Bank Lawyer's Blog

Jeb Hensarling: Modern Day Don Quixote

I didn't agree with Texas Congressman Jeb Hensarling, the only sitting member of Congress who serves on the TARP Congressional Oversight Panel, when he initially opposed the Bush administration's original TARP proposal last year. I can't say that I agree with every position he takes on political and economic issues. On the other hand, he's nothing if not consistent in his suspicion of the role of big government (especially, big federal government) in intervening in the economy, and for that I respect him. We need thoughtful opposition to the march of the current administration and Congress, aided and abetted by the federal banking agencies and some of the more notorious opportunists who head a few of them, to impose their version of a "command economy" on this country under the guise of dealing with an "economic crisis."

Last week, Hensarling proposed a bill that would end TARP on December 31, 2009. It would also make it easy for any TARP recipients to repay TARP CPP capital and would end the current administration's attempt to make TARP a roach motel for certain large banks (e.g., Bank of America, Citigroup) that are branded "too big to fail," which is turning into "too big not to be micromanaged by Democratic politicians for the benefit of their core constituencies and largest political contributors." Hensarling's legislation would also force the Treasury Department to liquidate warrants as TARP preferred stock is repaid, thereby removing a hammer hanging over the head of those banks that have otherwise repaid what they "borrowed." Finally, it would reduce the TARP funds available for use by the Treasury Department dollar-for-dollar with the amounts repaid, thereby reducing the Treasury Department's ability to spend those dollars again and meddle elsewhere in the economy with them.

Hensarling appeared last week on CNCB's program "Squawk Box" (see clip below) to discuss the proposed legislation. It became apparent that TARP's merely one of the aspects of the federal government's intervention in the economy that's bugging him. He admitted that his "tipping point" was the "lawlessness" (my term, ot his) of the Obama administration's behavior in perverting the bankruptcy laws so that the United Auto Workers union received far more than they would have had Obama and his minions not used TARP as an arm-twister to get creditors who received TARP and other federal assistance to approve a plan that screwed bond holders who otherwise would have been entitled to more preference than they were given in the final plan. He's worried that this is only the first of many instances of creeping "command economy" maneuvers by the current administration and the majority party in Congress. I suppose he calculates that he might as well start "squawking" about it on television and through whatever other venue he can.

I agree with his attitude toward the prospects of the legislation being enacted: "high hoes, low expectations." I'd add something about a snowball in Hell, but I think he covered the prospects properly. Nevertheless, as time marches on and the agenda of the powers-that-be continues to play out, he'll likely have an increasingly sympathetic audience among many bankers, including all those community bankers who are too small to save, and who've either been left on the sidelines or beaten like drums by the same regulators who handle the big boys with kid gloves.

Dick Durbin Derailed--Again

Depending on which side of the political spectrum you inhabit, last week's destruction of Senator Dick Durbin's amendment to allow bankruptcy judges to cram down the value of residential real estate loans to the fair market value of the collateral securing the loan was either a dastardly deed or the second coming of The Great Emancipator. Lefty Los Angeles Times sang the blues, disguised, as usual, as an unbiased news story.

The financial services industry is in trouble over its role in crashing the world economy, but that doesn't mean its lobbyists have lost all their muscle on Capitol Hill.

Exhibit A: The Senate delivered a stinging rebuff to President Obama and consumer advocates Thursday by rejecting a measure to help homeowners facing foreclosure.

Yeah, those damned lobbyists and other "special interests" derailed the will of the people with their ungodly use of logic. Curses! Foiled again!

Its defeat in the Senate marked a turnaround for the Democratic supporters of the bill, who had hoped that the party's new majority would boost its chances for passage.

Instead, Democratic leaders were furious to see bankers lobbying against consumer protection measures after Congress had approved enormous sums to shore up the financial services industry.

"I am sick and tired of being asked to give billions to these banks," said Senate Democratic Whip Dick Durbin (D-Ill.), who threatened to oppose any further industry bailouts. "If they have no sympathy for homeowners facing foreclosure, I don't have any sympathy for them."

Travis Plunkett, legislative director of the Consumer Federation of America, attributed bankers' continuing clout to the fact that they are major financial players in campaign contributions -- to Democrats as well as Republicans.

According to the Center for Responsive Politics, commercial bank employees donated $22.5 million to congressional candidates -- more than half of it to Democrats.

Legislators influenced by political contributions? What next: the sun rises in the east tomorrow morning? Is there no end to mankind's and nature's perversity?

