Monday, December 22, 2008

Bush Admin Hamstrung by Conservative "Trickle-Down" Ideology

House of Representatives Speaker Nancy Pelosi, Rep. Barney Frank and other Congressional Democrats are drafting legislation to target the remain $350 billion allocation of the Troubled Asset Relief Program (TARP) to reduce home foreclosures. "Absolutely nothing has been done to respect that part of the TARP legislation," Pelosi told reporters as she discussed Congress's agenda in coming weeks.

Secretary of Treasury Paulson argues the Conservative Ideology perspective that TARP funds should be used to generally prime the banking system pump to have loan availability back into the economy rather than to use TARP to target home foreclosures directly. Paulson says that Banks are expected to increase their loans because of the TARP federal aid. Paulson says, "It may be slow, but as funds for lending "trickle-down" through the market, more homeowners will resolve their foreclosure problems." Conservatives are still trying to make that old "trickle-down" economics thing work - will they never learn any new tricks?

Treasury Secretary Henry Paulson said Friday that Congress will need to release the last half of the $700 billion rescue fund because the first $350 billion has been committed. Paulson said he intends to allocate the second installment of $350 billion to financial system much as he allocated the first installment of $350 billion. Paulson, a former Wall Street market executive, pumped $250 billion of the first TARP installment, in market fashion, to buy stock in hundreds of banks as a way to bolster their balance sheets and get them to resume more normal lending.

Key Democrats, including House Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, complain that the Treasury's $700 Troubled Asset Relief Program, or TARP, has done little to help struggling homeowners as it pumped the first $350 billion into the balance sheets of banks and other financial firms with little visible benefit. She and Frank are preparing "legislation that specifically requires that provisions of the TARP legislation [to target the foreclosure problem] be honored, when congress releases the additional funds," Pelosi said.

After receiving $350 billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the TARP money or they simply refuse to discuss it.

"We've lent some of it. We've not lent some of it. We've not given any accounting of, 'Here's how we're doing it,'" said Thomas Kelly, a spokesman for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that to the public. We're declining to."

The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what's the plan for the rest?

None of the banks provided specific answers. The answers, or more accurately the lack of answers, highlight the secrecy surrounding the Troubled Asset Relief Program. Congress intended for the banks to lend the money to resolve the home foreclosure meltdown - not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But there is no regulatory oversight or even a review process in place to make sure that's happening and there are no consequences for banks who misuse the money. After all, Republicans, and in particular George Bush, are not ones to let facts and experience get in the way of ideology, particularly on something as abhorrent as government oversight and regulation of business.

Perhaps one reason banks are mum about how they are using TARP funds is, according to an AP study, that after banks received the taxpayer money top executives rewarded themselves with cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management. The AP Study found that the total amount of bonus money given to nearly 600 bank executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.

Even though neither the Banks nor Treasury Secretary Paulson can specifically outline how the banks have used TARP bailout funds or how the funds are being used to address the home foreclosure problem, Paulson is insisting that congress release the second TARP installment of $350 billion directly to banks.

Legislation demanding that the second installment of $350 billion be targeted for home foreclosure mitigation will be ready within the next couple of weeks, said Steven Adamske, an aide to Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee.

Most Democrats -- in Congress and on President-elect Barack Obama's team -- favor pressing lenders to renegotiate troubled mortgages. That is the tack of the Streamlined Modification Program, championed by Federal Deposit Insurance Corporation Chairman Sheila Bair. The SMP is aimed at trimming foreclosures and ending fire sales by offering a guarantee to lenders that modify a mortgage so payments are trimmed to 31% of a home owner's gross income.

If banks cut interest rates or stretch out the life of a loan, Washington would cover part of the lender's losses should a homeowner re-default. Bair says the plan would save 1.5 million homeowners at a cost of $24.4 billion. When Bair first suggested pushing lenders harder to modify iffy mortgages last spring, it was dismissed by the Bush Administration. Since then Bair has very successfully instituted many of her ideas at IndyMac, the failed thrift the FDIC took over in July. Secretary Paulson argues that Bair's plan is inappropriate for the Treasury's $700 billion rescue, because it would be an expenditure rather than an investment that would earn a return.

Congress may delay releasing the second installment of $350 billion to President Bush's Secretary Paulson and wait to release the funds to Obama's Treasury Secretary, Timothy Geithner, who supports directly targeting the money for foreclosure mitigation. Senate Republicans have threatened to filibuster legislation to directly use TARP funds for foreclosure mitigation.

If the previous year of record foreclosure rates, falling home values, a declining stock market, and continuing inflation have seemed like too much catastrophe for the US economy to bear, just wait. A second (Tsunami Size) wave of foreclosures are set to begin in the spring of 2009. This is when another round of Option ARMs mortgages will begin to reset making monthly mortgage payments instantly unmanageable for millions of additional home owners. This will be the first major test for the Obama Administration and Congressional Democrats.

Option ARMs mortgages were sold, at the height of the mortgage bubble, to homeowners eager to cash in on rising property values and keep their mortgage payments as low as possible. What makes the coming option ARM resets most worrying is who they were marketed to and what the "option" part of the mortgage really means. These borrowers had relatively good credit ratings when they took the loans, but many people taking these loans did not fully understanding how they worked and why their "apparent" interest rate and monthly payments were so low.

Since congress repealed the 1968 Truth In Lending Act in 1994, mortgage brokers selling the option arms mortgages were not compelled to fully explain how the mortgages worked. To the contrary, the language of these mortgages was often convoluted and opaque, explicitly designed to mislead the borrower.

Option ARMs mortgages allowed homeowners to pay only a small portion of the interest on their loan every month for the first two or three years. The larger portion of the interest payment was added back into the total mortgage amount over that two or three year period until the "reset" date. In other words, borrowers keep making monthly payments only to find out that their loan amount got bigger every month. When the payments reset, based on the prevailing interest rates and interest inflated loan total, which is now far greater than the property's value due to all that accrued interest, the monthly mortgage payments become instantly unmanageable for many homeowners.

The steep declines in real estate markets over the past year due to the foreclosure crisis is helping to fuel a self-sustaining cycle of foreclosures, followed by property value decrease, followed by more foreclosures. This helps to accelerate how quickly and how deeply homeowners find themselves "underwater" in a house they can't sell for the amount of their interest inflated mortgage. And few homeowners feel good about sending in a higher mortgage payment every month when they realize their equity has been completely eliminated by the interest inflated loan amount and the collapsing U.S. housing market. So, in 2009, banks are facing a second wave of mortgage holders who will have no other option than to just walk away from their house when their payments reset.

Related Postings: Post Script:
Secretary of Saving the World
Tim Geithner's daunting to-do list at the Treasury Department.

Timothy Geithner, the New York Fed chief, was tapped by President-elect Obama to serve as Treasury Secretary. In the last year, the United States has effectively nationalized the financial sector. Thanks to Secretary Paulson's and Secretary Bernanke's occasionally frantic efforts to fend off systemic collapse, the government now largely owns AIG, Fannie Mae, Freddie Mac, and chunks of several banks as well as oodles of dodgy assets pledged as collateral for loans. Paulson and Bernanke have spent, promised, loaned, guaranteed, or assumed in liabilities amounts that are now approaching $14 trillion.

Secretary Geithner will have to function partly as a money manager to decide what to do with the portfolio of shares Treasury now holds in big banks like Citi. Like a private-equity magnate, he'll have to decide the appropriate capital structure and ultimate disposition of companies, like AIG, that have become wards of the state. And with the remaining $350 billion of the Troubled Asset Relief Program, he'll be the investment banker in chief, deciding who might be bailout-worthy.

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