Banks take the hit, say both Chidrambram and Bernanke

Ben Bernanke, the Fed Chairman, made a surprising statement the other day. It reads something like this -

"In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances . For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool."

Source: [http://bigpicture.typepad.com]
Link to the original article [click here]

This sounds so similar to what Mr.Chidambaram proposed in his Budget Speech for 2008-09. However, in this case, unlike the US, it is the taxpayers money that will be used to make good bank's losses.

The point really is - Are we setting poor precedents, when it comes to public borrowing?

While on this topic you may want to read two insightful articles by Dr.Ajay Shah [link] and Andy Mukherjee [link].