March 26, 2010

Desperation Stage for the Bailout


Yesterday before Congress Ben Bernanke agreed that the Fed’s balance sheet is now over $2.3 trillion. He lamely said he dreams of its someday returning to its pre-Bailout level below $1 trillion.
We see the contradiction. Today the Bailout looting is primarily laundered through Fannie and Freddie MBS buys, and the Fed has been the main repository of this toxic junk. Taxpayer money is thus directly stolen by the government and handed over to the banks, while the worthless paper received in return is meant to prop up the worthless paper already on the banks’ balance sheets.
There’s no other “market” participant here, because there is no market. The market wants to deflate. Only the zombie banks and their government stooges are artificially resisting reality.
So how can the Fed stop buying? There’s no one else to prop up MBS values, and no one else to artificially goose “new sales”. Doesn’t that Fed balance sheet have to keep bloating, as the main bloat of the reflation?
A measure of the intractability of these knots is how banks and the Obama administration are being driven, very much against their will, to extreme measures to try to prop up the mortgage market.
Their baseline has been clear all along. They want to reflate the bubble, and failing that they want to stabilize prices and extract as much revenue as possible from distressed borrowers. So the scam was always to pretend to want to help borrowers, while they were really just stringing them along, getting them to keep making payments they couldn’t afford for as long as possible before the inevitable foreclosure. Most of all they try to prevent borrowers from walking away from the mortgage while there’s still any blood left to squeeze out of them.
Any government who really wanted to help borrowers would empower bankruptcy judges to impose writedowns of principal (cramdowns), and if any kind of government backstop was to be provided at all (which it shouldn’t be), it would be predicated on requiring writedowns of principal, where the lender would have to take the bulk of the loss, with the taxpayer assuming only minor exposure at most.
But this government has demonstrated its bad faith all along by actively repressing bankruptcy cramdown empowerment, while enacting only a phony mortgage modification program, which was never meant to produce more than a token number of permanent mods. Instead it was meant to use the application process and temporary mods to string along all these borrowers, while the whole process was guaranteed by the taxpayer. Direct handouts for the lenders are even a part of it. The whole thing’s simple consumer fraud and embezzlement, along with some direct theft thrown in.
Yet reality’s avenging sword in the form of debt deflation has been too fiercely wielded for this lame program to suffice. The market’s still melting down, delinquencies are still rising, and new data indicates that we may be reaching a tipping point on the willingness of people to walk away.
Historically, even those who are deeply underwater on their mortgages only rarely walk away if they’re capable of making the payments. In my previous series on strategic defaults (part 1, part 2, part 3, part 4, and part 5) I discussed the reasons for this. The system’s actions are predicated on this. That’s why so far the HAMP was available only to people who met a certain threshhold of distress, and why in general lenders have been willing to get serious only once someone is already delinquent 90 days or more. The only time they ever get serious about modifying anything is once they think the borrower has become a real risk to walk away.
By contrast, those who are merely underwater but are believed to be able to afford the payments are never the recipient of help, but instead get the moralizing propaganda treatment, “you should pay your debts; you’ll be a bad citizen if you walk way”, and the rest of it. This is because historically the data supports the expectation that if those in negative equity can afford to keep paying they will.
But as I said, there’s some evidence this may be changing. That’s why we’re seeing some shift in what banks and the administration are willing to do. Reality is dragging them along, slowly, kicking and screaming.
The new version of the Obama scam has the same goal as the old one: Prop up zombie bank balance sheets and reflate the bubble. But now they say they’ll not only continue with the old policy of temporary reductions in payments, but they’ll try to convince the lenders to make some principal writedowns as well. Here’s the key measure of their desperation: Their previous policy pretended to help only those already “distressed” (those already in the delinquency labyrinth, those whose credit scores were already getting whacked, those who might be reaching the end of their willingness to not walk away). Now for the first time they say they’ll try to do something for the 11 million (20% of those with mortgages) who are merely underwater.
Meanwhile Bank of America is following Citi in pretending to extend its own mod program.

The bank said it would reach out to delinquent borrowers whose mortgage balance was at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income.

So BofA has now on its own reached the point Obama reached a year ago, and from which Obama now feels he needs to retreat somewhat. I guess that’s an indication of how the banksters are the most hard core psychopaths, while their government flunkies are weaker and somewhat more vulnerable to public and reality-based pressure.
The new administration plan, while still unclear in the details, will plunder the taxpayer all the way, including using perhaps $14 billion of TARP money. We should be clear that even if bowing to reality requires them to actually really help some underwater borrowers:
1. This is done only for the profit of the insolvent banks;
2. All such help, and any writedowns the banks actually undertake, is subsidized 100% by the taxpayers;
3. It’s doomed to fail anyway at propping up the bloated price, let alone reflating the bubble.

This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.

The F.H.A. has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened. It now insures more than six million borrowers, many of whom made minimal down payments and are now underwater.

