Team Obama’s Summers & Geithner’s “White” Wash of Bailout Banks to Avoid Bankruptcy Proceedings

While President Obama is jetting throughout Europe, more bad economic news have hit the fan.  Joblessness continue to be on the rise with sign of slowing, services provided by states such as unemployment benefits previously extended are quickly depleting, state and local taxes on the rise with fiscal budget deficits, and retirement and pensions plans are under pressure due to drop in value and the lack of contributions.

Critics continue to berate the Team Obama economic plan and its ability to solve the crisis as home prices continue to fall and there is lack of marketability of toxic assets to investors other than the banks themselves.  In the latest critical comments offered by experts, the supposed bank stress test move is nothing more than a “scam”, a white wash placebo to calm the American people.  This critique comes quickly on the heels of the news that FASB will relax and make changes to their “mark to market” accounting rules.

How long will American voters and taxpayers wait for results despite trillions of their money are going out the door to failed private corporations?  Take this poll.

The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.

He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program’s failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. To make us chumps,” Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: “’If we lie and they believe us, all will be well.’ It’s Orwellian.”

The former regulator is extremely critical of Geithner, calling him a “failed regulator” now “adding to failed policy” by not allowing “banks that really need desperately to be closed” to fail. (On Saturday, Geithner said on Face the Nation, if banks need “exceptional assistance” in the future “then we’ll make sure that assistance comes with conditions,” including potentially changing management and the board, but did not say they’d be shut down.)

Black says the stress test must also be viewed in the context of Geithner’s toxic debt plan, which he calls “an enormous taxpayer subsidy for people who caused the problem.” The fact bank stocks have been rising since Geithner unveiled his plan is “bad news for taxpayers,” he says. “It’s the subsidy of all history.”

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Obama Wants Bailed Out Banks to Modify Loans But Banks Don’t Want Play

President Obama presented a plan shortly after taking office to keep Americans in their homes by giving banks the taxpayers’ money in order for the bailed out banks to rework loans so mortgage payments can be reduced. But the banks have failed to do that as they have failed at everything else for the American economy and its people.

How long will Americans wait for results as jobless rates rise to an high since 1983 and more people lose their homes?  Take this poll:  http://www.misterpoll.com/polls/427966

Loan modifications rise; many don’t pare payments
Foreclosure prevention efforts grow, but fewer than half of loan modifications reduce payments

  • Friday April 3, 2009, 10:10 am EDT

WASHINGTON (AP) — Lenders are boosting their attempts to avoid home foreclosures, but fewer than half of loan modifications made at the end of last year actually reduced borrowers’ payments by more than 10 percent, data released Friday show.

The report, based on an analysis of nearly 35 million loans worth more than $6 trillion, was published by the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision. It provides the most detailed and broad analysis to date of efforts to stem the foreclosure crisis.

Among loan modifications made in the October-December quarter, about 37 percent resulted in a drop in payments of more than 10 percent, compared with about one-fourth in the first nine months of the year. Regulators saw that growth as a positive sign.

“The trend toward lowering payments to make home mortgages more affordable is moving in the right direction,” John Bowman, acting director of the Office of Thrift Supervision, said in a prepared statement.

Still, nearly one in four loan modifications in the fourth quarter actually resulted in increased monthly payments. That situation can happen when lenders add fees or past-due interest to a loan and spread those payments out over the 30- or 40-year period.

Perhaps unsurprisingly, the report found that loans were far less likely to fall back into default if a borrower’s monthly payment is reduced by a healthy amount.

Nine months after modification, about 26 percent of loans in which payments had dropped by 10 percent or more had fallen back into default. That compares with about half of loans in which the payment was unchanged or increased.

“This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high re-default rates,” Comptroller of the Currency John Dugan said in a statement.

The Obama administration is aiming to help up to 9 million borrowers stay in their homes through refinanced mortgages or modified loans. It is spending $75 billion to provide lenders an incentive to alter more loans.

Still, the faltering economy, driven down by the collapse of the housing bubble, is causing the housing crisis to spread.

Among the loans surveyed in the report, just over 10 percent were delinquent or in foreclosure, compared with 7 percent at the end of September, the report said. Delinquencies are increasing the most among prime loans made to borrowers with strong credit, it said.

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Forget Bailout Says Economist-Break the Bank and Put Into Receivorship

How will Wall St respond to this?  Not well I imagine, but no short term pain then no long term gain.  Isn’t this the type of change President Obama was promising or was that just another unfulfilled Washington campaign promise long gone by.

Part I: Geithner’s Plan “Extremely Dangerous,” Economist Galbraith Says

From The Business Insider, March 23, 2009:

Tim Geithner has finally revealed his plan to fix the banking system and economy.  Paul Krugman, James Galbraith, and others have already trashed it.

