“Tim Out – Sheila and Debt Relief In?”

By Bruce Krasting, a foreign exchange and derivatives veteran who comments regularly on the financial scene.

In my piece “What’s in Store for 2010” my number one prediction was:

-Tim Geithner will resign as Treasury Secretary. Sheila Bair will replace him.

The odds of getting any of these types of predictions correct are probably 20 to 1. Given what has happened in the past few days I would now say that the ‘swap’ of Sheila for Tim is an even money bet.

Mr. Geithner has outlived his usefulness. He is too connected to the bailouts of 08. Bear, Lehman, AIG, TARP and even QE are all part of his legacy. That makes Tim a lightening rod. Too many Americans hate that part of our history.

I don’t think the current flap relating to the deliberate ‘non-disclosure’ of information relating to AIG is that big a deal. When the full history of this period is finally told (it will take awhile yet) this particular transgression of Mr. Geitner will look small by comparison. The things that we do not yet know about that we ‘agreed to’ during the ‘crisis period’ are going to cause us to roll our eyes and bow our heads when all is said and done.

Those that had their hands on the tiller were firmly of the belief that the western world financial system was shutting down. They left no stone unturned in trying to save the patient. They committed future generations for Trillions in additional debt. Every step available to calm market fears was taken. Even withholding information. When you are at war, and you think you are losing, you do what you have to do. If you later win the war and someone criticizes you for using WMD so be it.

I will take a stab at writing the President’s statement on this:

“I have today accepted the resignation of my Treasury Secretary Tim Geithner. One year ago the global economy was facing the biggest challenge in history. Tim and a small handful of dedicated individuals took the steps that were considered necessary at the time to first stabilize a collapsing system and second put the economy of the US and the globe on a path that would lead to recovery.”

“For this, the American people owe Tim our thanks. He worked tirelessly during one of the darkest periods of our history. And he succeeded. Today the economic crisis of one year ago has receded. Our economy has stabilized and growth has resumed. Our financial institutions have also returned to health. The financial support provided them through the TARP program has worked. We see the evidence of this as those banks who took assistance a year ago are now paying it back with interest.”

“Our country continues to face serious economic challenges. Unemployment remains stubbornly high; we face a protracted period of large fiscal imbalances. A critical weakness continues to be with homeowners who are unable to meet their financial obligations.”

“I have appointed Sheila Bear to replace Tim Geithner. Sheila will bring to the Treasury Department her proven leadership and administrative skills. She has both the knowledge of the core issues and the compassion that is required to address the problems that are at hand.”

“Sheila has set the standards and seen to the implementation of the Nations efforts in restructuring home mortgages. The guidelines for refinancing troubled homeowners that she established have been accepted by virtually every public and private sector lender. Much more work needs to be done in this area. Many homeowners are still facing default. This reality causes human suffering and is adding to our economic problems. I am looking forward to working with Ms. Bair in this critical area as well as all of the other challenges we face.”

Okay, so that was BS. But if it does go this way, the Boss will say words to this effect. He will just do it better.

My sense is that this would be a very significant development. I believe that Ms. Bair will introduce a very large program of PRICIPAL debt relief for borrowers. This program will start with the D.C. mortgage lenders Fannie, Freddie and FHA. It will be forcibly extended to the private sector lenders. (They already have significant reserves on a lot of this.)

I hate this development. But I think it is the ‘right thing to do’. The inequity of it will cause great divides. The cost will be astronomical. The total could go as high as $800 billion. A significant portion of that would be born by the Government lenders. My guess for the taxpayer tab is $500 billion. I do not see any realistic alternative however. If we let the problem fester it will cause us to lose a decade of growth. Better we deal with it now.

A muse of all of this is that the money to accomplish a half trillion dollars of debt relief has already been made available to the D.C. mortgage lenders. Mr. Geithner saw to that on Christmas Eve when he did the ‘Sneaky Pete’ announcement of a virtual blank check for the Agencies. For me, that was a much more serious offense than the disclosure issues with AIG. That was then, this is now. I thought that this, by itself, would have proved to be a significant enough gaff to take him down. As it turns out, that straw on the camels back may well prove to be the critical step that insures that the next Treasury Secretary will have the ‘Bazooka’ that is necessary to address the problem. Funny how things work. It almost looks like it was planned.


