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We Can Win the Survival of the Fittest

I just read this BusinessWeek article entitled How Banks Are Worsening the Foreclosure Crisis.  I probably should go for a long walk now instead of writing this because I feel my blood pressure boiling.  After reading this article and thinking about what I said yesterday about being blackmailed, I am absolutely convinced that we are being played by the financial conglomerates.

Financial Conglomerates are playing us because they believe that public sentiment is in their favor in two regards: 1) helping home buyers who took on risky mortgages; and 2) government takeover of banks.  But, they are over playing us and public sentiment is turning against them.  They cannot be allowed to hold us and our economy hostage.

On the defensive, the industry nevertheless benefits from one strain of popular opinion that home buyers who took on risky mortgages—even if the industry pushed those loans—don’t deserve to be rescued.

The industry pushed these loans is a key point.  The “American Dream” mantra has been absolutely ingrained into our psyche and financial conglomerates did their best to market that the “American Dream” was attainable even if you had questionable credit history, spotty work history or unsteady income.  People spoke to mortgage brokers and lenders who told them not to worry you can afford the “American Dream”.  These mortgage brokers/lenders were perceived as experts by people who desperately wanted the “American Dream”.  Hell, this was their job and they were telling people don’t worry you can afford the “American Dream”.  Damn right, most people would sign on the dotted line - the expert banker said you can afford.  The experts told people ‘we will structure your loan so that mortgage payments are low and after a couple of months or years [before the interest rate shoots up; maybe disclosed - maybe not] you can refinance to a fix rate’.  “Don’t worry real estate prices always go up and that will help you with refinancing” these experts said.

This was happening all over the country.  But that problem was that real estate prices don’t always go up as we have so painfully realized.  Real estate prices were falling and many people with these risky loans either forget that the interest rate was resetting or were rejected on refinancing the mortgages for various reasoning including real estate values were plummeting.  The “American Dream” was turning into a nightmare.

Initially, the banks were in denial that there was problem with these risky mortgages.  In late 2007, after realizing that there might be a problem they turned defensive and uncooperative with regulators and Congress. 

One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt. Lobbyists say they will fight to restrict the types of loans the bankruptcy proposal covers and new powers granted to judges.

They tried a public relations ploy called “Hope Now Alliance”.  This was a “government-endorsed” private sector organization that consisted of lenders who agreed to work with nonprofit credit counselors who would borrowers avoid loan defaults and foreclosure.  It was just a ploy.  In fact, most of the subprime mortgages that were modified were delinquent after six months.  The reason: the modifications actually increased mortgage payments and not lowered them because the lenders were tacking on missed payments, taxes and big fees.

An analysis [Alan White, a law professor at Valparaiso University] White did of a sample of 21,219 largely subprime mortgages modified in November 2008 found that only 35% of the cases resulted in lower payments. In 18%, payments stayed the same; in the remaining 47%, they rose.

Financial conglomerates are not going to support any program that jeopardizes their bottom-line even though it was their actions that have caused this mess.  Their messengers in Congress and public relations people will continue to blame the homeowner’s who entered into these risky mortgages.  We must not be fooled by this rhetoric.  The homeowner’s are suffering the consequences of their actions and those lucky to still be in their homes certainly don’t expect their mortgage payments to disappear.  They need help with mortgage loan modifications that truly reduce the monthly payments.  This can be done but financial conglomerates refuse to help.

The financial conglomerates created this mess.  They lent the money for these risky mortgage loans, then they securitized them and created all kinds of other risky securities or derivatives based on these risky mortgages.  Now that their house of cards has fallen they want taxpayers to buy these toxic assets from them so that they can continue to operate like nothing happened.

Blackmail is the extortion of money or payment by the use of threats.  TPMMuckraker’s story from yesterday provides some circumstantial evidence that financial conglomerates may be blackmailing us.  The Deutsche Bank U.S. Chief Economist wrote in a daily newsletter to clients:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the
economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives.

We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

Even if blackmail may be too strong of word in this case the reality is that these financial conglomerates are not going to sell these toxic assets to private investors; despite the wishes of Treasury Secretary Geithner.  The financial conglomerates are going to hold out for the best deal possible and the only party that can offer that deal is taxpayers via the Treasury Department and the Federal Reserve Bank.  They will continue to hold out and not do anything with toxic assets or even loosen credit.  The economy will continue to tank and out of desperation Treasury and the Fed will purchase the toxic assets from them.  This scenario/strategy assumes that public sentiment is against and political will in Washington will not materialize for a more active role of the government.

Currently, there is something that is absolutely at the foundation of this economic/financial crisis: the profit motives/survival of the financial conglomerates are directly in conflict with what is best for taxpayers and our economy.  It is not in their interest to modify loan mortgages or sell toxic assets below an initial purchase price because that can increase the chances of insolvency.  Addressing this conflict may mean a more direct role of the government.  A role such as a liquidator of assets or something similar to a bankruptcy trustee or receiver; and yes, possible temporary owner of these fuc*ed-up banks.