Big Bank Strikes Again

Seriously, I am so done with these elites.

WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts.

Now with 25 banks having failed last year, 17 so far this year, and many more expected in the coming months, the FDIC has proposed large new premiums for banks at the very time when many can least afford to pay. The agency collected $3 billion in the fees last year and has proposed collecting up to $27 billion this year, prompting an outcry from some banks that say it will force them to raise consumer fees and curtail lending.

So for ten YEARS, these banks didn't pay their insurance premiums, secure in the knowledge that they were the masters of the universe and nothing could ever hurt them. Keep in mind that the Asian financial crisis hit right in the middle of that time. But these banksters were invulnerable. But now the FDIC is eating banks left and right, and everybody expects the money just to magically appear in their account.

And I'm not leaving the policymakers off the hook, either. This was clearly a bipartisan swoon, a fealty to rich Wall Street greedheads that shouldn't be bothered with the imposition of insuring their customer's deposits. Congress agreed that there was enough reserves in the fund not to charge banks for ten years. Sheila Bair was, if anything, a hero in this, pleading since before she took over the FDIC that the program needed more capital.

Bair said yesterday that the agency's failure to collect premiums from most banks "was surprising to me and of concern." As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

"That is five years of very healthy good times in banking that could have been used to build up the reserve," Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. "That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times."

It is astonishing what is being revealed about how much banking interests ran the country for the last 15 years. Now, after taking hundreds of billions of dollars from taxpayers, they're whining about all the burdens the acceptance of public money is placing on them, like executive pay caps and selling corporate jets. Of course, they're not going to give back the money, just whine about it enough so that Congress loosens the reins. And even if they did return a portion of the TARP money they'd just make an end run to grab their corporate welfare through AIG. Because we wouldn't want a crisis on our hands by not paying them out.

So when times are booming, the banks want no regulation and won't even condescend to meet their own financial obligations with the government. When the casino closes up and they're tapped out, they come back for a handout. Which they get, at massive expense without taxpayers sharing in the upside. But don't you dare tell them how they can and can't spend the money. After all, they know best, right?

Foreclosures Finally Getting A Look

Post-stimulus, we still have an insolvent banking industry and a housing market in free fall. Prices continue to drop at an alarming rate, and there doesn't seem to be a bottom. And 2008 was a record year for foreclosures, which depress prices, lower property values and suck money out of the system.

Clearly we need a solution. And this is what the White House is looking at doing.

The Obama administration is considering a proposal to help distressed homeowners by subsidizing lenders who cut the interest rate on mortgages, according to sources familiar with the discussions.

The sources cautioned that the administration is still weighing several options for addressing the country's growing foreclosure problem. The Treasury Department has set aside $50 billion for a homeowner relief program, which officials said was likely to be announced within the next week. The sources spoke on condition of anonymity because the plans are not final.

The initiative would include both carrots and sticks for lenders, said lawmakers briefed by the administration. For example, it would probably endorse legislation to allow bankruptcy judges to change the terms of mortgage loans, a measure opposed by the industry. But the program would also include legal protections for lenders that modify loans but fear being sued by investors. Government subsidies could be among the inducements for lenders, the lawmakers said.

Under one proposal being actively discussed, the government would share the cost to lenders of reducing interest rates for cash-strapped borrowers, the sources said. For example, consider a homeowner with a $200,000 mortgage and a 9 percent interest rate who now pays about $1,700 a month, including taxes and insurance. Lowering the interest rate to 5 percent would reduce the payments to about $1,160. The government and industry would each chip in to cover the difference, about $540.

If this is just talking about existing homeowners and not slashing rates for new homes below what the market will bear, which will reinflate the housing bubble for no reason, I think there's some merit to it. It looks like the lenders are ready to get into this as well. But it should be combined with other measures.

First of all, there should be an absolute moratorium on foreclosures for 60-90 days. Fannie and Freddie are suspending sales, which is good, and some big banks are temporarily halting them as well. This time is needed for implementation of this loan modification idea, which is essentially the brainchild of Sheila Bair at the FDIC. There's going to be some moral hazard in bailing out people who made bad decisions in getting a home, but it's a pittance compared to all the corporate welfare money promised, and considering that predatory lending put homeowners into mortgage products they didn't even want, I think we can live with a little excess at the margins. Reuters has more.

Fighting Foreclosures, Not Entitlements

Some progressives are worried about this signal by PEBO (President-elect Barack Obama) that he will tackle entitlement spending at this time where fiscal spending takes precedence over the deficit, but I'm not. It's based on a direct question he was asked at yesterday's press conference, and his answer was pretty boilerplate. Whenever the chattering class hears the word "entitlements" from a powerful politician, they get a thrill up their leg. Doesn't mean anything's going to happen. And Medicare spending needs to go down as a portion of overall health care spending, so if he's just talking about a comprehensive health care policy, that's not really the same thing.

