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The G-20 Summit

Deroit is Burning

World News in Depth

Obama' and the Bankers

Cheney of Fools

Dictator Bush

...City officials and housing advocates...in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate....The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away...

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

In [one typical] case, the company that was most recently servicing [the] loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold...the loan said it could not find a record of it. “It is what some of us think is the next wave of the crisis,” said Kermit Lind, a clinical professor at the Cleveland-Marshall College of Law and an expert on foreclosure law.

In Buffalo, where officials said the problem had reached “epidemic” proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled....The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure.

The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can,” Mr. Cecala said. “It’s just a sign of the times that things are so bad no one wants to take possession of the property.” In South Bend, boarded-up houses for whom no one has stepped forward are dotting the landscape, adding a fresh layer of blight to communities that were already scarred from the area’s industrial decline....“Nobody has any idea who owns what or who’s responsible,” said Judy Fox...at the Notre Dame Legal Aid Clinic. “It’s a very common story.” Mayor Stephen J. Luecke of South Bend added: “It’s just a crime the way it puts people in limbo. They first off have gone through the grief of losing their house, then they move out and find out that they still own it and have responsibility for it.”

Establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in "Lords of Finance," his new book about the folly of central bankers before the Great Depression...Krugman may be exaggerating the decay of the financial system or the devotion of Obama's team to preserving it. But what if he's right, or part right? What if President Obama is squandering his only chance to step in and nationalize [or] restructure the banks before they collapse altogether?

Obama aides have invited commentators of all persuasions to the White House for some off-the-record stroking; in February, after Krugman's fellow Times op-ed columnist David Brooks wrote a critical column accusing Obama of overreaching, Brooks, a moderate Republican, was cajoled by three different aides and by the president himself, who just happened to drop by. [*] But, says Krugman, "the White House has done very little by way of serious outreach. I've never met Obama. He pronounced my name wrong"—when, at a press conference, the president, with a slight note of irritation in his voice, invited Krugman (pronounced with an "oo," not an "uh" sound) [**] to offer a better plan for fixing the banking system.

[Krugman] criticizes the Obamaites for trying to prop up a financial system that he regards as essentially a dead man walking. In conversation, he portrays Treasury Secretary Tim Geithner and other top officials as, in effect, tools of Wall Street.... These men and women...are suffering from "osmosis," from simply spending too much time around investment bankers and the like. In his Times column the day Geithner announced the details of the administration's bank-rescue plan, Krugman described his "despair" that Obama "has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they're doing. It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street."

...Krugman first leaned toward populist John Edwards, then Hillary Clinton. "Obama offered a weak health-care plan," he explains, "and he had a postpartisan shtik, which I thought was naive." Krugman generally applauds Obama's efforts to tax the rich in his budget and try for massive health-care reform. On the all-important questions of the financial system, he says he has not given up on the White House's seeing the merits of his argument—that the government must guarantee the liabilities of all the nation's banks and nationalize the big "zombie" banks—and do it fast. "The public wants to trust Obama," Krugman says. "This is still Bush's crisis. But if they wait, Obama will be blamed for a fair share of the problem."

Obama administration officials are dismissive of Krugman's arguments, although not on the record. One official made the point that pundits can have a 60 percent chance of being right—and just go for it. They have nothing to lose but readers, and Krugman's many fans have routinely forgiven his wrong calls. The government does not have the luxury of guessing wrong. If Obama miscalculates, he could truly crash the stock market and drive the economy into depression. Krugman's suggestion that the government could take over the banking system is deeply impractical, Obama aides say. Krugman points to the example of Sweden, which nationalized its banks in the 1990s. But Sweden is tiny. The United States, with 8,000 banks, has a vastly more complex financial system. What's more, the federal government does not have anywhere near the manpower or resources to take over the banking system. [***]

[*] In the relevant Brooks piece, he describes how Obama and three other "senior members of the administration" try to convice him of their moderate credentials and point out that numerous Obama ideas are "Republican ideas....They do not see themselves as a group of liberal crusaders...They’re not engaged in an ideological project to overturn the Reagan Revolution....[They] feel they spend as much time resisting liberal ideas as enacting them....They say, Republicans should welcome the budget’s health care ideas...all Republican ideas....I got the impression they’d be willing to raise taxes on the bottom 95 percent of earners as part of an overall package." --Politex

[**] Obama surely knows how to pronounce Krugman's name. This is a bitchy, Bush-type response, and it's beneath Obama if he wasn't kidding around. --Politex

[***] This Obama argument is based on a lie: Krugman is asking for nationalization of "zombie" banks, not all banks. If our government can't take over failed banks because there are too many of them, the banking system must be restructured. Independent Senator Bernie Sanders has made this point. If financial groups are "too big to fail," they're to big to exist. Otherwise, the banks are calling the shots with little government control, as they morph into "financial instutions". This is pretty far up the road to fascism, according to FDR's definition of "fascism" (see top of Bush Watch home page). As to manpower and resources, the various bailouts suggest the resources are there if we want them to be, and Geithner's understaffed Treasury Department appears to me to be partly a choice: you can't nationalize many failed banks if you don't have top people in place.