-I do think that Sheila Bair would make an excellent T. Secretary. She has the skills and experience. She also has a vision that we desperately need. She is no lightweight. She will fight very hard and she has a lot of ‘chips’ in her pocket. The fact that she is a woman is helpful. In my opinion it is high time that a woman took this job. Lets face it. The ‘Guys’ have screwed this up for decades.

-If all this happens and Tim G. ends up at PIMCO or with Wilbur Ross structuring investments in “Distressed Debt” as Neel Kashkari and James Lockhart have, I am just going to puke.

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  1. SA

    I doubt Geithner will be forced out over AIG (public outrage is about zero) and if he is, Bair is too disliked in the industry to replace him. Whoever comes in will be another creature of Summers and Rubin, probably a “regulator” who is an ideological pawn of the Street just as Geithner is. The only way I see Geither leaving is if the economy takes a sudden slide.

  2. Robespierre

    “When you are at war, and you think you are losing, you do what you have to do. If you later win the war and someone criticizes you for using WMD so be it.”

    I’m always amazed at how little importance we give at crimes committed at government posts. The truth of the matter, it seems, that we are willing to send some one who robs a 7/11 to years in jail and yet we find all kinds of justifications to dismiss criminals dress in Armani suits. What is really at heart is: Did Tim break any laws? Were his actions to the benefit a handful of Obama’s campaign contributors? Why is Obama supporting this guy without even taking the time to investigate his actions? Were we “at war” also when Tim decided to cheat on his taxes? It looks to me that we are too quick at accepting government corruption and lawlessness. Are we that different from Zimbabwe or other 3rd world country were bribery is a way of life?

    1. Maggie Knowles

      “Why is Obama supporting this guy without even taking the time to investigate his actions? ” – Because We The People don’t make him keep his promises. We The People think we can vote (or let others vote for us) then go home and expect change. Not going to happen. We The People have to organize and force our gov’t. to do our bidding. I read somewhere that the youth unemployment rate is around 50%, maybe they’ll organize themselves, one can hope.

    2. Vinny G.

      “Why is Obama supporting this guy without even taking the time to investigate his actions? ”

      Because their respective mothers were best buddies. That’s why. Loyalty goes deep here.


  3. Richard Kline

    A program of mass pincipal reduction paid for by the Guvmint of US? Well, it could happen. Bo Prez is gonna have to have something to run on for 12 besides the best bale toter The Man has ever had. It’s only money, as Cosmo Vitelli said—but look at what _he_ had to do to settle up. . . . That’s what worries me.

    1. Bruce Krasting

      My spell check is broken and the young lady who edits this has a drinking problem…… Sirry!

  4. Dave

    CORRECT! At times of crisis certain persons step into the chasm and fill the present need, but who are wholely unsuited and even distasteful in the same position after the crisis is past. Geithner has fullfilled his role: He was the right person to step into Treasury to calm the markets, chiefly because he was Wall Street’s man, hair of the dog for their hangover.

    That time has past. We now need another type of “hero” (or heroine as suggested) to run the marathon needed to restore the economy to solid footing, whether it be Sheila Bair, or countable others capable of taking us forward.

    1. Robespierre

      This is what your “hero” delivered:

      The world’s biggest investment banks are expected to pay out more than $65bn (£40bn) in salaries and bonuses in the next two weeks, reinforcing the view that it is business as usual on Wall Street and in the City barely a year since the taxpayer bailout of the banking system.

      1. Gary Anderson

        I wrote a little webpage because this discussion needs a timeline of events to see the SCAM that was and is involved. From the site: What is coming:

        The new idea is to reimpose high capital requirements on US banks. This could happen in 2012 or soon thereafter.

        The Fed still wants low interest rates and will crash the market again if necessary to sell bonds. The Fed will do the bidding of the BIS and eventually restore high capital requirements on our banks. This will scare the sheeple and there will be a lot of volatility and bonds will be sold as people flee stocks.

        I have written here at Seeking Alpha about the reverse repo market and the need for the Fed to sell bonds and unwind this private bank’s balance sheet.