"There's no question that our industry has lost a substantial part of its credibility and its reputation in the eyes of legislators and regulators," David G. Kittle, chairman of the [Mortgage Banker's A]ssociation, said in [a] video.

Indeed, a recent Gallup Poll found that only 5% of respondents expressed a "great deal" of confidence in U.S. banks -- the lowest since the poll started asking the question in 1979.

Indeed. Once again, a main stream media drone can't understand the distinction between a mortgage lender, represented by the MBA, and a commercial bank, represented by the ABA. The Gallup poll isn't directed to the same industry group that MBA chairman Kittle was addressing. In addition, the Gallup poll was directed to members of the great mass of the unwashed, bootless, and unhorsed, not the "legislators and regulators" to whom Mr. Kittle was referring. Let's not let details get in the way of a good story, though.

The home loan measure, sponsored by Durbin, would allow judges to reduce, or "cram down," the principal owed on an existing mortgage for a primary residence. It would remove an oddity in current bankruptcy law:

Judges handling bankruptcy cases can already reduce the principal -- and thus the size of the payments -- on a vacation home, car or boat, but not on a mortgage for a primary residence. The bill would have changed that. Sponsors hoped that would give banks an incentive to modify loans to give relief to borrowers facing foreclosure.

An "oddity"? Hardly. It is a deliberate decision by the US Congress to keep the cost of residential purchase and refinance financing affordable and to promote housing. While Congress might reconsider that incentive, and a healthy debate over the issue is not something to be avoided, a mischaracterization of the lack of a cram down right for first lien residential mortgages as an "oddity" that Durbin's amendment was designed to remove is a graphic display of either ignorance or bias by reporter Janet Hook. No where in her article is any mention of the major argument made by opponents of the amendment, that a cram down right would increase the cost of first residential mortgage loans. You can also legitimately debate the validity of that argument, but to completely omit it from the article makes Ms. Hook a shill for the bill's supporters.

On the other side of the fence, the capitalist oppressor mouthpieces of The Wall Street Journal, while correctly pointing out that it was an alliance of community bankers and credit unions that was especially influential in its criticism of the cram down amendment (in opposition to their sell-out Big Brothers at Citigroup and Bank of America), nowhere in the article is mentioned the bitter criticism of the defeat by consumer groups or Democratic supporters nor the influence of nefarious lobbyists. You might as well have been watching Sean Hannity on Fox. On the other hand, at least The WSJ saved its outright crowing for the editorial page.

The cramdown would have allowed bankruptcy judges to rewrite contracts to reduce the amount that people owe on their mortgages. But a bipartisan majority understood that relief for today's troubled borrowers would be paid with higher rates on the next generation of homeowners, as lenders priced the added risk into mortgage contracts.

A dozen Democrats joined Republicans in the 51-45 vote, and even Pennsylvania turncoat Arlen Specter gave his former GOP comrades an assist. Speaking for millions of renters and nondelinquent borrowers, Mr. McConnell said that the vote "ensures that homeowners who pay their bills and follow the rules won't see an interest-rate hike at the whim of a bankruptcy judge."

[...]

The victory is also an example of Republicans helping the economy and thus saving Democrats from their own worst instincts. Liberals were so intent on helping troubled homeowners that they were willing to punish the profits of the very banks they say they want to lend more to new mortgage borrowers. May we have more such virtuous "obstructionism."

It may be a victory for now at least, but there's always next week, next month, next year.

"No man's life, liberty, or property are safe while the legislature is in session." Gideon J. Tucker, 1866.

KPMG: Stomped By The Elephant

Yesterday’s news that the trustee in bankruptcy for former subrime mortgage giant New Century (one of the first big subprime lenders to fail a couple of years ago) had sued KPMG and its international parent over the collapse of New Century didn‘t really come as a shock. When a company that big fails quickly and spectacularly, you know that its auditor has put its professional liability carrier on notice. You also know that the bankruptcy trustee is going to squeeze as much blood as he or she can out of the auditing turnip for the benefit of the unsecured creditors. However, today Francine McKenna at re: The Auditors, focused her keen eye on the matter and dug out some gems, including one near and dear to our hearts. That one was actually uncovered by Francine two years ago, the first time she wrote about New Century, and which she reiterated today. Discussing an SEC investigation, she notices some lapses in securities disclosure documents [emphasis Francine's]:

There are 17 pages of discussion of general and REIT specific risk associated with this company, but no mention of the specific risk of the potential for their banks to accelerate the repurchase of mortgage loans financed under their significant number of lending arrangements….it does not seem that reserves or capital/liquidity requirements were sufficient to cover the possibility that one of or more lenders could for some reason decide to call the loans. Did the ratios drop? Were they delivering their monthly compliance certificates to all the lenders? Were those accurate and truthful? Did the lenders have the right to call the loans unilaterally? It does say that if one called the loans it is likely that all would. Didn’t someone think that this would be a very big number (US 8.4 billion) if that happened?… I find it very curious that no matter how much auditing and disclosing goes on, we continue to see “rapid, unexpected declines” in once high-flying companies that suddenly teeter on the edge of bankruptcy, even though the best and the brightest are supposedly “Keeping Watch” for us as their auditors.

As regular readers know, I’ve been yipping and yapping like an annoying little Shih Tzu about the primary danger of the “mortgage banking” business model for the little over five years this paltry blog has been in existence: the “Elephant in the Room,” investor-forced repurchases of loans. As Francine rightly points out, when you originate and sell a volume of loans many, many times the amount of your capital and liquid assets, you're facing tremendous potential risk if your underwriting is not, shall we say, “robust.” In seventeen pages of discussion of risk in a disclosure document, repurchase risk is never mentioned. That’s striking.

The Chairman of the Board of a small FDIC-insured financial institution once told me that his institution had outstanding loan sales of many thousands of times its capital. Yet, the specific federal regulator overseeing that institution consistently failed to ever ask the institution how it intended to cover that risk and, in fact, spent relatively little time evaluating origination and underwriting controls as opposed to the regulatory “flavor of the month,” such as Bank Security Act compliance, consumer protection law compliance, or other less critical areas. He wondered whether the regulators “got it.” I don’t know whether or not they ever “got it,” but you have to wonder if auditors failed to "get it," as well.

Francine makes other interesting points, among them:

• Suing the international parent of US accounting firms is a trend that we’ll continue to see.

• The emphasis of the complaint on a lack of “independence” might reflect a lack of sophistication by the plaintiff’s counsel as to the nuances between “independence” and simple negligence, although, to her, “[t]his one seems clear cut enough on the negligence and professional malpractice points alone.”

• “Rolling over and playing dead for the sake of the business is not an ‘independence’ violation, I’m sorry to say.” Lines like that keep me coming back to Francine.

• KPMG still audits Citibank and was the auditor of Countrywide. How much more fun can they stand? Moreover, “who’s next?”

TARP Derangement Syndrome

The successor to "Bush Derangement Syndrome" among the chattering and political classes might soon be "TARP Derangement Syndrome." With the House and the Senate rushing through punitive legislation to punish bonus recipients at AIG, and in the process scooping up a number of other executives and employees of financial institutions other than AIG that took TARP CPP dollars and other forms of federal government aid, the public hysteria to trace TARP dollars through the golden goose's gullet is rapidly approaching ludicrous proportions.

The latest example is the dust-up caused by the Cleveland Plain Dealer breathtakingly breaking the news today that giant Ohio-based thrift Fifth Third Bank, a CPP recipient, had...gasp...conducted a marketing campaign that included a sweepstakes program that distributed $900,000 in prizes. TARP dollars to ordinary citizens in the form of a sweepstakess! Outrageous!

Or so intimates the main steam media, at any rate.

The sweepstakes idea was concocted a year ago, and the contest began before the TARP program was even announced. As Joe Champline, Fifth Third's Vice President of marketing correctly noted, "Once you start a sweepstakes, you must continue it and declare winners."

Not that compliance the legally binding obligations is of concern to members of Congress. Yesterday on NBC's Today show, I heard New York Democratic Rep. Carolyn Maloney being badgered by substitute host David Gregory about the fact that AIG was bound by legally enforceable contracts to pay the bonuses, after Rep. Maloney had asserted to Gregory that AIG's management should not have paid the bonuses. Rep. Maloney, apparently ignorant of the 5th and 14th Amendments to the US Constitution, as well as the difference between government and private parties, and caring not a fig for the concept of "a deal's a deal," said that the government abrogated contracts all the time ("renegotiated" might have been the word that she used), and she gave bankruptcy court as an example. The utter idiocy of that argument as applied to a private party like AIG, as well as her lack of understanding that even the US government can't abrogate private contract rights without due process of law, demonstrates that "Peter Principle" Maloney has reached her highest level of incompetence as a member of the House Financial Services Committee.

