As readers not living in Minnesota may not know, the state government of Minnesota may shut down soon as the result of a budget crisis. Big Labor is telling Big Banks, specifically US Bank and Wells Fargo, that if school districts turn to them to borrow money during the shut down, the dastardly banks better not even THINK about charging ANY interest on those borrowed funds, or they will face the wrath of the kind of rationalists who put Jimmy Hoffa under a New Jersey bridge abutment. The SEIU circulated a petition to its members asking them to sign on to a grim warning to those two big banks:
When our nation's banks were in trouble it was working families who bailed them out. Now we need you to do the right thing and live up to your place as leaders in our financial community.
That would be a stupid argument even if the alleged "facts" were not fabricated. The truth ("You can't handle the truth!") of the matter is that neither Wells Fargo nor US Bank was "bailed out" by US "working families" (the top 1% of taxpayers pay more income taxes than the bottom 95%, and the top 1% are not considered "working families"). As reported in October 2008, Wells Fargo's Chairman Richard Kovacevich told Hank Paulson that Wells Fargo didn't need no stinkin' TARP. In response, Hammerin' Hank made Dick an offer he couldn't refuse, so Dick took one for the team. As for US Bancorp, its CEO, Richard Davis, famously declared that TARP was a "big fat lie."
"We were told to take it so that we could help Darwin synthesize the weaker banks and acquire those and put them under different leadership," Davis said..."We are not even allowed to mention that. ...We were supposed to say the TARP money was used for lending." He went on to say he would be "darned" if US Bancorp were to become part of of the "collateral damage" from the government's "sloppy attempt at nationalizing the [banking] industry."
But don't let facts get in the way of propaganda, SEIU. After all, you're feeling the pinch of your decreasing membership every time the Obama administration cracks down on employers who hire illegal immigrants, so we realize that you can't let truth stand in the way of a good spin around Pravda Park on the Goebbles-mobile while spouting a variation on the theme of "schools can't afford to pay [the banks'] profits." Who then, is supposed to "pay the banks' profits?" What's that you say, SEIU? Banks aren't supposed to make profits? Banks are either public utilities or eleemosynary institutions? Charging interest to borrowers on money lent is un-American? The banks need to screw their shareholders based upon lies and nonsense?
Here's another suggestion about how to "do the right thing": Instead of paying attention to Big Labor, let's all start paying attention to The Big Lebowski. After all, there are worse things in life than "socialists."
Walter Sobchak: Nihilists! [Expletive deleted] me. I mean, say what you like about the tenets of National Socialism, Dude, at least it's an ethos.
As the American Banker's "cheat sheet" summary of the 27-page settlement proposal presented by state attorneys general to the large loan servicers makes clear, the state attorneys general are pushing principal reductions on loan servicers.
Servicers are pushed to consider principal reduction as a first option when possible, although the term sheet makes it clear that the subject has also been "reserved for further discussion." Servicers must evaluate certain delinquent loans with a loan to value ratio of greater than 100%, and offer principal reduction if that would result in a better net present value than a standard modification.
Instead of forbearing on principal, the draft agreement says servicers shall begin "conditional forgiveness of principal" if a loan modification performs well.
"Standard shall be that one-third of forborne amount is forgiven for each successive year that the borrower complies with loan modification terms over a three year period," according to the term sheet.
The state AGs and other federal enforcement agencies are also pushing for the reduction of mortgage debt in the bankruptcy process.
"Servicer shall consider implementation of a special loan modification process for bankruptcy cases where the borrower (a) is considered for voluntary principal reduction to fair market value of property while other unsecured debt is discharged; or (b) as part of a Chapter 13 plan, the interest on the borrower's first lien is reduced to zero for five years and then reamortized at a market rate for 25 years at the conclusion of the five year payment plan," the term sheet says.
The term sheet also touches on second liens, requiring that for all loan modifications, including principal reductions, second loans must be modified proportionately to the first lien or extinguished at the time the modification is offered.
As the New York Post noted today in an exclusive article, loan servicers are responding to this pressure by telling the AGs that they can do something that is physically impossible to themselves, although likely to be quite pleasurable if such an act could, in fact, be consummated.
The deal proposed by federal regulators and state attorneys general in a 27-page draft settlement distributed to the nation's five largest mortgage lenders last week is a "non-starter," sources told The Post.
