It's obvious that Americans do not understand what is meant by systemic risk. Worse, I suspect that most of the members of the various House and Senate oversight committees do not understand it either.
Paulson, Geitner, Bernanke: they all understand it. But the knowledge is so complete, so innate, they simply do not realize that other people do NOT understand what they mean, how it is assessed, what the risks are. Or, perhaps, they know their Congressional overseers do not understand, but they haven't figured out how to explain it without showing that the emperor has no clothes (that a lot of those in Congress have not a clue.)
Worse, the ignorance related to this issue goes further. On Monday, Mar. 17, 2009, Pulitzer Prize-winning journalist Gretchen Morgenson said two truly idiotic things on Terry Gross's Fresh Air.
First, she couldn't understand why U.S. taxpayers should pay off foreign counterparties of AIG. Apparently the NYT's crackerjack financial reporter doesn't realize that our financial system does not stop at the country's border. We live in a worldwide financial market. Americans invest abroad. Foreigners invest here. The banks are actually rather tightly connected. Nor does it occur to her, apparently, that obligations (treaty, legal, etc.) also do not stop at the Atlantic and Pacific Oceans. Further, if there were no legal or self-interest reason for doing this (because massive bank failures in Europe would, and to some extent have, effect us), there would still be a moral obligation.
The worldwide financial crisis (not the recession which probably would have happened anyways) began in the U.S. with our sub-prime mortgages, our inadequate or non-existent, or lax regulatory systems, and our glorious "quants" who invented all these instruments that have come close to destroying not just our financial system but the world's. This mess was made in the U.S. and we have an obligation to help our partners while we help ourselves.
Second, she couldn't understand why the President couldn't just break the employment contracts at AIG because they're no different than the bankruptcy cramdown (allowing judges to force a write-down of first home mortgages in bankrupt proceedings).
Hmmmmm. The President can't do either. He hasn't the legal authority. As a matter of fact there has been enormous resistance in the Congress to the proposed bankruptcy cramdown bill (passed in the House but not, at this date, in the Senate) precisely because "contracts must be respected". Nobody in the Executive branch, including the President, has the authority to abrogate, willy nilly, any kind of contract between willing parties.
Barney Frank, to his credit, admits it is not a good idea for the Federal Government to get in the business of, through statutes, canceling contracts. And I, quite frankly, do not like the idea of using the IRS to punish people we think ought to be punished. No matter how such a law is written, I figure some innocents will be caught. And, again, if the Congress can do that in this case, where there is lots of public support, what if it did it for less universally approved reasons?
Frank thinks it makes more sense to exercise our rights as owners of AIG. I will note, however, that Liddy's lawyers told him that if they broke the contracts, the employees could sue, would probably win and it would end up costing even more. I'm not a lawyer. I have no idea if this is true. But the retention bonuses do seem to be issued on a "pay for performance" basis rather than a just "you're here" basis which makes them more rational than otherwise might be thought.
P.S. As I have said before, I am not an accountant, a lawyer, an auditor or a finanacial analyst. I do not work in the financial services industry. My opinions are based on a lot of reading and hundreds of hours of watching C-SPAN and my own commonsense.
Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts
Wednesday, March 18, 2009
Saturday, February 21, 2009
CNBC's Santelli: Ignorant & Unprofessional Rant
CNBC, with the exception of Kudlow and this jerk, has generally had the best, if still weak, reporting on the financial crisis.
But Santelli's rant was both unprofessional and ignorant. The lack of professionalism is obvious. He's supposed to be a reporter on the floor of the NYSE [correction: Chicago Board of Trade].
Ignorant because he obviously didn't listen to Obama's speech in its entirety and because none of us will know the full details of the mortgage plan until March.
But let's deal with his "do you want your taxes to pay for your neighbor's mortgage when that person wasted money on a [fill in the blank]"? (You could use this same argument for objecting to universal health insurance, unemployment insurance, ERISA, welfare, etc.)
Let's assume the worst, that some tax dollars will go to the "undeserving", however one defines that person. That isn't alone reason to object to the plan. No system is perfect, private or public. And, sometimes, people who shouldn't get something do. The objective of any public program should be to maximize the positives and minimize the negatives.
