Tuesday, October 19, 2010

Timothy Geithner Forecloses on the Moratorium Debate

President Barack Obama, left, flanked by Treas...

Published on Tuesday, October 19, 2010 by The Guardian/UK

Timothy Geithner Forecloses on the Moratorium Debate

By refusing to halt foreclosures to sort out the mortgage mess, the treasury secretary again shows his favour to Wall Street

Treasury Secretary Timothy Geithner is good at telling fairy tales. Geithner first became known to the general public in September of 2008. Back then, he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board chairman Ben Bernanke and then Treasury secretary Henry Paulson, who told congress that it had to pass the Tarp or the economy would collapse.
This was an effective fairytale, since congress quickly handed over $700bn to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. To prevent the collapse of the banks, congress could have given the money – but with the sort of conditions that would ensure the financial sector would never be the same. Alternatively, it could have allowed the collapse, and then rushed in with the liquidity to bring the financial system back to life.
But the Geithner fairytale did the trick. Terrified members of congress tripped over each other to make sure that they got the money to the banks as quickly as possible.
Now, Geithner has a new fairytale. This time, it is that if the government imposes a foreclosure moratorium, it will lead to chaos in the housing market and jeopardise the health of the recovery.
For the gullible, which includes most of the Washington policy elite, this assertion is probably sufficient to quash any interest in a foreclosure moratorium. But those capable of thinking for themselves may ask how Geithner could have reached this conclusion.
The point of a foreclosure moratorium would be to ensure that proper procedures are being followed. We know that this is not the case at present. There have been several outstanding stories in the media about law firms that specialise in filing documents for short-order foreclosures. They hire anyone they can find to sign legal documents assuring that the papers have been properly reviewed and are in order.
In some cases, this has led to the wrong house being foreclosed. People who are current on their mortgage – or who, in one case, did not even have a mortgage – have been foreclosed by this process. The more common problem would be the assignment of improper fees and penalties to mortgage holders. Or, in many cases, foreclosures have probably occurred where the servicer did not actually possess the necessary legal documents.
A moratorium would give regulators the time needed to review servicers' processes and ensure that they have a system in place that follows the law and will not be subject to abuse. This is the same logic as the Obama administration used when it imposed a moratorium on deepsea drilling following the BP oil spill.
No one can seriously dispute that there is a real problem. Three of the largest servicers, Bank of America, JP Morgan and Ally Financial have already imposed their own moratorium to get their procedures in order. This is just a question of whether we should have regulators oversee the process or "trust the banks".
If the argument for a moratorium is straightforward, it is difficult to see any basis for Geithner's disaster fairytale. If there were a moratorium in place for two to four months, then banks would stop adding to their inventory of foreclosed properties.
But most banks already have a huge inventory of unsold properties. Presumably, they would just sell homes out of this inventory. This "shadow inventory" of foreclosed homes that were being held off the market has been widely talked about by real estate analysts for at least two years. It is difficult to see the harm if it stops growing for a period of time.
Of course, it actually was Obama administration policy to try to slow the process of foreclosure. This has repeatedly been given as a main purpose of its Hamp programme, the idea being that this would give the housing market more time to settle down. Now, we have Geithner issuing warnings of Armageddon if a foreclosure moratorium slows down the foreclosure process.
It doesn't make sense to both push a policy intended to slow the foreclosure process and then oppose a policy precisely because it would slow the process. While this is clearly inconsistent, there has been a consistent pattern to Geithner's positions throughout this crisis.
Support for the Tarp, support for Hamp and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I'm just saying.

Dean Baker is co-director of the Center for Economic and Policy Research

Monday, April 19, 2010

Behavior of Big Banks Parasitical

Cover via Amazon

Published on Monday, April 19, 2010 by The Guardian/UK
Squashing the Goldman Vampire Squid
Allegations against Goldman Sachs highlight the pressing need to break up big banks and introduce strict financial regulation

by Dean Baker

In the past few months we have learned a number of things about Goldman Sachs.