With solutions similar to Krugman's, Harold Meyerson writes in the Washington Post, the "plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them. It's certainly not because Americans are dead set against bank nationalization: A Newsweek poll this month found that 56 percent of respondents supported it. Hell, Alan Greenspan supports it." --Politex

...After 1980...a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America. And finance...attracted many of our sharpest minds and made a select few immensely rich.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption. Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.

Which brings us...to the Obama administration’s approach to the financial crisis. Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago....

...The underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules. As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

The leaked reports of the Obama administration’s bank rescue plan Krugman refers to in our previous piece appear to be correct, given the NYT report of the announced Obama plan: "For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, is that the auction will lead to realistic purchase prices." Here's the relevant Q and A at the Geithner press conference announcing the plan:

Q "Looking at the example you give in the fact sheet -- the first program -- you start with talking about $100 in bank loans, but the private investor only has to kick in $6 for -- seems to be on the hook for $6 at the end of the day, and the FDIC guarantees between there and whatever was paid for the bad loan.
"Do you think a person outside this room, outside the Beltway, looking at that would feel like that's a -- you know, you've gotten a good deal by getting someone to kick in $6 for a loan that is valued at a $100, that's being purchased for $84.

SECRETARY GEITHNER: "I'm very confident you and your colleagues will do a good job of framing this thing -- (laughter) -- but let me just come back to the basic point. Okay? The point is, relative to what? What our job is, is to try to fix this problem in our financial system at least cost to the taxpayer and ways to get the incentives right so we can have private capital come in and not have the government do all of it...." --Politex]

Fuller explanation here.

Here's Krugman's response:

...The whole point about toxic waste is that nobody knows what it’s worth, so it’s highly likely that it will turn out to be worth 15 percent less than the purchase price. You might say that we know that the stuff is undervalued; actually, I don’t think we know that. And anyway, the whole point of the program is to push prices up to the point where we don’t know that it’s undervalued. So default on those non-recourse loans is a substantial possibility, which means that there is a large implicit subsidy involved....We’re giving investors a big subsidy, so this has nothing to do with letting markets work. And a final point: If getting the prices of toxic assets “right” isn’t enough to rescue the banks, that doesn’t mean that we’re doomed; it means that we actually have to, you know, rescue the banks, Swedish style, rather than rely on fancy financial engineering to make the problem go away.

Portfolio's Felix Salmon just doesn’t see the plan for toxic assests, now being called "legacy" assets by Geithner, actually selling: "[T]here’s no indication whatsoever that this whole scheme will, you know, actually work. Private-sector investors want to pay as little as possible for these “legacy assets”, in order to maximize their returns. But the banks will not sell any of their legacy assets unless they can do so at a price close to the level to which they’ve already been marked down. Is there any reason to believe that there’s a private-sector bid out there for legacy assets at their current marks? Not really. But if there isn’t, the banks will simply refuse to sell, and there won’t be any money or assets changing hands at all."

On the flip side, some see Geithner's plan as being safer than the alternative, bank nationalization, the plan that Krugman favors: "Bank nationalization will be complex, costly, and contentious. To work, it will almost certainly have to include a broad guarantee of all bank system obligations, something the public won’t be happy about. Congressional support won’t be easy to come by. Geithner’s plan will either work or else it will pave the road for that support. It might not be pretty, but that makes it a plan worth trying." --Kevin Drum

Further, perhaps Geithne's foot dragging on filling the Treasury Department's top desks has something to do with preventing his department from being able to take on the job of nationalizing the banks:

"No one knows if the Treasury Department has the technical capacity or simple competence to swiftly assume control of much of the United States banking sector. If Treasury seems unable to simply build out a banking plan and claw back bonuses, what makes anyone think they can run the banking sector?" asks Ezra Klein>

On the other hand, Klein argues that support for nationalization will be stronger than it is now, should the Obama plan fail:

"No one knows how bad the downside is if you botch receivership, or if receivership doesn’t work. It is easier to abstractly argue the virtues of successful nationalization than contemplate the consequences of unsuccessful nationalization. As such, it should be the absolute last resort. And this plan preserves it as such. There is a non-trivial chance, after all, that the banks will not sell to the private investors because the private investors will not buy the assets at a price that makes the banks solvent. If the private market determines the assets are worth 30 cents on the dollar but the banks will collapse if they’re not bought for 45 cents on the dollar, then the auctions will reveal insolvent banks that cannot be rendered whole through market measures. In that scenario, nationalization will become a consensus strategy, and as such, lose much of its downside.

