Congress Pushing Covert Bailout to Save Big Finance and Screw Homeowners

By Zach Carter, AlterNet. Posted April 9, 2009.

"They asked me to suspend the moratorium, and I said, 'Look, I will not suspend the moratorium if I do not have a good solution to the debt crisis. If we just suspend the moratorium and are not able to pay the debts, this makes no sense at all.' " 

Banks did not begin to seriously negotiate with developing nations on the full scope of their debt burden until they had actually started accounting for big losses on those loans.

In 1987, when the U.S. banks were first starting to see some red ink from their loans to foreign governments, Bresser-Pereira pitched a plan to the Treasury Department that would reduce Brazil's total debt burden. As banks wrote down the value of their loans, they became more willing to reduce that debt burden. 

"It would have been much better for them to have agreed earlier, for sure," Bresser-Pereiera says. "In 1987, they already knew that some of the money was lost, and they had already written it off in their balance sheets. So what they wanted was to continue to make business."

It is important to note that serious negotiations only began in 1987 -- Brazil would not actually reach formal agreements with its U.S. creditors until the early 1990s. 

"This also relates to the accounting practices that are involved in the current crisis," Darity says. "The foreign loans could be kept on the books as performing for far longer than domestic loans when the borrowers went into arrears. There are some similar kinds of accounting high jinks ... in the current crisis." 

The order here is crucial. Banks do not worry about borrowers' problems until their balance sheets make it financially acceptable to do so. By making it even easier for banks to hide losses on their balance sheets, regulators are approaching the issue precisely in reverse.

They should be forcing banks to take losses from bad lending, so that they have strong economic reasons to cut their losses and help borrowers stay in their homes. If banks do not have the funds to withstand the losses, the government should take them over and take care of their borrowers.

Instead, the government is protecting the banks, which are in trouble for engaging in predatory subprime lending, while the borrowers targeted by those lending schemes receive no relief.  

The Latin American debt crisis experience makes it pretty easy to predict the effects of today's accounting trickery: banks will do everything in their power to keep borrowers under their current loan contracts so they don't have to take massive losses on their balance sheets. This will involve short-sighted solutions that hurt homeowners and the broader economy.

We are already seeing some of this behavior from banks. According to Valparaiso University Law Professor Alan White, most borrowers who renegotiated the terms of their loan with their bank in the fall of 2008 actually ended up owing the bank more than they had previously. 

Unlike the Latin American debt crisis, however, banks will not be shipping the economic calamity overseas this time -- they'll be detonating it in neighborhoods around the United States. But, as with the crisis of the 1980s, the culpable loan pushers will be saved, while the troubled borrower will be screwed.

See more stories tagged with: economic crisis, mark-to-market

Zach Carter writes a weekly blog on the economy for the Media Consortium. His work has appeared in the American Prospect, the Atlanta Journal-Constitution and on CNBC.

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