Who's Bailing Who?

In case you were wondering, yes, we're still in the midst of a major housing crisis. Home sales are down in Southern California by 43%, for example. And foreclosure rates may be starting to stabilize, but that still means that many are losing their homes, plus the rate resets scheduled for next year could transform that trend real quick.

A lot of economists, the Treasury Department, and George Bush himself are making a lot of noise about saving people's homes. But that's not even close to what this is about. This is about bailing out banks who made a lot of horrible decisions and don't want to pay for them.

That's not the first thing you'd think when you hear this quote from St. Greenspan:

GREENSPAN: Well, I think it's important to recognize that there are a very large number of people who are in very major stress and having great difficulty in paying off their mortgages and even when they've tried exceptionally hard.

But when you think of how you come to grips with this, it's important to help those people outside -- without affecting the mortgage rates and without affecting the structure of markets. Cash is available and we should use that in larger amounts, as is
necessary, to solve the problems of the stress of this...

STEPHANOPOULOS: Cash from the government?

GREENSPAN: Cash from the government, yes. In other words, if you're going to do that, it's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely.

This is not at all what it seems, however. Companies like Merrill Lynch and Morgan Stanley are taking billions of dollars in "write-downs," which basically means a total loss on a portion of their securities. Practically all of those bad securities are due to mortgages that have been defaulted on. The banking industry is in serious crisis and looking for a handout. And while they're getting it from the Federal Reserve, to the tune of $20 billion in short-term loans, and also in foreign investment (Morgan Stanley got a $5 billion dollar stake from China today), it's far more palatable to make it look like a bailout for John and Jane Doe than for Mr. $100 million dollar bonus CEO. When it would have meant something to take action, before the thousands upon thousands of foreclosures, the Fed and the Bush Administration stood mute.

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

Of course he wasn't interested. It didn't affect him or his fellow shareholders. But as soon as it did, suddenly the financial aid packages just HAD to kick in. For the good of the people, you see.

I suspect there will be a bailout of "Big Shitpile," laundered through the false "good intentions" of cash payments to homeowners. What that bailout won't go is give any incentive to the banks or the lenders to be careful ever again. Because they can always count on that yummy corporate welfare to bail them out.