One bank official said that the draft, if implemented in its current form, would force many of the nation's banks to stop underwriting mortgages altogether because they wouldn't be able to manage the new costs of servicing home loans under the proposed agreement.
While some pundits think that servicers are merely posturing at this point (including threats contained in the Post article to get out of "Mortgage Dodge" altogether), the loud and increasingly bitter grumblings I've heard from long-time mortgage bankers in this relatively stable portion of the US lead me to believe that the settlement, coupled with the trifecta avalanche of upcoming Dodd-Frank regulations, recent FRB regulations in the mortgage area, and the prospect of the CFPB's loving ministrations, have many smaller-to-mid-sized mortgage originators seriously considering (and in some cases, actively seeking) other lines of business. Sure, there will always be someone available to make a loan secured by a house, perhaps the Guido ("Bananna Lips") Spignoli Mortgage Company or the King Faisal bin Abdul-Aziz Al Saud Memorial Sovereign Wealth Mortgage Fund for Boys, but I think that making it increasingly more cumbersome and expensive to make, service, and/or invest in mortgage loans will accelerate the trend I've previously noted: the concentration of the mortgage origination and servicing business in the hands of a few very large "players."
The "principal reductions suck" crowd got a boost from three Federal Reserve Bank economists (h/t Calculated Risk), who argue that principal reductions don't work. The closing three paragraphs of their position papaer are worth reading in full.
Ultimately the reason principal reduction doesn't work is what economists call asymmetric information: only the borrowers have all the information about whether they really can or want to repay their mortgages, information that lenders don’t have access to. If lenders weren't faced with this asymmetric information problem—if they really knew exactly who was going to default and who wasn't—all foreclosures could be profitably prevented using principal reduction. In that sense, foreclosure is always inefficient—with perfect information, we could make everyone better off. But that sort of inefficiency is exactly what theory predicts with asymmetric information.
And, in all this discussion, we have ignored the fact that borrowers can often control the variables that lenders use to try to narrow down the pool of borrowers that will likely default. For example, most of the current mortgage modification programs (like the Home Affordable Modification Program, or HAMP) require borrowers to have missed a certain number of mortgage payments (usually two) in order to qualify. This is a reasonable requirement since we would like to focus assistance on troubled borrowers need help. But it is quite easy to purposefully miss a couple of mortgage payments, and it might be a very desirable thing to do if it means qualifying for a generous concession from the lender such as a reduction in the principal balance of the mortgage.
Economists are usually ridiculed for spinning theories based on unrealistic assumptions about the world, but in this case, it is the economists (us) who are trying to be realistic. The argument for principal reduction depends on superhuman levels of foresight among lenders as well as honest behavior by the borrowers who are not in need of assistance. Thus far, the minimal success of broad-based modification programs like HAMP should make us think twice about the validity of these assumptions. There are likely good reasons for the lack of principal reduction efforts on the part of lenders thus far in this crisis that are related to the above discussion, so the claim that such efforts constitute a win-win solution should, at the very least, be met with a healthy dose of skepticism by policymakers.
Don't expect politically and ideologically driven "settlement" demands to ever be derailed by "a healthy dose of skepticism" or, for that matter, an acceptance of reality. It's not the way the world is that matters to many of the people pushing political agendas in the banking world these days, it's the way they want the world to be. That's why these types of efforts usually unleash the power of the law of unintended consequences, and why the results of the operation of that law are so often so unpleasant.
When Ally Bank and Bank of America settled with Fannie Mae and Freddie Mac several weeks ago on repurchase request claims made by the GSEs, there was speculation in the trade press that these settlements might pave the way for other big banks subject to similar repurchase requests from Uncle Freddie and Auntie Fannie to pay up. There was also talk (including by this blog's bloviator) that the settlement terms looked a wee bit generous to the banks.
Well, Bank of America and Ally may have decided to "fold 'em," but Wells Fargo has decided to tell the GSEs that they can continue to "hold 'em." What's more, the creator of Stagecoach Island told the press that it doesn't think those settlements by its competitors were as generous as some of us might have thought.
Wells Fargo said Wednesday that it won’t follow Bank of America in reaching settlements with Fannie Mae or Freddie Mac on disputed mortgages sold to the mortgage financing giants.
Wells Chief Financial Officer Howard Atkins said the settlements reached by its competitors may not be as generous as some perceived them to be.
