Wouldn’t you think PR people would avoid the “Nobody anticipated…” formulation made famous by Condi Rice about terrorists and echoed by Bush about Katrina? Apparently not, as Floyd Norris reports in today’s New York Times (Banks Plead They Can’t Follow Rules) :
“No one anticipated a day when potentially hundreds of thousands of residential mortgage loans would be modified,” said Alison Utermohlen, an official of the Mortgage Bankers Association who has led the effort to get the accounting rules relaxed.
The banks, it seems, want to change long standing rules to make it appear that they have not lost as much money as they have.
Norris, hopefully tongue in cheek, sympathizes:
But the plea that the banks never saw it coming does ring true. In this cycle, those who lent the money thought that they had no reason to concern themselves with whether it would be paid back.
Instead, they planned to sell the loans, usually to trusts that would then finance the loans by issuing securities. Such trusts have different accounting rules.
In any case, the banks seem to have shared the general belief that house prices would always go up, so anyone unable to meet mortgage payments could sell the house. If losses are never going to appear, why prepare to deal with them?
Whose general belief is it that the banks shared? I’m not stupid enough to be a banker, so maybe that’s why I didn’t believe the bubble would always expand. But even a banker should be able to figure out the answer to this question: Why do you think they call it a bubble?
Let’s put aside the high end properties that rich foreigners may be buying. There are, generally speaking, two reasons that the price of houses in this country could just continue to go up indefinitely. The first involves an increase in the real value of real estate, and that requires that the real value of incomes go up. If incomes stagnate then home prices cannot continue to rise because people will stop buying them. The second way is through inflation, i.e., the real value of both homes and income stay flat or rise slightly, and the value of money goes down. The first possibility doesn’t reflect reality on the ground, the second isn’t happening and even if it were, the banks would still actually lose money because they would be repaid in less valuable dollars than they lent out, and even the relatively high interest rates they charge wouldn’t make up the difference. (I realize this is somewhat simplified, but it’s still basically true).
Certainly the bankers have learned their lesson at this point, correct? After all, the CEOs get paid big bucks to make smart decisions. At the very least you can’t fool them twice, can you?
Today, the Bank of America bought Countrywide for $4 billion dollars.