Defeating The Bankster Strategy For Defanging Financial Reform

[Joanne98]

The Banksters have been fighting tooth and nail against financial reform, and have been having a good bit of success while the nation is focused on health care reform. Their strategy is the same as it always is: they call on the members of Congress with money past and future peeking out of their pockets; they invent some minimal justification for the weakest possible regulation; and they find someone to front for their faulty arguments.

Members of Congress, like most of us, aren’t that knowledgeable about financial matters, and have internalized the bizarre notion that it’s dangerous for government to interfere with the free market. Members don’t really look that hard at the explanations, and instead focus on the money, and the complaints of their constituents, even when those complaints are baseless.

We can make a difference if we are informed and passionate, but if we want to win, we need allies who will make it hard for the Republicans to maintain a solid front and impossible for Democrats to stay warm in the cash-lined pockets of the financial elite.

One example of the bankster strategy is their defeat of judicial modification of mortgages in bankruptcy, which is known among practitioners as cramdown (explanation below). When the House passed an amendment to allow modification in bankruptcy, the banksters were faced with a real problem. It would actually work, and would benefit many homeowners.

But, banks and the holders of investments in those pools of mortgages called collateralized debt obligations or collateralized mortgage obligations would have to book their losses immediately. It would disrupt their long-term goal of getting the Treasury to buy out their garbage at above-market prices.

So, they did what they are good at: they made up a bunch of barely plausible justifications, and sent someone else out to do their dirty work. They bellowed that judicial modification would cause an increase in future mortgage rates, and would hurt community banks. For the Republicans and their base, they made the laughable argument that activist judges would be interfering in the free market. The first argument is false: the House allowed modification only for existing mortgages, and only for a short time. The rest of the claim was debunked here. Judges routinely modify all kinds of secured debt in bankruptcy, so that is absurd.

The community bankers, directly and through their trade association lobbyists, got on the phone to their senators, whining about how horrible this would be for them. That wasn’t true either. The number of loans made by community bankers and held on their books is insignificant, and is an insignificant part of the problem. The real problem is in those CDOs. Valparaiso Law Professor Alan White has been following the Columbia Collateral file, which provides monthly reports on loan-level performance information for approximately 2.9 million subprime and alt-A mortgages (as of November 26, 2009), all of which are securitized in CDOs. This is about 5% of all mortgages outstanding, and accounts for about 20% of foreclosures and mortgage modifications. According to Professor White,

Investors lost $3.73 billion from foreclosures sales in November 2009. The average loss on foreclosed properties was $147,800, representing a loss severity of 64% of original principal for the 25,266 foreclosures sales.

The loss includes lost principal, unpaid but accrued interest and out-of-pocket expenses, such as legal fees for foreclosures, maintenance, property taxes and insurance. The average principal on the foreclosed loans was $230,726. Community bankers are not looking at losses in that range. They are more conservative and more pro-active and they know their markets better than the fly-by-night mortgage brokers who filled those CDOs with junk mortgages.

The use of others to push policies that benefit the banksters and other CDO holders is replicated in the current push for regulation. As this post explains, the derivatives pushers have used similar tactics to cut loopholes into regulations that would affect them.

Continued>>>
http://firedoglake.com/2010/01/03/defeating-the-bankster-strategy-for-defanging-financial-reform/

[laughingliberal]

1. Certainly, it was Wall Street's concern for community banks that was behind their opposition to the

cramdown provisions. Why would we question that? :sarcasm:

[Demeter]

2. The Zombie Banks Would Go Bust If They Crammed Down

They would be totally uncapitalized, just as they have been for years now, but it would be obvious and not capable of being concealed, dismissed, or wished away. And there will be no further largess from the Treasury, either.