You can see the logic in Wells Fargo's "hang tough" attitude when you realize that the GSEs' demands for loan repurchases fell for the second consecutive quarter, and that all repurchase claims against Wells Fargo, including those from private investors and private mortgage insurers, are now down from an original face value of $3 billion to half that amount. Heck, if stiff-arming worked so well all the time for everyone, nobody would repurchase a dollar's worth of loans from the GSEs. If I were standing in Wells Fargo's shoes, I, too, might not think that the generous terms offered BofA were generous enough.
I guess the next step is up to the GSEs. Do they want to press forward aggressively with lawsuits against Wells Fargo, on the basis that if it continues to thumb its nose at its beloved Uncle and Aunt, no member of the family will ever again give them an ounce of respect when they make a repurchase demand? Or, perhaps, do they want to "rethink" their outstanding repurchase requests and make Wells an even better offer than they made Ally or BofA, an offer even a hard case like Wells wouldn't refuse? 20% of remaining face? 10%? Throw in a snuggy with a picture of Franklin Raines on it?
After all, when your only business is buying and securitizing loans, you don't want to terminally alienate the nation's top mortgage loan originator any more than you can afford to terminally alienate any of the other top six originators (including Bank of America and Ally) who, combined, originate over two-thirds of the mortgage loans in this country (such has been the consolidation in the mortgage loan business since the subprime meltdown). There's no doubt that by making all these repurchase demands against the big banks, the GSEs have fundamentally changed the quality of loan originations by the major loan originators. I mean, look at Citigroup.
Three years after bad home loans helped trigger the recession and six weeks after the government cashed in the last of its $45 billion Citigroup investment, the New York-based bank is still selling mortgages that violate quality standards, according to an internal Freddie Mac review obtained by Bloomberg.
Fifteen percent of the performing loans Citigroup sold to the government-owned mortgage-finance company in the second half of 2009 and the first half of 2010 had such flaws as missing appraisals or insurance documents or income miscalculations, according to the review of 375 mortgages. The target for defects should be about 5 percent, said Tim Rood, a former executive with Freddie’s sister agency, Fannie Mae, and now managing director at Washington-based advisory firm Collingwood Group LLC.
So, the GSEs have proved their point, and maybe it's time to put all this nastiness behind us, link arms, and mosey on down the highway, to a land where the taxpayer picks up Fannie's and Freddie's ultimate tab, which will include not only unrecovered losses on bum loans that weren't repurchased by big banks, but $160 million in legal fees for former officers of Fannie and Freddie who are accused by the government of making massive mistakes, if not engaging in outright wrongdoing. Unlike big banks, however, the taxpayer doesn't get a steep discount on his or her tax bill when it comes due each April merely by "hanging tough."
It's an interesting staring game going on, and, thus far, it appears to some of us that the GSEs are blinking. The ultimate loser of the game won't be Fannie or Freddie, however. To find that loser, all you have to do is to look in the mirror.
Francine McKenna talks about the tale of two recent litigation settlements that arose out of the bursting of the subprime mortgage bubble. She thinks that KPMG may have gotten less than its just desserts in the settlement of a case brought by shareholders of Countrywide because, unlike similar litigation that involved imploded subprime originator New Century, no bankruptcy examiner's report was involved. Francine thinks that bankruptcy examiners have proven adept at rolling over large logs and rocks in the cluttered forest that these kinds of cases grow and revealing lots of nasty worms and grubs that the Big 4 audit firms would just as soon leave buried.
Most telling to me in her lengthy (and interesting) commentary is this passage from a July 2009 Bloomberg article, that cites portions of :
One specialist who complained about an incorrect
accounting practice on the eve of the company’s 2005 annual
report filing was told by a lead audit partner “as far as
I am concerned we are done. The client thinks we are done. All
we are going to do is piss everybody off,” the complaint said.
A spokesman for KPMG said that the statement was "taken out of context" in that "[t]he
next sentence, which was omitted from the examiner’s report, 'indicated that the firm’s national office had already reviewed and signed off on the issue, complying with the firm’s normal procedure...'"
In other words, if the national office makes the wrong call and the grunts in the field cry that the emperor has no clothes, their officers can legitimately tell the troops to "stuff it" and the firm is off the hook. Have I got that right?