This part later in the interview is interesting:

In an interview later in the day with CNBC and The New York Times, Mr. Obama suggested that he would hold his economic stimulus proposal to the low end of the amounts that economists think will be necessary because it was likely to grow in size as it moved through Congress. He said that he intended to propose a broad overhaul of financial regulation by April, and that he was working with Congressional leaders on his promised plan to limit foreclosures in the wake of the mortgage crisis.

“We’ve got to prevent the continuing deterioration of the housing market,” he said.

That's good news on both fronts, IMO. The numbers he's throwing around are too small for the problem, so I certainly hope they expand. As for the part about the housing market, Kevin Drum sez that housing is still too overpriced and needs to deteriorate further. But in context, I think Obama is talking about foreclosures. And government ought to be creating incentives to limit those because they not only hurt housing prices but they cause major economic upheaval - a foreclosure costs the greater economy something like $250,000. So encouraging work-outs with homeowners to get them in a position to pay would be a step forward. Like the cram-down legislation working its way through the Congress.

Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday, and hopes are high that it will pass after a similar plan failed last year [...]

The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt.

We simply ought to do this. And the fact that Sheila Bair, who has been pushing the most homeowner-friendly, foreclosre-stemming solutions to the housing crisis, will be staying at the FDIC, is more proof that foreclosures are going to be targeted by the incoming Administration. That's a good thing.

The Bair Essentials

Somebody help me out on this. Democratic lawmakers are fairly united in thinking that the Treasury Department is doing a terrible job helping homeowners avoid foreclosure, and they are threatening to hold back the second half of the bailout funds until something meaningful is done.

In early October, Congress authorized the Treasury to use $700 billion of taxpayer money to buy soured assets from banks to ease a financial panic. But a week later, the Treasury balked on that plan, saying it would instead try to strengthen the financial system by buying shares in the banks.

"We gave them money for one thing and then they used it for another," said Rep. David Scott, a member of the House of Representatives Financial Services Committee.

"They said we'd have more oversight; no oversight is in place. These are lies. We've been bamboozled. The Treasury secretary owes us an explanation," said the Georgia Democrat [...]

Rep. Maxine Waters, a California Democrat who had supported the $700 billion program, pressed Kashkari for actions that would throw troubled homeowners a lifeline.

"Please don't come here and ask for another penny because if you do, I'm going to work 24 hours a day with the same people I worked with to support you to make sure that they do not support giving you another dime," she said.

(Scott is mistaken in the sense that it's a GOOD thing they didn't go forward with the initially iteration of the TARP, but he's generally right on the bamboozlement.)

But the only official in the government who is offering any kind of a plan to deal with foreclosures is Sheila Bair, the head of the FDIC. I understand why the current White House would have a problem with that:

More than any administration official, Mrs. Bair has called publicly for using billions of taxpayer dollars to finance the modification of loans threatened by default. But her advocacy has contributed to a battle that is pitting White House and Treasury officials against the F.D.I.C. and lawmakers in Congress. The discord has influenced programs that have so far proved insufficient to stem a tide of foreclosures that Moody’s Economy.com expects will affect 10 million homeowners over the next five years. And it is drawing personal conflicts and animosities into the policy-making process.

White House and Treasury officials argue that Mrs. Bair’s high-profile campaigning is meant to promote herself while making them look heartless. As a result, they have begun excluding Mrs. Bair from some discussions, though she remains active in conversations where the F.D.I.C.’s support is needed, like the Citigroup rescue [...]

“I’ve heard the stories of people who are suffering and can stay in their homes if there is just a small adjustment to their loans,” said Mrs. Bair, a Republican who was appointed to her post by President Bush two years ago. “There are some people in the Republican Party who resent the idea of helping others,” she added. “But the market is broken right now, and unless we intervene, these people and the economy won’t be helped.”

But last week we learned that Tim Geithner is trying to push Bair out of her FDIC post in a new Obama Administration.

I mean, it seems to me that Bair is a perfect candidate to head the foreclosure modification program, which Obama says he favors. She's a Republican who is pragmatic and wants to get something done for the average American. Obama wants to focus on "what works" instead of partisan ideology. Well, here you go. If it's a personality problem between Geithner and Bair then that's a really bad sign, because it just blows up the whole idea that personnel doesn't matter and ideas are paramount at this time.

The Times article didn't address the tension between Geithner and Bair. Someone needs to straighten this out.

Summers' Balloon Bursting?

One thing I noticed during the primaries was that Obama was always willing to listen to criticism before charting a course. He may not have always changed that course, but he often did. That may be the case with the choice of Larry Summers as the Treasury Secretary.

