Tweet
The financial industry knows how to help itself to public money, and it has an insider, Tim Geithner, to make it happen. Despite the anger over the insignificant (compared to the bailout) bonuses at AIG, Geithner wants to solve the toxic waste problem by throwing enormous amounts of money at hedge funds. The idea is to set up funds called the Public-Private Investment Partnership, and use the money to buy junk from banks. Here is a description from the New York Times:
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
The part about how we share in the vast profits to be made is unavailable at the time of this writing. But good to know that we still have enough money to throw at the rich, who seem to think a 25% return is just about right. We are lucky to have Professor Galbraith to explain why this idea stinks.
Individual homeowners? In what cannot be a surprise to anyone familiar with the power of money, the WSJ reports that the bankruptcy cramdown bill is in trouble in the Senate.
Financial institutions strongly oppose court-ordered mortgage workouts, saying they would increase risks for lenders, raise mortgage rates and clog courts.
The reasons cited by industry are nonsense. There is no increase in risk to lenders. The amendment only applies to existing loans, which are totally at risk now. It won’t increase mortgage rates on future loans, since it won’t be available on future loans. And it certainly won’t clog bankruptcy courts: what it will do is give the American people leverage to bargain with the financial giants.
Why should the rich take a hit? With their servant/cowards in Congress, they simply refuse to acknowledge the role of the financial industry in the disaster, including the massive rise in mortgage fraud, hammered home in two recent reports. First
The number of mortgage fraud reports among loans made last year grew 26% from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.
The Mortgage Asset Research Institute, Inc., is a Lexis-Nexis company with software to sell, software designed to help banks ferret out mortgage fraud. Their web page opens with this sentence:
Mortgage fraud perpetrated by industry insiders accounts for 80 percent of all reported mortgage fraud losses.
They base that unsurprising assertion on another report, now updated, from the Financial Crimes Enforcement Network, or FinCEN. Financial institutions have to report suspicious transactions to FinCEN. The reports are called Suspicious Activity Reports, SARs, and institutions must have systems to monitor their operations looking for reportable events. This is the one thing in the War on Terror that actually has worked. It is primarily designed to find potential terrorist activities, and we all hope it is working. However, the range of financial crime is greater than terrorism. It ranges from check-kiting to Ponzi schemes, and on into more interesting things, like mortgage fraud.
FinCEN reports that in 2007, there were 52,868 SARS based on mortgage fraud, compared to 37,313 in 2006. The rise in reports of mortgage fraud is greater than the increase in any other area reported in SARs. And remember, this is just regulated financial institutions. Mortgage brokers, the main source of mortgage funding, aren’t covered by the FinCEN regime. FinCEN sampled a group of SARs and tells us:
Narrative details in the reviewed SARs identified mortgage brokers as the loan originators for the majority of the suspected fraudulent loans; 1,025 of 1,769 narratives (nearly 58%) disclosed that the loans were originated by mortgage brokers.
And of course, the Mortgage Bankers Association, the trade group for the fraud industry, is lobbying to defeat cramdown. They can count on the support of their Republican Senatorial Vassals.
In the meantime, who represents us taxpayers? The patsies at Treasury? The frightened ConservaDems? Larry Summers? Robert Rubin? It’s scary.
47 Comments
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About Firedoglake
Masaccio, thanks for this excellent analysis. Scary indeed.
Larry Summers was managing director at D.E. Shaw a hedge Fund before joining Obama. The hedge fund specialized in taking over bankrupt companies. The latest plan is a win-win opportunity for the Hedge Funds.
Do I see dots to connect?
And chunks of this bailout money are going straight back into political donations, tightening the downward spiral.
Obama is a sacrificial lamb, but he’s playing right along with it. He’s dooming his presidency from the very start, even if he might have little choice over his appointments and policy.
Rape me once shame on you.
Rape me twice shame on me.
Time for a very big phone, letter, email and noisy campaingn
My plan is to go to the auctions, bid on everything, and then as the mortgageholder to pay 4%-5% for their loans.
