America's big banks, among others, that helped send us spiraling into the Great Recession are at it again. They're warning of even more dire consequences if we don't follow their advice and raise the U.S. debt limit.
In an April 25 letter to Treasury Secretary Timothy Geithner, Matthew E. Zames, a managing director at JPMorgan Chase, conjured up a financial apocalypse certain to follow if the government can't borrow more billions. A week ago, 300 corporate leaders issued similar warnings.
Businesses frightened by the prospect of a U.S. default have been intensely lobbying their closest friends: conservative Republicans who are resisting a higher debt ceiling. The U.S. Chamber of Commerce, the National Association of Manufacturers and the Financial Services Forum are among those warning that the failure to raise the debt ceiling would boost interest rates, collapse the stock market, destroy banks and hurl us into a worse recession.
It takes brass for some of those responsible for our troubles, but who benefited to the tune of more than $1 trillion in bailouts, to prophesy certain doom. It is especially hard to swallow their warnings when they are doing so much to prolong the financial crisis by sitting on mountains of cash.
The Associated Press has reported that American companies have horded a record $1.9 trillion in cash. Howard Silverblatt, senior index analyst at Standard & Poor's said the large businesses that constitute the firm's index of 500 big businesses are holding $940 billion in cash. For as much as government can be criticized for wanting to spend every last cent and more, corporate America needs to be accountable for the stash it is withholding from Americans dearly wanting to invest, buy homes and do all the other things that make jobs.
Take the banks that are doing quite well, thank you, that have reduced, frozen or canceled homeowners' lines of credit without home appraisals. Their computers apparently decided to do it, based on who knows what. JPMorgan, according to a suit to be heard in federal court in Chicago, froze credit lines shortly after accepting a $25 billion government bailout (which the bank has since repaid). Similar actions have been filed against other big banks.
Banks do what they do to protect their bottom lines, not necessarily to shaft consumers and gag the economy. But the results can be the same.
Here's a real case known to me:
The death of a widower left his son with about a $500,000 mortgage that was "under water" (i.e. the loan was greater than the value of the home). The son put the home on the market for $329,000 and after some months received an offer to buy of $285,000. That would mean that the bank would take a loss, but at least the bad loan would be off its books, the buyer and the seller would be happy and the transaction would help the economy get a move on. Everyone waited and waited for the bank's approval and finally, four months later, the bank said no dice. The deal was off. More months passed as the house sat empty with no offers. Several months later one finally arrived, but it was for $240,000. Again, the bank fiddled and fiddled until, five months later, it rejected the offer. Now, verbal offers of about $150,000 are showing up.
The son had done the best that he could to sell the home, but finally he had enough and notified the bank that the empty house was now its problem. Meanwhile, a slow, unnoticed drip, drip, drip leak in a second floor utility room collapsed the ceiling and ruined the floor below. The front door became so soaked that it couldn't be fully closed and locked.
The house, unattended by an uninterested bank, was rotting away, and dragging down with it property values in this upper-middle-class neighborhood. I've tried, but have never received a sensible explanation for why a bank, through willful neglect, is willing to devalue its own assets to the point of worthlessness when it could have recovered at least some of its investment. Some people guess that it has something to do with accounting procedures that protect the quarterly bottom line.
For sure, this is but one anecdotal case, but my wife, Barbara, a real estate agent, reports that stories like this are ever more common. The warning signs abound: America's housing stock is in danger of moldering. It would be nice if the banks would worry about that too.
This column also appeared in the Chicago Tribune.