May 01

Pragmatist or Opportunist?

Obama-RomneyEssentially the voters in 2012 will have a very simple choice to make, whether to elect a political pragmatist or a political opportunist. On the one side is President Barack Obama, who by all accounts holds very few, if any, ideological convictions. In fairness, he does lean just left of center, but rather than having a belief system rooted in progressive ideals, it appears that his belief system has been fashioned by his personal experiences and educational training alone. He is a no nonsense analytical thinker. He looks plainly at a situation and determines what can be accomplished. He then moves further away from his original position expecting that his opponents will do likewise, and embraces a series of compromises until some agreement is reached, however distant from his original position. While this jumping-off point normally lends itself to practical common sense solutions, it has failed to hold true in his case. However polarized the other side, he is determined to come away with something. Mitt Romney on the other hand also appears to lack any foundational ideology, while leaning marginally right. His early political career appears to have been fashioned by his experience at the feet of his father, the one time chief of American Motors and Governor of Michigan. His father is widely regarded as a right-leaning moderate. He has spent much of his adult life surrounded by business elites, and will advocate on their behalf so long as in doing so he treads upon the path of least resistance. He too seeks out practical solutions to the problem at hand, but he allows the political winds rather than any firmly held position to determine what is in fact practical. So, the question is whether it is better to elect an individual who refuses to bend when the longer term practical political consequences may be deleterious, or someone who will bend facilely.

Looking at some examples from Obama’s first term we can see the limits of political pragmatism and general rigidity. The most glaring example is his reaction to the financial crisis. His policy decisions following inauguration through today are generally accepted by his progressive base, as well as most rank and file Democrats, as being far too friendly to Wall Street and the financial sector generally. Much time and effort has been spent ensuring the solvency of the banking sector, while little or no help has been offered to those most affected by the crisis. Experts have opined that it is precisely the President’s pragmatic rigidity that has contributed to his failure to move toward a more progressive fair approach in addressing the depression. Interestingly, while disappointed, neither the Democratic base or independents have been willing to take Obama to task over his  continued willingness to assist Wall Street. Even while Obama has been reported to have a great degree of contempt for Wall Street and apparently views the fruits of its labor generally valueless, he has bent over backwards to help it. Even when pushed by the public and Congress to pass some sort of financial reform package, the result was an impotent regulatory regime in the name of Dodd-Frank, and facially attractive but only marginally  protective credit card and other consumer protection reforms. Yet Wall Street still views him with extreme and venomous derision. Continue reading

Apr 30

IMF Chief Calls for Mortgage Principle Forgiveness in U.S.

International Monetary Fund Chief Christine Legarde has added her voice to the growing chorus of economists not bought and and paid for by the banking sector in calling for the United States to begin to reduce the principal on underwater mortgages purchased during the fraudulent run-up in housing prices between 2002 and 2008. She recommends doing so in order to stimulate growth across the globe, but doing so would also significantly impact the economy at home.

She called upon Fannie Mae and Freddie Mac, both of which are overseen by the Federal Housing Finance Agency, to reduce the principal owed on homes, whether the homeowner is in arrears on payments or simply underwater and current in their obligations. Unfortunately, FHFA boss Edward DeMarco has steadfastly maintained that he will not support policies that allow for widespread mortgage write-downs. Mr. DeMarco was to make a decision by April 30, 2012 whether or not he would move forward on a plan under Obama’s HAMP program to allow principal reductions on properties backed by Fannie Mae and Freddie Mac where the mortgage holder is seriously delinquent. Unfortunately Mr. DeMarco recently announced that he would ignore the deadline, imposed by Congress, and continue to study the problem.

The HAMP program reductions that are under consideration by Mr. DeMarco would only affect about 10% of all underwater mortgages backed by Fannie Mae and Freddie Mac because homeowners who are underwater but continuing to make timely payments are not eligible for reductions. Mr. DeMarco has said in the past that he fears mass purposeful mortgage delinquencies if the program is permitted to move forward, a prospect that has not been supported by evidence. The likelihood of damaging ones credit rating and potentially losing a home in exchange for a principal reduction that may or may not come at all has not convinced any significant number of borrowers to stop making their mortgage payments.

The Obama administration has been reported as putting pressure on Mr. DeMarco to make a decision allowing the contemplated principal reductions to move forward, but I am dubious as to how extraordinary the insistence has truly been from the White House. The administration has offered a deluge of failed and ill-conceived fixes to the mortgage mess since 2008, none of which truly aimed at forcing the banks and Fannie Mae and Freddie Mac to allow principal write-downs of underwater properties. A wisely constructed plan by the FHFA and the administration could easily limit any reductions to those homes actually purchased during the fraudulent run-up in home prices, and those homes who value exceeds that of the original mortgage, excluding refinancing undertaken to make additional unnecessary purchases. Configuring a program to address this problem and stimulate the economy would not be a herculean task.

