On April 30th, the Senate defeated the “cram down” bill that would have allowed bankruptcy judges to adjust mortgages so as to allow those people going through bankruptcy to keep their homes. The defeat came as some democrats sided with the bill’s opposition, mirroring a general weariness from within the banking community towards this piece of legislation.
The media balked at this defeat with claims that echoed the bill’s sponsor Richard Durbin (D-Illinois) that the banks essentially controlled congress and that senators needed to vote along with the needs of the American people rather than according to the desires of the banking and mortgage lobbies. The accusation from Durbin, and from the media following the defeat, was that these senators (particularly the 12 democrats who voted against the bill) were essentially bought out. The media portrayed the senate as under bank control.
We would suggest an alternative interpretation of the senate’s vote and the defeat of the “cram down” bill: it was a good decision on a piece of unwise legislation. The reason, of course, that the banks opposed this bill was because with the decision kept in their hands, they would decide in such a way as to minimize their losses. In the hands of a bankruptcy judge, there is no guarantee whatsoever that bank losses would be minimized — bank losses are not the point of this legislation. And as we face an economic climate wherein financial institutions are in need of taxpayer bailout, exactly where do we think they will turn to recoup their losses when the bankruptcy judge decides in the best interest of the borrower and not the bank?
In the end, those people who may have fallen onto hard times and who find themselves in bankruptcy court will become a burden to the tax payer who may never have taken a mortgage, who may have decided to rent instead of buy because the rates seemed to good too be true, or who is now only barely managing to stay, themselves, out of bankruptcy court. For anyone facing bankruptcy, the situation is, of course, bad, but what is bad for banks, because they are on the government dole, is bad for everyone in the country. We’re the one’s who have to bail them out.