Today for lunch, I met with the executive director of a local legal aid organization and the director of the local Industrial Areas Foundation group. They have been organizing for quite some time to get banks to renegotiate. They are also trying to get money for a pilot project to get banks to write down some principal if the borrower can get a soft second.
So they went to the Treasury Department to try to sell Treasury officials on the plan. They met with one very high-ranking member of the Department, who asked them whether the banks were in on it. When they replied that they had gotten tentative commitments from B of A, and Chase, and asked whether the government would be able to get the money to support such a program nationwide, the official replied,
“If B of A and Chase come in here and say that we should do this, then we’ll find the money.”
I asked them to repeat that, to make sure I heard it right. Yes, you heard it right, they said. The Treasury didn’t want to know whether the program worked — just whether B of A and Chase wanted it.
The Treasury is now officially a wholly-owned subsidiary of the big banks. We knew that already, but I have rarely heard it stated so baldly.
Well, is it a question of Treasury being a subsidiary of the banks or just outsourcing their economic analysis to them? If the big banks think it’s OK, then we at Treasury don’t have to worry about the soundness of the numbers or the realism of the business plan. It’s a bit like (in the olden days) not being fired for buying IBM. You won’t get fired (if public servants get fired in the US) for funding a project that has the backing of B of A and Chase.
If the answer had been No - or simply that no banks had yet been approached - but the business plan depends on the cooperation of senior financial institutions, presumably Treasury would have been within its rights to send you off to find more allies. They seem to approve your allies. Is that bad news?
Being a right winger in college in the sixties, except for my total abhorrence of the Vietnam disaster and my advocating Karl Marx’s analysis of economics, I had interesting discussions. Long term I was right.
“we at Treasury don’t have to worry about the soundness of the numbers or the realism of the business plan”
Well, then let us just hire a real fucking idiot straight from the loony bin that can make out Chase and Bank of America at the head of a piece of paper and give them a stamp “approved.” Why the fuck do we need to pay a fucking dime to these highly overpaid welfare recipients at the joke called “Treasury” that seems to do exactly that? That is the correct economic treatment of the nitwit’s statement under all standard and sicko economic theories. Am I right? You only hire at the least cost the lowest level person who is able to perform the job?
No wonder Geithner walks around with that smirk on his face, he’ll definitely not be challenged by any of his underlings.
It’s a bit more complicated than this. A program like this won’t work if the banks aren’t really on board, so the Treasury is telling the people coming to them that lukewarm agreement from the banks won’t get it done. The banks have to want it enough that they are willing to come in themselves to ask the Treasury, there’s no point in devoting effort to it, whether the Treasury is their subsidiary or not.
There are good reasons for this. The unfortunate fact is that, soft second or not, the vast majority, 85%+, of reworked mortgages are back in default within 18 months. All you manage to do is to lose everyone involved, the bank, the Treasury, and even the homeowner, more money by reworking the mortgage. Everyone loses. The Treasury has already gotten burned on this with other programs. Unless the banks are convinced that the homeowners involved are better risks than everyone else they’ve been pressured into reworking, no one wants to touch it.
There is only one eventual solution: lots and lots of people are going to have to be foreclosed on and go back to renting. I don’t want to sound heartless, and I think that there is a very appropriate place for government assistance to those people, but they’re better off if that assistance comes after the foreclosure. For most of them, trying to keep them in the house only prolongs their period of financial distress. That doesn’t do them any good.
I think I see both sides to this. One is what Willem Buiter has called “cognitive regulatory capture”, i.e., the financial regulators only see things through the eyes of financial institutions. The other is that no program like this will likely succeed if the major players aren’t behind it.
Of course, both of those take the Treasury official’s word at face value. Another possibility is that the official was merely humoring your contacts, and this was a polite way of saying no.
unbelievable. Name names…time for a nasty fax.