Money magazine just had the stories of 4 people who were "victims" of the housing bubble.  These people all have made it through a tough journey and you kind of feel happy for them that they are out of their dire circumstances.

A series of personal choices and a few unforeseen circumstances wrecked them finanacially. 

"their goddaughter came to live with them. ....

Bill stopped working so someone would be home, which halved the couple's income. Then, there were big expenses for taking care of the child.

"She needed a lot of extra care," Lori says. "We put a lot of money into her education, dropping $50,000 the first year into Sylvan Learning Center for remedial work."

The coup-de-grace happened when Lori injured her back and couldn't work.

They burned through their savings and took out a second loan on the house. Their monthly mortgage bill, about $1,400 when they first bought the house, ballooned to $4,400. They started missing payments; they simply didn't have the money. They went nine months without paying.

"Oh my God, it was so horrible, the worst stress we'd ever been under," Lori says. "It sent my husband over the edge to a nervous breakdown."

Before this all happened, the article goes on about how they spent a lot of money on vacations and nice stuff.  I guess they didn't think saving for a rainy day was very important.

So they did a short sale and now they are have their dream jobs and are renting a place from his mother.

That sounds nice that everything worked out and they are back on their feet. 

But I began thinking about the losses that were taken by the bank in the short sale.  Do those losses just disappear?  These people borrowed real cash from their cash-out refinances to buy real stuff.  They were supposed to repay the money from the money they eventually earned by doing real work. So when they default on the loan, does the work they needed to do in the future to repay the loan just magically disappear? Can we just forget about it and make believe it never happened?

Let's follow the money.  There are a few possible scenarios.

The bank has to take the loss.  I guess it's just part of the business that they are in.  Their job is to try to lend money to people who they think will be able to pay them back.  On this one they took a loss.  So the bank's shareholders will lose money.

But what if this is one of the many troubled banks or a bank that is "too big to fail".  They will get a bailout from the Treasury which means that Mr. and Mrs. taxpayer are picking up the loss.

What if it is a bank that actually does fail because they made too many of these loans that didn't get paid back?  Well then the bank gets shut down by the FDIC and all of the bank assets are sold off and any losses eat up the capital reserves that the investors in the bank paid. I guess that's a risk of investing in a bank.  Now the way the FDIC is supposed to work is that it supposed to monitor the capital reserves a bank holds in case some of it's loans go bad. Usually the FDIC forces a bank into bankruptcy when they figure that the reserves are at a point where if they had to sell off all of the assets of the bank there wouldn't be enough to cover all of the deposits of their depositors.

Unfortunately, the FDIC hasn't been doing their job too well.  They've been waiting too long to close down many banks until the losses of the banks are more than the capital reserves.  So not only do the investors get wiped out, but now the FDIC has to dip into their insurance fund to pay off all of the depositors. 

Now the FDIC is out of money. It is broke.  So now it has to tap into a credit line that the Treasury has issued to it.

You got it.  That means Mr. and Mrs. taxpayers gets to pick up the loss.

The point is that losses just don't disappear into thin air.  Someone has to pay for them. Someone has to sell something of value or work a certain length of time to produce the money that was squandered or lost by someone's unfortunate circumstances.

So the taxpayer who was lucky and thrifty and conservative with his money gets to pick up the tab for someone else's misfortune and lack of savings.

The taxpayer also gets to backstop the bad decisions of the incompetent bankers without sharing in the profits that were made from the fees collected in originating the loans.  The banks get to keep the profits while the taxpayer gets to share in the losses.  With that kind of set up, why wouldn't a bank try to make as many loans as possible?  Why not go for the high risk, high fee loans?  When times are good, profits go up and big fat bonuses are given out.  Bonuses that don't get clawed back if things eventually blow up.

I have a feeling that some of this is what's getting many taxpayers riled up.  They might not know the exact details of how they are getting screwed, but they get the sense that something just isn't right here and they keep getting the short end of the stick.