        I wonder how many times they can do this without the stupid long term investors waking up!!!

        The whole process is a SCAM. Whether we turn out like Japan is not yet known but there are many similarities and a similar credit crisis with low demand for loans.


  5. Ronald

    More noise about pulling a national principle MOD lever and the crisis is over. Then the consumer can buy those RV’s,ATV, boats, new cars,new furniture for the new house. The financial media is the land of wishful thinkers.

  6. fresno dan

    I really enjoy the insights of Bruce Krasting, who I discovered by reading this blog.
    First, I think most of what he says here is realistic. I think most of these government officials thought it was the end of the world (albeit that it was caused by them not knowing what they were doing to begin with).
    “I hate this development. But I think it is the ‘right thing to do’. The inequity of it will cause great divides. The cost will be astronomical.”
    On this I disagree – I think jiggle mail and walking away would be a better outcome for everyone but the financiers. Bankers are more severely punished – I have no faith that in writing down loans the bankers will take a hit proportionate to their culpability, and I imagine they will generate new scams along the way to get money from the government, and continue to misprice houses.

    Getting house prices down to affordable levels and true market value, versus down to levels that the debt slave…er, mortgage holder can pay is the more important point. Having a mortgage reduced from 500K to 350K, when the place really is only worth 200K, does our economy no good (look at Trulia and homes in Florida and California to see that these house prices have to be cut MORE than half).

  7. Mo

    Chris Dodd will soon be looking for a job….

    My 20 to 1 prediction is that he will be T-Sec before the end of this administration.

    1. ArmchairRevolutionary

      Chris Dodd is done in public office. He is only qualified to be a lobbyist these days.

  8. b

    As I’ve read on other blogs, if there is an attempt at a national principle reduction starting with the GSEs, just wait to see the reaction of all the neighbors on the block of those who have their principle reduce. The landlord neighbors, the tenant neighbors, the neighbors who have diligently been making their mortgage payments. All those who have been playing by the rules. I smell an insurrection.

    From “Calculated Risk”:
    But the authors don’t suggest who should pay for the reductions in principal. If this was a government program, it would be very expensive and unpopular. Diana Olick wrote today at CNBC: Are Principal Writedowns the Answer to Housing Crisis?

    “I would honestly rather see my home’s value go down than see the guy next door … who made a poor/negligent financial decision get a mulligan at my expense.”

    I think that would be the overwhelming public reaction.

  9. MLM

    Any “solution” that doesn’t reduce debt/GDP is not going to work. Principal reductions via government borrowing just shift the debt from one hand to another.

    Somebody needs to take a haircut.

  10. Hill Staffer

    I doubt Geithner will go, but who knows. But the idea that the administration would replace him with Sheila Bair is just crazy. She’s a Republican and on top of that Obama doesn’t like her (or her ideas). There are a world of people to choose from. The President gets to pick anyone he can get confirmed by the Senate, and that;s a wide range of people. He will not and does not have to pick a member of the opposing party whom he dislikes.

  11. Ishmael

    Once again bailing out the speculator at the savers expense.

    Please tell me why the guy who lied to get in his house should get $150,000 from the government while the guy renting and saving and waiting for the right price should get nothing?

    The laws are already in place to take care of this situation. If a person can not pay their mortgage then foreclose on them. I would pay them a small sum of something like $10,000 to not destroy the house before they move — shows what a sorry person the average person is now days. Then this person will no longer be a debt slave, can rent for a lower cost, rebuild their credit and buy a lower priced home in the future.

    I would then put the house on the market so every American has a chance at this. Then the saver is rewarded and not the speculator.

    Finally, if the hits are too big for the institutions, let us say Freddie and Fannie then I would force a cram down on their debt. There is no reason debt holders should get a free ride. In addition, many of these debt holders are countries which practiced merchantile economic policies against the US. It is now time for them to pay the price.

    Soon the problem will be solved. The risk of future Moral Hazard is not created, properties are now in the hands of those who deserve them, US tax payer will pay less, foreigners who have been screwing the US will be screwed and contract law will work the way it is suspose to. All seems like winners. Your solution just seems to make the innocent losers.

    What I wonder about is everyone who works in the financial service industry continue posting their opinions that Uncle Sugar should pick up the tab. Why is that.

