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Banks, Homeowners and the Battle Over ‘Too Big to Fail’

It’s a big day for banks: The Obama administration is expected to unveil new “too big to fail” proposals for dealing with troubled financial giants, Reuters reports. The proposals would “give the government the power to dismantle large financial companies that get into crises.”

The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may take out some language that would allow for temporary bailouts.

Robert Reich argues that a stronger approach regarding too big to fail is long past due. It should have been a reality earlier, but was blocked by the fact that Congress and the White House have strong financial and other ties to Wall Street, he contends. Anything short of truly breaking up big banks won’t be enough, Reich writes.

Congress won’t go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street’s lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That’s why the idea isn’t even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it’s using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up — and soon.

Meanwhile, there has been little talk about the optics created by the massive government response to the problems in the banking system, while many homeowners find themselves on their own. Sen. Dick Durbin (D-Ill.) chastised banks this weekend for causing neighborhood blight by failing to take care of their foreclosed houses, Bloomberg reports. Durbin spoke in Chicago at a “Showdown in Chicago” protest sponsored by labor and community groups, and timed to coincide with the American Bankers Association annual conference in that city.

“As long as those plywood boarded-up houses are sitting there, we are not going to have an economic recovery,” he said. “These banks have to realize they can’t sit on these neighborhoods, sit on these families and sit on economic opportunity across America.”

But as usual in this crisis, the focus on regulation and speeches has missed what’s actually happening on the ground. And that’s the really scary part, according to the Miami Herald (via Patrick.net). Homeowners in South Florida, the Herald reports, are walking away from their mortgages in droves. The walk-away phenomenon — once more a theory than a reality — is a now a measurable occurrence.

As property values have plummeted by an average of 50 percent, such strategic defaults now make up a sizable chunk of South Florida’s foreclosures. In the fourth quarter of last year, they accounted for an estimated 28 percent of all defaults in Miami-Dade and Broward counties, according to recent research from the credit bureau Experian and Oliver Wyman, a New York-based international consulting firm.

That’s up from 8 percent in the same quarter two years ago. With property values down even further now, researchers are certain the numbers have risen even more.

With the social stigma of foreclosure eroding, experts say it is becoming easier for discouraged borrowers to justify throwing in the towel.

“People are saying, ` Everyone is doing this, and I do not feel any compunction in fashioning my own bailout,’ ” said Roy Oppenheim, a Weston real-estate and foreclosure defense attorney who conducts weekly seminars that discuss strategic defaults and other financial options for distressed borrowers.

Looks like homeowners are deciding they’re too big to fail as well. That can happen when bank executives and employees take home big bonuses after being bailed out by the government — it looks like they’re getting away with something, and any homeowner underwater on a mortgage can see that. Unless the government genuinely cracks down on big banks, it’s not unreasonable to expect that more homeowners will likely rationalize their decisions to strategically default. As things stand now, major financial institutions can make risky decisions knowing full well that, in the end, the government will be a backstop. What message does that send to a troubled borrower struggling to keep making payments on their mortgage?

This post has been updated.


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