Catastrophe (13 page)

Oh, no? Has he met Barack Obama and Barney Frank?

Roubini and others have called for a short-term nationalization he euphemistically calls “temporary receivership,”
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along the lines of what Sweden did in the 1990s, when its banking system got into trouble.

Sweden had its own banking mess in 1992. As the
New York Times
describes it, “after years of imprudent regulation, short-sighted economic
policy, and the end of its property boom, [Sweden’s] banking system was…insolvent.”
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To address the crisis, Sweden acted boldly and quickly. It swooped in and nationalized its banks, forcing them to write down their losses. It spent $18.3 billion, in today’s dollars, to rescue its banks, the equivalent of 4 percent of its GDP. (The $700 billion TARP bailout represents about 5 percent of U.S. GDP.)
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But the case of Sweden is notable because its government was willing to accept big political pain in return for its action. It forced the banks to admit which loans were bad and made them write them off (rather than keep them on their balance sheets, praying that things would start looking up). Then the government took over the properties that were in default, presumably evicting people from their homes and forcing businesses to close if they weren’t paying off their debts.

By seizing the properties, Sweden was able to sell them off and make back a good share of the money it had to put up. Then, when the bank balance sheets were finally cleaned up, Sweden resold the banks to new private owners and made back more of its money.

In the end, the taxpayers of Sweden got more than half their money back. The shareholders lost everything, but their stock values had been close to zero anyway. And today the Swedish banking system is weathering the current financial storm rather well, having had its shakeout seventeen years ago.

By contrast, the government of Japan dithered for years, refusing to make banks write off bad loans and keeping banks in private hands. Many blame Japan’s decade-long recession on the government’s failure to follow the Swedes’ example.

What Roubini and other proponents of nationalization are trying to avoid is creating a host of paralyzed banks that exist in name only, prevented by the toxic assets on their balance sheets from actively assisting the economy through new lending. Right now, he says, we are stuck in a never-never land of “zombie banks” that remain in private hands, too strong to die and too weak to lend.

Roubini even worries that, by forcing sales of some banks to others, we may inadvertently have created even larger zombie banks. “We started,” he says, “with banks that were too big to fail.” But when the feds arranged that
series of shotgun marriages—in which J.P. Morgan took over Bear Stearns and Washington Mutual, the Bank of America bought Countrywide and then Merrill Lynch, and Wells Fargo merged with Wachovia—the resulting conglomerates were just overgrown zombies. “It doesn’t work!” Roubini insists. “You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.”
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Instead, he says, the solution is to nationalize the banks, clean up their balance sheets, and then break them up and sell them, creating “three or four regional or national banks” out of each one. Ultimately, he says, this will make the banks “stronger.”
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But that approach leaves one major factor to chance: Once Obama got his hands on the banks, would he clean them up and sell them off as the Swedes did? Or would he use them as tools to manage an increasingly socialist economy?

From the current, modest pressure the U.S. government is putting on banks—using the leverage the TARP program provides—we can see how eager it is to exercise an increasing degree of control. Right now, the liberals are lashing out at corporate bonuses, demanding greater consumer lending, and trying to influence credit policies.

In Obama’s mortgage rescue plan, for example, banks that receive TARP money are obliged to participate in the loan restructuring program the president has proposed. (More on the rescue plan in the next chapter.) And Obama used his TARP muscle to get Chrysler bond holders to accept 29 cents on the dollar. If the feds are using their TARP leverage this aggressively, imagine what they’d do if they owned the banks!

It’s easy to see the government demanding more affirmative action in bank hiring, less redlining of impoverished neighborhoods, more emphasis on minority businesses in lending, and the curtailing of lending to companies that employ foreigners or outsource or hire illegal immigrants. It’s exactly this kind of meddling that led Fannie Mae and Freddie Mac to go so disastrously wrong! Politicians, egged on by their constituents, can’t help themselves.

And once the politicians give themselves this kind of power over the banks and financial institutions of this nation, can you really imagine them giving it up that easily? Can you envision the bureaucrats who are
hired to oversee the nationalized banks relinquishing their sinecures this quickly?

Forget about it. They’d have to be pried out of their cold, dead hands.

