It looks like the Obama administration is going to introduce a range of policy options later this week for how they would like Congress to change the way the GSEs and the mortgage market. Maybe there will be good solutions proposed, but based on the fact that administration allies and bank lobbyists are basically pushing the same set of reforms for Fannie and Freddie, I’m not terribly optimistic.

Yves Smith writes:

It’s as if a population suffering from a toxic reaction to mustard was now offered options ranging from Dijon to pommery to spicy brown as meaningful improvements. And this is not an exaggeration. The new GSEs (and let us not kid ourselves that that this is where the Powers That Be are driving this effort) would have an explicit government guarantee, be larger in number, and supposedly have higher capital buffers.

The problem is that any government sector guarantee for a private sector entity is a terrible idea absent very tough constraints on operations, which is the still-unlearned lesson of the financial crisis. And the idea that any higher capital standards will hold over time is dubious. Fannie and Freddie were enormously powerful lobbying forces, a de facto mainly Democrat slush fund; any new GSEs will have similar collective clout and will press for their agenda on a unified basis, which is certain to include waivers that will amount to lower equity requirements. Increasing leverage is one of the easiest ways to improve performance in a financial firm.

Now the Administration is also allegedly presenting some elements of securitization reform on Friday. We’d be glad to be proven wrong, but we anticipate any proposals will be cosmetic and/or insufficient in scope. The real problem is that the coming staged fight over GSE reform will serve as a useful distraction for what is really needed, which is much broader mortgage market reform. Pursing the GSE question largely in isolation is sure to produce bad outcomes.

For instance, one of the excuses for continuing to have a large role for the GSEs 2.0 is that the private securitization market is dead. But that is because the banks have been blocking reform and investors have gone on strike. But the lack of private market demand is then used as an excuse as to why we still need something GSE like to play a big role. That’s tantamount to killing your parents and asking for charity because you are now an orphan.

Smith is spot on to point out that pushing through major changes to Fannie and Freddie while we still don’t really know how the take aways from the financial crisis of 2008. But, if we’re going to have this debate now, I think a much better way to reform the mortgage market would be to stop trying to achieve policy outcomes for home ownership in the United States through GSEs or their successors and start doing it through the federal budget. If we want homes to be affordable, the government should help people directly pay for them. FHA has had a much higher success rate, fewer foreclosures because their loans had strict standards for qualification and vetting, meaning money only went to people who were good candidates for success. We should not outsource and then subsidize this behavior to public/private entities.

This misses some key points about the motivations for how banksters were blowing up the housing bubble and manufacturing as many RMBSs as possible, but is still a pretty good summary of why attacks on homeowners who are in default as deadbeats is wrong, while banksters are squarely to blame for the foreclosure crisis.

If nothing else, this shows how thin the banks’ arguments against homeowners is.

Dean Baker has a post which poses the following question:

Structural Unemployment: Does Anyone Care About Evidence?

No.

This has been another edition of Simple Answers to Simple Questions.

Teddy Roosevelt gave this speech at a Harvard alumni dinner in. I’d say it applies today, not in the least as an incredible representation of a populist view of who government and the economy should work for and who it should not bend towards.

This Nation never stood in greater need than now of having among its leaders men of lofty ideals, which they try to live up to and not merely to talk of. We need men with these ideals in public life, and we need them just as much in business and in such a profession as the law. We can by statute establish only those exceedingly rough lines of morality the overpassing of which means that the man is in jeopardy of the constable or the sheriff. But the Nation is badly off if in addition to this there is not a very much higher standard of conduct, a standard impossible effectively to establish by statute, but one upon which the community as a whole, and especially the real leaders of the community, insist. Take such a question as the enforcement of the law. It is, of course, elementary to say that this is the first requisite in any civilization at all. But a great many people in the ranks of life from which most college men are drawn seem to forget that they should condemn with equal severity those men who break the law by committing crimes of mob violence and those who evade the law, or who actually break it, but so cunningly that they can not be discovered, the crimes they commit being not those of physical outrage, but those of greed and craft on the largest scale.

The very rich man who conducts his business as if he believed that he were a law unto himself thereby immensely increases the difficulty of the task of upholding order when the disorder is a menace to men of property; for if the community feels that rich men disregard the law where it affects themselves, then the community is apt to assume the dangerous and unwholesome attitude of condoning crimes of violence committed against the interests which in the popular mind these rich men represent. This last attitude is wholly evil; but so is the attitude which produces it. We have a right to appeal to the alumni of Harvard, and to the alumni of every institution of learning in this land, to do their part in creating a public sentiment which shall demand of all men of means, and especially of the men of vast fortune, that they set an example to their less fortunate brethren, by paying scrupulous heed not only to the letter but to the spirit of the laws, and by acknowledging in the heartiest fashion the moral obligations which can not be expressed in law, but which stand back of and above all laws. It is far more important that they should conduct their business affairs decently than that they should spend the surplus of their fortunes in philanthropy. Much has been given to these men and we have the right to demand much of them in return.

