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Home Publications Blogs Beat the Press Fans of Economic Recovery Need Not Worry About Banks Being Penalized for Law Breaking

Fans of Economic Recovery Need Not Worry About Banks Being Penalized for Law Breaking

Monday, 10 December 2012 05:45

The NYT reported that a new round of lawsuits could potentially cost banks hundreds of billions in damages and penalties from fraudulently marketing bad mortgages. The piece warned readers:

"Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life."

Actually it is quite unlikely that the outcome of these suits would have a noticeable effect on the housing market. These suits may affect the asset position of major banks however they will not affect the incentives to issue proper mortgages going forward.

At the moment, the spreads between the interest rate on mortgages and the interest rate paid on mortgage backed securities are near record highs, which means that banks have enormous incentive to issue mortgages. If some of the major banks suffer big losses as a result of these suits it will not reduce these incentives. Therefore banks will still be anxious to make mortgage loans. Furthermore, since mortgages involve relatively quick turnarounds between the issuance of a mortgage and selling it in the secondary market, even banks with impaired capital are likely to still find mortgage issuance to be a very profitable endeavor. 

Comments (4)Add Comment
banks will remain profitable thanks to heliBen
written by pete, December 10, 2012 8:57
Banks are being bailed out continuously with low rates...if this needs to extend further to cover some penalties, fine. I.e., taxpayers will pay in the end. This is really a silly game they are playing. What is most interesting is that the banks are settling, but no one has been charged individually. And now they have run out the clock using the 5 year statute of limitations. Wonder which one Geitner is going to work for?
Punishing Crime Usually Hurts the Economy
written by Frankly Curious, December 10, 2012 12:33
It is infuriating that the media worry about the effects of punishing financial criminals. They have no problem with the productivity loss of locking up cannabis smokers. But when banks may lose profits? The horror! What's good for BofA is good for America, but what's good for Americans, not so much.
Frankly curious...
written by pete, December 11, 2012 10:55
Hey, the media could get a 2 fer with stoner Jimmy Cayne, who toked and played bridge while Bear burned.
selling on the secondary market
written by mel in oregon, December 11, 2012 3:37
which is the real reason the united states is in such a bind today. when the loans & derivatives thereof were bundled, packaged & sold all over the world, an amazing amount of amateurs, scam artists & ponzi scheme creators surfaced as loan officers encouraging people with no money to buy a home. the poor homeowner thought,"at last i can own my own home". well no, it was soon foreclosed. plus nearly all homes in america are worth less than they were 5 years ago. now as has been pointed out numerous times by baker & many others, home prices escalated artificially for several years before the crash. it should have been a warning at least to someone that calls himself an economist. nope! as long as the fed is using monetary policy as a substitute for creating good jobs & making life less miserable for the 150 million americans who are having a pretty tough time, there will never be a real recovery. oh the stock market may go up, but that won't make for less misery for the less fortunate who are quite numerous.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.