    As far as Shelia Bair being the right person, I really question that. Ms. Bair has been very slow on taking over banks. This delay has resulted in significant losses to the FDIC fund. She appears to be just another stoogie of the financial service industry.

  12. Blurtman

    How will the mortgage principle reduction work exactly? If you are underwater and not paying your mortgage, principle is reduced. If you are underwater and paying your mortgage, no reduction for you?

    And then in two decades, when home prices are above water, do the recipients of principle reduction get to claim the appreciated value?

    And what about other debt reduction, like credit card debt?

    It will be impossible to fairly enact such a program. Furthermore, it seems to be similar to “From each according to his ability, to each according to his need.”

  13. Hugh

    I think that it is unlikely that either Geithner or Summers will leave before the November 2010 elections because of the effect that their departures would have on them. The window for dumping them stretches from the elections to about mid-2011 when Presidential campaigning begins.

    As for principal reductions, it is important to note that cramdowns would force banks to revaluate their holdings and this would force them to admit that they were insolvent. So as much as I support cramdowns, I don’t see them happening.

    Also re Bair, the Obama Administration has never seen her as on their “team” so it is unlikely that she will ever become Treasury Secretary. We have this paradox that those who know the most about what went wrong and how to fix it are precisely those who are the most frozen out by this Administration. This is because any real solution would necessitate curbing the powers of the corporations and that isn’t going to happen in this Administration.

  14. Hugh

    I should point out that a plan that delivered relief to homeowners would have to be available to all. It would work by using some yardstick like pre-bubble pricing in local housing markets to assess the value of the property and the size of the cramdown and conversion, if needed, to a long term fixed rate mortgage. Some Alt-A holders, for example, might not be able to afford their house payments under any payment regime. These could be offered renting options and shifted to more affordable housing if they qualify. There are lots of ways to handle these things. It doesn’t have to be one size fits all.

  15. avrymann

    It turns out that the best thing about Geithner was that he cheated on his taxes. Everything he did as Treasury Secy was so much worse. Yes, you could say it was a “leading indicator”.

    Public outrage doesn’t matter, press outrage does. As Winston Churchill once remarked, “Their is no public opinion, only published opinion”. It makes for very interesting speculation as to why the press is making a big deal about this now. It is my understanding that it was known at the time but the press suppressed it. It does give OBushma the excuse he needs to sacrifice Geithner and replace him with another master of deception. I maintain that Summers was disappointed he didn’t get the job in the first place and OBushma would be risking him going rogue if he doesn’t get the job this time.

  16. Doc at the Radar Station

    Principal cramdowns *in bankruptcy* are what is needed. The law needs to revert back to the way it used to be and bankruptcy needs to be made an *easier* option for people to take-so they will take it. Hey, the courts and the lawyers will be very busy doing this case-by-case, but that’s OK. The people who have no way of paying even a crammed down mortgage won’t be paying one. If they don’t want bankruptcy, but they’re willing to take an “FC” ding on their credit-well mail the keys in and be done with it. The bad debt has to be purged and the wreckage dealt with. Blanket bail-outs of underwater homeowners aren’t politically feasible.

      1. Blurtman

        Baker’s idea sounds decent. Not sure where ownership of the home resides but I suppose that is up to the bank.

        Why not just formalize where this is heading and turn the mortgage into an option, where the owner only receives the new renegotiated price plus inflation when he sells? So if home prices recover, the bank gets the profit from the appreciated value. The option would have value, and an instant asset would thereby be created.

        This is not that far fetched. A relative lives in a low income development in NJ. When he sells, he only receives his purchase price adjusted for inflation.

  17. Michael Cain

    A Bair-for-Geithner exchange would appear to be a reasonable political move at this time. The biggest political problem facing the Administration in the run-up to the 2010 elections is to get voters to believe that the Dems are serious about helping Main Street. Bair’s appointment would help with that; whether it would have meaningful impacts on policy remains to be seen.

  18. Luca Masters

    ‘The fact that she is a woman is helpful. In my opinion it is high time that a woman took this job. Lets face it. The ‘Guys’ have screwed this up for decades.’