Every man of great wealth who runs his business with cynical contempt for those prohibitions of the law which by hired cunning he can escape or evade is a menace to our community; and the community is not to be excused if it does not develop a spirit which actively frowns on and discountenances him. The great profession of the law should be that profession whose members ought to take the lead in the creation of just such a spirit. We all know that, as things actually are, many of the most influential and most highly remunerated members of the bar in every centre of wealth make it their special task to work out bold and ingenious schemes by which their very wealthy clients, individual or corporate, can evade the laws which are made to regulate in the interest of the public the use of great wealth.

Now, the great lawyer who employs his talent and his learning in the highly remunerative task of enabling a very wealthy client to override or circumvent the law is doing all that in him lies to encourage the growth in this country of a spirit of dumb anger against all laws and of disbelief in their efficacy. Such a spirit may breed the demand that laws shall be made even more drastic against the rich, or else it may manifest itself in hostility to all laws. Surely Harvard has the right to expect from her sons a high standard of applied morality, whether their paths lead them into public life, into business, or into the great profession of the law, whose members are so potent in shaping the growth of the national soul. [Emphasis added]

President Obama has suggested that he will initiate a debate on the tax code, including the corporate tax code. I think an honest debate on taxes in the US, especially those paid (or, more often, not paid) by corporations, would be premised by something that looks a lot like what Teddy Roosevelt said here.

Oh and I’d love see the Chamber of Commerce respond to this line:

Every man of great wealth who runs his business with cynical contempt for those prohibitions of the law which by hired cunning he can escape or evade is a menace to our community; and the community is not to be excused if it does not develop a spirit which actively frowns on and discountenances him.

I’d say we need more active frowning nowadays.

Yves Smith relates what could be some of the best news in a long time on the foreclosure crisis.

What is particularly interesting is that the SEC seems to be targeting specifically the sort of abuses that we have chronicled at length on this blog: failure to convey mortgages to the securitization trusts in accordance with the pooling and servicing agreements (which were part of the offering documents); whether robosiging is inconsistent representations made to investors (this frankly is a novel angle, I’m impressed the SEC is considering it), as well as an issue that has gotten more attention in the media, that investors appear to have been mislead on a widespread basis about the quality of mortgages in late vintage subprime mortgage bonds.

Note that we’ve been surprised at the complacency of investors regarding the losses banks are taking on the issue of standing in courts all over the US. The securitization industry has desperately been trying to spin this as “deadbeat borrowers trying to get a free home” when the overwhelming majority of people in court are either convinced that they are the victim of servicing abuses, are fighting the dubious and pervasive practice of banks trying to break a bankruptcy stay (all creditors are supposed to take a time out while the borrower works out a bankruptcy plan with the court), or really just want a mod, but are having to cudgel the bank in court instead. Investors have been filing a few cases, but peculiarly on the (we think) not so attractive representations and warranties issue, in which the investors argue that the mortgages in the securitization pools were far worse than they were told, and the lousy quality of those mortgages (as opposed to the economy taking a big hit) is the reason they have suffered losses.

Even though the banks clearly put a lot of dubious loans into the deals, it is difficult and costly to win these rep and warranty cases, which means these case are typically settled early on, and for not very large amounts compared to the amount at issue). The issue of failure to convey mortgages properly to the trust seems more of a slam dunk, but we wonder whether investors are loath to advance a legal theory that strikes at the heart of the mortgage industrial complex. After all, if they win, they have just established that they were sold non-mortgage backed securities. Nevertheless, the news that the SEC is taking this matter to heart may embolden some of the fence-sitters.

The Financial Times piece Smith is working off of is a good read. The SEC is asking some of the right questions, to be sure:

While declining to discuss any investigations, Mr Lench highlighted areas that could be of concern: “Were representations relating to the transfer or documentation of mortgages into the loan pools accurate? Did activities such as ‘robo-signing’ contradict those representations? Were disclosures to investors regarding the quality of the loans in the pools accurate?”

Lench goes on to say this isn’t just about what happened in the years leading up to the financial collapse of 2008, but will include issues arising today.

Mr Lench said his unit was working with “legacy” cases from the financial crisis as well as new ones stemming from the “rippling effect of the unfolding crisis”.

Hopefully this will go towards stopping foreclosures based on faulty documents and places where the current servicer does not have custody of the mortgage note with a proper chain of custody.

The real question, at the end of all of this, will be if regulators pursue criminal charges for those parties who committed criminal behavior.  Short of criminal charges, I’m not sure that there is any action regulators can take which will meaningfully discourage this sort of behavior which wrecked our economy and continues to wreck peoples’ lives from happening again.

