Geithner is Allowing Banks to Recapitalize on Backs of Homeowners, or… Games Bankers Play

This article was originally posted on September 3, 2009… seems like forever ago, doesn’t it?  I’m re-posting it now because for one thing I know relatively few read it… I didn’t have all that many readers back then.  And for another, because it’s every bit as relevant today as it was back then… I was way early on this one… and I’m about to publish another article on how Geithner’s accounting rules are driving servicer behavior.  So, read this and then stay tuned.

I’ve been working on understanding this fast moving, gelatinous 3D jigsaw puzzle we call our housing crisis for over a year now, and it’s been nothing if not frustrating.  Here are a few of the questions that, even after a year, have been sticking around in my brain…

A. Forgetting the last administration’s mysterious behavior related to the housing crisis, why didn’t the Obama Administration’s housing rescue plan offer more to stop the flood of foreclosures that’s preventing any sort of economic recovery from taking hold?

In other words, they flubbed it?  Team Obama flubbed it?

All those extra smart guys in the administration and no one thought to do the grocery store math that was involved in figuring out what would and wouldn’t work.  Come on… why did they flub it?  They didn’t have to flub it… it was almost too easy to do right.  It had been flubbed recently.  They couldn’t have learned from past mistakes?  They certainly looked smart enough to handle something as simple as housing.  Health care?  Maybe not.  But housing?  Come on… I could fix housing and I’m not 22 Harvard grads, or how ever many of those people they have running around the White House these days.

So, alright they flubbed it.  Okay then.

B. Why aren’t the banks and servicers modifying more mortgages?  I’ve read so many opinions on this haziness that I can’t see straight at times.  Is it the investors’ unwillingness to maximize profits?  Servicing agreements that call for a banking executive human sacrifice in order to modify a mortgage?  How about their exceptionally short-sighted but greedy nature?

Oh, wait… maybe it’s their obvious inability to hire people, implement systems, answer a large number of phone calls, or stop their personnel from repeatedly losing file folders.

That last one has become my personal favorite, by the way.  Apparently, I’m being asked to believe that Bank of America, Chase, and Wells are continuing to have a dickens of a time doing things like hiring financial types, creating efficient processing systems, stopping paperwork from getting lost over and over again, and anything over a couple of thousand calls each day… basically their organizations shut down.

It’s like I went to bed, and when I woke up I was in a world where insurance companies couldn’t seem to stop overpaying claims, the DMV had a drive up window, and Bank of America can’t answer the phone, or hold onto a folder for over an hour.

“Where did I put that folder?  Oh no… Darn it.  I lost another one.  That’s 22 so far this week. I’m so silly.   Where do I keep putting them?  I swear, I’d lose my head if it wasn’t screwed on tight.”

C. Why are the banks more profitable all of a sudden?  Maybe I don’t understand how banks make money, or perhaps it’s that I don’t have a solid understanding of what the phrase “more profitable” means.  But see… the thing is… I aced the Money & Banking economics final exam back in grad school, and I just can’t help thinking… something very wrong here.

I just read that banks are more profitable, and they’re so profitable that they’re literally racing to shovel money back into the Treasury and we the taxpayers are making billions in unexpected profits.  Unexpected profits… everyone’s favorite kind of profits.  I still remember once when I found $20 in a pair of jeans I hardly ever wore, and it was a kick.

So, even Geithner himself didn’t expect these profits.  Like when he saw them come in he went: “Whoa now, what have we here?  Where the heck did this $10 billion come from?  Get Bernanke on the phone, he’s not going to believe this.  Woohoo!”

Unexpected profits, huh?  Down right super spooky.

Ten months ago, Obama looked like he was going to throw up in his mouth a little as he pronounced the economy near dead and then tried to convince us that we were basically months away from a soup line, and should be grateful for that.

Okay, so it’s The Great Depression Part 2… but it’s the kind of Great Depression that gets tons better in ten months?

As far as I’m concerned, if it was going to improve in ten months, I wish they hadn’t of even mentioned it to begin with… could have kept it to themselves.  I would have gladly focused on a little gay marriage over a bed of immigration and stem cell research nestled in Afghanistan with a side of nuclear Iran.  Yep, that would have filled me up for sure.

But still… you can’t help thinking about stuff like the banks not lending, employers not hiring, people not spending and foreclosures never ending… asset prices dropping, with no sign of stopping… but things are getting better… for the bank but not the debtor… and I can’t stop myself from rhyming, it seems I’m stuck in 4/4 timing… help… me… whew.  That was close.  Once I got stuck in a rhyming frenzy and had to be sedated.

You get my point though, right?  Why are the banks more profitable?  Are they holding car washes and bake sales on weekends?  Renting out conference rooms to MonaVie and Pre-Paid Legal meetings in the evenings?  I thought banks made money by lending it out.  I was sure it had something to do with lending it out.  But they’re not lending it out.  And they’re getting more profitable.  So, well… okay then.

And people aren’t spending, as they watch their home’s value sink past 1986 levels.  Some neighborhoods look like a Hollywood set in a movie about the end of time.  Empty streets… looks like whoever lived there left in a hurry.  It’s the kind of scene you might expect Rod Serling to walk into:

“Witness, Mr. Henry Beemis.  A small man with small ideas.  A man who’s job it was to remove people from their homes.  But as we’ll soon see, some homes don’t like it when their people are removed.  The kind of homes you’ll get to know as you move ever closer to… The Twilight Zone.”  (I wish I could insert the music.)

Employers aren’t hiring either.  The unemployment rate… the real one… is over 16% nationally, and even the administration is admitting that 10% plus is around the corner.  Half the homes in the country will soon be underwater.  There’s not even anything ahead that looks like it might make the banks more profitable.  They’ve got to downsize, assuming they survive at all.  For example, I’m pretty sure that Chase isn’t going to be fully utilizing WAMU’s 2,200 retail branches going forward.  Just a guess.