And people think "Big Law" is a racket.
As Francine points out, Countrywide may very well have saved itself (actually, saved its acquirer, Bank of America) a load of cash by being acquired rather than having been wrung through the bankruptcy wringer where all the dirty laundry is hung out for everyone to see. I think she's right on the money.
Incidentally, Francine was yapping about New Century and the risk that loan buybacks posed to that company long before the subprime chickens came home to roost and lay something on New Century's shoulder other than golden eggs. She's a blogger well worth following, even if she's loathed by Big Audit, or, more likely, because she's loathed by Big Audit.
While guys like John Dugan get their knickers in a twist about the "moral hazard" of granting limited accounting forbearance to community banks who want to amortize commercial real estate losses, the Main Stream Media wrings its hands about big bad mortgage lenders who expect a borrower to pay back money he or she borrowed and, when the borrower doesn't pay it back, not only foreclose on the home but sue some of the borrowers for the deficiency. When will the madness stop!
First out of the moral outrage starting gate was The Washington Post, which a couple of weeks ago ran a story entitled (with just a hint of incredulity) "Lenders go after money lost in foreclosures."
Over the past year, lenders have become much more aggressive in trying
to recoup money lost in foreclosures and other distressed sales,
creating more grief for people who thought their real estate headaches
were far behind.
In many localities -- including Virginia, Maryland and the District --
lenders have the right to pursue borrowers whose homes have sold at a
loss to collect the difference between what the property sold for and
what the borrower owed on it, also called a deficiency.
Before the housing bust, when the volume of foreclosures was relatively
low, lenders seldom bothered to chase after deficiencies because
borrowers had few remaining assets to claim and doing so involved
hassles and costs. But with foreclosures soaring, lenders are more
determined to get their money back, especially if they suspect borrowers
are skipping out on loan they could afford, an increasingly common
practice in areas where home values have tanked.
The story relates the sad fact that many of these borrowers are forced to file bankruptcy.
"I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," [bankruptcy attorney Nancy] Ryan said. "They're stunned when they realize they're not."
That about says it all for a segment of the population that considers a legal obligation a mere inconvenience and is "stunned" when the counterparty actually enforces its rights.
The article does correctly observe that most lenders don't pursue deficiencies where they expect the borrower has few valuable non-exempt assets other than the home. It also notes that since second lenders are most often left out in the cold in a foreclosure these days, they are more likely to sue than are first lien lenders.
The story also features a couple who did a short sale with the express understanding that the home equity lender reserved the right to come after them for the unpaid balance of its debt. Nevertheless, the borrowers reacted bitterly when the second lender actually called to collect six months later. They stated that they should have trashed the home and let the lender foreclose. Apparently, they failed to appreciate the fact that by taking care of the home and doing a short sale, they very likely lowered the ultimate amount of the deficiency liability that they owe by a substantial amount, especially if the alternative was wrecking the interior of the house and then letting the lender eventually foreclose. That course of conduct made good business sense.
The attitude displayed in these cases appears to be that since times are tough, lenders need to let borrowers off the hook and absorb the losses themselves because, I assume, the borrowers are "entitled to it," even if they can afford to repay all or a hefty portion of the deficiency. A bank's management that enacted and followed a policy of doing that would be in breach of its fiduciary duties to its shareholders and, when viewed by a regulator other than Sheila Bair, would have engaged in an unsafe and unsound banking practice. The lender would also very likely be insolvent itself in short order.
Obviously, each case needs to be analyzed on its merits, and in many cases, the borrowers lack of financial resources will justify the bank not pursuing the deficiency. However, the bank's management has an obligation to act in the bank's best financial interests, not in the borrowers' best financial interests. If the two interests coincide, great. If not, and the borrower has assets to go after and no apparent legal defense to enforcement of the bank's right to be paid, the bank has a duty to enforce that right.
I realize that a distraught borrower, especially one raised in the land where every mother's child has a right to a flood of unending self-esteem and a guarantee (enforceable by the government) that nothing bad will happen to him or her until he or she eventually tragically dies for no good reason at all other than that life is ultimately meaningless, might have difficulty grasping the harsh dose of reality that legal contracts are enforceable. However, aren't these some basic concepts that we expect major market media outlets to fathom and to put into perspective for the reading public? Is that asking too much?