I really liked this ad and the emotional pull it uses to tie the production of high quality cars to the survival of an American city. While it is surely in Chrysler’s interest to persuasively market their cars, doing so in a way which is honest about the importance of the auto industry for the success and recovery of Detroit is important. We don’t hear a lot of talk about the realities of the economic collapse: jobs lost, neighborhoods abandoned, factories moved. This ad brings them forward with a simple hope – that we can work our way out of a downturn, given the chance.

Americans have to want autoworkers and a city like Detroit to succeed. Whether you think economic recovery is going to require more government help or private business growth, this isn’t going to happen on its own. Good on Chrysler for stepping up and forcing the issue.

Marcy Wheeler has more analysis of the ad, though her conclusion is largely the same as mine: “But whatever the cynical calculations behind this ad, whatever the value of the Chrysler 200, someone needed to tell this story.”

It’s really hard to not read reports about HAMP and its failures and not get really mad. Government should work for people. It should make peoples’ lives better. It should serve as a defense for the defenseless. But what we’ve seen instead under HAMP is a prioritization of bank balance sheets over American homeowners. It’s maddening. In the last 24 hours, I’ve read about how hard it is for Americans in underwater homes to make a decision to walk away. I’ve also read that, not surprisingly, banks have buried people in paperwork as a means of making permanent loan modification a near-impossibility: less than 20% of those who applied for a trial modification went through and got a permanent modification. Alan White of Public Citizen writes:

Most of those who fail initially or at the conversion stage are not failing because their cases are hopeless. On the contrary, many are rejected for reasons that suggest workouts are possible (such as those whose debt ratio is not high enough for HAMP.) The program suffers seriously from lack of enforcement, from needlessly detailed and prescriptive rules, and from the Administration’s unwillingness to confront the principal reduction issue.

On the last point, ProPublica is out with a report today that covers the history of opportunities for cramdown to become policy and how it was rejected by the administration at every turn.

“We would propose that this stuff be included and they kept punting,” said former Rep. Jim Marshall, a moderate Democrat from Georgia who had worked to sway other members of the moderate Blue Dog caucus on the issue.

“We got the impression this was an issue [the White House] would not go to the mat for as they did with health care reform,” said Bill Hampel, chief economist for the Credit Union National Association, which opposed cramdown and participated in Senate negotiations on the issue.

Privately, administration officials were ambivalent about the idea. At a Democratic caucus meeting weeks before the House voted on a bill that included cramdown, Treasury Secretary Tim Geithner “was really dismissive as to the utility of it,” said Rep. Lofgren.

Larry Summers, then the president’s chief economic adviser, also expressed doubts in private meetings, she said. “He was not supportive of this.”

The absence of a policy solution to tens of millions of homeowners being underwater results in pain and suffering, not to mention a huge weight on the economy.

I’d really like to be able to go a day without reading a story about the fraudclosure crisis or HAMP or bankster profits that made me want to pull my hair out, but I doubt that is going to happen any time soon.

Michael Lewis has an analysis of the Irish bank bailout in Vanity Fair that is a must-read. This passage in particular sounds remarkable familiar:

In any case, if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the bank for 50 cents on the dollar—that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awakened to find his bonds worth 100 cents on the dollar. The Irish government had guaranteed them! He couldn’t believe his luck. Across the financial markets this episode repeated itself. People who had made a private bet that went bad, and didn’t expect to be repaid in full, were handed their money back—from the Irish taxpayer.

For those wondering, this is what global oligarchy looks like.

Yves Smith describes the best way to change the perverse incentives that drive pure greed on Wall Street.

The best methods to induce a real change in values would be criminal prosecutions, barring lesser miscreants from the industry for life (and we don’t mean young insider traders, but business unit managers for more complex abuses), and measures that come closer to approximating unlimited liability, like clawbacks (if someone who leaves his firm with a big hole in its balance sheet can have pretty much all of his tangible wealth seized, that might focus a few minds).

I don’t think there’s any chance that banker pay will stop rising through the stratosphere without a fundamental change in how the banking system is valued. At this point in time, Wall Street firms just don’t seem to grasp that they did really bad things, things that shouldn’t be done, and millions of people were hurt as a result. As such, they don’t get that their values system needs to be adjusted to conform with being half-decent members of society. This change isn’t going to happen on its own. People need to be put in jail for their criminal behavior and massive bailouts should prompt Congress to have meaningful oversight over these institutions, including over compensation, be it through clawbacks or caps moving forward.

It’s clear that it is much easier for powerful politicians to punch public servants than do anything which might anger bond holders. Of course this is actually speeding the destruction of communities and only forestalling the inevitable consequences of continuing to ignore the necessity of confrontation with banks and bond holders.