As the mortgages were bought from the banks with the mortgage holders (taxpayers) money, this should be equitable. The mortgage holder is still on the hook for the loan payments (through taxes).
This Just In!
“We know where you live.”
The banks got what they wanted in 1999 and 2000. It took only 8 years for the entire edfice to come crashing down. Unfettered capitalism will always result in it devouring itself. Reregulate now. The congress and the president back in the 1930s fully understood what would happen, because it happened to them. However, we do not know or understand our own history so the snakeoil salesmen come along and spin out tales of great wealth from nothing..and we believe, credulous(and GREEDY) people that we are, we believe. Money for nothing. Well, we got what we wanted, didn’t we?
Dugg right here — please join me!
Dugg
yeah. that worked so WELL with FISA.
and dugg!
Try #6. It’s a better plan.
As a nation we have come to the point where we give to the wealthy and loan to the distressed.
I would much rather see money thrown at mortgages to pay them off. So some people get lucky: good for them. Do we think no one is getting lucky now?
i don’t know if i trust that. in the end, obama needs to own it. he absolutely has control over his own actions, appointments, and policy.
For those interested in the numbers on the PPIP, take a look at this analysis from one of the commenters at Naked Capitalism.
DeLong explains it somewhat differently here.
Nobody explains what special expertise hedge funds and private investors bring to the table.
The one thing I see that is missing in this discussion about the lack of motivation for the administration and congress to roll back financial regulation laws before Clinton …….. IS that no one seems to want to do things for the good of the country…. to prevent this from happening again way in the future……
This is and has been all about the me philosophy and only looking to the next quart stock report.
NO ONE plans or looks for the long term…… if we did we would have early childhood education which DOES reduce crime and numbers in prison…… or Universal healthcare OR secure retirement …….
Am I missing something here?
Will hapless homeowners, etc be subjected to barely regulated collection efforts by entrepreneurial investors with nothing to lose and
millionsbillions to gain?NOW we’re talkin’!!!!!
Hard to say. Maybe synoia will buy your mortgage.
I don’t like that the Mortgage Bankers Association is lobbying to defeat bills like the cramdown remedy for bankrupt homeowners, and I also don’t like it that the financial services industry in general is lobbying Congress to evade its responsibility for the meltdown. But I don’t accept your analysis (or Professor Galbraith’s analysis) that Geithner’s plan is just a big waste for taxpayers. Taxpayers are also job holders, people with investments and bank accounts. I thought it was understood, even from what I’ve read on FDL, that the risk in this meltdown did not arise because of FNMA and GNMA but because of the collapse of housing values and the subprime mortgage market and the CDS and CBO’s associated with subprime mortgage loans. I heard that one of the risks was that there was possibly $60 trillion worth of these CDS’s which pertained apparently to the face value of the worthless loans held by banks, insurance companies and other investment firms.
One way of dealing with the crisis in the financial system itself is to deal with each of these bad loans and unwind each one like individual reverse closings or bankruptcies, one at a time with reapprisals of each residence. This will take too much time to stabilize the financial system.
The other way is as Geithner is approaching it: through this Public Private Partnership with a combination of loans and equity buy-outs of the CBO’s (i.e. the bundled securitized subprime mortgages, which I take are the “toxic assets” or referred to).
Your analysis does not help when you throw out a red flag like “throwing money at the rich” especially in the week following a lot of outrage at the AIG bonuses. What do you mean by “the rich”? Is this money just going to be funneled into the bank accounts of Mr. Geithner’s friends? Those fat guys wearing top hats and tails and smoking expensive cigars?
Or is it going to the corporations (like banks and insurance companies) and similar institutions which will go down and take our savings and retirement funds with them because of their inability to pay back the $60 trillion or whatever in CDS’s? I’m pissed too that these characters who sold themselves and everybody else that they were so smart got us into this mess. But let’s not let our emotions lead us into easy solutions and a blame game that will drag down what we have left.
