Your Shriveling 401(K): Thank Financial Red Tape and the Foreclosure Furor

If your 401(K) has shrunken recently, it may be due to falling bank stocks, like Bank of America stock, which has fallen from over $19 a share to less than $12 a share over the last six months.   Most 401(K)s indirectly own Bank of America stock, because its stock is held both by most large diversified mutual funds, and by most index funds.

Bank of America just reported a $7.3 billion loss due to $9.87 billion in costs resulting from the restrictions on debit cards contained in the 2010 Dodd-Frank Act backed by the Obama administration.  (Those restrictions will also result in sizeable costs being passed on to consumers, while benefiting certain politically-connected businesses.  Other provisions in the Dodd-Frank Act not only harm banks and the economy, but are resulting in the return of some checking account monthly fees and per-check fees, while another costly law called the CARD Act is leading to the return of annual fees on some credit cards.)

But Bank of America’s stock value has fallen more due to the recent furor over foreclosures and the possibility that paperwork errors and securitization may thwart foreclosures against defaulting mortgage borrowers.  Bank of America temporarily halted foreclosures in all fifty states.  Leading law professor Richard Epstein explains how a permanent halt to foreclosures would be a disaster for “prudent borrowers and lenders,” as “those purchasers who bought homes out of foreclosure proceedings may well be forced to defend their titles against the original borrowers who went into default.”  At AOL News, Marty Robins gives additional reasons why a halt to foreclosures is a bad idea that would delay “economic recovery,” wipe out bank capital, reduce their “lending capacity,” and increase “interest rates” on mortgages.  A Washington Post story illustrates the negative ripple effects on the economy and ordinary citizens of halting foreclosures.

Bank of America stock fell more than 4 percent today after the New York Fed and others threatened to sue Bank of America to force it to repurchase $47 billion in mortgage securities that soured.  (Earlier, the Fed pressured Bank of America into buying a collapsing Wall Street investment firm whose failure it perceived as threatening the economy.   And the New York Fed, then headed by Timothy Geithner, used the AIG bailout to make billions in unnecessary payments to politically-connected financial firms that didn’t even need the money. )

Earlier this month, perhaps to appease politicians, Bank of America suspended foreclosures in all 50 states after sloppy paperwork in some foreclosures became apparent.  Now, it’s trying to resume foreclosures in 23 states, after a review disclosed no examples of innocent homeowners being foreclosed upon by it.  But state attorneys general smell blood and are pressing the banks not to resume foreclosures at all.