In the case of Fifth Third, we had Ohio Republican House member Steve LaTourette, a TARP hater from the get-go, jumping in front of the microphones to bloviate about the matter.

"This sweepstakes might not use a dime of bailout money, and might be a legitimate and successful marketing tool for the bank, but something that passed the smell test prior to the bailout might not afterward..."These institutions should walk on eggshells and really gauge what public reaction to their choices might be, because it's not good enough in this climate to say, 'I promise we didn't use taxpayer money.' "

How would a denizen of one of the rankest environs on the planet, the US Congress, be qualified to judge a "smell test"? I would have thought his entire world would smell like sulfur 24/7/365.

What is "good enough" for guys like LaTourette and the people he represents? What's next for banks that accept TARP or other government aid? Do marketing geniuses like Maloney and LaTourette get to micromanage what is and is not an appropriate marketing expenditure? Is any marketing expenditure appropriate? Better yet, if it's "public outrage" that drives what is and is not appropriate, just put all bank marketing budgets up for a public vote. That's the only truly safe way not to have "public outrage" fuel a public brawl in the public media.

I'm all for having Congress call for the average citizens who won money in that sweepstakes up to Capitol Hill to be grilled by the mouth-breathers there about how the winners spent the money they won in the "scratch off," and/or why they think that they're entitled to keep the dough. Better still, let's pass special legislation that those "winners" who don't return the money to Fifth Third pay a 90% excise tax on the winnings.

How low can we go?

Cramdown Pare-Down?

Late this afternoon, Housing Wire summarized the latest developments in the cramdown-in-bankruptcy provisions that are contained in the "Helping Families Save Their Homes Act." A vote on the Act is expected by the House next Tuesday. According to sources noted by Housing Wire, it appears that two important modifications may be made before the House vote.

Some of those discussions include linking any bankruptcy cramdowns to the Obama administration’s newly-announced mortgage modification plan, as well as potentially limiting cramdown authority (at least initially) to subprime mortgages only. Marketwatch reported Thursday afternoon that a group of 67 centrist House Democrats are pushing for an explicit loan modification-cramdown link, meaning that no mortgage could see its principal balance reduced by a bankruptcy judge unless the borrower had first sought out relief under the terms of the administration’s loan modification guidelines.

[...]

Senator Richard Durbin (D-IL), the lead sponsor of the cramdown legislation, suggested to American Banker on Tuesday that Democrats might be willing to limit cramdown authority to just subprime mortgages, in an effort to quell industry unrest and long-standing opposition to the proposal. Subprime loans are not available for modification under the administration’s HASP.

“We’ve talked about that as a possibility,” he told the news service. “I am willing to negotiate. I want this to be a reasonable approach, but we have to include [bankruptcy]. If we don’t include it, we’ll be stuck in the same mess we’re in today.”

Both of those changes would be good news for mortgage lenders. They'd also be good news for most borrowers, of course (you know, those who actually pay back their loans in a timely manner), since broad cramdown power that applies to prime loans may very well increase the cost of those loans. Consumer advocates argue otherwise, but mortgage lenders assure everyone who will lend them an ear that, indeed, those three or four credit-worthy borrowers who will still be able to get a mortgage loan by the time this meltdown turns into a recovery will pay more than they otherwise would if cramdown in bankruptcy is a reality for prime loans. Of course, no one knows for certain, do they?

Another interesting provision of the Act that is discussed by Housing Wire is the "safe harbor" for mortgage loan servicers who engage in the type of "systematic mortgage loan modifications" favored by Sheila Bair. I'll need to see the final version of that provision before I believe it, but I expect that no matter how it's worded, cranky investors and their class action counsel will find that Congress has once again violated private contract rights, and we can look forward to many, many years of "Dancing With The Bear."

Yesterday, we noted how bankruptcy attorneys are rolling in dough. Next up to feed at the trough may be trial lawyers.

Thank you Congress.

Bankruptcy Laterals Bringing In Big Bucks

Today's Law Blog touts the big bucks bankruptcy lawyers are pulling in. While big law is laying off corporate lawyers, bankruptcy is back in vogue and paying serious money to partners with skills and (we assume) portable business who can move laterally as quickly as they can move forward.