Since “a renewed downturn in the market”, AKA the market continuing to return to a reality-based level, is inevitable, we can confirm that here the government is simply trying to socialize on the taxpayer bank losses it considers inevitable.
So with this we have an indicator that the administration is being pushed along by some sense of reality, even as Bernanke glumly ponders the Fed’s balance sheet. How can it be true that the HAMP wasn’t sufficient and needed to be tweaked so that the benefits don’t fall 100% to the banks (but according to the new plan more like 99%; the point is that they’re grudgingly facing the fact that to help the banks at all they may have to actually help a few real people, or else see the whole mess go down the tubes as strategic defaults reach a tipping point; as the Guiso-Zingales-Sapienza study found, walking away is highly contagious); how can that be true, but it also be true that the whole Bailout can be laundered through the Fed? It can’t be true. These are recursive iterations. The MBS scam, the whole laundering process from the GSEs and the FHA up to the Fed and Treasury, with the hapless HAMP trying to do emergency repair work in the innards, is a tottering Tower of Babel.
They keep building it higher, more top heavy, while frantically trying to patch up the crumbling foundation, using up their duct tape, then scotch tape, and now they’re down to the band-aids.
Reality is banging on the door, and is now calling up the battering ram. How long can they keep the door barred?


  1. … while their government flunkies are weaker and somewhat more vulnerable to public and reality-based pressure…

    Well, they would be, they have a vulnerability at the poll booth.

    What I find interesting is the posture of people like Denninger who absolutely do not understand what we are dealing with here.


    Comment by Edwardo — March 26, 2010 @ 10:31 am

  2. I haven’t read much Denninger, so maybe I’m missing some subtext, but that sounds right on to me.

    Or do you mean that his tone could be interpreted to mean he thinks Obama’s just incompetent rather than an intentional bank agent (as well as often incompetent)?

    Comment by Russ — March 26, 2010 @ 4:50 pm

  3. ALLCAPS KARL swings from being 100% right on the money to off-his-rocker right-wing lunacy.

    But he’s absolutely right about the complete lack of justice that distinguishes the Panic of ’08 from similar ones throughout history… I wish more pundits would beat that drum. As it stands it’s only him and you.

    Comment by jimmy james — March 26, 2010 @ 8:40 pm

  4. Justice seems quaint at best and “fucking retarded” at worst to all the corporatist scum.

    They really believe that trickle-down is the only way the world can function, so that freedom and justice are simply obsolete; or they even think it actually is just. I think Obama truly believes that Blankfein and Dimon, and of course himself, are the best people of our time.

    I was wondering, what exactly does Obama think his reputation is going to be? He must really believe he’s going to be considered a hero for having fought hard for Wall Street and the other rackets and for having beaten up on the non-rich. That’s what a psychopath he is.

    Comment by Russ — March 27, 2010 @ 2:11 am

  5. Yes, he thinks Obama is just incompetent. And he thinks the system is akin to something with gunk inside of it that only needs to be cleaned up to function properly.

    Comment by Edwardo — March 27, 2010 @ 12:39 pm

  6. Ah, the old “reform within the system”.

    I really think that by now it’s just not possible for an intelligent, mentally stable person to sincerely believe in that anymore.

    One would have to be an idiot, some kind of cultist, or a lying, mercenary hack.

    Comment by Russ — March 27, 2010 @ 5:21 pm

  7. Well, Karl seems to be less an idiot than someone who is trapped in a belief system, a way of thinking, that (for us) doesn’t comport with reality.

    Comment by Edwardo — March 28, 2010 @ 11:19 am

  8. Mr. Denninger’s most recent post is a classic example of what I am referring to. He makes an excellent point- or so it seems to me- but he doesn’t go nearly far enough with it, ask the right questions or draw the proper conclusion which is that the entire government is captured by, and mired in, a corporatist kleptocracy/disaster capitalist mode.


    Here’s a few key quotes”

    “We in America are forced to pay for all of the medical innovation in the world, as a direct and proximate consequence of the acts of the douchebags in Congress who have (1) banned reimportation of drugs and devices, and (2) exempted drug and device makers, along with insurance companies, from anti-trust laws that would otherwise make their conduct felonious in The United States.”

    “It happens because our lawmakers have put in place a legal structure that allows health-care related companies to sell at below-market (and perhaps even below-all-in cost!) prices to other nations while barring the purchasers of those drugs and devices from selling them to whoever they want specifically, those who live HERE.

    So, when, at the end of the post- if you choose to read it- Denninger refers to government, he does so as if it is a singular, autonomous entity as opposed to both parties functioning as the handmaiden of a corporate overlord.

    Comment by Edwardo — March 28, 2010 @ 11:31 am

    • I should probably read him more often. It seems like a mix of good points and misguided ones, which is much better than the all-bad norm.

      Basically, he seems to say the rackets do bad things, but that it’s the government’s fault for letting them do it. We see that kind of argument a lot.

      It doesn’t make much sense. It’s “true”, and of course government “should” be doing things very, very differently. But the reason it doesn’t isn’t some inherent incompetence or weirdo “government philosophy”, but because the rackets themselves have corrupted it.

      So it follows that so long as the rackets exist, this is always the government you end up with. And therefore the only solution is to eradicate the rackets.

      Then we can have the much smaller, much better government everybody claims to want, but which most people’s actions show they don’t really want at all, because they want and need a big, aggressive government goon to further empower the corporate gangsters.

      They want big finance? They need big government. Want imperial wars? Big government.

      And so on..

      Comment by Russ — March 28, 2010 @ 12:04 pm

  9. I’m impressed. You really have a way of clarifying and explaining complicated matters of finance and big government that make perfect sense to my slow-witted brain. I think I have like a 386 processer with 16 megs of RAM for a brain, yet, somehow, I understand what you’re saying.

    Comment by Bloodgroove — April 4, 2010 @ 11:54 am

    • Yes, Russ would make a fine philosophy professor. You’d want to take courses on phenomenology from him.

      Comment by 86Proof — August 20, 2010 @ 12:06 am

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