More On Making Assets Toxic

Yesterday we talked about the joys of bundling, the fun we had with that old fuddy-duddy Glass-Seagall off our backs, and all the good that using Banks as charities has done us. (We also pointed out that if we don’t get rid of bank charity and bundling and bring back something like Roosevelt’s old law, we’ll be right back in this mess very soon.) Let’s continue and see what other problems banks have that need to be corrected BEFORE we waste any more bailout money on them.
A “waste” you ask? Wells Fargo took a good, deep draught at the Bailout fountain a few months ago. Just yesterday word came that they were taking their most successful mortgage lenders on a nice vacation to Vegas—at what will essentially be your and my expense. Yes, waste.
Our bankers seem to be so intoxicated on speculation and what we used to call in the game of Hearts, “shooting the moon”, their judgment is not to be trusted without close supervision while they detoxify. (The process may have begun at Wells Fargo, which just cancelled the Vegas trip in the light of public scrutiny.)
They need, as they sober up from their long speculative binge, to get back to the fourth issue I mentioned yesterday. They have to start acting like bankers, sober bankers, and get back to something called “due diligence”.
Due diligence is a legal term that simply means “using your head” or “looking at all the available facts”. It is often defined in court as meaning that you should have done what any sane man would have done in the same circumstance. (Applying what they call in Torts Law the “reasonable man” standard.)
For a bank this means that before you hand someone three or four hundred thousand dollars of your (and your depositors’ and shareholders’) money, you check the borrower out. You ask reasonable questions like, does he have a job? Does his wife work? How long have they had these jobs?
What did they do before? How much do they make? Do they work someplace that is likely to be around awhile? Do they have prison records? Have they defrauded anyone else, gone bankrupt recently or been foreclosed on before? How much debt do they have? Etc. etc. You get the picture.
Much of this is part of the public record. It may involve a couple of phone calls double checking what appears on the application form. Last year’s tax return, and so forth. In other words it will take a bit of time, a few man hours. But, hey guys, you’re talking about putting a few hundred thousand dollars at risk. (With a bit of it being MY money, if I bank with you.)
This is precisely what banks stopped doing. When your sole interest is puffing up the books with what look like valuable “assets”—and then bundling them so you can sell them for even more profit as quickly as you underwrote them, little things like checking facts go by the board.
What’s worse, not only don’t you check the facts like a sane man, you start fudging the facts. If the application shows an income that can’t repay three hundred thousand in debt, you alter the income statement. You drop a few inconvenient items off the app. like a notice that the borrower is presently unemployed or has defaulted on five credit cards and so on—to make him appear like a decent risk.
Remember, this was all done with unsuspecting depositors’ money—and now we’re paying for it with that same depositors’ tax dollars. That’s what allowing banks to bundle, dropping the requirement that banks not speculate mindlessly has gotten us.
Before we bail them out, let’s take away the bottle. Make them sober up. Enforce it. Have the regulators in place (think of federal regulators’ visits as Congress ordered AA visits) before giving them one dime of tax money as a bailout. Or, as Wells Fargo showed us, they’ll sneak out to the Speculators’ Bar anyway they can.
A final thought on housing for the poor, the low income people who live in areas that used to be red lined. Admit that creating housing for them—that they can hope to afford to stay in—really is a work of governmental charity and act on it accordingly.
Expand Habit for Humanity housing; put government money behind it. Not banks. Let us see it as a line item in the Federal budget—not something hidden in a bundle sold by Citicorp. If we don’t want to house them, then let’s be honest enough to admit it.
To those who protest, “but we’re just giving housing to them” if we take it out of private hands, I answer, “We give food stamps and assistance payments without any return. Maybe we have to take the same view of housing. “I remind fellow Christians that Christ himself said, “The poor you will always have with you.” Nowhere does he make a distinction about the “deserving poor”.
Judeo-Christian tradition has long held that it is sinful to lend to a poor man at interest—no matter what fecklessness or moral failing may have caused his poverty. Let’s get banks out of it.
Whatever we do, let’s take banks off the sauce and put curfews (regulations, if you will) on them before handing them another trillion dollar support payment! I hope you’d do the same for your own child.