We Are So Very, Very Screwed

So, I just had a depressing conversation with a colleague who basically said we're all going to hell in a hand basket.

While I disagree with some of his points, it does coincide with what we're hearing about Bank of America.

Short version: the largest bank in America is insolvent and so we're all screwed.

There are some encouraging signs of economic growth coming out.  Markets, including commodities futures, are up on reports that hiring is going well and future orders are starting to perk up.  Just as we might expect, two years after a significant financial panic, the economy is slowly chugging back to life.

Just in time for the second round of the financial panic.  If what I'm reading is true (and it sure seems to be), BofA - when it bought Countrywide Mortgages - bought the obligation to pay off the Mortgage Backed Securities at face value if certain conditions weren't met.

And Countrywide looks to not have met those obligations.

I'm grossly simplifying here, because I can barely wrap my head around the arcane jargon of Wall Street.  But basically, BofA could now be on the hook for Countrywide's fraudulent mortgage practices.

The cost would be beyond the ability of BofA to pay, and frankly at this point beyond the ability (or the interest) of the government to pay.  I have no idea where we go from here.

But twelve years ago, I told my students that the repeal of Glass-Steagell was a terrible, terrible idea, and I think it's pretty obvious I was right.  And again, I can't understand why we didn't get a new Glass-Steagell in the recent financial reform.  But even so, it would largely be irrelevant to the current crisis at BofA.

I suppose the immediate future holds a few options, none of them good.

First, it is difficult to see a bailout of BofA.  Whomever put that together would be toast.  The GOP may be the big money party, but I can't see them risking the wrath of the Tea Party to bailout BofA.  The Democrats also carry a ton of water for Wall Street, but I can't see them taking this on either after the drubbing they got when people (wrongly) ascribed TARP to Obama and led in part to the midterm debacle.  Obama seems to like to do the right thing at great political cost, but without Congress, he can't do anything.

Second, it's difficult to see the House doing anything constructive, especially when it comes to reform.  Most of these financial crimes by Countrywide occurred under the Bush Administration and go back as far as 2004.  They won't be interested in finding out why.  We will get political theater, because that's what the GOP is good for.  The financial reform package passed by the Democrats was a pea shooter when it should have been a shotgun.  But it was still a pea shooter.

Third, Wall Street might find a way clear of this on their own.  I think some of the foreclosure shenanigans recently uncovered were efforts by BofA to clear mortgages that were backing fraudulently created MBS.  In other words, by forcing dubious foreclosures, they were trying to get rid of all this toxic crap that Countrywide left them with.  Just a hunch.

Fourth, it's tough to see a way that this ends without BofA in bankruptcy.  What, exactly, would that mean?  I have no idea.  It would be nice to have a GM style happy ending, but I honestly have no idea how you navigate the byzantine fraud and financial obligations at the heart of the BofA story.  With GM, you just had to liquidate liabilities, which would allow them to make cars again.

It seems the least bad option is some sort of soft bankruptcy for BofA that destroys their shareholders and financial "services" but retains their depositors' money.  Something that would allow BofA to continue to run their branch offices and issue credit cards (retail banking), but gives a significant loss to the other side of their operations.

But everyone's counting on the fragile recovery that we've been seeing to take off soon.  Everyone except the GOP who seem to be hoping for economic calamity in order to regain power.  What would be the effect of the collapse of BofA on that recovery?

I shudder to think.  Maybe we've already hit rock bottom, but probably not.  It wasn't until 1931 that the second wave of the financial crisis hit and bank failures began in earnest.  Is that where we are?

Either way, once again, I'm left reaching for my pitchfork and torch.  Honestly, the toll that the banksters have taken on America is literally impossible to calculate.  We're getting killed and the GOP is holding the entire government hostage to insure that Wall Street millionaires get a tax cut.

I don't think this is the end of the world as we know it.  But they don't call them "depressions" because they are full of levity and fun.