Take Luc Despins, a veteran of many big bankruptcies, including Enron and Lehman Brothers. Paul Hastings last year paid him more than $5 million per year, guaranteed for three years, to lure him from Milbank Tweed.

Raniero D'Aversa Jr., who used to be a top bankruptcy partner at Mayer Brown, was paid about $2.5 million last year to join Orrick Herrington ─ a 25% pay raise for D’Aversa.

A couple of years ago it would have been impossible to imagine firms throwing professional-baseball money at bankruptcy lawyers, who can not only command fat salaries on the lateral market but are getting paid more just to stay put ─ because of the risk, of course, that they could jump to a competitor.

Even ancient mariners are taking calls from headhunters.

Down in Houston, Hugh Ray, the 66-year-old head of restructuring at Andrews & Kurth, says he's surprised that even he’s getting barraged by recruiters. “I’m getting calls all the time, and I’m an old man,” he says. “It makes your inner child feel loved.”

Personally, my inner child would love some ice cream rather than a headhunter's call, but I won't get any (ice cream, that is) until Lent is over. In the interim, I'll prepare my inner child to squeal in delight as he fields calls from headhunters looking for bank regulatory lawyers. Those of us who've been through down times before know that bank lawyers can turn from being obstetricians to oncologists without missing a beat.

Cramdown's A'Comin'

To no one's surprise, (certainly not ours), first lien residential mortgage loan cramdowns will soon be coming to a bankruptcy court near you. Although we haven't seen the bill yet, Dick Durbin's office announced today that he, Chuck ("Bank Run") Schumer and Chris ("I Boinked Princess Leia") Dodd, had cut a deal with Citigroup on a bill that would permit such cramdowns in Chapter 13 bankruptcy proceedings. According to The Wall Street Journal, which broke the story, this "marks a surprising change of direction by the financial-services industry."

Banks have consistently fought such legislation, saying cramdowns would raise borrowing costs for all home buyers and jam courts with homeowners who wouldn't otherwise declare bankruptcy.

"This is the breakthrough we've been waiting for, to have a major financial institution support this legislation will create an incentive for others to come our way," Sen. Durbin said in an interview. "I want to congratulate Citi for being open-minded about this [and] playing a major leadership role."

I thought Barack Obama was the breakthrough we've been waiting for? I guess not.

The WSJ also reports other "open-minded" financial institutions support the bill, but did not identify them. I'd hate to think that Bank of America died and left Citi in charge of the US commercial banking biz. After all, when it comes to "open-mindedness," it's hard to beat BofA, which sometimes is so open-minded that its brains fall out.

Frankly, as described by the WSJ, the bill doesn't sound as bad as many might have feared, even though it goes beyond what the banking industry has been willing to support in the past.

The Democrats' proposal allows judges to force major reductions in home loans, after homeowners certify that they have attempted to contact their lenders about a mortgage reduction before bankruptcy proceedings begin. They do not however have to have engaged in negotiations with their banks.

The cramdown bill would apply to all mortgage loans, including but not limited to subprime loans, written any time  prior to the bill's date of enactment.  It allows judges the ability to lower principal or interest rate, extend the term of the loan, or any combination of the three. "Cramdown" refers to the ability of judges to lower a mortgage principal so that it is equivalent to the current market value of a home.

In a concession to lenders, if a lender is found to have violated the Truth in Lending Act during bankruptcy proceedings, the institution would be subject to fines, but would not have to forgive the loan, as is the case currently. Major violations would still be subject to full sanctions under the law. The TILA provisions would pre-empt any state lending laws.

I'm certain that many bankers who do not have the heft of major Mastodons like Citi and BofA will be critical. I can admit to a bit of mystification myself as to the fact that the cramdown right will apply only to loans made prior to the date of passage of the legislation. I thought the argument for extending cramdowns to first mortgage loans was to deal with those awful subprime and "exotic" loans made when real estate values were as high as the lenders and borrowers who based their lending decisions upon those values ever rising. Why not single out specific types of loans? Also, why not pick an effective date that is at least no later than mid-2008? Good arguments can be made that an even earlier date should be selected. You're going to effectively "rewrite" some conventional home mortgage loans that were initially prudently underwritten, to the disadvantage of the lender. That's done with second loans, auto loans, and commercial loans, but the lenders of those types of loans set pricing based upon the knowledge that there's the risk that cramdown could occur. That's not the case for first mortgage loans. Is that "fair," in light of the fact that the Democrats who support this bill are all about "fairness"?