[We spoke with noted economist Galbraith this morning. In the accompanying segment, he calls the Treasury Secretary’s plan “extremely dangerous.”]

Why?

In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit

Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has been trying to get approved since last fall?

In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms.  He views the crisis the same way Wall Street does–as a temporary liquidity problem–and his plans to fix it are designed with the best interests of Wall Street in mind.

If Geithner’s plan to fix the banks would also fix the economy, this would be tolerable.  But no smart economist we know of thinks that it will.

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy.  Here they are:

The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.  As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem.  The banks, meanwhile, are lending.  They just aren’t lending as much as they used to.  Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.

The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back.  And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.

Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.  House prices have dropped by nearly 30% nationwide.  That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion).   The banks don’t want to take their share of those losses because doing so will wipe them out.  So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.

Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they’ll sit there and say they are lending while waiting for the economy to bottom.

Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years.  House prices are still falling.  Retirement savings have been crushed.  Americans need to increase their savings rate from today’s 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average.  Consumers don’t have room to take on more debt, even if the banks are willing to give it to them.

The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP.  The first is Nonfinancial Debt To GDP.  The second is Total Debt To GDP.

In Geithner’s plan, this debt won’t disappear.  It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

For more coverage including charts, see The Business Insider.


Part II: Geithner, Obama Kowtowing to “Massively Corrupted” Banks, Galbraith Says

Like it or not, many people seem to be resigned to the idea there’s no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning. (Click here for part one of our discussion of the plan.)

That’s hogwash, says University of Texas professor James Galbraith, author of The Predator State. Of course there’s an alternative: FDIC receivership of insolvent banks.

Aside from being legally proscribed, the upside of FDIC receivership is the banks are restructured and reorganized for potential sale (either in whole or parts), Galbraith says. Such was the fate in 2008 of, most notably, Washington Mutual and IndyMac.

Crucially, FDIC receivership also means new management teams for insolvent banks; and Galbraith notes new leaders will have no incentive to cover up the fraudulent or predatory lending practices of their predecessors. Given the entire system was “massively corrupted by the subprime debacle,” the professor believes criminal prosecutions on par with the aftermath of the S&L crisis – when hundreds of insiders went to jail – is a likely (and necessary) outcome of the current crisis.

But don’t expect to see many “perp walks” if Geithner’s current plan comes to fruition. That’s one reason Galbraith called the plan “extremely dangerous” in part one of our interview.

So why isn’t the Obama administration pushing for FDIC receivership? “Political influence of big banks,” the economist says.

Other renown economists agree.  One is Paul Krugman of Princeton University, NY Times Columnist and Nobel Prize winner feels Geithner’s plan won’t work and disagrees with with Larry Summers and Ben Bernanke in addition to the Secretary of the Treasury.

Why is government leaderships on both sides of the aisle so hesitant from exploring other options such as the one presented by Galbraith and Krugman?  Is it because it does involve the take over of many of these banks into receivorship and hence breacking the control of current management, shareholders and the contracts that these institutions hold?

Or is it the special interest money that finds its way to campaign funds that make politicians hesitant to be as objective as they should and need to be in the full interest of all Americans and their long term interests but not just those that are tied to the banks?

Looking at the tally of money (source:  opensecrets.org) contributed to our federal government campaigns by commercial banks, it is no small amount.

Election Cycle Rank† Total Contributions Contributions from Individuals Contributions from PACs Soft Money Contributions Donations to Democrats Donations to Republicans % to Dems % to Repubs
2008* 14 $36,596,575 $25,461,187 $11,135,388 N/A $17,382,130 $19,188,294 47% 52%
2006* 10 $25,556,994 $14,171,801 $11,385,193 N/A $9,593,806 $15,718,285 38% 62%
2004* 12 $30,712,741 $20,304,454 $10,408,287 N/A $11,055,108 $19,575,158 36% 64%
2002 17 $19,990,341 $7,832,719 $8,669,773 $3,487,849 $7,287,686 $12,642,527 36% 63%
2000 14 $25,909,905 $11,034,100 $9,619,581 $5,256,224 $9,388,944 $16,443,924 36% 63%
1998 10 $17,736,407 $5,611,846 $8,759,627 $3,364,934 $6,105,895 $11,471,053 34% 65%
1996 10 $19,237,898 $6,775,437 $9,394,731 $3,067,730 $6,474,350 $12,709,248 34% 66%
1994 9 $13,356,699 $4,410,141 $8,029,818 $916,740 $6,459,487 $6,886,612 48% 52%
1992 8 $14,780,020 $5,482,094 $8,234,315 $1,063,611 $7,445,336 $7,314,787 50% 49%
1990 9 $9,769,910 $2,867,784 $6,902,126 N/A $5,159,968 $4,609,142 53% 47%
Total 12 $213,647,490 $103,951,563 $92,538,839 $17,157,088 $86,352,710 $126,559,030 40% 59%

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