I’ve said before that the problem is that we pay too much attention to the problems of hedge funds and money center banks. They want massive returns for investing in relatively safe propositions. That is what is causing me anger. I get no interest on my cash, and precious little return is available anywhere. Why should the hedge funds and the “private equity” funds get paid enormous amounts for unraveling the mess?
What exactly is it that they are doing that makes them worth it?
The Obama team is aware of this problem. This is in the Wall Street Journal:
Another major concern is that the problem was caused by widespread mortgage fraud, a point reinforced by the reports I cite. This can be laid at the door of the giant aggregations of capital in hedge funds, money center banks and so on. No one was doing due diligence, at least not enough to find out about the massive fraud. Again I say, why should they profit from a disaster in which they are so deeply implicated?
I think it’s time for the homeowners to stage a strike. Just sit on it, don’t go anywhere. Let’s see the gummint call out the Guard to deal with them.
They’ll require synoia post a prohibitively expensive bond to bid. From a reputable(tm)insurance co.
Home cooking at its finest.
Hapless homeowners need to take Trump’s advice.
Consult a lawyer. Have the lawyer pull all the paperwork looking for TILA, RESPA, and unconscionable advantage issues in the transaction.
Then get the lawyer to get the loan rescinded as fraudulent.
(TILA = Truth in Lending, at origination, RESPA – Real Estate Settlement Procedures Act at closing, Unconscionable Advantage singing 90 pages of loan docs in front of a person who knows little or nothing about the paperwork).
I’ll repeat the important part: Get a Lawyer.
Only need a bond for 3% from investors. That we’ll get back, costs to us 1%, return to investors 1% (or 33% on their money). That’s why we’d sell the loans back to the borrowers for 5% of their face value.
That’s do-able.
Does anyone remember when the Free Marketeers decried social welfare-i.e., some cheese and peanut butter commodities and a few food stamps -to NEEDY families?That all these folks needed was to get off their lazy butts,yada-yada-yada…..
It was DENOUNCED as SOCIALISM for WELFARE QUEENS.
Now,excuse me,but EXACTLY what is the politically correct terminology for the Welfare Kings on Wall Street?
I hear faint strands of the American standard tune,”Just a Gigilo” wafting in the background…..
Need some good legal advice on structure to #26.
Thieves.
massaccio @22:
Giant aggregations …exactly…why can’t these be busted up by RICO,
The anti-racketeering law?
Just a thought here, but wouldnon-American employees working in foreign subsidiaries of US taxpayer bailed out companies, be considered illegal,alien labor?
I know it sounds odd, but the RICO statute can be invoked in regards to the hiring of illegal aliens.
I am so sick of the continued rape of the American underclass (e.g. anyone who isn’t wealthy and controlling the financial system to maintain their wealth. I signed the petition for last week’s hearing, but it was nothing and relatively irrelevant compared to the atrocities of the present and proposed proposals to protect the hedge funds, etc. When are the FLD leaders going to do something beyond supporting transparency.
I tried to read the pages and pages of questions developed by the FDL technical team, noting the probability, as someone noted, that few if any of these questions would be asked. Hooray for the tech team, but so what if their work goes nowhere? What will it do for the homeowners (and everyone else) who have been raped by the ________ I don’t even have a word for what I think of the more than greedy WS and political hypocrite “enemies” – profanity is of no use.
An FDLer offered a survey on progressivity. I scored 307 out of 400, making me more liberal that liberal democrats. Again, so what? Other than just more frustration and disgust. I’ve a relative who scored 70, way below the survey designed most conservative designation. It’s easier to forgive my relative than it is to forgive the more than greedy WS and Congressional hypocrites of either persuasion who enjoy kabuki theater as some folks contend. At least my relative is more honest about his positions; while the financial political leaders are totally beyond that as far as I can tell.
