I recently had the pleasure of making friends with George Stephanopoulos on FaceBook and reading the following piece on George's Bottom Line.  The piece brings into examination an Op/Ed piece, Some Myths About Banks, written by Kenneth D. Lewis, Chairman & CEO of Bank of America.

I responded on George's Bottom Line.

I am amazed at the broad brush stroke asymetry of the lesser points in Ken Lewis' letter. 

Bubbles, true. Expect them to repeat in every long term economic cycle. That's capitalism at work. But to ascribe some notion of equivalency in participation by batching the catalysts of failure together is as much the rubber headed approach to the analysis that drew his pursestrings in the purchase of Merrill Lynch.  

I've said this ad naseaum. Borrowers have a cap on leverage, irrespective of the vicissitudes of run-away valuation. That number is capped at 100% of the prevailing value of a home.  True, some who got into the refi-cycle early were able to increasingly lever themselves in the process, but even taking a 10 year prior (1996) approach, one can argue the limits of full cap borrowing might not exceed 200% of an early market value ($500,000 - 1996 to $1,000,000 - 2006).   

Now take a look at the CDO/CDS machine. Seemingly unlimited slicing of interests backed by even greater measures (greater in imaginary numbered in a sequenced gaussian formula) of insurance (AIG, etc) on the default side. Orders of magnitude of irresponsible borrowing (the sale of risk for the receipt of payment in premium).  No matter the day, time, year, century, epoch, a homeowner will never pay 30 times the normal premium to insure a residence for 30 times the value for loss. Much less exact that kind of fiscal imprudence on the value of an asset. 

On that note, guys like Rick Santelli and demagogues who claim the homeowner's indulgence of following the Smiths and Jones' to the closing table for a slice of the American Dream is bailout deplorable. Its lesser-class bigotry in its finest hour. Stooping to the curb low enough to kick the victims in the teeth. The truth is that class warfare is in full swing and every American is quietly being hurded into a slaughtering pen. No one is getting a fair shake of relief here. The "so-called" irresponsible homeowner is being targeted by financial bigots and the investors who lease property to tenants are getting slobber-knocked by a government hell bent on avenging the moral and financial losses of the class underguard. No one is getting fair handed relief.  

AIG by comparison, the world's largest garbage transfer station, is draining U.S. taxpayer dollars in the same way as Pres. Bush bamboozled Congress on an $800 billion war bill. All deposit, no return. Congress is funneling U.S. taxpayer dollars into AIG and other lending institutions to pay bad bets in foreign markets.  The greatest risk takers of all, the banks and institutions that took 30 times the dip into the honey jar, are getting bailed out by the very citizens to whom these institutions ravaged behind their backs and now seek to fire off no entry point signs for lending. 

Absurd! 

By comparison, certainly a family's and/or an individual's financial condition is a matter of self analysis and governance. And borrowers need to consider the risks when buying a home, such as how much they can afford, how much can they afford to lose, how much leverage can they take and how many times their home is going to be sold and re-insured for loss of foreclosure behind their backs. 

The consumer is partially at fault and I don't want to make a case for complete victimization at the hands of the masters of the universe. Maybe the consumer has a modicum of responsibility, but that responsibility is limited at best.  The sad reality is that we've become immune to the hard edge of debt from years of an abusive relationship (a battering parent in the form of 20%+ interest bearing CC debt to a child longing for approval as the spend thrift debtor).  America's habits are so formed.  

Having spent the better part of 25 years as a capital markets professional and having started in the real estate finance industry from 1985 to 1989, one thing is patently clear, the borrower has no idea of what an income ratio is and what it means to the qualification of a loan. Here is another asymetrical twist. Incentive. Mortgage brokers, banks, investment banks and game changers then take it one step further, helping the forelorn looking greyhound catch the electronic rabbit (the American Dream). 

Lewis goes on in his letter to talk about nationalization and false impressions. Does he mean Nationalism will give false impressions like those given by LEH, FNM, FRE, WM, BSC, MER and every other bank / brokerage that claimed financial solvency and rectitude? Ok, then let them fail and let the markets do what they do best. Give back your TARP money Mr. Lewis and dump Merill Lynch into the gutter where it belongs for decades of fiscal deceit that forged such great monuments as the Orange County Municipal failure on a derivatives scheme and Henry Blodgett's Internet Bubble. 

Yes, let's talk about the changes that banks need to make in their business models. Whew! That was refreshing. For a minute there I thought he might say something irrational like the need to hold an annual banking summit at the Phonecian in Scottsdale in memory of Charles Keating. Lewis ends his notes right back on the issue of household debt. His answer is let the consumer soak in 20%+ interest rate on debt type  misery while allowing competitive forces lead the way back to responsible lending.  

Nice going Ken.

No talk about the problems that brought us here like the fiscal drug lords and trafficking of cheap products, slave labor - all tools of environmental and moral hazard. 

No talk about the cause and effect of repealing Glass-Steagall and letting Banks and Investment Banks run amok. 

No talk about the orders of magnitude of irresponsible leverage from the likes of those who will invariably lead us down the next yellow brick road of bubbles. Ken Lewis, get your facts straight so we can have an honest debate about the important issues to help us rebuild a healty financial services sector in tandem with the important trade issues that will better support economic growth. 

Mr. Lewis, your two points are non starters.   

Start by starting with the truth and then offering solutions.