Bankruptcy or Bonuses, Which Would You Rather Have?

Megan McArdle has a post up on the tax system, but says this in the post:

I’m not angry and bitter; I’m about as mad as I am at the prospect of people who bought homes they can’t really afford getting a bailout while I continue renting–which is to say, not very.  Life is rather too short to spend it getting angry at remote strangers.

I guess a lot of this was discussed following the famous Santelli rant, but it’s worth noting that as yet (Senate vote is pending — who knows what they’ll do to it), there are no people who bought homes they can’t really afford getting a bailout. In fairness, Megan seems to acknowledge as much (“the prospect of”), but were this prospect to become a reality, it wouldn’t change the fact that the two are pretty wildly different. On the one hand, you have financial service firms who were instrumental in magnifying the damage of the housing bubble wistfully dolling out bonuses financed by $300 billion from taxpayers, that in many cases will be larger than whatever “bailout” homeowners receive. Of course, this $300 doesn’t include the other ways that people in the financial services have been bailed out, like today’s announcement from the Treasury Fed committing $750 billion buying mortgage backed securities (this was in addition to $500 billion already spent).

On the other hand, the so-called “bailout” for homeowners allows bankruptcy judges to alter the terms of a mortgage once the lender and the bank have already tried to adjust the mortgage voluntarily. In other words, the “bailout” results in the decrease of a home’s mortgage (and asset value, I’ll add) after you go to bankruptcy court. The way people have been describing this, you’d think Barack Obama was going to come strolling down your street with a t-shirt gun loaded with wads of cash to make it rain on your irresponsible neighbors. In reality though, nobody wants to go to bankruptcy court, but I bet there are a lot of people who wouldn’t mind receiving “retention” bonuses when they’re quite lucky to even have a job. The two aren’t even remotely close. (I know people are arguing that there’s demand for these AIG workers elsewhere, and that if their departure could bring to bear disaster. To which I would ask, $173 billion isn’t disaster?)

I say all this fully understand that there are sound policy reasons to be bailout banks and homeowners, and I think these issues of fairness are secondary, but to suggest the level of unfairness is symmetrical is ludicrous.

UPDATE: Also want to point out the obvious that whatever you might say about owners buying homes they couldn’t afford, it’s not as if these people bought their homes on a credit card. That is, someone else looked at their finances and decided to give them a loan. Now, whether they were given a loan under the assumption the house could be sold several years later at a higher value, whether the loan officer just didn’t care as long as they qualified, or whether the bank legitimately thought their new debtors could afford the home is basically immaterial insofar as the powers that be gave the loan a green light. Of course, this doesn’t absolve the homeowner of total responsibility, but it’s a bit of a stretch to suggest that this whole operation was the result of homebuyers run amock.


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