    That’s only relevant if the screwing up was due to their being males. That’s a pretty outlandish claim.

    PR-wise it might be beneficial, and that’s important, but in terms of screwing up, no.

  19. JKH

    I tend not to take shots at these people, but Geithner’s different.

    The main alarm bell was his statement to the effect “I’ve never been a regulator” before a hearing on the crisis in late 2008.

    Is there any way to explain this or excuse it?

    1. Blurtman

      Precisley! The NY Fed website states that one of their roles is to regulate depository institutions. Timmay’s defense is that as he did not do his job, he bears no responsibility for what happened. Amazing, no?

  20. Ishmael

    Principal cramdowns *in bankruptcy* are what is needed. The law needs to revert back to the way it used to be
    Ish here — Principal cramdowns were not performed under the prior bankruptcy law. Home mortgages were secured debt and accordingly, in bankruptcy the asset was foreclosed upon.

    Baker’s idea once again is another socialist/communist idea to reward the speculator. If the worse thing that can happen if you over pay on a house is have a cram down forced on the lendor or the lendor forced to rent the house to you at market rent then buyer’s will not care what price they pay for the house because they can always get it adjusted.

    Guess what happens to the mortgage market (which already appears to be nonexistant except for the Fed). It totally disappears. Why would any one loan money on a home if the loan could always go to bankruptcy court and be renegotiated. Sounds like a great world, everyone over pays for their homes, the government issues all the mortgages and then forgives the mortgages. Why didn’t we think of this earlier. Everyone can have a 5,000 sq ft house with granite counter tops. Nirvanna on earth. Why does anyone need to work!

    1. Yves Smith Post author

      Cramdowns are well established for other types of secured lending in bankruptcy, for real estate in Ch. 11 (commercial) BKs and for yachts (and I believe second homes and commercial real estate in personal BKs).

      The cramdown is not arbitrary. The notion is you can’t have a secured loan where the principal balance of the “secured” part is more than the actual value of the underlying asset. So the mortgage (secured loan) is written down to the current market value of the asset. The amount of the write-down is then treated as unsecured debt along with all the borrower’s other unsecured debt.

      1. Ishmael

        Yves — I am not an attorney but I have negotiated a number of large haircuts for companies. The only reason the secured lendors would take the haircuts is they figured they would get more in the long run. In most commerical bankruptcies the equity holders are totally wiped out. Secured lenders will take a haircut as part of the restructuring and they do this because they will get a big part of the new equity. I know a number of PE firms (Oaktree Capital) who will buy up debt of troubled companies to take them over in BK’s. They take a hair cut on their debt but they get most of the new equity.

        So, if we are drawing similarities from commerical BK’s and home ownership, in most commercial BK’s the equity is wiped out. In a similar manner the home owner is wiped out. As far as yachts, I do not know but there sure are a bunch of foreclosed ones around and I do not see why they would be any different then autos. The Repo man shows up and takes them and the equity holders get nothing. I can not imagine the BK judge awarding a cram down on a yacht or auto. Also, do not know anything about second homes. The one thing I do know is I have never heard of a cram down on a piece of residential property. Now the owner might negotiate a hair cut but this is not a forced cram down by a bankruptcy judge.

        If secured property is not secured then why ask for it in in loan negotiatins and why give a lower interest rate for it.

  21. albrt

    Yves is correct, and home mortgage cramdowns did exist under prior versions of the Code and court precedent.

    In theory the cramdown should net the lender a loan at a reasonable interest rate that is equal to or better than the value the lender would have received in a foreclosure. And the cramdown is only approved if the debtor has a reasonable plan for paying the new mortgage going forward.

    Lenders usually believe bankruptcy judges are too favorable to borrowers, but on balance this is by far the most practical way to work through the problem. Unfortunately, the administration does not want to work through the problem. The administration has decided to inflate away the debts using a Fed-driven process that Krugman and other leading economists will swear isn’t going to cause inflation until after the inflation has happened.

