crisis, the Obama administration has bent over backward to accommodate the nation's large financial institutions, arguing that shoring up the banking system is in everyone's interest.
To that end, the White House has given banks a lot of carrots in this crisis. But when it comes to buying back reckless loans, banks should now get the stick.
In the larger picture (Got BP?), this is why you do not make nice with these guys. By default, until proven otherwise, you treat them as hostile parties, because they have demonstrated no interest whatsoever in serving the public good.
This is what our north star should be: