Washington is refusing to make the banks eat the debt bubble they created.
By Mike Prokosch
JP Morgan Chase launched the 2010 Wall Street Bonus Sweepstakes last month. The bank is still losing money on consumer services, but well-heeled investors and financial traders more than made up the difference. The bank announced $11.7 billion in profits and $26.9 billion in compensation, including bonuses that will run in the multimillions for top executives.
Then Goldman Sachs reported record profits of $13.4 billion. It’s set to dole out a staggering $16.2 billion in compensation and bonuses, which could provide an average of nearly $500,000 per employee. And Morgan Stanley, even having sustained a loss last year, has set aside $14.4 billion for compensation and bonuses.
Then there’s Roberto Velasquez, a sobering reminder that the foreclosure crisis is still raging.
Velasquez, a general contractor, bought a single-family home in Dedham, Massachusetts six years ago and took out a mortgage that turned out to be a predatory time-bomb. After a few affordable years, his adjustable interest rate ballooned and his payments hit $4,800 a month. He kept up, though, until the Wall Street crash knocked the stuffing out of the construction industry. Then he fell three months behind.
Velasquez found jobs and came up with the three months’ payments, but the bank wouldn’t work with him. His home was foreclosed on in November. A local bank offered to the home and sell it back to him for its present market value—the most his bank would get for the house if they sold it at auction. Still no deal. “We did what they asked,” Velasquez says, “but they don’t want to work with anybody.”
That kind of arrogance will sink more than Velasquez, his wife, and their two kids. Foreclosures feed on themselves, depressing neighborhood property values and putting ever more people underwater. There were 3.4 million foreclosures in 2009. Experts tell us to expect more this year. Unless the foreclosures stop, the housing market will keep spiraling downward. It will take the building and mortgage industries with it, stalling economic recovery.
All of us will be hurting for years because Washington is refusing to make the banks eat the debt bubble they created. Instead, the bailed-out banks are walking away with record profits and fat bonuses.
There’s a way to avoid another decade of downturn. United for a Fair Economy’s new report, State of the Dream 2010: Drained, outlines key proposals that can stem the massive loss of personal wealth and homes. States and the federal government should put an immediate hold on foreclosures when unemployment causes homeowners to default. Bankruptcy judges must be given the power to cut down mortgages to levels homeowners can afford, as they already can for other types of loans. These reforms would stabilize families and communities, especially communities of color that are seeing hard-earned wealth stripped from them at alarming rates. The government would also push the banks to accept realistic write-downs on the inflated property values their books still reflect, squeeze debt out of the economy, and hasten a recovery. And they might even keep the banks from doing this to us again.
President Obama just proposed a “Financial Crisis Responsibility Fee” to be imposed on the Wall Street firms that caused the crash and soaked up most of the relief funds. While this is a good start, the fee is temporary. When it ends, the banks can return to their irresponsible ways. A permanent financial transactions tax would discourage speculative trading in home mortgages and the derivative pyramids that were piled on top of them. Serious financial re-regulation, like that outlined in the State of the Dream report, is also essential.
In the end, recovery isn’t enough. Banks whose irresponsible behavior led to the meltdown must accept part of the responsibility, or they’ll do it again. At the same time, we must aid the hardest-hit communities, where joblessness and foreclosures are still wreaking havoc. That’s the only route to a fair recovery and a healthy economy.