THE DAY THE DECLARATION OF INDEPENDENCE WAS REPEALED

It’s not just that Barack Obama wants to nationalize the backbone of our nation’s system of private enterprise, the financial institutions of America. He also wants to
inter
nationalize a power that was once considered a core element of our national sovereignty: the right to regulate these financial institutions.

At the G-20 summit in London on April 2, 2009, President Obama pledged U.S. support for a “framework of internationally agreed high standards” in the regulation of financial institutions.
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In the name of “greater consistency and systematic cooperation between countries,” he agreed to submit our regulatory organs—such as the SEC and the Federal Reserve—to oversight by a newly created international Financial Stability Board (FSB), which would “collaborate with the IMF (International Monetary Fund).”
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Here’s what the international regulators could do:

That’s not a typo. The last item speaks of regulating the “pay and compensation” and “corporate social responsibility” of “
all
firms.” All. Every one. As in: the entire economy!

Meet Mario Draghi, our new boss. He is the head of the Financial Stability Forum, on which the new board is to be based. He is the governor of the Banca d’Italia. The IMF and the Financial Stability Forum—and now the FSB—will be headed by Europeans. Traditionally, the United States has controlled the World Bank, while Europe got the IMF. Now Draghi and the other European central bankers will have tremendous power over the United States and its financial institutions.

This is the price Obama and the leaders of the world are making us pay for being the nation where the global financial crisis began: we are no longer our own masters.

ACTION AGENDA

The stakes in the outcome of the bank rescue plan dwarf those involved in even the president’s big-spending stimulus package and the supplemental appropriations we discussed earlier. The risk of those plans is that they could force us to endure a painful cycle of inflation and recession while saddling future generations with high bills for interest and debt repayment.

But the risks and dangers involved in nationalizing the banks would be of a different order of magnitude. If the bank bailout leads to nationalization and the politicians don’t follow Sweden’s lead and return them to private ownership as soon as possible, the Obama administration will effectively have transformed the United States into a socialist democracy. Businesses that need operating cash to grow will have to go hat in hand to government-owned banks for loans. And the politicians making the decisions will attach whatever conditions they like to these loans (as, indeed, they’re already doing with the TARP loans).

Soon Washington will be telling bankers to give preference to certain types of loans over others. Sometimes the politicians will make the mistake of betting on the wrong horse economically (as Japan did in the 1990s, when it steered investment toward companies developing big mainframe computers and away from laptops). Other times, they will substitute short-term, populist economic demands for long-term investments. And they will
always be subject to the temptation to appoint somebody like Rod Blagojevich (the corrupt ex-governor of Illinois) to run the program, allowing the lending to be guided by hidden motives.

In any event, our elected officials aren’t bankers—they’re politicians. They’re bound to get it wrong. And they’ll end up costing our nation billions of dollars in lost assets.

(Some may ask,
But isn’t that exactly what the privately owned banks just did?
The answer is: yes. But they did so after giving us sixty years of solid prosperity and economic growth, with few interruptions, because for the most part they heeded the demands of the marketplace. In the process, they left the world’s state-driven economies in the dust.)

The stakes couldn’t be higher.

That means that it’s our job to be vigilant. We have to be alive to any effort to keep the banks under federal control. Nationalization could be acceptable if it is short term. But the minute we see any sign that Washington wants to hang on to the banks indefinitely—and that’s a real threat—we need to take a strong stand against it.

How are we supposed to do this? The simple answer is to elect men and women to Congress who don’t want the government to own the banks. Whatever both parties may claim about their fiscal responsibility, the only ones who can be reliably counted upon to keep American business in the hands of the private sector are the Republicans.

In the short term, nationalization of the banks may be inevitable. But to allow this takeover to occur under Democrats would be to invite a plunge into a socialism that could take decades to reverse. Remember that old Washington motto: “The only things that are permanent are those which are temporary.”

This reality makes the election of 2010 the most important off-year election since 1974 (when voters swarmed to replace Nixonian members of Congress in the wake of Watergate). The safety of our free-enterprise economy may well hang in the balance.

Falling behind on your mortgage? Facing foreclosure? Lost your job? Worried about losing your house, too? Facing a personal catastrophe?

