It's All Toxic Now

The Obama Administration's plan to help stabilize American financial institutions was announced just a few moments ago.  It calls for lending money to private investors who will purchase the so-called "toxic assets" from banks.  The idea is having those assets off the bank ledgers will free up cash and prime the bank lending pump.

The stock market, as I write this, is up over 300 points.  Wall Street goes wild, thinking, finally, the cavalry has come to the rescue.

But really, according to this fascinating article in Rolling Stone, it seems all we have done is rescue the very companies that continue to tell us they are too big to fail, that we are too naive to understand their products, and what is good for them is good for us.  All of these lines we have heard before.  I continue to believe that anything that is too big to fail is too big to succeed, and question the value of propping these behemoths up when really their foundations seem rotten.

What we are doing, by lending money to hedge funds and other private investors is continuing the desperate efforts to make money off of money off of leveraged money.  If these same financial institutions warn about the "moral hazard" of helping individual borrowers by lowering interest charged on credit cards or cram down provisions to modify mortgages in bankruptcy, how can they be so arrogant to not see the moral hazard they are asking us to endorse?  

I keep wondering where is the outrage?  Why are we not banging on the doors of this Administration, of Congress, telling them to forget focusing on the easy targets, the bonuses, and rather it's time to re-do the whole corrupt system.  We can not be held hostage, like the Americans in the Iranian embassy, by these corrupt and unethical corporations.  But oh, that's right, we don't have expensive lobbyists paid to make sure our interests are protected.

But Is It Enough?

Yesterday, President Barack Obama finally introduced his plan to help homeowners who are on the verge or in the throws of foreclosure.  In Washington State, as in numerous states across the nation, foreclosures are usually done without any intervention from the court.  Rather, notices of foreclosure are sent to the homeowner by the lender (or usually, through some foreclosure specialist who does this for a living) and the clock starts ticking.  In Washington, a homeowner has 180 days from the notice of foreclosure to come up with the delinquent payments plus accrued late fees, attorney fees (even though no attorney for the bank is involved), assessments for mailing, publishing costs...you get the drift.  And because these foreclosures are done without any judicial review, there are chances that a lot of foreclosures happen to folks who may not be in default, or who are close to coming up with the delinquencies but can't find a voice at the end of the phone at the lender to talk to.  And from this time last year when policy-makers started talking about the foreclosure crisis to yesterday, you can only imagine that there have been a lot of foreclosures.  A lot of families put into the streets.  A lot of stress, pain, and suffering.

Meanwhile, the least discussed part of the Obama plan is the stick he will ask Congress to impose if lenders do not cooperate in stemming some of the tide of foreclosures.  Currently in US bankruptcy law if you are in default of your mortgage and you file for bankruptcy, the only thing the bankruptcy court can do for you is to suggest you find the money to become current.  A bankruptcy judge can not "force" a lender to modify the loan.  However, this was not always the case, but the banking lobbyists got to Congress and the so-called cram down provisions were taken out of the bankruptcy code (a note here, if you're a corporation a bankruptcy court can "force" lenders to adjust terms of loans...gee, are we surprised?  And ironically, cram-down provisions are still legal for second homes and vacation properties...hmmm, who owns those I wonder?).  

Today, in the financial press, such as the Wall Street Journal, there is a lot of gnashing of teeth over the possible re-institution of the cram-downs.  And I ask again, what world are these financial institutions living in?  If these geniuses get what they want, they may end up owning every house in places like Nevada!

But here is the thing that caught my attention in listening to President Obama.  Several times in his speech he said that this plan would help "people who followed the rules."  The first time I noticed this kind of language was during the Clinton Administration.  The language is code for: "we're not going to help people who are poor, on welfare, or are not breaking their backs to make minimum wage."  For instance, the Obama foreclosure plan is specifically excluding people who "bought more house than they could afford."  Apparently, they did not follow the rules.  Or the plan is not designed to help people whose mortgage debt exceeds 105% of the current market value.  I guess those folks didn't follow the rules either.

Here's what I want to know:  First, who wrote these so-called rules?  Second, since when do politicians, who haven't followed very many rules themselves, get to dictate what rules are followed in a crisis like this?  Third, is it then true that the mortgage brokers who made gazillions of dollars and realtors who are driving around in their big honking Mercedes bought with their fat commissions after luring, purring, and assuring people that indeed they could afford this house, did they follow the rules?