I've been thinking that what's wrong with Obama is his reliance on a belief in an idelized bipartisanship to get things done, even when those supposed bipartisans he selects don't have his best interests at heart. Paul Krugman has touched on another Obama flaw: his obsessivness. It's ok to have faith in yourself and fight in the face of adversity, but how much negative feedback do you need to know when you've made a mistake? In Obama's case, the answer is "too much." Perhaps hubris is a part of Obama's character, as well. Here's what Paul Krugman writes about the Obama administration’s bank rescue plan:

"Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. This is more than disappointing. In fact, it fills me with a sense of despair.

"There’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive."

The plan is basically Robin Hood in reverse: private investors buy toxic assets at auction. If the assets go up, the investors make a profit. If they go down, taxpayers will cover most of the loss. "So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets," writes Krugman. The "problem with this plan is that it won’t work....If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place."

The Bush/Obama solution is the opposite of what has gotten countries, even our own, out of similar economic disasters over the centuries: "As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books....But the Obama administration, like the Bush administration, apparently wants an easier way out," and it begins by unreslistically overvaluing the toxic assets Obama wants to sell to private investors."

But wait, it gets worse: "An alarming aspect [of the laterst version] of the plan is that private investment companies will manage the process on behalf of the government, despite the fact that government is providing most of the capital and insuring most of the risk, writes Robert Kuttner. [This supposed aspect of the plan has yet to be verified after the Obama announcement of the actual plan. --Politex] "Basically, the Treasury is colluding with private speculators to create off-balance sheet entities, to offer new windfall profit opportunities and disguise the true degree of risk. If this all sounds vaguely familiar, Geithner's Treasury, with no sense of irony, is offering a reprise of the several abusive and opaque gimmicks that produced this crisis, a tour that winds back down Memory Lane, from AIG to Enron.

"Like everything else about the Paulson-Geithner approach, this latest twist is totally clubby and non-transparent. There is no objective process, and no public criteria. Congress is being kept in the dark. The Congressional Oversight Panel is being denied the documents it needs....The Treasury does not have the staff resources to do the job properly, so it hires private investment bankers. This recalls the era when J.P. Morgan and his financier pals mounted a private rescue to halt the bank panic of 1907. But Morgan was a purely private banker, and he was using his own bank's money. It this case, the Treasury is supposedly a public institution using taxpayer funds, yet behaving with all the transparency of Morgan.

"...Far too much power is being given to the least regulated and least transparent players in the financial game, and too much is being left to the caprices of speculators. Indeed, these are many of the same firms that took the other side of bets with outfits like AIG, whose gambles crashed the system. In addition, this desperation use of private equity companies and hedge funds is compromising government's ability to regulate these shadowy players.... It all adds up to the most expensive and risky way of trying to recapitalize banks, and the least likely to succeed. Instead of simplifying, it is adding complexity and leverage. In effect, Geithner is doubling down on the same kinds of speculations that crashed the system. This time, however, the government guarantees are explicitly negotiated in advance, rather than being cobbled together after the crash. The main purpose of this entire strategy is to disguise the true depth of the hole in bank balance sheets and to prop up insolvent banks, not to repair the larger system. It has been largely designed by and for the same Wall Street players that created the crisis.... "Where in this affair is the president who hired Secretary Geithner and at whose pleasure the embattled treasury secretary serves?...The entire Obama economic team is far too close to Wall Street and far too much a continuation of the Paulson approach....The grave political and economic risk is that Obama continues to let Summers and Geithner lead him down the garden path; the industry-oriented mortgage rescue saves too few homeowners; housing remains in the doldrums and mortgage securities with it; the hedge funds and private equity companies make some money with government guarantees, but the banking system remains comatose; and Republicans increasingly become the instruments of public anger. For the moment, the president is a prisoner of this thinking and these appointees...and we all will live with the consequences."