So you still have a job and a 30-year mortgage you can afford. But you could be underwater (owing more than the house is worse). Maybe you don't care. It's your home and you figure it will eventually regain its value. But your neighbor is having trouble making the payments, maybe because one of the partners has lost a job. That person may decide, quite logically, to walk away from a house that isn't worth what is owed on the mortgage. So the house gets foreclosed. The same thing happens across the street or on the next block. All of a sudden, your home's value shrinks even more, and maybe the neighborhood starts to go downhill, too. Perhaps you don't care. Those "other" people didn't deserve any help, no matter what happens to your neighborhood as a result. This is the prototypical case of cutting off your nose to spite your face. Most reasonable people, however, would prefer to live in an intact neighborhood with no foreclosure signs. Obama's proposal will specify rules for reducing mortgage payments and writing down the principal that should reduce the likelihood of mushrooming foreclosure signs in this scenario. This is a social good - even if some of the individual recipients are "undeserving".
As for the details of the plan... I suspect they will pretty much resemble what Baird has done for the Countrywide mortgages. In her program, if you don't have a job or can't afford to pay a mortgage (however renegotiated), you will lose your house. You also have to live in the house - so the program won't help speculators. Allowing judges to force a cram down in bankruptcy is widely disliked (because a first mortgage is a special kind of contract and if you allow this contract to be broken there will be long term financial consequences). I'm not qualified to judge the long term consequences. But, short term, the idea is to have a stick in the wings so the people holding the mortgages will be more inclined to negotiate reduced payments or some kind of mortgage write down. And, finally, as I recall, Baird's program uses a NPV calculation to determine if the changes to principal and interest make financial sense to the owner when compared to the cost of a foreclosure. It it doesn't, foreclosure is the only solution.
In short, the plan won't help everybody. Foreclosures will still occur. And most of the "undeserving" will, indeed, lose their houses. The goal of the program is to help the rest, the ones who are in trouble through no real fault of their own.
But Santelli, like most ideological Republicans, doesn't care about the public good. And he's gotten a lot of press for his rant which he no doubt counts as a personal good.
But Santelli's rant was both unprofessional and ignorant. The lack of professionalism is obvious. He's supposed to be a reporter on the floor of the NYSE [correction: Chicago Board of Trade].
Ignorant because he obviously didn't listen to Obama's speech in its entirety and because none of us will know the full details of the mortgage plan until March.
But let's deal with his "do you want your taxes to pay for your neighbor's mortgage when that person wasted money on a [fill in the blank]"? (You could use this same argument for objecting to universal health insurance, unemployment insurance, ERISA, welfare, etc.)
Let's assume the worst, that some tax dollars will go to the "undeserving", however one defines that person. That isn't alone reason to object to the plan. No system is perfect, private or public. And, sometimes, people who shouldn't get something do. The objective of any public program should be to maximize the positives and minimize the negatives.
So you still have a job and a 30-year mortgage you can afford. But you could be underwater (owing more than the house is worse). Maybe you don't care. It's your home and you figure it will eventually regain its value. But your neighbor is having trouble making the payments, maybe because one of the partners has lost a job. That person may decide, quite logically, to walk away from a house that isn't worth what is owed on the mortgage. So the house gets foreclosed. The same thing happens across the street or on the next block. All of a sudden, your home's value shrinks even more, and maybe the neighborhood starts to go downhill, too. Perhaps you don't care. Those "other" people didn't deserve any help, no matter what happens to your neighborhood as a result. This is the prototypical case of cutting off your nose to spite your face. Most reasonable people, however, would prefer to live in an intact neighborhood with no foreclosure signs. Obama's proposal will specify rules for reducing mortgage payments and writing down the principal that should reduce the likelihood of mushrooming foreclosure signs in this scenario. This is a social good - even if some of the individual recipients are "undeserving".
As for the details of the plan... I suspect they will pretty much resemble what Baird has done for the Countrywide mortgages. In her program, if you don't have a job or can't afford to pay a mortgage (however renegotiated), you will lose your house. You also have to live in the house - so the program won't help speculators. Allowing judges to force a cram down in bankruptcy is widely disliked (because a first mortgage is a special kind of contract and if you allow this contract to be broken there will be long term financial consequences). I'm not qualified to judge the long term consequences. But, short term, the idea is to have a stick in the wings so the people holding the mortgages will be more inclined to negotiate reduced payments or some kind of mortgage write down. And, finally, as I recall, Baird's program uses a NPV calculation to determine if the changes to principal and interest make financial sense to the owner when compared to the cost of a foreclosure. It it doesn't, foreclosure is the only solution.
In short, the plan won't help everybody. Foreclosures will still occur. And most of the "undeserving" will, indeed, lose their houses. The goal of the program is to help the rest, the ones who are in trouble through no real fault of their own.
But Santelli, like most ideological Republicans, doesn't care about the public good. And he's gotten a lot of press for his rant which he no doubt counts as a personal good.
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