Bloomberg News is getting lots of attention this morning with its headline shouting Wall Street Aristocracy Got $1.2 Trillion in Secret Loans.
Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.
By 2008, the housing marketâ€™s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.
Fed Chairman Ben S. Bernankeâ€™s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.
â€œThese are all whopping numbers,â€ said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. â€œYouâ€™re talking about the aristocracy of American finance going down the tubes without the federal money.â€
Doctor Housing Bubble today looks at a home in the Bel-Air section of LA, whose declining price he describes as “chasing the market into the bottom.”
Why is this poor house’s market value tanking so horrifically? Doctor HB notes that the same trillions of federal loans to “a very familiar list of lenders… WaMu, IndyMac, JP Morgan, Wells Fargo, and Bank of America” have allowed a shadow market of 56 homes in the unprocessed foreclosure pipeline to loom over the 23 homes actually offered for sale on the local MLS. Your tax dollars at work.
Last week the California unemployment rate shot back up to 12 percent. Couple this with the underperformance of revenue for the state and we have heavy headwinds ahead. It will be a herculean effort for home prices to remain inflated in bubble markets as the economy and incomes slump. Part of what has held up the housing market in many areas is the building up of shadow inventory to control supply and try to increase home prices. This has been a dramatic failure and has cost the U.S. taxpayer trillions of dollars simply to keep the too big to fail banks afloat with financial swindles. There is no reason for this policy to continue unless we want to have another lost decade for our economy (this seems to be the path we are embarking on). Even prime locations are having a tougher time in this market. Today we will take a look at a home in the Bel-Air neighborhood of Los Angeles that is chasing the market into the bottom. …
Of the 23 homes listed on the MLS for Bel-Air 3 are short sales and one home is listed as a foreclosure. Yet this does not tell us the entire story and this is the continuing saga of problems that we will be facing for years to come.
56 homes are in the shadow inventory for Bel-Air yet only 1 foreclosure has made it to the MLS! What is even more disturbing is that many of these homes in the shadow inventory were purchased right at the peak.
Ah yes, a very familiar list of lenders we see here. WaMu, IndyMac, JP Morgan, Wells Fargo, and Bank of America. Look at when the loan was recorded. Many of these shadow inventory properties were purchased during the mania in 2006 and 2007. This is only a sample of the 56 homes in the foreclosure pipeline. The shadow inventory is a big issue although the media wants to make it seem that it is only occurring in poor neighborhoods. Of course they donâ€™t want to focus on neighborhoods where many of their executives live.
Why is the recession continuing? A large part of the answer is that failed mortgage loans have not been liquidated and resolved, the real estate market has been artificially kept in an unconstructive state of stasis by federal assistance. The large lenders received massive federal loan subsidies, allowing both them and their unfortunate insolvent borrowers to continue to reside in a financially comatose condition essentially on federal life support.
But the housing market and the economy cannot recover until the loans destined to die are really dead, the houses destined to be foreclosed are really foreclosed and resold, until the bad inventory is all sold at distress prices and the whole mess cleared off the national books.
In essence, the dÃ©gringolade produced by federal interventions in the home mortgage industry was so painful that government, Wall Street, and many home mortgage borrowers have all preferred to drag out the agony rather than take their medicine. That preference on every part is natural and understandable, but it is a major economic policy mistake, and the whole country is paying for it in both the literal and the figurative sense.
Hat tip to Glenn Reynolds for the Doctor HB story.