So, what’s the deal?  I’m about to tell you.  And you will not like it.  Not one bit.  It’s positively scandalous, besides being just plain awful.  Here’s what’s going on… the banks aren’t being irrational in their behavior, they’re acting that way on purpose.  Because it’s in their best interests.  Ready?  Okay… here we go:

JPMorgan Chase bought Washington Mutual in a fire sale.  They paid $1.9 billion for the whole kit and caboodle.  Such a deal.   $90 BILLION in mortgages on the balance sheet for $1.9 billion.  How about the $60 billion in servicing assets, the real estate, the $300 billion plus in retail deposits and a loss sharing agreement with the FDIC.  Everything a girl could hope for… wrapped up with a bow.

They paid $1.9 billion and got, in addition to everything else, $90 billion in mortgages.  Worth saying again.  Basically, they bought them for cents on the dollar.  But approve a principal reduction?  Unthinkable.  The guy owns a house and owes $300,000 but can’t make his payments and you only paid $3,000 for it… you cut the price and start collecting payments on the now performing loan.  But, not our banks.  They seem to prefer foreclosing, paying the extra costs, and trying to sell REOs, which makes no sense.

Why would a bank chose to foreclose and evict when there’s already someone living in the house who would love to buy it?  By modifying the loan, the bank won’t have to pay all the associated costs of foreclosure, and then put the property on the market where it might not sell for some time.  Selling an REO?  Lucky to get 50% in some areas.  Why not just write down the loan for the homeowner and save all the trouble?  Again, it makes no sense.

Until I went back and thought about the partial suspension of the accounting regulations imposed under FAS 157 & 159, which applies only to banks and only as of last April or May, I believe.  That’s when I started feeling queasy.

Under the partial suspension of the FSAB accounting rules, the banks don’t have to write down Level 3 assets to market value, if they state that the bank has no plans to sell the assets for an extended period.  In other words, if the bank says that it’s not going to sell a given house anytime soon, they can keep it on its books at its full fictional value.

So… a couple have a home on which they owe $300,000.  It now appraises at $150,000, but will sell as an REO for $130,000 tops.  The bank backs off the appraisal and says it’s worth $110,000.  Then they pay everything from property taxes to property preservation.  They take the home back as a foreclosure instead of modifying, which is a bummer for some family, but they get to leave it on their books for $300,000… until later… and by later I mean after the mid-term elections.

They don’t have to write it down because they say they’re not planning on selling it anytime soon.  The nice couple lost their house.  But the bank just totally cleaned up.  And with the FDIC loan freebies, they can sit there for years before they even consider trying to sell that house.  When they do sell it… who knows, maybe the market will be better?  Or maybe that particular banker will be retired by then.

So… Sec. Geithner is allowing the banks to recapitalize on the backs of homeowners losing their homes to foreclosure.

What’s next Tim?  Child labor tax credits?  That should boost productivity… let’s put 3rd graders back on the assembly line where they belong?

I’ll say one thing for Secretary Geithner: He’s great at distraction.  He goes, “Lookie over here.”  Then he points his finger towards China… and a pigeon flies out of his ass.  You really have to watch this guy.  David Copperfield has nothing on this guy.

He’s full of beans, though.  He’s lying through his teeth every time he opens his mouth.  At the end of the day, he doesn’t really care if another million or two get put out of their homes, as long as he can get the banks recapitalized without having to go back to Congress before the mid-term elections.

New investors in IndyMac paid $13 billion and got $500 million per year in servicing assets, and 33 branches, $6 billion in retail deposits, an origination platform, a loss sharing agreement with the FDIC, and $40 billion in loans on the balance sheet, which is close to 200,000 loans.

But reduce principal?  Don’t be silly.  It just wouldn’t be prudent.  Not at this juncture.

Now, just so I’m clear about this… this means Obama knows this is happening.  I personally think that’s why Obama never talks about his team flubbing the housing thing.  I don’t think he can keep his food down when he thinks about it.  I mean, a mother’s son killed himself last week over being unable to obtain a loan modification from GMAC.  But I guess on the bright side, the new Ally Bank is giving away tee-shirts at its grand opening.

Oh what a tangled web we weave when first we practice to deceive.

Tim… you are a dickish man.  You really don’t see anything wrong with how this whole mortgage meltdown is being mangled, do you?  You’re really okay with it.  I bet there are people in this country that used to want to beat you up all the time.  Was 5th grade hard for you, Tim?

Well, I’m here to tell you Mr. Secretary… you’re making a big and bad mistake.  You are underestimating the American people in a big way.  You think you’ll get things cooking again, at least on paper, and slide right through the midterms, and by then no one will care what you did.  But it’s not going to work like that, Timothy.

People are going to start figuring out that it wasn’t the borrowers who broke the world, Tim-O.  Poor people who bought houses they couldn’t pay for did not take out Wall St. inside of a week.  I know…it’s a fabulous story, but you had to know it wouldn’t hold indefinitely.  And when people figure it out… boy oh boy are they going to be… let’s see… how would your Ivy League buddies say it… oh yeah… they’re going to be miffed.

We’ve already seen how well you’ve handled the banks.  You said they were too big to fail, and since then you’ve allowed them to only get bigger.  Bam… did you see that pigeon?  Shot out of his ass like Apollo 13.

I’m going to have to start watching this guy a lot more closely.

Mandelman out.

NOTE: Okay, accounting gurus… I’m right, right?  That is what it says in the revised FASB regs, right?  Geithner’s just using another tool to extend and pretend and bring in insolvent banks for controlled crash landings, right?

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