Blessings,
As I understand the trail of bread crumbs, Person A bought a home. Bank or broker bundled the mortgage with those of persons B to Z and sold the bundle to Huge Bank F or Pension Fund C. Huge Bank F and Pension Fund C bought insurance from AIG to cover the chance that the bundle would decline in value.
A year or two passes and Person J defaults on their mortgage, but the rest of the cohort is still making their payments via a monthly electronic fund transfer to Processor C. Who holds Person J’s note? Huge Bank F? Maybe, but Huge Bank F was given a jolt of liquidity via TARP. That did not cancel the debt. Person J, who is now legally named Schmuck 1, is still on the hook. Does AIG hold the note? Maybe, but they got a cash transfusion from the FED which they passed on to Huge Bank F. And still that did not cancel the debt. And the only tangible asset, the home, is now sitting empty because we have to make someone pay for the credit bubble and the Schmuck family is living in a Motel 6 down the way.
The loan has been paid off twice, once by the taxpayers to Huge Bank F and once by the Fed to AIG. And the house sits empty — why?
Are we nucking futs yet?
The loan has been paid off twice, once by the taxpayers to Huge Bank F and once by the Fed to AIG. And the house sits empty — why?_______________
Just a guess, but maybe it’s about the money brokers wanting to own the actual real estate-the land? Maybe it always was?
After all,they’re not making any more of it,are they?
And then after the taxpayers have paid twice for the dwelling,the house can be bulldozed,and then the land can be sold to their crony developer friends with ,ofcourse, tax incentives and taxpayer subsidies-once again- in the guise of economic development!
You may be right. Our at risk towns will look like the Lower Ninth Ward. Whatever the historians call this, it may be the economic equivalent of Katrina in reshaping our way of life.
It may be stating the obvious but the “toxic assets” at this point aren’t entirely “toxic” in the sense they have no value. They, or at least some of them, have value as long as there is the possibility that someone, like the USA, is willing to take them off the books are some to be determined price. No, it’s not right. I don’t like it either. And there is a bit of circular reasoning in this. Everybody “knows” the assets are worthless. But they don’t become de jure worthless until the holder files bankruptcy or closes its doors and there is a run on the institution. What we’re buying is the avoidance of pandemonium and panic and time for these con artists to write down the “toxic assets” in a more orderly fashion. Hopefully when that’s accomplished then the laws can be changed so that this type of con job will never, ever happen again.
I was watching a Bill Moyers presenation a few weeks ago where the guest was explaining that the brokers who were providing subprime mortgages,engaged in REVERSE redlining.
Traditional redlining had [in the past] ,moneylenders avoiding economically depressed areas,otherwise known as redlining.
Ofcourse, the local government provides TIF(Tax Increment Financing) to developers who invest in distressed areas,and the state and Feds have their own basket of goodies to bestow.
Hey,CREATE the distress-and get paid twice to do it.PLUS ,you can use the LAND as collateral-its worth more without the house-especially if you can get some rezoning done by a friend at City Hall.[Snark}.
Have nothing to offer, but I’d be interested in seeing an ox diary laying out your proposed structure.
I think you’ve got the order wrong. Change the laws first as a precondition to helping with the assets.
We can multi-task. Otherwise, you’re just perpetuating a moral hazard cycle (assuming there’s anything left to pillage in the future).
If we can blow the treasury on a quick bail out, we can also pass preventative legislation quickly. Otherwise, this resembles a classic con.
I don’t think the stuff is worthless, either. The NYT says there are bids in the range of $.30, but the banks want $.60. So, no, they aren’t worthless. But. It doesn’t take a rocket scientist to value them. It takes grinding bureaucratic work. One after another. Kind of like the way the Manhattan Project did its complex calculations. So, why should we pay hedge funds or private equity a 20% return for simple-minded business practice?
One thing you can do is to learn about this stuff, and call your congress critter or senate critter, whether rep or dem. Ask for the staffer responsible for the area. Ask for the position of the congress person on the issue. Ask why that is their position. Tell them you’re just some schmoe citizen, but you disagree and explain why.