Daniel Goldman is senior editor of First Things, a journal that advertises itself as one that is concerned with the intersection of religion and the public square. Therefore, imagine my surprise when Goldman's Monday morning piece on the First Things blog (which I got around to reading only this afternoon) contained some cogent observations on the recent bailout of Greece by the European Union and how a "peek behind the curtain" indicates that not only is Europe in trouble, but so also are those of us who reside in the land of the free and the home of the brave (plus Wall Street, Chris Dodd, and a Boy Named Sue).
The market got a peek at the man behind the curtain. It wasn't the
Wizard of Oz; it was the ghost of John Maynard Keynes. And it didn't
like what it saw.
Keynes assumed that people have a very
short-term view of things. If you inflate the currency, the workingman
will see the same number of shillings in his pay-packet and spend more,
he wrote in the first pages of the General Theory (1936). By
the same token, if the central bank reduces the interest rate to zero,
investors will shift portfolios to stocks, everyone will feel richer,
and consumers will spend more – which is more or less what happened
during the past two quarters of putative recovery in the United States.
They won't mind that government deficits have ballooned to 12% of GDP
(or 18% of GDP in the United Kingdom, if unfunded pension liabilities
are taken into account).
The fact is that Keynes was right, at
least some of the time. Investors tend to focus on the next turn of the
market, because professional investors are paid to follow the pack
rather than work out what is a worthwhile investment and what is not.
Keynes had contempt for investors; as he wrote in 1931, "A sound banker,
alas, is not one who foresees danger and avoids it, but one who, when
he is ruined, is ruined in a conventional way along with his fellows, so
that no one can really blame him." Every banker in the world had to
short the market on Friday, and every banker in the world had to buy the
shorts back this morning – which is why European stock indices are up
nearly 10% as of 8:00 a.m. Eastern Standard Time.
The trouble,
though, is that the long-term sometimes peeks in. Issuing lots of
government debt is a good idea if the economy can support it. The
trouble with Europe is that forty years from now, there won't be enough
Europeans to pay the taxes to fund the government debt.
[...]
The elderly portion of Europe's population will rise from 24% to 49% of
the total, an insupportable burden. Who would want to buy 40-year
European bonds?
[...]
At every inflection point of the financial crash, governments stepped in
and announced that they had solved the problem. The crisis began in
July 2007; central banks stepped into provide liquidity in August, and
the Fed cut interest rates in mid-September . The consensus then held
that the crisis was over and that bank stocks were cheap. Then came the
Bear, Stearns failure in March 2008, in which the remnants of the firm
were sold to J.P. Morgan. Financials briefly soared, and the analyst
consensus was that bank stocks were cheap—just before Lehman Brothers'
failure in August 2008. The Bush administration announced a $700 billion
bank bailout in September 2008, and financials rallied, before crashing
again in early 2009, amidst rumors of a general bank nationalization.
More bailouts followed, and this time, an extended rally.
Each
bailout requires more leverage, and puts at risk a larger and larger
compass of the financial system. The central banks with their combined
muscle crushed all the short positions in the market this morning. But
time is against them; and now that the market has had a peek behind the
curtain, things will never be the same.
As one of the commenters to Goldman's post put it, "Here in Italy, I used to like to crack wise that the Euro is Monopoly
money. Now? It's all Monopoly money, baby"
Let's boil this down to its essence, without all the "blah-blah-blah": we're screwed.
But have a great weekend anyway. Armageddon is still a ways off. Après nous, le déluge.
A couple of weeks ago, we mentioned that blogger Francine McKenna of re:The Auditors has been on the case of the nation's largest accounting firms about their failure to properly catch and force clients to disclose a major risk of mortgage banking: repurchase risk. Yesterday, she had some more to say about the subject and none of it was good for KPMG and its auditing cohorts.
If you are a regular reader of this site, you may remember the first time I warned you about the poor disclosure practices surrounding
repurchase risk. It was all the way back in March
of 2007 and I was referring to the lack of disclosures surrounding
New Century Financial.
[...]
New Century failed. There was a very detailed, well-done bankruptcy
examiner’s report on that one, too.pointed
the finger at KPMG for not heeding the advice of their own experts,
a la Andersen/Enron. Instead of the KPMG partner telling the client
that their models for estimating potential losses were flawed, the
partner told the staff to shut up and move on. Mr. Missal
I
warned you again seven months ago that another KPMG client,
Wachovia/Wells Fargo, has the same poor disclosure of repurchase risk.
