(This post appeared at the author’s blog.)After news emerged yesterday that Bank of America will modify delinquent borrowers’ loans via forgiveness of principal, a reader forwarded me this open letter to CEO Bryan Moynihan. I agree with every word.
To: Bryan Moynihan,
CEO, Bank of America
Dear Mr. Moynihan,
I awoke this morning to read that Bank of America intends to begin forgiving mortgage principal for delinquent borrowers. I am writing to inform you that I will never bank with your firm ever again.
Principal forgiveness is an affront to every responsible, non-delinquent borrower in your book of assets. Not only is the federal reserve subsidizing the replenishment of your bank’s capital by confiscating yield from savers/depositors so you can earn monstrous spreads on your loan book, but now you are rewarding those who bit off more than they could chew, while those who did not take on excess leverage, or who kept their income-to-debt ratios manageable, see no benefit, even as their home equity values have declined. Even worse, you are denying savers who sit in the cash market the opportunity to purchase inventory from the delinquent.
Capitalism should migrate assets from the weak to the strong, not the contrary. If you want to mitigate your loan losses, I suggest you advance an organised short-selling process to mitigate the expense of foreclosure, and to discover the fair market value of your delinquent assets. But for me, allowing those who are delinquent to now benefit from their financial excesses is a despicable solution that ignores the integrity and responsibility of those who actually finance the lion’s share of your earnings: those who don’t default.
Moral hazard be damned. Count me as one future cashflow stream you will never see again!