Banking Regulation - The US Government’s Next Scapegoat

Banks are now in the government's crosshairs.

For the past 15 months, the government has done everything possible to help the banking sector. It had to. The financial crisis required it.

So the Feds dropped the bank lending rate to 0%. They weakened accounting standards so the banks didn't have to take huge writeoffs on upside-down mortgage loans. They passed out hundreds of billions of dollars in bailout money. And they kept a bid under the mortgage market by using your tax dollars to buy up $1.2 trillion in mortgage-backed securities.

In the process, the Feds created the most lucrative market ever in which to run a bank. Not even the village idiot could lose money borrowing from the Fed at 0% and investing in U.S. Treasury notes at 3%.

Thanks to your tax dollars, the banks have remained standing. Their quarterly profits are exceeding even the most optimistic expectations. And executives are helping themselves to hundreds of millions of dollars in bonuses.

What have they done to show you their gratitude? If you were caught in a bind one month and were struggling to make ends meet, did the banks come to you with the same helping hand that was extended to them and offer some flexibility?

No way.

The banks hiked interest rates on your credit cards. They dropped the interest on your savings accounts. They cut off your credit lines. They imposed new fees for services that once were free and raised the charges on everything else.

In short, the banks squeezed every last nickel out of customers who were suffering from the economic downturn, and they thumbed their noses at anyone else.

It's not smart to bite the hand that feeds you… especially in an election year.

Now, with the economic revival failing to trickle down to the masses, and with the electorate embracing a "kick the bums out" mentality, politicians are in need of a scapegoat. Who better than the banks?

You can almost hear the rhetoric…

"It's not our misguided policies and lack of economic understanding that's the problem. It's the evil bankers. They're capitalizing on your misfortune and refusing to share the wealth that we have granted them. Therefore, we propose the following…"

Let the parade of new banking regulations begin.

And with public sentiment toward banks already so negative, it'll be easy to pass through even the most ridiculous new rules under the guise of public benefit. For example, consider this little ditty reported by Bloomberg last Thursday…

The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government's Home Affordable Modification Program. The proposal, reviewed by lenders last week on a White House conference call, "prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed," according to a Treasury Department document outlining the plan.

That'll be fun for the banks, won't it? How long do you think it'll take a government committee to review each foreclosure referral? How long will those borrowers get to stay in their homes, rent-free and without consequence? Moody's estimates about one-third of all mortgages in the country are upside-down. How many of these homeowners will stop making payments the instant this proposal becomes a law?

Bankers are about to find out that the pendulum does swing the other direction. The Fed has already raised the discount rate. It has stated its intention to stop bidding up the value of mortgage-backed securities by April. And now, the politicians are looking to impose new regulations on the banking sector.

Bankers are getting rousted off the gravy train. As lucrative as it was to run a bank over the past year, it'll be the exact opposite over the next 12 months.

They have only themselves to blame.