Don’t look to the Obama administration’s mortgage rescue plan for help—unless you’re one of the lucky few who manage to qualify under its arcane provisions.

Oh, the plan says you can get help to avoid foreclosure…unless:

1. You’ve lost your job
   
2. You owe more than your house is worth
   
3. You’re already in default
   

In other words, if you need help, you won’t get it.

Announcing his mortgage program in February 2009, Obama was quite expansive, claiming that it would help “up to five million homeowners who have seen the value of their homes decline to refinance their mortgages.”
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He also said it would “assist up to four million home owners to modify subprime mortgage loans so that payments would be no more than 31 percent of household income.”
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But the fine print sent quite a different message. The reality is, those who most need assistance will be left out in the cold by Obama’s plan.

About 27 percent of the 52 million home owners in the United States with a mortgage are now “under water”—that is, the amount of their mortgage loan is greater than the value of the property that secures it.
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Obama wouldn’t be much help to most of these 13.8 million families.
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His plan allows people to refinance or get help only if the total amount of their mortgage debt is less than their home’s value or no more than 5 percent above it.
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As
MSN Money
puts it, many homeowners today “owe so much more than their houses are worth that a lender would do better by foreclosing.”
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Most of the subprime borrowers fall into this category. The whole point of subprime lending was to help home buyers get loans without having to make a down payment—a system designed to encourage low-income families to buy homes. Indeed, Fannie Mae and Freddie Mac explicitly encouraged these potential buyers to take the plunge by offering to buy up their mortgages as soon as the ink was dry.

Now, however, Obama is suddenly looking askance at these very same borrowers, who merely did what Washington wanted them to do: buy a home with no money down.

When you buy a house without making a down payment, the mortgage debt is, by definition, equal to the value of the property. As soon as a recession causes the home to decline in value, it automatically puts such a home “under water”—and thus ineligible for Obama’s so-called mortgage rescue plan.

And what about those who have lost their jobs in the recession? In order for an applicant to qualify for reduced mortgage payments (through a cut in the rate, a federal subsidy, or a prolongation of the period of the mortgage), Obama’s program requires that the applicant be able to afford the new mortgage. Its definition of affordability is that the borrower have to pay no more than 31 percent of his income each month to service the debt.

If you can’t pay the freight—because you lost your job or for any other reason—you’re out of luck. As Nicolas Retsinas, the director of the Joint Center for Housing Studies at Harvard, notes, “You can modify all the loans you want, you can try to refinance loans, but if you don’t have money com
ing in through your pay [like a] weekly paycheck, you can’t pay anything.”
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That’s simple enough that it shouldn’t take a Harvard professor to explain it—yet it seems lost on the Harvard-educated Barack Obama.

Just to make sure anyone who is jobless doesn’t sneak in under the wire, Obama requires applicants for relief to “provide their most recent tax return and two pay stubs as well as an ‘affidavit of financial hardship’ to qualify for the loan modification program. In the affidavit, applicants will have to cite the reasons behind their financial woes…. The government will then take steps to verify the information.”
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But what about those who are behind on their mortgage payments but not yet in foreclosure? The rules of the new program are a bit vague here. The plan provides that “only homeowners in good standing” can qualify for the loans.
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You don’t have to be behind on your payments. If you can show that you‘re “at risk of imminent default” you are eligible.”
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So an applicant for relief must walk a fine line: he must be “in good standing”—which, presumably, excludes those actually in foreclosure—yet at “imminent risk” of default. So if you happen to be in between these markers and don’t owe more than your house is worth, you’re eligible for Obama’s help.

Or maybe not.

As it turns out, only home owners whose mortgages are insured or owned by Fannie Mae or Freddie Mac are eligible for Obama’s plan. “Fannie and Freddie own or insure about half of the nation’s $12 trillion in mortgages. Pension funds, hedge funds, insurance companies and other private investors hold the other half mainly through mortgage-backed securities.”
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Oh, and another thing: the program is voluntary. Banks and other lenders don’t need to participate. Indeed, many
won’t
participate—because they don’t give a damn what happens to the mortgage loans they made. Most of those original mortgage deals are long gone, sold on the secondary mortgage market and then chopped up and securitized and sold on Wall Street. Why should they worry?

