COLE: Obama’s next big bank bailout

Fine print says taxpayers are still on the hook

By Rebel A. Cole

The Washington Times

Thursday, August 26, 2010

Illustration: FHA piggybank by Linas Garsys for The Washington Times

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With the ink of President Obama’s signature on the Barney Frank-Chris Dodd financial reform bill barely dry, the next bank bailout already has begun. How can that be, you might ask? Weren’t we promised that this “landmark” legislation would end bank bailouts? Weren’t we promised that this legislation ushered in a new era of transparency on Wall Street? Could it be that the politicians lied to us? Say it ain’t so - but it is.

How can I make such a preposterous claim, you might ask? What evidence do I have to support my assertion? Well, I reply, look no further than the second-quarter earnings report of the Wall Street titan J.P. Morgan Chase. You will, however, have to dig deep into the report, into the financial supplement on Page 32, where the company reports information on the credit quality of its loan portfolio. At the bottom of the page in footnote (a), you will learn of more than $12 billion in non-accrual loans (read: the borrower ain’t gonna pay) made by the bank but that the bank does not consider to be “nonperforming.”

Why not, you might ask? There in footnote (a) is your answer and prima facie evidence of the next bank bailout. These bad loans are insured by U.S. government agencies. Which agencies, you ask? So do I, because the bank doesn’t identify them. But the most likely culprit is the Federal Housing Administration (FHA), which insures residential mortgages.

Of course, it is unfair to single out J.P. Morgan Chase. So take a look at the second-quarter earnings report of Bank of America. There, on Page 40 of its supplemental information, is a line item “Federal Housing Administration insured loans past due 90 days or more and still accruing,” showing a balance of more than $15 billion. Why are these loans not considered to be “nonperforming”? The answer is simple: Bank of America plans to collect from the FHA.

Likewise for Wells Fargo. On Page 33 of its supplemental information is a footnote saying that its “90-plus days past due and still accruing” line item “excludes GNMA [Ginnie Mae] and similar loans whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.” By comparing the reported amount with the amount from its Y9C form, which reports basic financial information to the Federal Reserve, I estimate the exposure at more than $30 billion.

If this brings to mind the backdoor bailout of Wall Street banks by AIG, it should. At just these three big banks, the taxpayers are on the hook for almost $60 billion in bailout money. This is yet another way to funnel our taxpayer dollars from Main Street into the banks on Wall Street. So the next time you hear Mr. Obama, Sen. Dodd or Rep. Frank tell us how they have “ended bank bailouts,” remember that old comment from Yogi Berra, “This is like deja vu all over again.” Only this time, the conduit is not AIG, it’s the FHA.

Rebel A. Cole is professor of real estate and finance at DePaul University.