[...]
The latest
announcements of potentially material losses due to forced
repurchases of mortgages from Fannie Mae (Deloitte) and Freddie Mac
(PwC) were made JP Morgan and Bank of America – both audited by PwC.
[...]
Maybe ya’ll should kick the tires a little more on Citibank’s big
comeback. Citi is the only big
money center bank left that is audited by KPMG. Recent testimony
before the Financial Crisis Inquiry Commission says their
underwriting standards fell apart between 2005-2007.
This rock has just been overturned and what is crawling out from underneath it is not favorable for the nation's largest auditing firms. Francine's warning us that not only will large financial institutions who originated and sold subprime, Alt-A, option ARMs and other wounded ducks to Fannie, Freddie and other investors (and who are still solvent) during the height of the craziness in the early-to-mid 200s continue to suffer for their sins, but so will their auditors. In fact, the auditors will suffer more, because while many of their sick-mortgage originating clients like New Century have gone to dwell in the land of fire and brimstone, the big accounting firms are still standing, still insured, and--for now--still possessed of deep pockets. There's nothing more a plaintiff's trial lawyer loves than a defendant with deep pockets and a paid up malpractice policy.
If "ya-all" (or "y'all") are interested in keeping up with this train wreck as it continues to play out, keep following Francine.
According to The Financial Times, Wall Street analysts are warning investors to start paying attention to a risk that we started yakking about five years ago: mortgage loan repurchase risk. FT journalist Tracy Alloway quotes Barclays Capital US analyst Jason M. Goldberg:
While most banks have guided to overall consumer losses peaking near term, we expect losses related to mortgage repurchases and
indemnifications to continue increasing at least through the remainder
of 2010. In fact, we believe this is an area that warrants close
investor attention during the next several quarters, at least until we
have moved through the remaining problematic 2007 vintages and into the
2008 and more recent vintages, as underwriting standards were
strengthened in the middle to late part of 2008. Note in their recent
10-K filings, BAC said repurchase demands could “significantly” increase
its losses, while JPM commented the cost repurchasing mortgages sold to
GSEs increased substantially, and could continue to increase
“substantially” further. Still, we view mortgage repurchases as more of
an earnings issue than a capital concern, since while these expenses are
large enough to depress earnings in any particular quarter, they are
not big enough to materially impact banks’ overall capital levels. This
is an area we plan on paying particular attention to during the upcoming
1Q10 earnings season.
While Alloway notes that lenders like JP Morgan Chase are pushing back against repurchase demands by Fannie Mae and Freddie Mac (something we also discussed in an earlier post), and that JP Morgan Chase asserts that 50% of the buyback requests go unfulfilled, she also points out that Chase's last 10Q filing stated that "[i]t anticipates that its 2010 revenue could be negatively affected by elevated levels of repurchases of mortgages previously sold to GSEs." Thus, Goldberg's cautionary language about hits to earnings appears to be justified.
Fellow blogger Francine McKenna has previously discussed the issue of repurchase risk in the context of the failure of subprime mortgage lenders to adequately disclose this risk and of outside auditors to discover and require the lenders to disclose it. As Francine observed, these failures give ammunition to disgruntled investors and bankruptcy trustees, aided at all times by trial lawyers, to squeeze the last ounce of blood from the Big Accounting turnips who audited the failed lenders (or lenders who survive but whose earnings are hit by repurchases). Warnings by analysts like Goldberg about the impact on earnings of repurchases give the hunters of deep pockets additional ammunition to successfully assert that this is a risk that should have always been foremost in the minds of those with the duty to publicly disclose it.
While I was going to post tonight about the Congressional Oversight panel's sudden discovery that commercial real estate threatens the community banking system, I'll get to that next week. Instead, I was sidetracked by some thoughtful e-mails I've received from a variety of readers that concern which "players" in the current commercial banking arena are primarily to blame for the industry's woes. Fingers were pointing in all directions. I also received a reminder from a reader about a post I did a couple of years ago when the proposed Wall Street bank bailout was still being debated. He enjoyed the fact that it seemed to be prescient with respect my most recent post about the FDIC disposing real estate loans and loan participation interests at fire sale prices. While that may or may not be true, it also contained a discussion about personal responsibility that cuts closer to the bone for me. Therefore, I'm going to re-post it tonight.
