naked capitalism

The editorial in today’s New York Times may be a sign that the tide is turning. The elites are starting to break ranks with the mortgage industrial complex.

Gretchen Morgenson reported yesterday that the Obama Administration was pressuring the New York Attorney General Eric Schneiderman to drop his opposition to the so-called 50 state attorney general mortgage settlement. The short form is the banks want a “get out of liability for almost free” card, which is patently absurd. Not only have they caused a colossal economic train wreck, but sadly, they remain such central actors that they need to be involved in remediation. Letting them off cheaply would be tantamount to putting a band-aid on gangrene.

As much as having Morgenson reveal this heavy-handed effort to undermine an investigation in progress was important, Morgenson is an outlier at the Times. She is the only writer in the business section who routinely exposes bad conduct in the corporate and financial arena. Too many of the other writers there engage in stenography, punctuated by random acts journalism. In fact, I’ve thought the only reason the Times keeps her is her Pulitzer prizes make it impossible for them to get rid of her.

As much as Morgenson’s expose was key, the editorial page of the New York Times throwing its weight behind Schneiderman gives him real political cover. From “It’s a Flawed Settlement”:

The Obama administration has turned up the heat on Eric Schneiderman, New York’s attorney general, to go along with a proposed settlement with the nation’s largest banks over dubious foreclosure practices. Mr. Schneiderman should stand his ground in not supporting the deal. The administration says that a settlement would quickly deliver much needed relief to hard-pressed borrowers, but it’s doubtful it would provide redress on a par with the banks’ wrongdoing or borrowers’ needs….

Mr. Schneiderman, who became the attorney general of New York after the scandal broke, has rightly refused to go along with a settlement that is not based on a thorough investigation, and has ordered investigations of his own. He has been supported by a handful of other state prosecutors, who say that the proposed deal would restrict their own investigations and prosecutions.

I do quibble with one part of the op-ed:

Shaun Donovan, the secretary of Housing and Urban Development, however, says that a settlement on the narrow issue of robo-signing would not preclude other investigations by individual attorneys general. But, clearly, once the robo-signing issue is off the table, investigators would lose leverage to pursue remedies for other possible illegalities in the packaging, marketing and transferring of mortgage securities.

This isn’t correct. Robosigning isn’t worth a lot liability-wise nor does it give much (any) leverage into other theories of action. The real issue is much simpler. The banks are not going to agree to a deal that includes only robosigning. The only reason for them to come to the table and pay any kind of damages is to get a broader release. We’ve said so from the get-go. And the Administration has spent so many cycles on the settlement that it perceives that it has its credibility at stake on getting a deal, no matter how bank friendly it is. (Actually, bank friendly is the point, it just can’t be blatantly bank friendly).

Back to the editorial:

The administration also says that the proposed settlement would require the banks to write down the principal balance on underwater loans. According to news reports, the banks are likely to pay around $20 billion in the deal. With 14.6 million homeowners owing $753 billion more on their mortgages than their homes are worth, how far does the administration think $20 billion would go?

The administration should pursue principal reductions for stressed borrowers, and it could do so immediately by calling on Fannie Mae and Freddie Mac to refinance the underwater loans of borrowers who are current in their payments. What it shouldn’t do is pretend that the proposed settlement is the only — or best — way to get quick relief to homeowners.

It is also significant that the Times is pushing principal modifications. Mind you, meaningful principal mods will take place over Timothy Geithner’s dead body. But that isn’t impossible. Geithner has said he wanted out but then had to reverse himself when Mr. Market got nervous that their favorite sugar daddy might not be there if financial hell broke loose any time soon (likely).

And if the economy really stinks next year (certain), the Administration might try a more ambitious mortgage mod program as a pre-election Hail Mary pass. The only way I can seem them reversing themselves is out of desperation, and the odds of them becoming desperate are pretty high.

As much as this is a very positive step, I hope readers will not take this for granted. In comments, not only did quite a few call or write Schneiderman to show support, but some of you also took it upon yourselves to express your disapproval to the two parties that Morgenson had identified as putting the screws on the attorney general: Donovan and a member of the New York Fed’s board, Kathryn Wylde.

I hope those of you who haven’t yet taken action will either give an “atta boy” to Schneiderman, or better yet, call or e-mail Donovan and/or Wylde and voice your disapproval.

Schneiderman: 800 771-7755 or 212 416-8050 or http://www.ag.ny.gov/online_forms/email_ag.jsp (the form is much more user friendly than most of this sort)

Shaun Donovan: Secretary.Donovan@hud.gov

Kathryn Wylde: no direct number, the “media outreach” (which shows what their priorities are) is (212) 493-7511. The main number for the Partnership for New York City (guess only the top 1% are “partners”) is 212-493-7400.

Barry Ritholtz has called for her resignation from the New York Fed (as a class C director, she purports to represent the public, when it’s clear she represents only the corporate funders of her not for profit). Call her office and say the New York Times editorial proves she is not standing up for what is best for the city and the country. Demand that she resign from the New York Fed.