May 22, 2014 archive

Geithner Extended

This man made millions suffer: Tim Geithner’s sorry legacy on housing

David Dayen, Salon

Wednesday, May 14, 2014 07:45 AM EDT

“I saw some of the excerpts about housing and I must say I split my side in laughter because Tim Geithner personally and actively opposed mortgage refinancing, constantly,” Hubbard told Politico. “And now he’s claiming this would be a great idea in the country.”

When Hubbard talks about refinancing, he’s being very specific. He co-wrote a plan in 2008 endorsing mass refinancing through Fannie Mae and Freddie Mac, as a economic stimulus, getting homeowners reduced monthly payments. This was one of the major fiscal policy tools available to the Administration that didn’t require additional spending – the Federal Reserve had lowered interest rates, it was merely up to Fannie and Freddie to take advantage of it. But in the early years of the crisis, the White House did little. Brad DeLong backs up Hubbard on this point, saying he never got a satisfactory answer for the lack of mass refinancing.

It took until 2012, just coincidentally an election year, for the administration to remove blockages on their key refinancing program (the Home Affordable Refinancing Program, or HARP). In an interview with Ezra Klein, Geithner plays the classic three-card monte trick of taking credit for every single refinance in the entire country, a number surpassing 20 million. In reality, HARP just hit 3 million refis this February, with the overwhelming majority of them coming after 2012. In the darkest years of the recovery, failing to engage in mass refinancing, particularly for those underwater homeowners (who owed more on their houses than they were worth) who couldn’t get a refi without government assistance, really missed an opportunity to put more money in homeowner’s pockets that would get spent.

On the more critical issue of helping homeowners stay in their homes, Geithner looks even worse. One smoking gun in the debate is the continued presence, throughout the Geithner tenure, of Ed DeMarco, a Bush-era official running the Federal Housing Finance Agency, the conservator for Fannie and Freddie. DeMarco blocked both refinancing for underwater borrowers and principal reductions for struggling homeowners, seen as the strongest and most sustainable way to keep people in their homes. The administration made no effort to remove DeMarco from his post despite claiming to be at odds with his policies.

In reality, Geithner made the same arguments as DeMarco against principal reduction, most explicitly in a hearing of the Congressional Oversight Panel in December 2009, arguing it would be “dramatically more expensive for the American taxpayer, harder to justify, and] create much greater risk of unfairness.” Geithner later cited the [potential moral hazard of “strategic default,” where homeowners would intentionally not pay their mortgage to get a principal reduction (something that never has and never would happen), to argue against making such modifications mandatory when they made sense for the investor and the borrower.

Keep in mind that this was the guy who handed hundreds of billions of dollars over to banks with basically no strings attached, suddenly worried about fairness when homeowners get a break on their mortgage payments. The White House was certainly chilled by the Rick Santelli rant about “the loser’s mortgages,” and mindful of giving money to the “wrong” people, but that was a political problem, one that could be solved by a stronger economic recovery, like through preventing foreclosures.

In his book, Geithner says that “I don’t think a more compliant FHFA would have produced a dramatically different result,” meaning that whatever differences existed between the administration and DeMarco were immaterial. In fact, the thrust of Geithner’s argument on housing in the book is that the administration did the best they could possibly do, that the alternatives were impractical or unwise, and that ultimately their efforts prevented 5 million foreclosures. This is another three-card monte trick, taking credit for every single mortgage modification, including ones not aided by the government’s HAMP (Home Affordable Modification Program) incentive payments. Even modifications that later went into default get counted as “preventing” a foreclosure under Geithner’s math. For context, there are currently not even 1 million permanent HAMP modifications.

Here are a few points to puncture holes in that balloon. On January 15, 2009, Larry Summers wrote a letter to Congressional leaders, promising a “sweeping effort to address the foreclosure crisis,” including a measure to “reform our bankruptcy laws.” This letter was critical to getting the second tranche of bailout money for the banks out of Congress, and yet afterwards, the administration gave little more than token support for the bankruptcy reform, known as “cram-down,” which would have allowed judges to modify terms of primary residence mortgages. Geithner admits in his book that “I didn’t think cram-down was a particularly wise or effective strategy,” meaning that, unless you believe Geithner played no role in administration decisions, the economic team effectively lied to Congress about cram-down to get the bailout money.