It's always useful when you're assigning blame in a complex situation to first stop and look in a mirror. After that, you can starting throwing stones.
There was an interesting juxtaposition of articles in yesterday's Dallas Morning News. Business columnist Cheryl Hall worried that the latest bailout might make the same "mistake" that she alleges the RTC made: selling assets at too low a price, and allowing buyers to reap big returns when prices recovered. Her article featured real estate developers and S&L owners in Texas who suffered from (and many would argue, contributed to) taxpayer losses caused by the meltdown of the S&L industry in Texas in the late 1980s and early 1990s. They included developer Henry Billingsley, who lamented that his strapped finances during the last downturn prevented him from making a killing from the RTC, but who is elated that this time around he's got the resources to take advantage of the proposed (albeit currently aborted) bailout.
"It wasn't that
you didn't know that it was a once-in-a-lifetime opportunity," says
developer Henry Billingsley, who made two RTC deals but was too
illiquid to bite off more. "When I saw this situation with [U.S.
Treasury Secretary Henry] Paulson, I said, 'There is a God in heaven.
I'm going to get a second bite at the apple.' "
Yes, I always regard it as proof of God's existence that opportunity exists to profit financially from the misfortune of other human beings. Doesn't every believer?
Craig Hall (no relation to Cheryl, as far as I know) was an apartment syndicator and owner of a state-chartered savings association during the 1980s. The thrift failed and many of his apartment projects went bankrupt. He, too, is itching to make a killing this time around.
The chairman
of Hall Financial Group expects additional financial institutional
failures to lead to the creation of an RTC-esque clone.
He and
Herb Weitzman, founder of the Weitzman Group, the state's largest
retail brokerage company, have joined forces to take advantage of any
deals that crop up.
"I was a participant on the wrong side last time," Mr. Hall says. "I want to be on the right side this time."
The last time around, the RTC and the FDIC had a list of people who caused losses to the FDIC (or to the now-merged FSLIC), and those folks were barred from participating as purchasers of assets from the RTC or FDIC (or as contractors with either agency). If this time around, a similar list is used, and the FDIC and Treasury look back far enough, then the dreams of some of these players who were once on the wrong side will not be sweet ones. Some might say that is only fitting.
Editorial columnist Rod Dreher was looking for different--and deeper--lessons from the current crisis than the ability to make a pile of money out of it, and whether the "New RTC" would sell assets at too low a price.
Novelist
David Foster Wallace, who recently committed suicide at age 46, once
told an interviewer that his generation had been morally "gutted" by a
pseudo-sophistication that sneered at boring everyday truths. He
explained that privilege had caused so many of his contemporaries to
forget that plain-spoken wisdom – the sort of truisms that supposedly
only children and suckers believe – is actually, you know, valid.
"The idea that something so simple and, really, so aesthetically
uninteresting – which for me meant you pass over it for the
interesting, complex stuff – can actually be nourishing in a way that
arch, meta, ironic, pomo stuff can't, that seems to me to be
important," he said. "That seems to me like something our generation
needs to feel."
[...]
Mr. Wallace's
observation came to mind the other day as I watched a beleaguered Wall
Street executive on MSNBC try to obfuscate his company's key role in
helping cause the crisis, the near-apocalypse that has delivered the
U.S. financial system to the far end of the valley of the shadow of
debt, to the edge of Armageddon. The poor man gassed on for 10 minutes,
using every possible verbal maneuver to avoid answering direct
questions put to him by journalists.
Who can blame him?
We have become used to this sort of thing. We've come to prefer
comforting lies to hard truths born of observation and experience,
thinking that in our brilliance we had somehow escaped the iron law of
necessity.
[...]
Complex
financial instruments come and go, but the hearts of men remain the
same. Greed, vanity and hubris we always have with us, as well as a
weakness for the soft sophisticated lie over the hard plain truth.
About human nature, tradition – the accumulated wisdom of mankind – is
never wrong. True conservatives – as opposed to those who confuse
mammon-worship with moral and intellectual principle – know that a
tolerable order can only exist when most people live by the moral laws
articulated in time-worn banalities.
So, send the
tumbrels into the streets to carry off the heads of sophisticates who
believed that we had repealed the laws of economics and human nature by
our cleverness. The Gods of the Copybook Headings demand propitiation.
