How America's Middle Class, And Future Pensioners, Bailed Out A Generation Of Overzealous Homebuyers
In the current Bernanke-Obama-Keynes toxic triangle (defined previously here) economy, blink too long and you will miss the latest bailout.
While 4 years ago, it was America's M.A.D.-hostage taxpaying middle class that had no choice but to fund the trillions in direct Fed cash handouts and guarantees to bail out the banks, in the process saving and preserving the trillions in wealth for America's uber wealthy (the "1%") class, ever since then it has been the government's turn to rescue the country's lower and lower-middle classes (the "47%"), who, with no gun to their heads, decided to splurge during the height of the housing bubble (insurmountable mortgage payments and $0 down notwithstanding) and buy that aspirational McMansion that would make them so much more appealing in the eyes of the next door neighbor (who too could never afford their house in the first place). This has happened courtesy of a progressively more pervasive mortgage forgiveness plan, which has seen the total amount of debt funding a given home purchase shrink little by little each day.
However, since there is no free lunch anywhere, certainly not when a bank's balance sheet is being impaired, like in 2008, someone is once again on the hook for this latest bailout. That someone, not surprisingly, is again America's middle class that lived within its means, that saved money while others splurged, and even put cash away for retirement, handing it over to various Pension investment vehicles.
As the FT explains today, it is now assorted pension funds, or specifically the people whose money is invested in said funds, that will have to "absorb losses on their mortgage bonds holdings" as a result of the ongoing settlements, largely politically driven, to afford the lower classes a 20%, 30% or more forgiveness on the total mortgage. Which naturally will do nothing but keep said irresponsible person in the home for a few months, until they redefault again and again, because it was never a question of how much equity one has in a given home. Instead, it was always a question of disposable income to pay mortgages and other discretionary items: income which is now long gone.
Investors in US mortgage securities have been forced to absorb large writedowns in response to a deal between leading financial groups and government agencies over the “robosigning” scandal.
Mortgage bond investors and US lawmakers had feared such an outcome earlier this year, after reports that a deal was near to resolve accusations that banks mistreated homeowners and wrongfully certified legal documents used to evict defaulted borrowers.
The banks – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial – agreed to forgive billions of dollars worth of distressed borrowers’ mortgage principal in exchange for waivers from potential liability. On Wednesday, BofA said that 60 per cent of the $4.75bn in first-lien mortgage principal it has thus far agreed to forgive would come from non-government guaranteed loans that were packaged into bonds and sold to investors. Of JPMorgan’s $3bn in forgiven mortgage debt, slightly less than half has come from investors’ holdings, a person familiar with the matter said.
How generous of the banks: to give out handouts to servicing clients, scoring the administration numerous Brownie points (the same administration that bailed said banks out) with losses that will have to be footed not by the banks, but by pension funds. The result - less pensions for those who had saved up enough money to be able to afford such an investment:
Earlier this year, some US senators worried that pension funds would have to absorb losses on their mortgage bond holdings as a result of a settlement meant to punish banks and aid troubled borrowers.
Obama administration officials tried to quell those concerns, first arguing that bond investors would not be forced to shoulder writedowns, then claiming that the “vast majority” of writedowns would occur on bank-owned loans. “Many of us expected a settlement to hold servicers responsible for their misconduct; not a bank bailout settling with other people’s money,” the Association of Mortgage Investors said.
Turns out Obama lied, and probably not for the first time.
And before the indignant reactions surge that this is in some way an ethical condemnation of the poor (or the rich, although we are far less concerned with that accusation), it is not: people, regardless of social status, poor, middle-class, wealthy, will act according to their motivations first and foremost, which are primarily driven around greed, and the various other deadly sins. If given the option to upgrade one's standard of living, and told to not worry about much else, everyone would take advantage. Obviously, the hangover always comes, but that never stopped anyone from drinking the night before.
The problem arises when none other than the government, which is the worst, most corrupt, most conflicted arbiter and enforcer of human behavior, is put in the position of determining how to encourage mass social behavior for the future: this is central planning at its absolute worst.
What is certain, is that by encouraging bailouts, for banks, for billionaires, for deadbeats, for corporations, for anyone who should have engaged in prudent risk management but did not, by encouraging behavior that is beneficial to the individual but destructive to the whole due to the government's own policies, what the government does achieve is enmesh an ever increasing majority of the population - not only in the US, but the entire world - into a blanket of codependence. It doesn't matter if one has led a life of fiscal prudence, or reckless monetary abandon - in the end everyone becomes codependent on everyone else, and everyone is on the hook for the government's infinite goodwill, not to mention monetary injections (which only come from diluting the money in circulation, not from creating new wealth: the Fed's printer has never created one penny of wealth - it merely dilutes it). The only problem with this utopia is that as Maggie Thatcher explained so well many years ago, one day, "other people" run out of money. All money.
At that point the music ends.
Which is why eat, drink and be merry: the government is engaging in a serial bailout of everyone, reckless behavior be damned: there is only reward, no risk, or so the central planners in various government offices: from the Fed, to the Treasury, to Congress, to the Senate and certainly to the White House, believe.
One day this will inevitably end, most likely in a series of mushroom clouds. Hopefully by then it will be "some other generation" picking up the pieces for the current, unimaginably selfish one.