Bailouts: Joe Doesn't Get Jack

In bailing out the banks for bad investment decisions - some would call them 'criminal' decisions- the Bush administration is sending two messages.

First the good news. The banks get bailed out, the employees - for the most part - keep their jobs, the executives, investors and shareholders breathe a collective sigh of relief. With luck the spreading cracks of the financial crisis are arrested and won't involve other aspects of the markets. The world goes on. Or not; we'll see.

Now the bad news. The average Joe in foreclosure sees none of the benefit to the cash injection as he continues to lose his home. Why is that bad? Apart from the obvious reasons, there's this. This bailout eventually trickles down to the taxpayer because somebody's got to pick up the tab for the losses. So Joe gets to lose his home to a bank that gets to keep it and get paid for it. Something's wrong here. There's a cork being put on the top of the market but the drain on the bottom is left open.

The reason sub-prime loans became problematic has, for the most part, been ignored by the media, the government and bankers. The problem is plummeting property values that are tied directly to the draconian interest rates that sub-prime borrowers are forced to pay.

Bankers charged sub-prime borrowers twice, sometimes three times, the interest rate that a good credit customer pays. Some interest rates were running at 12%+. That doubles the monthly repayment amount when comparing an 'A' credit loan to a sub-prime loan. Good credit pays $800, bad $1,600. Wow.

Why do the sub-primers pay more? Banks will tell you that there is additional risk involved in these loans. There isn't. The lending process is exactly the same for all borrowers. One is just more profitable than the other. Did you know that 60% of Americas have less than perfect credit? 60% - the majority of consumers.

The borrower is required to repay the loan monthly just like an "A" credit client. If they don't, they're charged a late fee, just like an "A" rated client. If they don't pay, they go into foreclosure. To reinstate the mortgage they pay fees, attorney fees and back payments. Just like an "A" credit customer. If not the bank takes over and sells the property. Same process, different revenues, more profit.

A disturbing fact revealed today is that borrowers who can't afford to pay or go into foreclosure are being forced to sign agreements with their lending banks to continue paying until the banks are made whole. This despite the fact that the banks are getting bailed out. What's good for the goose is obviously not good for the gander.

A way to stall the problem for both lender and borrower is to readjust all loans to "A" credit rates. This takes the pressure off the borrower, it allows them to make reasonable payments and the bank keeps a performing loan on their books. However the banks never explored this option; they'd prefer to wait and see if the government would bail them out. Or go bust, as Lehman found out. If we keep bailing nothing changes - special interests and their Washington lobbyists prevail. It's time to let a consumer bank go under also. Otherwise we're being taken for suckers.

The bailout solution has to be made with the homeowners and borrowers in mind. A moratorium on any consumer foreclosures for six months would be wise, to allow defaulted borrowers the opportunity to renegotiate with their banks to a rate they can afford. Let the banks work for their money and help their customers. Banks make a great deal of their money from bad credit customers. If the banks deserve a break so do the borrowers. They're ultimately paying for it no matter which way the cat jumps.

It is also worth noting that here we have a Bush White House bailing out banks again, just as Bush Senior did with the Savings and Loans during his term. An odd coincidence? Or are we seeing that the tail truly does wag the dog?

Oh, and on a parting note, the reason the market is 'rallying' (even though it still languishes when compared to where it was) is that money has nowhere else to go. This also means that if this White House gamble doesn't pay off and the market collapses...well you know what it means. Pity poor Joe.