In February, we found out that it played a central role in helping Greece to hide its government budget deficit from the European Union, the financial markets, and the public at large. Goldman sold complex swaps to Greece in which it paid the Greek government for future revenue streams on items like airport landing fees. This was in effect a loan, but the swap allowed the Greek government to avoid entering the borrowed money on its books as a loan, which would have raised its budget deficit above the euro zone limits. Today of course Greece's financial meltdown is threatening the stability of the euro.

Then, just last month, Goldman was sued for sex discrimination by a former vice-president who claims that she was put on the "mommy track" after taking a maternity leave. She was fired as she was about to start a second leave. (In fairness to Goldman, Wall Street is still for the most part an all-boys club.)

But the big news is Goldman's indictment for putting together a collaterised debt obligation (CDO) from mortgage-backed securities that were expected to fail and then marketing it to its clients as a good investment. The central allegation is that in early 2007, hedge fund manager John Paulson recognised that the housing bubble was starting to collapse.

This meant that many mortgages would go bad. The subprime mortgages, in which homeowners had little or no real collateral, and were facing resets to higher interest rates, were especially vulnerable. Paulson worked out a deal with Goldman in which he would pick the mortgage-backed securities that were put into the CDO. Paulson would then bet that the CDO would go bad, by taking out credit default swaps (CDS) on the CDO. A credit default swap is effectively an insurance policy where the issuer makes up a loss if an asset goes bad.

Goldman was left with the other side of Paulson's deal, finding suckers to buy this huge piece of junk. It would have been hard to find buyers for this CDO if investors knew that Paulson had deliberately constructed it as a piece of junk to short. Therefore, according to the SEC charges, Goldman concealed Paulson's role in constructing the CDO. Goldman allegedly told investors that the CDO was constructed by neutral parties, rather than letting them know that the assets were picked by a hedge fund manager who was taking a short position.

Of course Paulson won his bet, the CDO he put together really was trash. He made nearly $1bn on this particular bet, which involved buying CDS from an insurer, which was backed up by a major European bank. This deal helped to transmit the fallout from the housing crash to Europe, leading to financial crisis there.

In similar deals constructed by Goldman, the insurer was AIG. Of course AIG was unable to pay off its side of the bet, so Paulson or other short speculators on Goldman's CDOs got their money courtesy of the taxpayers, when the government stepped in to bail out AIG. Goldman was also buying CDS to bet against the CDOs it was putting together, although it is not clear that it had bet against this particular CDO. In any case, it clearly profited from the issue since Paulson paid Goldman $15m for its services.

Goldman's conduct in this deal can be framed using an analogy from Phil Angelides, the head of the Financial Crisis Inquiry Commission. Angelides noted that Goldman has bought CDS on the CDOs that it had issued and sold. He compared this to selling a car with bad brakes and then buying insurance on the car. In fact, it looks like Goldman effectively cut the brake lines, sold the car to unsuspecting customers, and then bought the insurance policy.

In fairness to Goldman, there is no reason to believe that they are any less ethical than any of the other big Wall Street actors, just more effective.

All of this should drive home the urgency of both breaking up the big banks and some serious financial reform. The folks who should have been clamping down on this behaviour included then treasury secretary Henry Paulson, who had just left his position as Goldman CEO to take the job.

Even if we put in place a better regulatory structure, as long as financial regulation is just a conversation between friends, it will not be serious. Last year, Rolling Stone columnist Matt Taibbi described Goldman Sachs as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money". It turns out that Mr Taibbi was far too generous in his assessment of the huge investment bank. We need to kill the Goldman vampire squid along with the rest of the species, only when we have reduced these monsters to a manageable size can we be confident that they will be effectively regulated.
© Guardian News and Media Limited 2010

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

Local Bias

Tuesday, October 19, 2010