We'll be interested to see the effect of this legislation on pricing of loans and loan servicing on pre-effective date mortgage loans. I wonder if prospective purchasers will drive harder bargains on bulk purchases of such loans from the FDIC due to this risk? You think?

At least the cramdown will not apply first loans going forward. Of course, any lender with a brain in his head has to assume that if Congress did it once, Congress could very well do it again, and price the risk accordingly. Moreover, this is likely not only to make first mortgage loans more expensive, but add even more impetus to restrictive underwriting standards. While many people believe that's not a bad effect, let's ask them again in a few years. As I observed when Durbin first started this push, the same folks who scream for cramdowns will be some of the first complaining that lenders aren't making enough loans to those with poor credit, who will likely be members of various classes of the perpetually aggrieved, and supporters of Senator Durbin and the rest of the Gang of Three.

Congress Cries "Cram It!"

Bankruptcy cram-down legislation for residential mortgages is back on the front burner. When we last looked at this proposal, its chances of enactment looked favorable, but it was stripped out of the legislation to which it had been appended prior to passage. However, as Luke Mullin notes, the post-election world is a whole new era for Democrats eager to make the evil banking business pay for its sins, and, at the same time, to help consumers who can't pay their home loans today prove that they won't be able to pay a stripped down mortgage a few months or years hence. That way, everybody loses, but politicians make it appear that they've actually accomplished something of long-term benefit.  That's the American way, no?

Given the makeup of the US House and Senate, and with Barack Obama in the White House, I don't think that the "tough fight" by the lending business that Luke correctly forecasts will ultimately prove successful this time around. The argument that banks have made repeatedly to thwart such legislation is that the reason that cram-down for residential first-lien mortgages was omitted from the Bankruptcy Reform Act of 1978 was that it would make residential mortgage lending more expensive for homeowners and would restrict the access to credit for millions of potential homeowners. I think that a large portion of the American public is at a point where it thinks that making residential mortgages tougher to obtain for millions of homeowners is not such a bad idea. Loose underwriting (in addition to outright criminal behavior and borederline-lunatic risk taking on Wall Street) played a huge role in creating the current crisis. If factoring in the risk of a cram-down in bankruptcy increases the cost of residential mortgage credit in the same way that it's increased the cost of commercial mortgage credit, "so be it," say most of the the non-bankers with whom I discuss the issue.

In addition, the drumbeat continues to "stop the tsunami of foreclosures." Letting the market sort itself out with respect to borrowers lacks popular appeal  (regardless of its logical force with free market advocates), since the current "conservative" administration decided to intervene to save lenders and securitizers. Rather than the thus-far slow and inefficient process of having loan servicers sort through the loan modification morass at a pace that has pleased no one, foreclosure opponents might prefer that a bankruptcy court not only stop the foreclosure, but re-write the loan while it's at it. Of course, the borrower will have to file bankruptcy first, which will screw up his or her credit for years to come, but that's a trade-off many may be willing to make to keep their homes. Again, if this makes residential lending tougher in the future, that's the price of "fairness" and besides, this is America: we live solely for today.

At least, that's the line today. When cramdowns, and other restrictions on first lien residential mortgage lending, have been enacted by the next Congress, and their full effect is felt, I have no doubt that many of these same folks will be moaning about how hard it is to qulaify, and afford, a home loan. I also have no doubt that among those moaners will be Bill Delahunt and Dick Durbin.

To Every Day, Spin, Spin, Spin

I recently asked a friend of mine, a D.C. "insider" at one of the national law firms who's one of the "go to" guys when the American Banker or another trade rag needs a quick quote for the latest breathless twist on the same old themes, what this person thought of Sheila Bair. She or he (the name, and even the the sex, of this individual will be disguised to protect the guilty) has been in a number of meetings with Ms. Bair, and is an astute evaluator of all things regulatory. He/she was quite complimentary of Sheila, and told me that Ms. Bair is both a smart cookie and an effective inside-the-beltway "playah," who has obviously, and effectively, been trying to stay on the right side of Barney Frank.

"Of course," she/he observed, "as a female, she really doesn't have a side that's attractive to Barney Frank."

That is the kind of comment that rewards my faith that before each day ends, someone, somewhere, will bring a smile to my face.