Geithner elaborates about cram-down to Klein, saying you would still have to go through a broken servicing industry and the court system to get it done, showing that he has no understanding of the value of cram-down whatsoever. The point, as the Cleveland Federal Reserve makes clear, wasn’t to actually use the bankruptcy process, it was to keep it in reserve it as a threat, to force banks toward modifications instead of a unilateral write-down administered by a judge. The point was increasing leverage for homeowners, and it’s not surprising Geithner wouldn’t grasp that.

Geithner: As Wrong about Soccer as Regulation

By William K. Black, New Economic Perspectives

Posted on May 21, 2014

Geithner begins his (brief) discussion of his regulation of Citi by stating that seven months after he became NY Fed President the NY Fed imposed a “hefty fine” on Citi. And then one reads the single clause that he devotes to detailing Citi’s conduct. It deliberately targeted its customers in a scheme to profit by placing its customers in grotesquely unsuitable investments – and then it covered up that abuse by lying to the NY Fed’s examiners – which is a federal felony. The deliberate sale of unsuitable investments to its own elderly customers may not have been a crime, but it was reprehensible and could have provided the basis for the “removal and prohibition” of the officers who led the abuse and huge fines against them. The crime of lying to examiners to cover up the breach of Citi’s fiduciary duties and own procedures should have led the NY Fed to file a criminal referral and demand that the Department of Justice (DOJ) prosecute the Citi officers who committed the felony. Instead, Geithner imposed only a “hefty fine” (trivial from Citi’s perspective) as a minor cost of doing Citi’s abusive and criminal business. It is revealing that he chooses to start his brief discussion of Citi with example of his feebleness as a regulator under the delusion that it demonstrates how tough he was. His narrative is deliberately disingenuous and unintentionally damning of Geithner as a faux regulator.

Remember, Geithner wrote this only months ago – after the federal government, state government, and investigators had demonstrated the three epidemics of accounting control fraud that drove the crisis, plus the Euribor and Libor cartels/frauds run by the world’s largest banks, plus the willingness of top banks to aid the most violent drug cartels in the world and (if Geithner believes his own agency’s findings) terrorist groups, and nations subject to Treasury sanctions because they are developing nuclear capabilities and/or support terror.

Geithner obviously still doesn’t get it. His story is preposterous – but it explains why there are zero prosecutions of any of the elite bankers for leading the frauds that caused the crisis. His story is that he was misled about the “capab[ility] and ethic[s]” of “Wall Street” because met almost exclusively with: “talented senior bankers, and selection bias probably gave me an impression that the U.S. financial sector was more capable and ethical than it really was.” Even Greenspan is more honest than Geithner – and failing that relative test means that Geithner should never be allowed to run anything.

I have a question for Geithner that perhaps some reporter would ask when he is flogging his book: was it the “senior bankers'” supreme “talent[],” “capab[ility],” or “ethic[s]” – or some combination of those stellar traits – that proved most useful in making them fabulously wealthy through “looting” “their” banks (Akerlof & Romer 1993) and brought the global economy to the edge of destruction (Geithner 2014)?

Geithner is seriously peddling the claim – in 2014 – that the crisis was caused by the junior clerks and lending officers of the banks. The noble “senior officers” that dined with Geithner are blameless. After all, everyone knows that the systemically dangerous institutions (SDIs) are “too big to manage” – no, wait, must not admit that or my support for SDIs looks bad. Rewind tape. Delete last sentence. Geithner’s “introspection” is phony.

Geithner has contributed the ideal dishonest bookend book to pair with a book that blames the crisis on the idiot-savant hairdressers who conned the poor banks run by Geithner’s “talented … capable and ethical” “senior bankers” into making them home loans they could not repay. Please put the over-the-top paperback fictions novellas of your collection between those bookends so that they will feel at home in your library. And if you believe the “blame the loan officer” and “blame the hairdresser” memes – well, there’s a house in Las Vegas I’d like to sell you at its June 2006 price. Read Geithner to see where Wall Street accountability went to die. And then recall that Axelrod described President Obama and Geithner as having a mutual “man crush.”

Andrew Ross Sorkin, Timothy Geithner, and the Three Card Monte Model of Propaganda

by Yves Smith, Naked Capitalism

Posted on May 12, 2014

The focus on TARP (and to a lesser degree, Lehman) allows Sorkin to omit mention of actions that were clearly Geithner’s doing, including: his fighting Sheila Bair tooth and nail on resolving the clearly insolvent Citigroup; his decision to pay AIG credit default swaps counterparties 100 cents on the dollar; his defense of the failure to haircut AIG employees’ pay; [Treasury’s acceptance of intransigence by AIG’s CEO, Robert Benmosche; his refusal to use $75 billion in TARP that Paulson’s Treasury had courteously left aside for homeowner relief; the clearly too permissive “stress tests”; Geithner’s Treasury allowing banks to repay TARP funds early rather than rebuild their balance sheets (get this: because they were eager to escape very limited restrictions on executive pay); Treasury letting banks repay TARP warrants at an unduly cheap price until Elizabeth Warren’s Congressional Oversight Panel caught them out; his cynical policy of “foaming the runway,” as in using what were billed as homeowner relief programs merely to attenuate foreclosures and thus spread out bank losses, which had the secondary effect of wringing more money out of already stressed borrowers before they were turfed out of their homes. And this is far from a complete list of Geithner’s actions that favored banks over the public at large.

Tim’s Not Wild About Larry


May 20, 2014

What is new and startling is the sheer number of the fights that occurred between the administration’s two top economic policy-makers, as well as the acerbity of their rivalry.  Geithner gives accounts of the chronic policy disagreements between them over the “Buffett Rule,” a proposal to tax very rich individuals, which Geithner supported and Summers thought was “gimmicky”; over the “Volcker Rule,” the curb on risky bank trading that Geithner came to warily endorse but Summers thought a “stupid and craven concession to populism”; and over nationalizing the banks (Summers thought it wasn’t a bad idea, while Geithner hated it). What emerges is a portrait of two men struggling for power and influence but also in a state of constant strife over ideas. In general, Summers is more of a progressive about changing Wall Street and tackling health care and other aspects of the ailing economy-one reason he left the administration in 2010 was that he saw Obama bowing to GOP demands for austerity at a time when more stimulus was needed, friends say-while Geithner is more the pure crisis manager, monomaniacally convinced that the economy can come back only if Wall Street does.

In the summer of 2013, Obama was reportedly keen again to appoint Summers as Federal Reserve chairman. But by then criticism of both Summers and Geithner had mounted over what critics deemed to be half-hearted stimulus and financial reform thanks in large part to their advice-a politically troublesome problem for the president amid the lingering aftereffects of the Great Recession. Summers, in particular, was a target of liberal economists such as Paul Krugman and Joseph Stiglitz for not pushing a much bigger stimulus. Some senators also wanted to confront him over his role in deregulating the financial system during the Clinton years, which helped set the stage for the 2008 financial crisis. After progressive Democrats in the Senate began lining up against him, Summers withdrew his name, and Janet Yellen, Bernanke’s No. 2, was chosen instead.

Why does any of this matter? In large part because Geithner supplies an unprecedented glimpse into the very small Democratic fraternity that has run the world’s biggest economy for much of the last two decades. Many of them are disciples of Robert Rubin, Bill Clinton’s former Treasury secretary, and until recently their views have been seen as largely monolithic. Clearly they are not, and depending on how the economy does, these lines of battle could reappear in Democratic Party politics going into 2016.

The Breakfast Club 5/22/2014

Welcome to The Breakfast Club! We’re a disorganized group of rebel lefties who hang out and chat if and when we’re not too hungover  we’ve been bailed out we’re not too exhausted from last night’s (CENSORED) the caffeine kicks in. Join us every weekday morning at 9am (ET) and weekend morning at 10:30am (ET) to talk about current news and our boring lives and to make fun of LaEscapee! If we are ever running late, it’s PhilJD’s fault.

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This Day in History

Breakfast Tunes


On This Day In History May 22

Cross posted from The Stars Hollow Gazette

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

May 22 is the 142nd day of the year (143rd in leap years) in the Gregorian calendar. There are 223 days remaining until the end of the year.

On this day in 1843, the Great Emigration departs for Oregon

A massive wagon train, made up of 1,000 settlers and 1,000 head of cattle, sets off down the Oregon Trail from Independence, Missouri. Known as the “Great Emigration,” the expedition came two years after the first modest party of settlers made the long, overland journey to Oregon.