My suggestion to politicians?  Lose the line about Americans who follow the rules.  We all know what you're trying to do, to assuage the few people left in America who may get upset that their tax dollars are being used for any bail out whatsoever.  But really, they will never be happy so why bother trying to assure them "only the rule followers" will be helped.

Frankly, if I were President, I would attempt to call a halt to foreclosures right now.  Suspend every single one of them.  1 in 10 homes in America are in some financial stress, whether it is worth less than the mortgage, in default, struggling to make payments, whatever.  That is a lot of folks.  Call a time out.  Ask Treasury to take 180 days to compile data on exactly what the problems are, where, who are the people, and what can we do to keep the greatest number of families in their homes.  Maybe we do mass cram-downs.  Wipe the slates clean of the consumer debt, cleaning up bank balance sheets as well, adjust the mortgages to where the greatest number of people stay put.  Backload the debt for a future sale.  Eliminate the due on sale clauses in Deeds of Trust so a borrower can sell the house without the buyer having to find a new loan.  There are tons of things we can be doing now to increase the numbers of people not losing their homes.

And oh, the next time, you know, in the next boom-bust cycle?  Let's make sure everyone knows what the rules are and follows them, so we're not segregating out people who simply got suckered.  Or we're not also bailing out the lenders, automotive manufacturers and whoever else has great lobbyists, who by the way, have never played by the rules.

What Are They Thinking?

In today's news, President Barack Obama is going to offer carrots to mortgage lenders in order to encourage them to reduce monthly payments of borrowers.  And of course, anything the federal government can do to help struggling home owners, owners who are either in default or on the verge of defaulting, is a good thing.  At least 6% of American home owners are either in foreclosure or on the verge.  That figure, of course, does not take into account the thousands who are struggling, who are not paying other bills in order to pay the mortgage, of the hundreds of thousands who have already mailed their house keys to lenders, or simply walked away.

But what really bothers me are two things.  First, lenders who are reluctant, no, objecting to helping any borrowers.  And second, the ya-hoos who say things like President Obama is running a risk of angering homeowners who are not in default and "bitterly" resent the government bailing out those who may have made bad decisions.  

First, the lenders.  It goes without saying that while there may be banks who are not taking any government money every single bank right now is benefiting from those who are seeking help from the Troubled Asset Relief Program (TARP).  On the idea that if one bank falters, especially one like Washington Mutual or Citibank or Bank of America, all the other banks suffer, then every bank should be responsive to direction from the government.  We, the taxpayers, are helping them survive in this economic climate.  So the lenders who say they can not do anything to help the borrowers and don't have an obligation to do so are really saying, what, they think holding on to empty real estate or selling it for a loss is a good thing because it proves you're man enough to foreclose?  And to the investors in the banks, or the ones who bought the collatoralized securities and are now apparently suing banks saying they have no right to suspend foreclosures (the banks, therefore, acting as mortgage servicers rather than owning the promissory note) I ask the same question: why would you want to hold onto vacant real estate.  It makes no sense given that the majority of foreclosures are happening in particular regions such as Southern California suburbs, Florida, Nevada.  Hello!  Lenders you foreclose and you end up with what?

Second, this whole argument about moral hazard is a straw man.  The idea comes from economic theory that if you have insurance you are less likely to guard against risk (as an aside, it seems the banks and other Lords of Wall Street sure knew a lot about moral hazard as they sliced and diced the mortgages to sell as securities in order to get them off their books).  In this context, of helping home owners reduce their mortgage payments, the moral hazard proponents seem to be arguing (using the term moral hazard as shorthand) that if the government helps homeowners now, a seed, a very bad horrible seed will be planted in American's minds that if they get into financial trouble, the government will always bail them out.

Done laughing yet?  

Seems to me that if you're robbed by a financial fraud, which evidence indicates many of the loans were done through dubious lending practices, you merit, in our society, help.  Let's not call this homeowners bail out, let's call it victim's assistance.  Victims of economic terror.  Victims of theft.  Victims of greed.

These bright bankers also think opposing re-instituting cram down provisions in bankruptcy laws is also a good idea.  Good Lord, banks lived with those provisions for decades before they finally contributed enough money to Democrats and Republicans in Congress to get them repealed.  Bankruptcy judges are not unreasonable wild-eyed populists who are going to make revisions to mortgages that will cause dire consequences to banks.  In fact, I would guess most cram-downs worked in the banks benefit before it was repealed.  Can our legislators please stop being afraid of bankers and their lobbyists?  They failed.  Repeat after me, they failed.  But for some reason (hmmm, do we need to check those campaign contributions, again?) Congress drags it's feet on re-instituting laws we all lived with for decades.  

If any of the Lords of Wall Street doubt that we are in an economic depression, look at the markets today, almost at the lowest point in a decade.  Look at how their own investors respond when they believe the Obama Administration is not doing enough to, oh, what is the word, bail out the banks.  It's time to look at helping the victims of this debacle, to make sure American's stay in their homes, that their kids stay in their schools, that their families share memories with their neighbors, that the local green grocery stocks the foods that family enjoys.  It's going to be a tiny amount of help in comparison to the monies banks are getting under TARP.

And hello, bankers?  Start thinking again, ok?

Reimbursing the Rescuers

Well, populism is alive and well.  Today, President Barack Obama did what the public has been demanding, limited the salaries of corporate executives who have sought federal "bail out" money.    These gentlemen, the head of Citibank, Bank of America, General Motors, to name a few, have made millions of dollars, enjoy limos, private planes, luxury suites in hotels, sports stadiums, their own offices...yet, they failed in their management and still were paid exorbitant sums of money.

For awhile I was trying to figure out how this situation was similar to mountain climbers who have to be rescued.  Paying for the rescue is a much debated problem among climbers.    It can, I believe, cut both ways.  Climbing is inherently risky.  Few people do it because of the risk, so why should those people, the ones who don't climb, have to shoulder costs of rescuing those who do?  As a society we rely on climbers to assess the risks, make decisions about continuing with the climb based on their abilities and the knowledges they may have concerning the risks when they begin the ascent.  On the other hand, climbing is an adventure that, in many ways, makes us all human.  From Homer's odyssey to Hilary's first ascent on Mt. Everest, adventurers open and expand our own souls.  We, as a society, want to encourage not discourage people taking risk and challenge with nature.

But these failed businesses?  It's true, capitalism is about risk.  Unfortunately, many  more lives are at stake than the CEOs of the bankrupt businesses.  In fact, those CEOs will always land on their feet, they certainly have stashed away enough money and assets.  It's their administrative assistant who is, well, to be blunt, screwed.  

So, not only do I think their salaries ought to be limited, but like the call to have climbers reimburse the rescuers, I think the individual CEOs, and their top executives, ought to reimburse the government (or us) for their salaries from the moment their books began to bleed red and they continued to take huge salaries.  

Heck, between those reimbursements and all the back taxes we seem to be collecting recently, we may cut the federal deficit in half!

Too Big to Fail?

I heard an interesting commentary yesterday.  The analyst said that when there is a corporation that is "too big to fail," something is very wrong with the world economy.  I would also add, that if something is too big to fail, and we're even at the juncture of talking about failing, then the corporation is also too big to be successful, which isn't that what capitalism is all about, being creating profits?

So here we are: Citibank is spinning off divisions.  Smith Barney is the first with more than likely others to follow.  And Citibank, having twice come to us, taxpayers, for money from the Troubled Asset Relief Program (TARP) will probably ask as third time for more money.

And here is the irony.  Somewhere out there some guy is opening his front door and a process server is serving him with a lawsuit.  The plaintiff?  Citicorp.  Why is he being sued?  Oh, maybe he stopped paying on his credit card, you know, made some bad decisions about his finances.  And the lawyers for Citicorp will play hard ball with this guy, taking as much money to pay the debt as they can get.  Yet, where is the accountability for Citicorp in it's own financial mess, the bad decisions it made, the creditors that don't get paid, much less the shareholders who are losing value on their investment?

No, I think it is time, now, for us to examine what it means "too big to fail."  In fact, I think when some corporation has become that big, it really isn't good for the global economy.  I mean, here we are with dark and dire warnings about what will happen to the international economy if/when Citibank fails.  Doom and darkness shall descend.  If a corporation gets to be so big that it's demise will actually impact the global economy, then something is really very wrong.  

Perhaps we have our priorities wrong.  I think the little independent two man mechanic shop down the road is too big to fail.  Or the dry cleaner's around the corner.  Or my vet clinic.  Or the green grocer that is a nice walk away.  

But Citicorp?  They have a history of bad decisions (raise your hands if you remember the Latin American loans?) yet they keep on ticking.  Where is the accountability?

Since I have written this, in Wednesday's New York Times there is an article about the banks needing even more money.  And then this small piece by a local columnist on how the banks are not lending to a small business here in Washington state.