As part of Ms. Bair's campaign to support Mr. Frank's agenda (and her own consumer advocacy bias), she's been touting for months her "systematic loan modification" approach to easing the credit crisis, and has made a big bet on the FDIC's ability to implement it with IndyMac's owned and serviced loan portfolios. Last week, she testified before Congress about the IndyMac efforts, and alleged that these efforts were paying off.

Bair also noted that 3,500 borrowers have preliminarily accepted the FDIC’s offer for a loan modification, although it’s unclear how many will ultimately end up with a modified loan.

“Through this week, IndyMac Federal has mailed more than 15,000 loan modification proposals to borrowers, and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures,” she said. “While it is still early in our implementation of the program, over 3,500 borrowers have accepted the offers and many more are being processed.”

Accepting the FDIC’s offer involves signing a modification agreement and mailing in a check for the new payment amount, along with information needed to verify income. It’s unclear how many of the 3,500 that have accepted the offer will ultimately see their loans modified based on verification of their income. Bair did not comment further on the specifics of the modification program in her remarks to the Senate on Thursday.

“Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country,” she said.

It’s a hope clearly shared by some key lawmakers as well, including Housing Financial Services Committee chairman Barney Frank (D-MA), who recently sent a letter to President Bush suggesting that Bair be appointed to a formal role involving foreclosure mitigation under the Emergency Economic Stabilization Act of 2008.

We had previously heard rumors that Ms. Bair has been angling for Hank Paulson's job in an Obama administration, although other rumors indicate that JPMorgan Chase's Jamie Dimon is the early favorite for that position (if he wants it). Publicly, Ms. Bair has stated that she'd be happy to stay on at the FDIC if Obama wants her to stay there and, you know, doesn't have to use her position to pay off a donor. Otherwise, she'll go back to her first love: ivory tower academia, where real life never interferes with a grand intellectual theory of the way the world IS. ("Paging Mr. Greenspan, Mr. Alan Greenspan: Please pick up a white courtesy telephone.")

Speaking of how reality "bites," uber-blogger Tanta at Calculated Risk took a look at Ms. Bair's efforts with IndyMac and could barely restrain a yawn.

So, in two months, just under 40% of borrowers estimated to be eligible have received written mod offers, and of those, just over 20% have responded. We still don't know how many actual modifications that will be, since income verification is still pending on the accepted offers. Nor do we know how many more borrowers have become "eligible" (i.e., 60 days delinquent) since the August estimate.

Certainly 3,500 modifications successfully completed in two months is better than nothing. Then again, I don't think IndyMac's modification rate prior to the FDIC takeover was exactly "nothing," either. Bair doesn't address that, so we still don't know if the FDIC's "expedited" approach has really been measurably better than what IndyMac was already doing. At best, it's probably only marginally better, which wouldn't be so much of a problem if Bair hadn't spent so much time earlier in the year scoring cheap rhetorical points about uncooperative servicers not doing enough to help. In any event, the Bair Plan doesn't seem likely to bring the mortgage crisis to a screeching halt by year-end.

And do note that Bair herself, in her testimony, does not trot out the fashionable line that the delays are all due to securitization rules and red tape...

That suggests to me it isn't the fact that the loans are securitized that is the major problem. It also suggests that the program is moving out of subprime and well into prime territory in order to find borrowers who can and want to arrive at a 38% mortgage-payment-to-income ratio. I guess that's progress; if you apply the program to borrowers who are, as a class, more likely to be able to afford their mortgages anyway, you do get more successful modifications. But something tells me that's not quite what we all had in mind.

Unlike Ms. Bair, Tanta has been involved in the mortgage banking business for decades, and writes with an authority on the subject matter that Ms. Bair can't muster. Moreover, Tanta's not concerned with staying on Barney Frank's "good side."

It's too early to tell whether the systematic approach to loan modifications is real or hype. Time will tell. We won't get out hopes up.

Ms. Bair was interviewed recently by Charlie Rose on PBS. Here's a link to the segment. She continues to hammer on the theme that the bailout must focus on helping delinquent borrowers stay in their homes through loan modifications, although she admits that the qualification for a modification must be determined on a loan-by-loan basis. How a "loan-by-loan" evaluation differs from what loan servicers other than the FDIC must do is left unexplained. In addition, during the twenty-five minute interview, she fails to present any justification for her advocacy of loan modifications in terms of the safety and soundness of the institutions that her agency regulates and/or insures. I know she has offered those justifications, but she never takes the opportunity to explain them to Charlie Rose's viewers. Instead, she speaks of the FDIC's "calling" and makes its employees appear to be seminarians rather than government bureaucrats. One is left with the impression that she believes that the right to a loan modification is a self-evident truth. Perhaps it's all wrapped up with the right to "life, liberty and the pursuit of happiness." Finally, watch the clip of Nancy Pelosi at the end, who also praises the pants off of Ms. Bair, and also indicates that the Democrats have not given up their desire to give bankruptcy judges the right to write down principal balances of residential mortgage loans and to rewrite their terms. She alleges that what every delinquent borrower needs to stay in their homes is the right to file for bankruptcy. Great news for bankruptcy attorneys; lousy news for the mortgage business.