It is wholly objectionable that the already incommensurate principal reductions proposed by Congress and the President are being insubordinately rejected. However, it should come as no surprise to anyone given the administration’s posture concerning this problem from the very beginning. Setting aside the earlier mentioned waterfall of half-assed programs previously concocted, the furthest the President has been willing to travel down the write-down road has been to propose federally assisted and voluntary refinancing of a small number of homes under lower interest rates. Not a single legitimate attempt has been made to reduce the principal of homes currently in repayment and dramatically underwater. Offering a homeowner the ability to pay twice the value of a home under a lower interest rate is no program at all. It is an insult to each American who had their tax dollars spent drowning large banks and mortgage institutions in liquidity in order to ensure their solvency.

So, Mr. DeMarco, no one is surprised by your decision. Further, only a fool should be surprised by the administration’s lack of movement on this issue. You’re a homeowner, not a bank, and as such, you don’t matter. The most logical course of action is to walk away from any home that is seriously underwater, because help is not coming.

Christine Legarde was right to call upon the American government to offer significant principal reductions to underwater homeowners. She is right because it will boost the American economy, setting free cash to be spent consuming goods and services and alleviating business and personal uncertainty. She is right because it will boost the world economy. She is right because it represents remuneration for the fraud perpetrated upon the people. She is right, quite simply, because it is the moral thing to do.

Apr 19

Could the Banks Fail Anyway?

Brian Moynihan

Bank of America CEO Brian Moynihan

Unless you just recently returned from a four-year vacation on the moon or have been trapped in a Massey Energy coal mine, you are aware that the American taxpayers have provided tens of trillions of dollars in direct bailout money and near zero-percent loans to the largest banks operating in the United States since 2008. While specific banks appear to have emerged from living for free in the American People’s pool house quite profitable and have regained their footing, several large banks remain on the verge of–or are currently operating in–insolvency.

Moody’s rating agency recently put nearly each of the large banks in the United States as well as several international banking behemoths on its watch list for a potential downgrade. Bank of America for example, reported first quarter revenues this year nearly $1.4 billion less than last year’s first quarter revenues of $2 billion. The primary reason for the decreased profitability is a  new rule that prevents the bank from reporting junk loans as performing loans.

Moody’s Investors Service has announced a review of 17 banks and securities firms with global capital markets operations. Underpinning this review is Moody’s view that these firms face challenges that are not fully captured in their current ratings. Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.

The New York Times ran an earlier story on this development at the large banking conglomerates in late May. In the report, the Times also uncovered a major concern for the large banks: The largest mutual fund players may seek to renegotiate contracts with certain banks or walk away from the relationship entirely in search of more financial stable partners. Without these trading contracts with the mutual fund companies, further stress with beset the overall profitability of the banks.

Nearly four years after the largest financial institutions in the world were bailed out by the American and European taxpayers, the very same banks are hat in hand demanding more assistance. Perhaps most importantly, the sheer magnitude of the bailouts and loans fail to capture the entirety of the destruction supervened upon the people. Budget cuts and ensuing layoffs, unemployment, trillions in lost home value and investment value, higher education and public school cuts, public park closures, unanticipated bankruptcies, infrastructure funding cuts, public health and assistance cuts, just to name a few. This entire adventure illustrates precisely why it is bad policy to allow any industry group to blackmail a government into action. It never ends, and eventually the crook comes banging at the door for more, and more, until policymakers are forced to act responsibly, as they should have from the very beginning. It is at this point that the industry is forced to take its medicine. It is time for the Obama administration to follow through on its first failed attempt to break up one or more of these large banking leeches and sell off the parts to smaller community banks rather than to continue to throw good money after bad. Maybe this time Timmy Geithner and company will do as their told. Or maybe we’ll continue down the same failed path.

Some Good News

Aside

While the federal regulators and the Department of Justice continue to treat the symptoms rather than the cause of the recent housing collapse, the Federal Reserve announced that it will force Morgan Stanley to review thousands of foreclosures processed by a former subsidiary. The goal is to compensate those foreclosed upon improperly.

Among the allegations made by the Fed against Saxon are claims that employees filed foreclosure documents without verifying their contents and that they filed mortgage documents with courts that were not properly notarized.

While each regulator and prosecutorial agency continues to trip all over itself in an effort to avoid going after any of the large banks at the heart of the crisis, something is better than nothing.