We shall offer them scapegoats and try to forget our own complicity in
the coming catastrophe.
After all, these scoundrels did
not elect themselves, nor was there an outcry heard in the land against
Wall Street rapacity and recklessness when our 401(k)s were rising, and
all but the lowliest plebeian was moving into his very own McMansion.
Along those lines, there's one proverb that we will all become painfully acquainted with in the years to come: You reap what you sow.
Near the end of the Oscar-winning movie "Unforgiven," the young assassin who calls himself "The Schofield Kid" is shaken by his first murder, and lamely tries to justify it with the assertion, "Well, I guess he had it coming." Clint Eastwood's character, William Munny, a man whose life of darkness is finally coming full circle, utters the benediction, "We've all got it coming, kid."
May all of us get everything we have coming to us as a result of this latest crisis, bailout or no bailout.
While most of the press focused on the FDIC's use of the cross-guaranty provisions of FIRREA, a couple of other interesting tidbits floated to the surface near the shipwreck that occurred last Friday when the OCC sank, and FDIC took control of, nine banks owned by FBOP. One of those tidbits was the fact that earlier last Friday, Tim Geithner, who had flown to Chicgo, announced that the FBOP's community banking arm, Park National Bank Initiatives, had been awarded $50 million in tax credits. No one told Tim that the bank was being closed later that day. While the FDIC keeps the closing information a state secret, I had several interested observers break into hearty guffaws at the thought that Sheila Bair had stuck it to a guy who once cursed her (and other bank regulators) out for not being a team player (meaning that she should stop thinking for herself and become part of the "Yes, We Can" hive). The Treasury Department assured everyone that (A) there was nothing unusual about the FDIC (or the OCC, the lead federal regulator of the banks, and another target of Geithner's previous F-bomb barrage) not communicating the pending seizure to Treasury, (B) no tax credits were "lost" when the bank went down, because they'll go to the acquirer of all of the failed banks, US Bank, and (C) blah, blah, blah, yadda-yadda-yadda.
My secret inside sources assure me that Sheila and her staff broke into a late-day giggle-fest behind closed doors over the picture of Geithner's empurpled face clouding with rage when he realized, late in the day, that he'd been goosed by his arch nemesis. They also assured me that Geithner responded with a veritable carpet F-bombing of all within earshot, causing a passing sparrow to fall dead from the sky. You have to give this bureaucratic "gotcha" to Sheila.
Another interesting tidbit was that the failed banks were fatally hit by the collapse of FNMA and FNMA, which rendered worthless $855 million in preferred stock owned by the banks. Those investments were considered gold not so many years ago, and banks thought of that preferred stock as a safe haven that yielded nice dividends. Although one expert criticized the "business plan" of the banks, it's hard to see how holding hundreds of millions of dollars in GSE preferred stock was anything other than a no-brainer until everything went to hell in a hand basket in a hurry. Who knew Fannie and Freddie were going to be as broke as Bernie Madoff? Other than know-it-all bloggers and anonymous commenters on the internet, that is.
A final interesting facet is that the regulators apparently stymied the holding company's attempt to raise $750 million in private equity. One analyst was quoted as saying that the FDIC wouldn't approve that infusion of capital because it might have had to come back and take over the bank anyway at a later date. Huh? As long as you don't let the bank use the new capital to grow its way out of the problem, my preference would have been to let the bank burn through the $750 million in private money before it ever got to the insurance fund. Then again, I'm merely a tool of private enterprise and not a free thinker with a big picture view like those in D.C.
Another Bank Fail Friday approaches. More fun is likely to ensue.
NOTE TO SELF: Even though you barely have time to bang out these daily screeds, do yourself and all the rest of the readers a favor: proofread BEFORE you post. Thank you.
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As readers not living in Minnesota may not know, the state government of Minnesota may shut down soon as the result of a budget crisis. Big Labor is telling Big Banks, specifically US Bank and Wells Fargo, that if school districts turn to them to borrow money during the shut down, the dastardly banks better not even THINK about charging ANY interest on those borrowed funds, or they will face the wrath of the kind of rationalists who put Jimmy Hoffa under a New Jersey bridge abutment. The SEIU circulated a petition to its members asking them to sign on to a grim warning to those two big banks:
