The Eclectic One

…Because labels are a poor substitute for thinking

Wall Street bailout: just say no

Posted by Bill Nance on September 23, 2008

I’ve been out of town for the last few days on some family business, but I caught the Saturday New York Times and just about had heart failure.

The Bush Administration has asked congress for a $700 billion blank check with which to bail out Wall Street, to be spent solely, and without oversight, by the Bush Administration’s Hank Paulson, Secretary of the Treasury.

Congress needs to politely tell the White House to take a hike. There is no way in Hell this administration should be trusted with any more authority. It has already undermined the separation of powers and taken on authority it has no right to, not to mention its repeatedly demonstrated incompetence.

This situation has arisen due to the ineptitude of regulators, the White House and the Republicans in congress, who have had the majority for 12 of the last 14 years. Sure, the Democrats have their rats as well, but they cannot possibly be held responsible for this mess, which they have had no ability to do anything to stop.

Is some kind of government intervention necessary?  Probably. Should we trust the Republicans, who have demonstrated time and time again that they are in the pockets of Wall Street to fix it? Don’t be ridiculous.

I’ve nowhere been able to find any details of how this would all work. For instance, who would be servicing the loans which are represented by these securities? Are those loan servicing contracts already in place and not breakable? Would they continue as they have been?

This is a big deal to homeowners, because quite frankly, having worked in the industry, I can tell you that loan servicing organizations are not all created equal. Some are more quick to foreclose than others, and some are more likely to make new arrangements with borrowers. It is not uncommon for instance, for a homeowner to call their servicer to make arrangements for a re-negotiation or temporary partial payment arrangement due to some hardship, to be told “no” without any rhyme or reason. Some servicing organizations’ rules on these matters are inflexible to the point of idiocy.

  1. Before the taxpayers take on the risk of $700 billion+ in mortgage debt, I want the servicing arrangements very clearly set out with proper oversight and rules which allow consumers otherwise able to pay,  to re-negotiate or temporarily suspend payments so the home doesn’t require foreclosure. Often times a homeowner can become “distressed” because of an unforeseen event such as a job loss or medical crisis, which will pass in a reasonably short time-period. (six months payment suspension tacked onto the back of a 30-year loan is insignificant compared to the cost of a foreclosure) A smart loan servicing organization can prevent a huge number of loans from ever going to foreclosure in the first place.
  2. If the government is going to buy these instruments, I want them purchased at something approaching current market value. If we’re going to be on the hook, the taxpayer should be the beneficiary of profits, not commercial or investment banks who made investments they weren’t able to handle. If a consumer buys a house with a mortgage they couldn’t possibly afford after a teaser rate period, they should lose their house for being stupid. Wall Street should get less consideration for stupidity than a consumer, not more consideration.
  3. I’m uninterested in “punitive” measures against commercial banks and funds. The prices of the securities in question should be set low enough that the institution should be hit and hit hard for their poor judgment. How they compensate their CEOs is their own business. The price at which they have to dispose of bad investments should be punitive in itself.

In the long run this could be a good deal for taxpayers. Huge numbers of the loans in question, probably the majority, are good loans as-is, or can be made so with smart re-negotiations. Plenty of people got home loans who should never have been able to, and were given nothing less than usurious interest rates. Trim these rates down to something reasonable and they will be able to pay. -Everyone wins. The decision to make the loans is already made; the key now is to get them to pay off in the long haul.

The upside of all this is that the government, unlike private industry, can sit on these instruments as long as necessary. The treasury doesn’t need to see “x” cash-flow in order to remain afloat. If it holds onto these assets it could actually make a tidy profit. But congress should not allow these deals to be negotiated by the Executive branch. Set up an RTC-like organization to manage the packages and STICK IT to sellers. If they aren’t willing to take a bath in order to stay in business, let them fail.

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One Response to “Wall Street bailout: just say no”

  1. […] good part of the bill is that it specifically addresses loan servicing for acquired assets. As I wrote here, quality loan servicing can prevent a lot of mortgages from ever going to foreclosure, and […]

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