Maybe some day, we'll all look back nostalgically at the good old days, when the loan-to-value ratio of a residential mortgage loan was "only" 80% and you didn't have to be Donald Trump to afford the points and interest rate. Then again, by the time the national experiment with the nationalization of the banking business is finished, perhaps we'll be telling out grandchildren about the days when lenders other than the federal government made mortgage loans.

Blessed Are The Lawyers

We've previously yapped about all the litigation generated by the subprime mortgage meltdown, and how trial lawyers are in a feeding frenzy as a result. Now it appears that law firms, especially the large ones, are gearing up for yet a new sub-specialty: work thrown off by the recently passed federal bailout bill.

Designed to help struggling financial institutions, the legislation came at an opportune time for law firms, which have been mired in their own downturn.

Now, firms in New York, Washington, D.C., and pockets around the country are digging into the bill and gearing up for what they hope will be a nice bump by advising clients on the bill's nitty-gritty or preparing documents to gain U.S. Treasury assistance.

"People are hoping this becomes the Full Employment Act for lawyers," says law-firm marketing and organizational consultant Peter Zeughauser.

Exactly who are these "people," Peter? Of the species Homo sapien? For most of the "people" I know, the prospect of lawyers using the generally loathed bailout bill as an opportunity to keep up the payments on their second Jaguar is a cause not for hope but for despair. If by "people" you mean "lawyers," then many human beings would argue that you're stretching the definition of the term to its outermost limits.

Assuming that people and lawyers can be lumped into the same category for discussion purposes, it's true that a lot of traditional mergers and acquisitions and asset securitization work is taking it in the nether regions, which has resulted in layoffs at even the most staid of blue-blooded Wall Street firms, and that the bailout bill offers a lifeline to barristers and solicitors alike.

"Any time you get a large-scale transfer of capital, lawyers get involved," says Mr. Zeughauser.

And their fingers get awfully sticky when so much cash is passing through the system, don't they?

The contours of the work aren't yet clear. But Erik Klingenberg, a structured-finance lawyer at Thacher Proffitt & Wood LLP in New York, says that calls from banks, hedge funds, asset managers, and distressed-asset investors started coming in last week, just after President Bush signed the legislation. "Clients were eager to know how this was all going to work," he says.

That's correct: no one knows how this might work, but lawyers will be pleased to bill you thousands of dollars to tell you in many, many convoluted words, that they don't know yet how this might work. For a few thousand more, they'll throw in some wild conjecture.

And that's just the beginning, folks.

Just how lucrative will the business be? Early-stage advisory business, such as monitoring developments and passing word along to clients, isn't the most lucrative work. But Michael Missal, a partner at K&L Gates in Washington, expects that once Treasury makes the full details of its programs clear, firms will kick into high gear, helping clients through the processes of selling off assets.

Many are hopeful that the work will go well beyond helping clients get a slice of Treasury's package. "You're going to get a pickup in regulatory work, and probably one in litigation and bankruptcy," says Dan DiPietro, the client head of the law-firm group at Citi Private Bank.

Others feel confident that a rush of investigative and white-collar criminal work also is coming. "Politicians are going to demand accountability," says Bruce McLean, Akin Gump's chairman. "If the government's going to buy up assets from a bank, it's probably also going to look into whether or not there was criminal activity." If there are indictments, civil shareholder litigation would be likely to follow.

Yep, there's sure to be a lot of chum thrown into the roiling, hour-churning waters of Oceana Lex. By the time the heat of the economic meltdown finally cools, Joe Sixpack, Hockey Mom, and their illegitimate step-cousin, Joe The Plumber, won't be able to afford even a can of cat food for dinner, but lawyers will find a way to not only fund that vacation on the Kohala Coast, but to send their kids Biff and Muffy to Cornell.

God bless us, every one!