The first time is really hard. After that, it gets easier. They have to listen and be polite if you are.
Eventually we win.
Some people think the assets are worth something. But if the government blows them off completely, as I understand some people on the internets think, then they are worthless. But we are all up shit’s creek if that happens, I think.
I understand SunnyNobility’s point and it makes sense to me too to change the laws but it doesn’t mean Geithner’s plan is so foolish or reckless as to be practically corrupt. The government has already said that it going to pay for these assets so of course there are going to be bids or offered prices. This is the beginning of negotiation.
A significant problem with these “toxic assets” is that there is no objective third party means of valuing them. The stock market or these commodity markets operate as amneans of automatic second by second valuation. They are not there to do that now. You can’t get appriaser to do this. Appraisers usually work from comparable sales or sometime from forecasted earnings. This is the “circular logic” part of the problem.
So you are left with the problem that the US government is basically the buyer of last resort. There is no market for these assets except for one possible buyer who may have tremendous leverage in deciding how much the assets are worth but which also does not want to see the assets become worthless or, as it knows, we are all up shit’s creek. It also does not scare away the possible partners.
Let me propose a possible scenario for you. Nobody knows what the possible downside of risk with these CBO’s and CDS’s are. Maybe its $60 trillion or something more or less. Maybe it’s just a lot of hot air. But suppose to settle the whole problem you can buy all the players off with $1 trillion? If you can stabilize the markets which thinks it may have a $60 trillion downside by paying off the interested parties for pennies on the dollar, shouldn’t you try to do that?
The loan has actually been paid off more than that.
Everyone who bought a house with less than 20% down had to have Private Mortgage Insurance. If the buyer defaults, guess what? PMI pays off the mortgage. That’s what it’s for.
So almost all of these “toxic assets” have already been paid off by PMI. Paid off at the inflated values of the Great Real Estate Bubble.
Why are taxpayers paying for them again? And yet again?
We need that bill passed and banks should know people can (and will) refinance with another bank if they don’t allow it.
The risks to banks were accepted by them with their bizarro rating agency AAA CDOs which were filled with crap. If banks don’t want the risk, then they should support the new regulations to fix mortgage lending. The bad ones already out there are going to cause pain for everyone and banks can’t get around that any more than the rest of us. So, they should go along with the plans to repair things as quickly as possible. It’s really in their best interest.
Because they can and are unraveling the mess. Isn’t it important to you that all this mess get straightened out?
But you assume they were paid off by PMI. What if the PMI had been so leveraged it didn’t pay?
masaccio, I’ve been reluctant to be too harsh about Geithner, but at this point it’s really looking grim. How does the Obama administration think that taxpayers aren’t going to figure out we’re being asked to bail out hedge funders who made a lot of money betting on fraudulent mortgages?
Give people a few more weeks to connect the dots, and I’d put the odds on more than 20% of the Congresscritters who stand for reelection in 2010 remaining in office at about 30:1.
Because it’s really really important to the country that it get done.
Same thing with getting bad mortgages crammed-down or modified by some other means or refinanced.
In the Geithner plan some wealthy people will make an easy buck. With mortgage fixes people get to keep their homes.
Sounds like a win win situation to me.
This is an issue that needs to be addressed, and it is not being addressed; it’s barely even acknowledged.
Of course not all loans that should have had PMI have it, and not all the ones that do have it are being paid off by the insurers.
But what about the ones that are being paid off?
That should represent a substantial portion of the defaulted home loans, and yet, all we hear about is that the banks are losing all this money on foreclosures, and the taxpayers have to pay for their losses, and oh my goodness Apocalypse!
Yes, but what about all the bad loans that are being paid off with PMI?
We don’t know — because nobody will say — what the real deal is, and at the rate things are going, we’re never going to find out, either.
All we get to do is pay and pay and pay. And pay some more.
For what, exactly?
I believe it’s called “extortion.”