The London-based Observer supports bailing out the banks, but with strict conditions.

British banks deny that they have messed up and are asking for state rescue, notes The Observer, which disagrees with their assessment.

“But the reality is that British banks are guilty of systematic arrogance and complacency. They relied on credit from each other to pump mortgages into the consumer market. They then took those debts, packaged them up as ‘securities’ and traded them with each other. As business models go, it looks like a cross between alchemy and pyramid selling. The regulators, meanwhile, did not know this was happening, or did not understand it, or did not care. How, then, were the customers who took out mortgages on the High Street expected realistically to evaluate the risk they were undertaking? Those that now face negative equity, or even repossession, can legitimately feel bamboozled by the City and let down by the government that failed to keep its excesses in check.”

It suggests some capital adequacy rules on the wholesale side but gets a little fluffy when it hits issues around the retail side—the mortgage holders.

“But the changes must go beyond regulation. There must be recognition that banks have social responsibilities. Lenders must give assurances that they will treat defaulting homeowners sympathetically, that they will introduce measures to ease the burden of debt for ordinary people. Banks must show their customers the same generosity that, like it or not, the taxpayer is obliged to show them.”

This does get sticky, and perhaps owners whose mortgages are underwater will have to take a loss. But realistically, banks lose money on foreclosures—they often get stuck with houses that are damaged by owners, or get damaged while they sit empty. Banks out to accept the losses, or some losses, on some mortgages, leave the owners in place, and write down the mortgage to realistic post-bubbled levels.

Maybe someone can write the software to automate the process so it can be done quickly and cheaply.

Filed under: Credit Crunch, Technology