I truly fear the next financial collapse, which indeed will happen, because over the past three years, both Republican and Democratic administrations haven’t just killed moral hazard for the larger financial sector, they have dragged its corpse down Wall Street in an elaborate funeral procession for all to see. The latest example of comes from the Huffington Post:
The nation’s five largest mortgage firms have saved more than $20 billion since the housing crisis began in 2007 by taking shortcuts in processing troubled borrowers’ home loans, according to a confidential presentation prepared for state attorneys general by the nascent consumer bureau inside the Treasury Department.
The dollar figure also provides a basis for regulators’ internal discussions regarding how best to penalize Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial in a settlement of wide-ranging allegations of wrongful and occasionally illegal foreclosures. People involved in the talks say some regulators want to levy a $5 billion penalty on the five firms, while others seek as much as $30 billion, with most of the money going toward reducing troubled homeowners’ mortgage payments and lowering loan balances for underwater borrowers, those who owe more on their home than it’s worth.
Let’s assume just for the sake of argument that this $20 billion made by the banks cheating regular people was the correct amount and the only important number, which, as Yves Smith explains, is a largely made up number and unimportant compared to the huge potential liabilities.
Even if the banks get slapped with the “large” $30 billion penalty, that is only a net loss of 50% more than was saved by cutting corners. More likely, though, the settlement will cost the banks less than $30 billion. If I know the maximum punishment for robbing a bank was only being required to pay back what I stole plus at most another 50%, my life of crime would start tomorrow.
Add to this the fact that no major players have gone to jail as a result of this meltdown, all the biggest firms were bailed out by the government so they can return to record profitability, and none of the individual bonuses that resulted from the artificially inflated the bubble were ever clawed back. Everyone can see that moral hazard on Wall Street is totally dead. The behavior that will become common as a result of total freedom from any punishment or responsibility in the coming years should truly terrify anyone who isn’t a member of the financial overclass.