Published: Saturday 22 October 2011
Participants in the Occupy Wall Street movement are right to argue that the big banks have never properly been investigated for the mortgage origination, aggregation, and securitization behavior that was central to the financial crisis – and to the loss of more than eight million jobs.
Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents.
But leading banks are also accused of illegal behavior – inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities to investors.
About 10 million mortgages are estimated to be “underwater” (the house is worth less than the loan). And, in key markets around the US, four years into the housing slump, home prices continue to fall.
As a result, households want to spend less and pay down their debts. To some extent, this is the natural aftermath of any credit boom. And household deleveraging in the US will take a long time.
If the banks were ever really held accountable for the social costs of their behavior, the bill would far exceed $300-400 billion. Realistically assessed, the full downside legal risks to financial institutions are in excess of $1 trillion – particularly if it can be demonstrated that the “mortgage-backed securities” sold to investors were not backed by mortgages at all, because the proper legal paperwork was never done.
Any settlement should also include the banks’ explicit agreement that they will support modifying America’s bankruptcy law to enable inclusion of mortgages in the usual court-run processes. If the Occupy Wall Street movement tells us anything, it is that the last thing the US economy needs is more households overwhelmed by debt.
As a result, households want to spend less and pay down their debts. To some extent, this is the natural aftermath of any credit boom. And household deleveraging in the US will take a long time.
If the banks were ever really held accountable for the social costs of their behavior, the bill would far exceed $300-400 billion. Realistically assessed, the full downside legal risks to financial institutions are in excess of $1 trillion – particularly if it can be demonstrated that the “mortgage-backed securities” sold to investors were not backed by mortgages at all, because the proper legal paperwork was never done.
Any settlement should also include the banks’ explicit agreement that they will support modifying America’s bankruptcy law to enable inclusion of mortgages in the usual court-run processes. If the Occupy Wall Street movement tells us anything, it is that the last thing the US economy needs is more households overwhelmed by debt.
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