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Euthanize the TBTF Banks: Heck, we'd be doing them a favor

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Headlined to H4 11/6/12

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Are bankers the shittiest businessmen in the world?

It sure looks that way.

Imagine if Uncle Sam provided you with a product that you could sell to everyone who walked through your door at no cost to yourself. Do you think you'd be able to make money on a deal like that?

Sure, you would. But you're never going to get that kind of deal because you're not a bigshot banker. Only bankers get their "product" (which is money) for free; everyone else has to pay their own way.

Currently, banks pay zero for the money they borrow from the Fed. Zero. Then they turn around and lend it to you and me for 12, 18 or 30% via credit cards, car loans, mortgages etc. In fact--as we pointed out in an earlier article--at least five banks are now dabbling in payday loans which --according to the Center for Responsible Lending --boosts the average annual interest rate up to eye-watering 365 percent.

Whoa! Now, that's some serious cabbage. You could probably live pretty high on the hog if you could ding your customers by that much, don't you think?

And the same rule applies to Bernanke's QE3. It's just another way of taking John Q. Public to the cleaners. The stated intention of QEternity was to lower mortgage rates by buying $40 billion in mortgage backed securities (MBS) every month. That was supposed to push down mortgage rates which, in turn, would lure more homebuyers into the market. Simple, right? Only it hasn't worked out that way, in fact, as of last Friday, rates on the 30-year "fixed" were a pitiful 10 basis points below what they were when Bernanke first launched the program. In other words, the banks are skimming off all the gravy for themselves. What a surprise!

But back to our larger point, which is that bankers are shitty businessmen who can't navigate the free market without lavish handouts from government. These behemoth capital-sucking TBTF zombies are just black holes that the government tries to fill with public revenues.

Case in point: Mortgage origination. It's all pretty straightforward, right? Joe Blow wants a loan for a new 2-story English Tudor in Hoboken. So you check his credit scores, his income, his job status, and his ability to put 10 to 20% down on the appraised value of the house. If he can meet these criteria; you issue a 30-year "fixed" loan at the current rate of interest and wait for the money to start rolling in.

What could be easier? It's basically free money, right? In fact, the bank jots down the loan as an "asset" on its books which brightens the picture when quarterly reports roll around. So it's all good. All the bank has to do is make sure that Mr Blow has the ability to repay the debt.

So why does the government have to get involved? Why does Uncle Sugar have to guarantee the mortgages that the bank is producing? That's their job, isn't it? Let them take the risk.

But that's not how it works in our bank-friendly republic. Just get a load of this from Washington's Blog:

"Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backed nearly 97 percent of U.S. mortgages in 2009." ("97% of All U.S. Mortgages are Backed by the Government", Washington's blog)

It's true. The USG underwrites nearly all the mortgages created by private industry. Here's a blurb from last week's Businessweek:

"'The taxpayer is directly on the hook for nine out of every 10 loans getting made,' Michael Heid, president of Wells Fargo & Co.'s home-loan unit said at the Mortgage Bankers Association annual conference last week. That includes loans backed by the Federal Housing Administration, and other agencies." (Businessweek)

So what's going on here? Why is government providing a multi-billion dollar subsidy ("free insurance") to the cut-throat shysters who just blew up the financial system? Can you explain that to me?

To illustrate how crazy this is, I want to draw your attention to an article in the LA Times which which helps to shed a little light on the criminality of the businesses we're talking about. The title of the article is "U.S. sues BofA, calling loan fraud 'brazen'" with the subtitle that elaborates on the content:

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Mike is a freelance writer living in Washington state.
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The BofA loans you discussed were made in 2007 bef... by Tom Gleeson on Thursday, Nov 8, 2012 at 7:13:27 PM