How not to fix a banking crisis

Jeff Taylor introduces some cold water reality to a fantasy castle-in-the-sky "fix" to the sub-prime mortgage crisis:

"It is probably in their best interest to walk away. They have no equity," Whalen says of the hapless borrowers.

The possibility of their underwater borrowers actually taking a walk terrifies the banks, however. Banks would have no choice but to write down and make real phantom losses lurking just off their books. What to do? How about pretending that the loans aren't actually bad. How do you do that? Pretend that the borrowers can pay them back. How do you do that? Pretend the teaser rate is the real rate. Presto, problem solved.

At this point, some adult would ideally step in and say, "no, that's fraud." But clearly Treasury is not that mature. And it appears the Fed has resigned itself to some form of greater idiocy coming out of Congress on the subprime front that maybe, just maybe, the teaser freezer can head off.

However, the stubborn fact remains that banks will lose money on teaser rates. Regulators and investors both know this. Who exactly are we trying to fool? Besides inattentive voters.

Of course, nobody in the highly educated, fast-paced, exciting world of banking ever noticed that lending large sums of money to people with little or no real ability to repay the principal might be a risk. Bailing them out with public funds is exactly the wrong thing to do . . . which makes it the odds-on favourite of both stricken bankers and politicians needing to be seen to be "doing something".