Loan Modification

Too Big To Fail Meets Too Small To Worry About

By Wendell Sherk, Missouri Attorney

One thing you can say about the latest financial meltdown, it has brought a new lingo to everyday usage.  The “too big to fail” concept has been around a long time in banking regulation but not many had heard the term until the last couple years.  The perversity of this is how much it is potentially harming homeowners — and threatening democracy.

For those who do not know, possibly due to a recent coma or retreat in a secluded mountain monastery, “too big to fail” refers to banks or other financial institutions which are so large, government agencies are too afraid of the fallout of their collapse to let it happen.   The belief is that their failure will cause such a ripple throughout the financial world that more harm will come than the cost of bailing them out in one way or another.  Lehman Brothers made them believers, if they had any doubt.

Today banks like Citibank, Bank of America, Chase, Wells Fargo all feature at the top of the list.  But so do other walking dead institutions like AIG.   So these institutions have either been given massive infusions of taxpayer money or taxpayers have taken on a lot more risk to keep them afloat.

At the other end of the spectrum are regular consumers.  You and me.  We are, practically speaking, too small to care about.  Our failure and bankruptcy will not cause massive ripples effects in the world economy, we’ll barely cause a ripple in our own neighborhoods.

Oddly enough though, a lot of “too big to fail” (TBTF) institutions are the servicers of, and often investors in, mortgages held by “too small to worry about” borrowers.  And these TBTFs are in charge of managing the programs to help bailout homeowners — with loan modifications — so our communities can be sustained.  In other words, we are asking institutions we are subsidizing massively to help reduce the profits and cashflow from loans they are making and servicing to us.

Shockingly, the TBTFs are not moving very rapidly to cut their own profits this way.  Why?  For a lot of reasons.  There are always reasons why a bank won’t do something you want it to do of course.  But then again…what will we do to them if they are just not willing to do anymore?  Let them fail?

Cutting “too big to fail” institutions down to manageable size — where they do not dictate policy to the citizens of a free country — is not just a matter of logic but, increasingly, of survival for the “little people.”

Related posts:

1. Stop Blaming Poor and Minority Homeowners for Credit Crisis
2. FED Prints Money to Ease World Credit Crunch

Full post as published by Mortgage Law Network on January 25, 2010 (boomark / email).