    1. Ishmael

      I lived through the popping of the oil boom in the 80’s in Texas and Oklahoma and the housing bust in S. Cal in the early 90’s. Lots of people lost their homes in both of those. I am sure if they could declare BK and had a cram down on the mortgage they would have done so. Usually what happens is people usually pay off their mortgage or keep their mortgage current and they could keep their home as they went through the BK. I will admit I am not an attorney, but I have worked in finance and negotiated my share of haircuts on loans but I have never heard of cram downs on homes over the last 30 years.

      1. Ishmael

        albrt– I read both your and Yves comment. She never said for home mortgages. What she did say is other type of secured lending and this is correct. The reason that lendors will agree to this is because they believe it will maximize what they will get back on the loan. In most bankruptcies I have ever seen, the equity is usually totally wiped out. The lendors end up owning everything and part of the debt is turned to capital. In these cases the secured lendors will take a haircut but as I said, the equity owners are totally wiped out.

        There are a number of vulture funds that buy the debt of troubled businesses. Through the bankruptcy procedures they wipe out the equity and take over the company. Cram downs will happen but it is to the benefit of all the creditors not the original equity holders.

        1. Ishmael

          One other thing, bankruptcy laws are at the state level and accordingly various matters are handled differently between states.

  22. emca

    The problem and solution lies not with Geithner and Blair, but Barack Obama, leader of the ‘free world’.

    The decision on who to bail-out was made 2+ years ago and has been continued in earnest by this administration. Loans mods as possible solution were crushed and are now a half-hearted attempt to cover that main event.

    What is critical remains to be championed, the question foreknowledge and culpability. What did the lender know about the financial condition of the borrower before they made the initial decision to write the loan? Further up the line, how much did the bundler, the agent, the securities buyer, the banks know about the quality of the loans when they proceeded with the transaction? Without any of these parties, with the tangle system that evolved, no deal would be done. Many parties are implicated, particularly writers of said Contract, who would be susceptible to charges of duplicity, deception and/or willful ignorance.

    Until prosecution(or discovery) is brought against the parties involved in a suspicious undertaking, then there is little convincing argument of guilt or innocence. What we will hear is only noise and fury, a grudge match of ideas.

    The buyers had their accomplices, the lenders. If one is guilty so likely is the other. The culpability should begin with just those who although suspects, where deemed innocent without trial or discovery, allowing the farce we are now witnessing to proceed.

    By the way, a judge can decide the merit of individual bankruptcy claims, not posters of an anonymous forum, who can at best generalize and worst take anecdotal evidence as that generalization. It was done that way in the past (cram downs, el al.), it can (and is) being done now. In the manner above, it may further the cause if the scope of injustice discover and precedents be set to help level the playing field to no ones’ advantage.

    1. Ishmael

      Before all the socialist raised their head and when we were still a country of laws, a business law professor once told the class I was in that the law was there to protect the innocent, not the stupid. We are talking about civil law not criminal. There are not accomplices in civil law. Really, the lendor does not have some legal quidelines that he must meet to make a loan. If the lendor makes a secured loan and the lendee can not meet the requirements of the loan the lendor then gets to foreclose upon and sell the assets to repay the loan. Now their are various defense that can be made against the lendor such as he is a predator lendor or he is “lending to own”, but generally I do not believe these defenses work very well. Otherwise there would not be that many asset based lendors. The reason you get a secured loan is so that you will pay a lower interest rate.

      On your other points, what ever. Yup, I am anonymous. I have just negotiated a number of loans with lendors including asset based lendors and in one case negotiated a billion dollar loan package in 1995 when that was some real money. I have also negotiated significant hair cuts on loans and one time participated in a cram down (outside of bankruptcy court). I have to admit I have stayed out of bankruptcy court both in my business and personal life so I can not say I am an expert on all of the rules, but I am a CPA so I have a pretty good understanding of them.

      1. emca

        In no order:

        -A lendor (lender?) (or borrower) committing fraud _is_ a criminal matter. A criminal investigation would determine the fact of that crime. It would be hard to see this as not pertinent because bankruptcy is a civil matter.

        “Really, the lendor does not have some legal quidelines that he must meet to make a loan.”

        -The lender _does_ have legal guidelines (laws) to meet in making a loan, he or she does not set Contractual law based solely to their advantage.

        “The reason you get a secured loan is so that you will pay a lower interest rate.”