Intense backlash from women’s groups may have pushed former Clinton Treasury Secretary Larry Summers off the short-list to lead Treasury for President-elect Barack Obama, according to widespread reports circulating in Democratic circles.

The women’s opposition to a possible Summers’ appointment was the explanation some Democratic sources are hearing for why the Obama transition team has crossed Summers off their list. The Obama team doesn’t want to kick off its administration with a controversy nor go head-to-head with an important constituency when there are other qualified candidates, political operatives speculate.

Reports that Summers is no longer in the running are widespread, but not everyone agrees that his problems with women have sealed his fate.

I don't think this is just about those comments about women and math, although it seemed insane for "No Drama Obama" to immediately cause a controversy with his first cabinet selection. The cable nets and talk radio would have had a field day with it.

But I think the intense reaction by liberals against bringing back the guy who ushered in a lot of deregulation in the 1990s had at least something to do with it.

So far, our petition has around 6000 names on it, and several Facebook groups have emerged to protest his possible selection. Women's groups have released a list of names for good candidates.

For Treasury secretary, Gandy said she suggested Federal Deposit Insurance Corp. Chairwoman Shelia Bair; Alice Rivlin, the first director of the Congressional Budget Office and expert on urban issues as well as fiscal, monetary and social policy; former Commodity Futures Trading Commission chairwoman Brooksley Born, who tried to regulate credit default swaps but was blocked by Summers, former Clinton Treasury Secretary Robert Rubin and former Fed Chairman Alan Greenspan.

The name that pops out is Sheila Bair. She happens to be a Republican, but she's a regulator, which seems right for the historical moment. She has support among progressive economists, and she has released one of the better plans for dealing with the mortgage crisis, by using a portion of the bailout money to allow homeowners to restructure their payments. She was pretty good on NPR on this today, in the face of Steve Inskeep going on and on about those luckie duckie homeowners who would be bailed out when their neighbors get stuck with the bill. It's the common way that the forces of the status quo have been arguing against rescue for those facing foreclosure, by pitting homeowners against one another while the bankers take the lion's share of the cash. Bair had an excellent response.

While the program may help some people who knowingly took out mortgages they couldn't afford, Bair says, "Why take a punitive step of forcing them into foreclosure? You're going to have another empty house sitting on the neighborhood for over a year. Who does that help? I don't think that helps anyone."

As for the people who were careful not to get in over their heads and would have to watch while their neighbors get help with their payments, Bair says, "I think that I would say to those neighbors … I want my neighbor's mortgage fixed because, yes, I do have some compassion for that person, but I also realize that it's in my economic self-interest to get this situation stabilized. This relentless procession of foreclosures is creating havoc with our housing market and we need to get it stabilized."

That is exactly correct, and exactly the attitude we need in the next Treasury Secretary. And I have to admit that it would be excellent to have a woman in this position, particularly in the male-dominated world of high finance.

By the way, as Digby noted, these trial balloons are very common in politics, and in this case, it appears that the system may be working. A name is thrown out, the reaction is noted, and the information taken into account. It's not only the norm for politics, it's the norm for the OBAMA CAMPAIGN when it comes to appointments like this. I certainly remember the leaks that Tim Kaine was going to be VP, then Evan Bayh, and then Joe Biden. So I'm glad people are weighing in on these options.

Foreclosed

85,000 American families lost their homes last month. That's a 25 percent increase year-over-year. While everyone on Capitol Hill is freaking out about about struggling industries and wanting to bail them out, if you look collectively at the impact of 85,000 foreclosures, the numbers are just as high. The conservative estimate is that every foreclosure costs $250,000 to the greater economy. So that's $21 BILLION dollars of economic impact in just the last month. Spread it over a year and you've got as much money as has been handed out thus far in the TARP program.

And this won't end by itself. 1 out of every 452 homes in the country received a foreclosure filing in the last month. So something must be done. This past week, HUD announced a new program to help homeowners, or actually an old program for which more people can qualify, but critics contend that it's not enough:

The plan announced Tuesday by federal officials and mortgage giants Fannie Mae and Freddie Mac sounds sweeping in its approach: Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.

But there's a catch. The plan focuses on loans Fannie and Freddie own or guarantee. They are the dominant players in the U.S. mortgage market but represent only 20 percent of delinquent loans.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., said the plan "falls short of what is needed to achieve wide-scale modifications of distressed mortgages."

With the government spending billions to aid distressed banks, "we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans," Bair said in a statement.

Sheila Bair is absolutely right. And if foreclosures go unchecked, it will put a hole in the economy that no amount of stimulus can fix. Both states and big banks are either talking about or instituting foreclosure moratoriums. We need one at the federal level.