Regular readers know that this is the direct result of policymakers and financial regulators having chosen in 2008 the Japanese model for handling a bank solvency led financial crisis. Under the Japanese model, protecting the banks is more important than allowing financial markets to operate freely and enforcing the existing rules of law.
Banks will continue to win until such time as the Swedish model for handling a bank solvency led financial crisis is adopted. It is only under the Swedish model that banks are required both to recognize the losses hidden on and off their balance sheets and to provide ultra transparency to prove the losses were recognized. It is only under the Swedish model that financial markets operate freely and banks and bankers are subject to the rule of law.
Last week was a big one for the banks. On Monday, the foreclosure settlement between the big banks and federal and state officials was filed in federal court, and it is now awaiting a judge’s all-but-certain approval. On Tuesday, the Federal Reserve announced the much-anticipated results of the latest round of bank stress tests.
How did the banks do on both? Pretty well, thank you — and better than homeowners and American taxpayers.
That is not only unfair, given banks’ huge culpability in the mortgage bubble and financial meltdown. It also means that homeowners and the economy still need more relief, and that the banks, without more meaningful punishment, will not be deterred from the next round of misbehavior.The bottom line is that the ongoing implementation of the Japanese model makes the situation worse and the financial system less stable.
Under the terms of the settlement, the banks will provide $26 billion worth of relief to borrowers and aid to states for antiforeclosure efforts.The bulk of this $26 billion will not come from the banks themselves, but rather from a third party: the investors in private label mortgage backed securities.
In exchange, they will get immunity from government civil lawsuits for a litany of alleged abuses, including wrongful denial of loan modifications and wrongful foreclosures....I didn't realize that robo-signing was an alleged abuse. I thought that the individuals who worked for the bank servicing areas testified that they signed thousands of documents that led to wrongful foreclosures.
The settlement could also end up doing more to clean up the banks’ books than to help homeowners. Banks will be required to provide at least $17 billion worth of principal-reduction loan modifications and other relief, like forbearance for unemployed homeowners. Compelling the banks to do principal write-downs is an undeniable accomplishment of the settlement....Having the banks spend the investors money is not an accomplishment.
Rather than subsidizing the banks’ costs to write down hopelessly delinquent loans, regulators should be demanding that banks write them off and take the loss — and bring some much needed transparency to the question of whether the banks properly value their assets....Please re-read the highlight text as it is a call for adoption of the Swedish model.
The settlement’s go-easy-on-the-banks approach might be understandable if the banks were still hunkered down. But most of the banks — which still benefit from crisis-era support in the form of federally backed debt and near zero interest rates — passed the recent stress tests, paving the way for Fed approval to increase dividends and share buybacks, if not immediately, then as soon as possible.So what is the policymakers' and financial regulators' excuse for not adopting the Swedish model?
When it comes to helping homeowners, banks are treated as if they still need to be protected from drains on their capital. But when it comes to rewarding executives and other bank shareholders, paying out capital is the name of the game.
And at a time of economic weakness, using bank capital for investor payouts leaves the banks more exposed to shocks. So homeowners are still bearing the brunt of the mortgage debacle. Taxpayers are still supporting too-big-to-fail banks. And banks are still not being held accountable.Please re-read the highlighted text it nicely summarizes what is wrong with the on-going implementation of the Japanese model for handling a bank solvency led financial crisis.
Bottom line: rather than Wall Street rescue Main Street as it would under the Swedish model, we have Main Street rescuing Wall Street under the Japanese model.