        -this smells of the Mortgage Bankers Association opposition arguments against HR 3609, which would have permitted cram-downs by judges, I in believe 2005.

        “On your other points, what ever. Yup, I am anonymous….etc”

        I didn’t have you specifically in mind when I wrote that, but its kind of you to volunteer. Since you are anonymous, I have no way to verify what your telling me. If I follow what you say, I have been dealing with distress situations, but are not an attorney. Not sure whether you have any experience with residential bankruptcy, whether your experience is relevant or counter-party to my argument.

        But we do have one thing in common, I’ve steered clear of bankruptcy. I also have never renege on a contract and don’t willfully practice ignorance.

        By the way since your knowledgeable on bankruptcy, you probably know of the Supreme Court ruling of 1993, Nobleman v. American Savings Bank, or that until 1978, in this country at least, cram-downs by judges on principle residences were permitted.

        1. Ishmael

          emca says — or that until 1978, in this country at least, cram-downs by judges on principle residences were permitted.
          Ish says According to the above then post 1978 cram downs were not permitted. I do not know how far back we want to argue, but since I graduated from college in 1977 I would say this has been true most of my professional life. I am not a legal expert but I would think that even pre 1978 there were not many cram downs. People had farms and homes foreclosed upon all over this country in the depression and subsequently. People even up to 1978 were more of stand on their own two feet type and I would think very few asked for some type of bailout. In addition, prior to 1978 mortgages were simple, most people made large down payments and incomes were more stable.

          I would also say, that I did a quick bit of research and it said with the change of the law in 1978 and the case you referenced in 1993, interest rates on home mortgages were reduced due to the risk of a cram down being eliminated. Accordingly, it can be concluded that interest rates would rise if cram downs were reinstated.

          I also looked at the 1993 Supreme Court decision you referenced at it basically is referring to Texas law. As I said above, bankruptcies are covered by state law even though this law is fairly uniform across most states. It should be noted however that both Texas and Florida are very lenient with regard to homesteads in bankruptcy and that is why many people (for instance OJ) move to these states when they are getting ready to file bankruptcy.

          I hope no one on this board is thinking I am giving professional opinion on the matter of bankruptcy because I am not.

          However in conclusion I believe we can say that since at least 1978 in most states cram downs have not been allowed. This is practically a life time for most people curretnly Going further back really is not relevant since mortgages were far simpler then and we would not be comparing apples to apples.

          In addition, history prior to 1993 seems to indicate that due to the potential of cram downs higher interest rates prevailed over all mortgages due to the potential for cram downs.

          Accordingly, the average citizen would be screwed twice if we went forward with some new law which would be applied retroactively to allow cram downs. First as a taxpayer the average tax payer would be asked to pick up his pro rata share of the cost of the cram down for the speculator and secondly since cram downs have been allowed the average citizen could expect the average interest cost on future mortgages to rise to offset the risk of a cram down in the future.

          That seems like a great deal! How many people reading comments want to sign up for this deal.

          1. emca

            Okay,Ish its getting late so I’ll try to be brief.

            What I was referring to is the pre-1978 use of cram-downs, at the judge’s discretion, for primary residence bankruptcies (not to exclude the 1978 to 1993 events).

            As you state, the argument at that time was that because almost all people paid their mortgages (a good thing, I agree), therefore special provisions for bankruptcy were argued unnecessary (by the banking industry?) and relevant legislation passed. From 1978, as you point out there was no consensus on term modification compliance, correct. Note though, the inference of state sovereignty is erroneous in that 1.) the 1978 Bankruptcy Act was a federal piece of legislation, not state, 2. judicial localities (within a state) interpreted application of the law with respect to primary cram down 3. bankruptcy is also covered by federal law.

            As to the argument that home mortgage interest rates would rise, Tanta from Calculated Risk, may she rest in peace, summed it best:

            “As far as I’m concerned, if you believe that prior to 1978, when modifications of home mortgages were unrestricted, and in the period of 1978-1993, when term modifications were restricted but cram downs were widely practiced, mortgage lenders offered higher-rate (relative to prevailing market), higher-LTV mortgage terms than they have in the post-1993 period, when they are safe from any restructurings, I would like to discuss a bridge purchase with you”

            As to whether cram downs are an effective way to deal with multiple problems there is thisfrom Confluence:

            “The bottom line is that the possibility of the cram down being used to restructure principal residence mortgages is one of the most valuable “sticks” society can have to put a check on lender stupidity, negligence and down-right thievery.”

