Who will pay higher interest rates for this rewriting of contracts? Good borrowers who are not at risk of going into default.
At first glance, Citigroup's endorsement last week of a Senate plan to allow bankruptcy judges to break mortgage contracts looks like a scene from "Goodfellas."
Since October, the government has invested $52 billion in Citi, while agreeing to eat up to $249 billion in losses on the bank's toxic real estate portfolio. And so it's really hard to say no when those Washington "investors" call for a favor. In the 1990 Martin Scorsese movie, a restaurant owner realizes too late that a partner big enough to protect him is big enough to take everything he has. As Ray Liotta narrates, "Now he's got Paulie as a partner. Any problems, he goes to Paulie. Trouble with a bill, to Paulie . . . But now he has to pay Paulie."
The problem with Citi's capitulation is that it means that not just Citi will have to pay the Beltway outfit if the bill passes. Other banks, borrowers and taxpayers will also suffer. In fact, this deal is looking more and more like a case of Citi colluding with its new political owners in order to force competing banks to break contracts and take more losses. This kind of politicized banking is precisely why the Bank of the United States was shut down in the 19th century.
After years of resisting, Citi has suddenly signed off on Senator Dick Durbin's plan to allow judges to rewrite mortgage contracts for borrowers in Chapter 13 bankruptcy. Under the Illinois Democrat's plan, which is earmarked for inclusion in the pending stimulus bill, judges could reduce the amount of principal, lower the interest rate, and change the length of the mortgage term.
Until Washington embraced the politics of housing panic, even sensible Democrats recognized that allowing such mortgage "cramdowns" was a terrible idea, sure to punish future borrowers with higher rates as lenders calculate the increased risk. The Congressional Budget Office warned in January 2008 that such a change could result in higher interest rates for homeowners and bigger caseloads in bankruptcy courts. In 2007, 16 House Democrats signed a letter opposing similar legislation. . . .
This is exactly why corporate profit rates go down when governments buy a share of companies: The US banking industry
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abudzar
