Bank of America Pays the Price

Bloomberg reports:

Bank of America Corp., the second-largest U.S. bank, said profit dropped for a third straight quarter as the company set aside $6.01 billion for bad loans... The bank said its home equity, homebuilder and small business loans were "particularly'' affected by the slowing economy.

The ever-growing Bank of America ("BoA"), with its nigh-ubiquitous ATMs in the West and extensive reach elsewhere, has long been one of the more successful retail banks in this country.  Of course, as with any multi-billion-dollar financial corporation, it has its hands in many pies; however, to the ordinary banking user it is known most for its ordinary banking activities - actual physical banks you can walk into, consumer loans, home mortgages, checking accounts, and so on.

Given the current problems in the home-mortgage market and the popped bubble of housing prices that puffed up unaffordable loans for millions of borrowers, it's no great surprise that BoA is suffering somewhat.  The losses being reported are simply enormous though, and appear to be quite widespread.  Is there anything about BoA that might have made it especially vulnerable to bad loans and consumer fraud?

As it happens, there is, and it is a great, glaring, conscious decision that BoA made at the corporate level.

In February of last year, it was reported that BoA had decided to offer credit cards to customers without Social Security numbers.

They didn't just allow people to walk in off the street and grab a nice shiny credit card out of the basket.  You had to have held a bank account with them for three months and caused no overdrafts.  At one time, this would have been sufficient safeguard.

Recall the last time you opened a bank account.  You had to show an ID, and provide information about yourself.  Most people show their drivers' license.  If you are a citizen, you have to provide your Social Security number so any interest you earn can be reported to the IRS.  But if you are not a citizen, and don't claim to be one, then no Social Security number is required.

And as luck would have it, illegal immigrants can freely provide a "photo ID."  It's called a matricula consular, and it's an ID card issued by Mexican consulates which are found in many major cities.

It has a picture on it.  It has a name on it.  It's even issued by a government with whom the US has diplomatic relations.  However, it's totally meaningless - the applicant at the embassy simply presents themselves, states their name, pays the fee, and walks out with a nice shiny "government ID."

U.S. banks are not required to accept a matricula consular as identification, but they aren't forbidden to do so either.  And BoA decided that a matricula consular was just fine.

Thanks to this tomfoolery, countless thousands of illegal immigrants now have a ladder into the real, documented economy.  First, go visit your Mexican embassy and get a matricula consular.  Then go take that card over to your nearest Bank of America and open a bank account.  Wait three months, and go back for a credit card.  Now you're just like anybody else, for most purposes!

BoA makes money from the fraudulent activity of the illegal aliens, as they cash their illegally-earned paychecks and wire the funds back home.  So at first glance, this sort of action should increase the bank's profits, regardless of the harm it causes to the wider society by aiding and abetting the crime of illegal entry.

But why do so many financial organizations ask for your Social Security number before doing business with you?  It's not just for tax purposes; your SSN is how credit ratings are indexed.

When you want a loan to buy a house or car, or anything else for that matter, the banker can look you up with the credit bureaus to see if you have been faithfully paying your other obligations.  Based on that information, he may offer you a loan only at a punitive interest rate or deny the loan entirely.

That's why most Americans try so hard to avoid car repossessions, home foreclosures, and other adverse credit events.  Once you have something like that on your credit report, it takes many years of hard work and faithful repayments of other debts to wipe the slate clean.  As a punishment for not paying your debts, the idea of credit rating agencies is fundamental to the American consumer and financial economy.

Illegal immigrants have no such fears.  If an illegal immigrant fails to pay their car loan, to say nothing of their credit card, the worst that might happen is that the repo man comes and hauls the car away.  They won't suffer on their credit report - they don't have one!  And if they do, it is under a fraudulent Social Security number that isn't theirs anyway, and they can always buy another one from the hooded guy down the street for a small fee.

Bankers set the interest rates they charge based on calculations of the likelihood that you'll stick to the terms of the repayment.  But with illegal immigrants, that system breaks down because there is nothing making them pay except their own good graces.

We read in the newspapers of the drop in new home construction and the suffering of the hospitality industries of hotels and restaurants.  Where are vast numbers of illegal laborers to be found?  Precisely there - building houses, cleaning hotel rooms, washing restaurant dishes.  So with many illegal workers now losing their jobs, and no particular penalty attached to not paying their debts, why would they?

As Karl Marx famously said, "A capitalist will sell you the rope to hang himself."  Bank of America continues in this illustrious tradition.  Today, we begin to see them dangling a bit on the gallows, and not before time.  If the executives and shareholders have a good painful stretching, maybe they'll learn the lesson that there's a reason it's not a good idea to rely on lawbreakers for key parts of your business.