Obama is hoping to entice the banks to participate by offering a $1,000 cash payment to those who service the mortgages for each modified loan and “as much as $1,000 annually for three years when the borrower stays current.”
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Home owners themselves are “eligible for $1,000 annually for
five years for remaining current”—although the money will go not to them directly but to pay down the principal on their mortgage.
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So…

Right?

Not so fast. There are a few other caveats: The property must be owner-occupied. In fact, it must be the homeowner’s
primary
residence. The mortgage must predate January 1, 2009. It can’t be investor-owned, vacant, or condemned. And the loan can’t be for more than $759,750.

If you can squeeze through these eligibility standards, you may be in luck. Then you can have your mortgage reduced, through matching government and private funding, so that the payments come to 31 percent of your monthly income.

Even so, a lot of mortgage-servicing companies feel they don’t have the power to reconfigure mortgage loans without the assent of the investors who might own a piece of the loan (who could number in the thousands if the mortgage was part of a syndication). So the loan-servicing companies are asking Congress to pass a law allowing them to restructure mortgages without explicit permission from the investors.

With all that in mind, then, how many people will really qualify for Obama’s so-called Homeowner Stability Initiative? Not a whole lot.

In practice, if those who have gotten in over their heads on their mortgages are to find any real relief, it’ll have to come through the bankruptcy
courts. One bill that’s making its way through Congress would allow bankruptcy court judges to modify mortgages without securing approval from the lender or the company that services the loan. This “cramdown” legislation offers the only real relief to families holding mortgages they cannot pay.

Opponents of that bill say it’ll raise the cost of borrowing, leading banks to consider more mortgages to be in default. But housing advocates say, correctly, that “mortgage lenders and investors won’t get serious about reworking unaffordable mortgages—through the administration’s new plan or any other—without the threat of bankruptcy judges changing terms if investors and lenders won’t consider modifying loans voluntarily.”
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The latest indications from Congress are that this bill may be in trouble. The Republicans oppose it (they’re wrong on this one) but so do a lot of Democrats. Why? Because they are all in hock to the mortgage lenders who have showered them with campaign contributions.

So Obama’s rescue plan won’t help most homeowners who need it and the Congress looks unlikely to pass the only way to get them real relief because the special interests won’t let it do so.

Obama, of course, knows the shortcomings of his plan. He realizes, obviously, that there are huge gaps. He hinted as much when he cautioned that his plan “will not save every home”
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—another memorable understatement.

So why won’t he take more dramatic steps to end the crisis? During the campaign, he repeatedly bemoaned the pain families must feel at losing their homes, his words dripping with empathy. After the Iraq War turned around, those very foreclosures became the single most important issue in his campaign. So why doesn’t he propose a real solution?

Because he’s caught in the classic liberal Democrat predicament. If he steps in, buys the mortgages, and then cuts a good deal with the families, letting them stay in their homes without facing foreclosure or eviction, he could alleviate all the current pain. But it would come at a steep price.

What happens if the family breadwinner loses his or her job in the interim? Or has already lost the job? Is the federal government going to throw families out of their homes? Not very likely.

And then, when the economy improves and home values rebound, what
if the current occupants refuse to buy back their homes at a reasonable market price? How are the taxpayers to recoup their money? Again, Washington would face the prospect of throwing people out of their homes.

The minute the liberal Democrats forced Fannie and Freddie to buy and insure mortgage loans to people who probably couldn’t pay them, they set up the ultimate problem: In a democracy, how can the government evict people from their homes?

The answer is, of course, that it won’t. As a result, taking over these mortgages now would mean setting up a kind of permanent government housing project for these families, keeping them in their homes at a substantial subsidy rather than evicting them and getting a fair market price for the property. These subsidized houses could sit out there for decades, a permanent drain on the economy; one can only imagine how hard some enterprising heirs might fight to hang onto those deal-of-the-century homes, trying to prolong the subsidy for generations to come.

By offering such a phony mortgage plan, Obama has, in effect, punted on the problem, letting the bankruptcy courts sort out the bad loans on a case-by-case basis. Let the judicial system order people out of their homes; the government’s not about to get its hands dirty.

That’s what judges are for.