Dean Baker: Taxes to Bail Out Robert Rubin

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Taxes to Bail Out Robert Rubin
By Dean Baker
t r u t h o u t | Perspective

Monday 25 February 2008

No one wants to pay higher taxes, but when the big banks are in trouble, who could be so heartless not to open their pocketbooks? That seems to be the consensus in the media in their discussion of the latest set of plans to bail out the Wall Street clowns who are losing hundreds of billions of dollars in the housing market meltdown.

Just to remind everyone, we are in the middle of a meltdown of an $8 trillion housing bubble. In the most recent data, house prices were declining at a 16 percent annual rate. This rate of price decline implies a loss of $3.2 trillion (more than $40,000 per homeowner) over the course of a year. This collapse is throwing the economy into a recession and leading millions of people to lose their homes.

As part of this story, most of the major banks have taken huge hits as a result of the fact that the financial wizards who guide them apparently didn't know what they were doing. Most of these banks have seen their stock prices tumble by 50 percent, or more, as they have taken write-downs of bad debt that now exceed $100 billion. Citigroup, the gargantuan bank that has former Treasury Secretary Robert Rubin near the helm, currently tops the charts with more than $20 billion in write-downs. Everyone agrees there is much more on the way.

Clearly these are desperate times, but fortunately the government is there to lend a helping hand. The Office of Thrift Supervision (OTS), the agency that supervises the country's savings and loan institutions (that's right, as in the huge bailout of the 80s), has come up with a brilliant plan to help the banks. They want to hand them tens of billions of dollars by having the government buy up bad mortgage debt.

Here's the deal: The foreclosure rate is at a record high and rising rapidly. The collapse of the housing bubble has left millions of homeowners with mortgages that are underwater, with the value of the mortgage exceeding the value of their house. This makes it more difficult for them to hang onto their homes if they want to, since homeowners have no equity against which they can borrow to pay their mortgages in bad times. This situation is aggravated by predatory mortgages that were peddled en masse in the bubble years.

Other homeowners may no longer want to keep their homes because they owe more than the value of their house. It doesn't necessarily make sense to pay off a $240,000 mortgage on a house that is worth $200,000. For this reason, millions of homeowners are simply allowing banks to foreclose on their homes, letting them eat large losses on their loans. ......(more)

The complete piece is at: http://www.truthout.org/docs_2006/022508B.shtml