How to Legally Rob a Bank

In the newest installment of Infinite Moral Hazard Theatre, Bank of America (NYSE: BAC) recently more or less asked people to rob it. The bank announced that it's now forgiving part of the mortgage balances of some of its borrowers.

To qualify, it appears all you have to do is owe about 20% more than the house is worth, and be in some sort of financial distress. The bank will then take the amount you owe above and beyond the current value of the house, put it in a special account, and over time, forgive that amount of your debt.

Isn't that theft?
Interpreted charitably, this is yet another program that encourages risky behavior, not to mention the sort of speculative gambling that got us into the housing bubble in the first place. With a more cynical view, it appears more like Bank of America's executives may have just conspired with the company's customers to rob its shareholders. No matter how you slice it, offering free money to deadbeats is like handing crack to addicts -- a bad idea that will ultimately backfire.

The obvious problem with the plan is the simple question of why anybody would continue to pay their mortgage if defaulting meant free money. From the looks of it, here's the chain of events needed to qualify for this cash:

• Buy a house you can't really afford with too small a down payment.
• Stop paying on the mortgage (thereby demonstrating "financial distress").
• Agree to pay a smaller mortgage amount.
• Wait for the bank to forgive your debt.
• Keep your house, and any appreciation that you might get when the market recovers.

And with that program, deadbeats are allowed to buy and keep houses they can't afford, and simultaneously punish savers and investors. And yes, people who are responsible with their money will pay (and are paying) for the bank's largesse. After all, that 'free money' has to come from somewhere, and that "somewhere" will likely be depositors, investors, and perhaps even taxpayers (again), who could wind up stuck with yet another bank bailout.

As this chart shows, Bank of America depositors are already paying for the bank's generosity, through lower interest rates on deposits than at other FDIC insured institutions:

Of course, to be fair, Bank of America's rates are closer to its large, money-center bank competitors such as Citigroup (NYSE: C) and PNC (NYSE: PNC). From a saver's perspective, however, an FDIC-insured account is an FDIC-insured account. Why would you voluntarily lock your money up for lower interest rates at a bank that's actively handing out your cash to people who don't pay their debts?

The way things are going, it may only be a matter of time before savers need to pay Bank of America for the privilege of watching the bank throw their money away on gifts to deadbeats.

Charity is a wonderful concept. But when a bank shortchanges depositors and investors to give away tens of thousands of dollars to irresponsible borrowers, that's not charity -- it's theft. Why anyone with a chance of qualifying for this free money would continue to pay on their Bank of America mortgage at this point is beyond me.

As a shareholder (for now, at least), I fear this will turn out to be yet another way this bank is proving itself an incompetent steward of my money. If the delinquencies increase in response to this offer of tens of thousands worth of free cash for not paying the loan back, the bank will only have itself to blame. It's a pity, however, that as a shareholder when this atrocity was announced, I've already been forced to number among those footing the bill.

Those are my thoughts. Share yours in the comments section below.