            …and I add, a little prosecution of the perpetrators would help, if only somewhere, somehow the will be found.

  23. Blurtman

    Agree with Ishmael. Ignorance (and certainly not greed) does not merit a federal intervention. Learning is painful. If you bought a home that you could not afford, the home was never yours to start. Second, if you thought it would keep appreciating, you have learned a lesson. The next time you buy a home, you will be better prepared.

    Also I agree that this type of mentality is close to socialism. Ditto the bank bailouts.

  24. Vinny G.

    Would be nice to see Tim “deer-in-the-headlights-look” Geithner out and Sheila Bair replace him. But a chance for that to happen is slim, I think. Oh’bama seems to be even more loyal to his friends than Bush was.

    But that’s okay. They’ll all leave together, when this one termer Wall Street Trojan Horse completes his 4 years. Three more to go.

    Looking forward to the Palin dictatorship..lol


  25. tegnost

    As a long time reader and admirer of NC and all the contributors as well as a life long democrat it pains me to read good ideas. These will not happen. O isn’t really a sell-out,he truly represents the interest of the liberal elite, which dovetails quite nicely with the interests of the consevative elite. Cheap labor and big profits. The only difference is the liberals want the cheap labor to have health insurance so they can’t get sued by them for on the job injuries. Both sides are disgusted by the poor, and their self esteem depends on their being on top. The poor are poor because they are not as good as the rich. If someone cheats to keep that status quo, then they just did what they were supposed to do. With the financial debacle and health care charade I say the democratic party is incapable of doing anything that will save them from being irreparably doomed. Forget socialism, we are one goose step away from fascism…ask not for whom the bell tolls…for the record I believe whole heartedly in capitalism and I don’t think any NC’ers think that’s what we’ve got, do they?

  26. TC

    DREAM ON about “PRINCIPAL debt relief for borrowers!” If that ever were in the cards it already would have happened months ago while the political capital possessed by our Herbert Hoover Jimmy Carter clone still was fresh.

    Likewise, I think you fail to account for the hit to confidence made more likely were Geithner unceremoniously shown the door (as if the more profoundly devastated confidence in U.S. regulatory authorities affected by encouraging AIG CDS payout secrecy were not bad enough). After all, secrecy was encouraged for a reason, and were that suddenly deemed insufficient cause for further protecting and promoting status quo, wildcat finance arrangements, then who on Team Fraud is safe?

    Finally, Treasury’s Christmas Eve present probably should be seen less an attempt to raise confidence among investors of mortgage backed securities than a con of those foreign central banks who support this market. The message was, “You keep buying this crap as needed, or we hyper-inflate the sucker to the stars and evaporate your interest.”

  27. GeorgeNYC

    Just to throw in my 2 cents. Why is it that everyone can assume that “inflation” will necessarily increase the price of houses? “Inflation” is an average of price rises, it does not mean that all prices rise at exactly the same rate.

    If we are hit with hyperinflation in commodities I can see where housing can actually experience strong deflation people may not be as willing to spend money on large houses that cost a tremendous amount to heat.

    Housing is a consumption item. Not an “investment” except to the extent that it does produce “housing” which is “consumed”. It’s value is subject to demand but also the costs to “produce” that housing, i.e. heat and electricity. It is not like a factory or something that actually produces goods which, as prices inflate, may still retain a set demand. The costs associated with maintaining a property could overwhelm its apparent “value”. Just look at those $0 homes in Detroit.

    1. EmilianoZ

      I think you’re right. We’ll have inflation and declining house prices. I can two reasons for that:

      1) Unemployment will remain high for a long long time. Most of those who have a good job probably already have a mortgage. Who’s gonna buy the houses?

      2) House prices have risen to totally insane levels compared to wages. I was told that from 2000 to 2006 house prices tripled in some areas. To compensate we would need such an inflation that our salaries would need to be tripled. Bernanke can engineer that but it won’t be pretty.

      “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency”

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