Great Migration of 1843

In what was dubbed “The Great Migration of 1843” or the “Wagon Train of 1843”, an estimated 700 to 1,000 emigrants left for Oregon. They were led initially by John Gantt, a former U.S. Army Captain and fur trader who was contracted to guide the train to Fort Hall for $1 per person. The winter before, Marcus Whitman had made a brutal mid-winter trip from Oregon to St. Louis to appeal a decision by his Mission backers to abandon several of the Oregon missions. He joined the wagon train at the Platte River for the return trip. When the pioneers were told at Fort Hall by agents from the Hudson’s Bay Company that they should abandon their wagons there and use pack animals the rest of the way, Whitman disagreed and volunteered to lead the wagons to Oregon. He believed the wagon trains were large enough that they could build whatever road improvements they needed to make the trip with their wagons. The biggest obstacle they faced was in the Blue Mountains of Oregon where they had to cut and clear a trail through heavy timber. The wagons were stopped at The Dalles, Oregon by the lack of a road around Mount Hood. The wagons had to be disassembled and floated down the treacherous Columbia River and the animals herded over the rough Lolo trail to get by Mt. Hood. Nearly all of the settlers in the 1843 wagon trains arrived in the Willamette Valley by early October. A passable wagon trail now existed from the Missouri River to The Dalles. In 1846, the Barlow Road was completed around Mount Hood, providing a rough but completely passable wagon trail from the Missouri river to the Willamette Valley-about 2,000 miles.

Muse in the Morning

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Muse in the Morning

Where the sun refused to shine

Late Night Karaoke

TDS/TCR (Unreliable Narrator)




The rest, including Jon’s 4 part extended interview with Aneesh Chopra, below the fold.

The SEC and Private Equity

Cross posted from The Stars Hollow Gazette

Naked capitalism‘s Yves Smith appeared in RT news Boom/Bust to discuss the risky business and abuses of private equity in the real estate rental market. Her segment starts at 3:45.

In her article, Yves also noted this piece from an article on private equity from Friday’s Bloomberg News:

PE Slump

Private-equity transactions overall have fallen 22 percent to $53 billion through April, data compiled by Bloomberg show, led by the drop in buyouts of public companies. The value of those leveraged buyouts declined to $3.2 billion compared with an average of $34 billion in the 10 years through 2013.

The peak for buyouts came before the financial crisis, when U.S. funds struck $659 billion of deals from 2005 through 2007, including the purchases of HCA Inc., Hilton Worldwide Inc. and Biomet Inc., the data show. Buying inexpensive public companies was generally easier for the funds than carve-outs are, said Raymond Lin, a mergers and acquisitions attorney at Latham & Watkins LLP.

“The easy days for private-equity buyers are over when they profited from buying undervalued companies,” he said. “Carve-out deals require a lot of up-front work that would incur additional costs and could affect returns.”

The Standard & Poor’s 500 Index, which reached a record this week, trades at 17.4 times reported profit, the highest level since 2010, according to data compiled by Bloomberg.

PE’s Limits

While high valuations haven’t scared off dealmaking between companies, buyout firms are motivated by different factors, said Gordon Caplan, chairman of the private-equity practice group at law firm Willkie Farr & Gallagher LLP.

“If business growth slows, companies have to buy things,” he said. “Private-equity buyers can’t create synergies like company mergers can in most cases.”

Corporations are more willing to spin off divisions as management continues to clean up underperforming businesses and pay down debt following the financial crisis, said Tom Franco, a partner at Clayton Dubilier.

SEC Official Describes Widespread Lawbreaking and Material Weakness in Controls in Private Equity Industry

Posted on May 8, 2014 by Yves Smith

At a private equity conference this week, Drew Bowden, a senior SEC official, told private equity fund managers and their investors in considerable detail about how the agency had found widespread stealing and other serious infractions in its audits of private equity firms.

In the years that I’ve been reading speeches from regulators, I’ve never seen anything remotely like Bowden’s talk. I’ve embedded it at the end of this post and strongly encourage you to read it in full.

Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers. [..]

Bowden pointed out that private equity is unique among the investment advisers the SEC supervises. The general partners’ control of portfolio companies gives them access to their cash flows, which the GPs can divert into their own pockets in numerous ways. Naked Capitalism readers may recognize that this arrangement is similar to the position mortgage servicers are in: they control the relationship with the funds source, and they are also responsible for records-keeping and remitting money to investors. And as we’ve chronicled at considerable length, servicers have shown remarkable creativity in lining their wallets and investors have been unable to discipline them. [..]

Needless to say, this overly cozy arrangement has proven to be a ripe breeding ground for illegal conduct.