Geithner's role - the cramdown

[autorank]

I was surprised and disappointed with the appointment of Tim Geithner, head of the NY Fed, as
Secretary of the treasury. That was for good reason. He screwed up on credit default swaps and
we've yet to pay for that.

Why Geithner? There were people saying, if you want to fix a problem you need people who know the
problem, etc. That wasn't comforting ... until I heard a criticism of the stimulus plan (which I like)
for any sign of benefits to homeowners.

And then I thought of Geithner: what is his role?

Here it is. Geithner will deliver the "cramdown" to mortgage holders.

That's what Obama does for home owners ... it would be huge.

What's a cramdown?

CRAMDOWN-- a court-ordered reduction of the secured balance due on a home mortgage loan, granted to a homeowner who has filed for personal bankruptcy.

-- In a cramdown, the bankruptcy court splits the outstanding mortgage balance into two parts. The amount of debt equal to the current appraised value of the home is treated as a secured claim, which the borrower must continue to pay.

-- The amount of debt in excess of the current property's value becomes an unsecured claim, which is usually not repaid in full. In areas where home prices have depreciated, cramdowns can result in significant mortgage reductions.

-- In some cases, the judge may order the remaining secured debt amortized over the remaining life of the loan term, thus lowering monthly payments. In other cases, monthly payments remain the same as before the cramdown, and the secured mortgage is simply paid off faster.
http://teachmefinance.com/Financial_Terms/Cramdown.html

There is no entity in the financial community that has any credibility left after Bank of America
was exposed for the Merrill deal and Wells caught for it's employee "recognition" event. What are
they going to say? It's not fair! Screw them.

This idea popped into my head when I corresponded with Numerian over at The Agonist
(who has written brilliantly on the meltdown).

[Phoebe Loosinhouse]

1. That is an incredibly sane and reasonable way to deal with the current situation.

It turns "negative equity" into unsecured debt, right?

[autorank]

5. Right, then that debt vanishes.

I really like the re-amoritization of the new secured debt.

In my scenario, Obama/Treasury play the role of the bankruptcy judge.

Geithner has to be used for something. He could recoup his rep by pulling this off. Nice deal,
and it should be for everybody.

[Phoebe Loosinhouse]

9. But is it true that the unsecured debt would vanish?

Didn't the Bankruptcy reform bill give more strength to the staus of unsecured debt as a sop to the credit card companies?

I could see that a portion of the unsecured debt might be negotiated away or restructured, but would it actually vanish?

I could also see a scenario where banks are punished for violating basic underwriting and common sense rules by having things like ninja loans and stated income loans having the value to loan difference evaporated as a consequence of their fiduciary laxness. Let them pay for their negligence which they hoped and schemed to pass off onto others.

[autorank]

15. This would be outside the normal bankruptcy laws. It's the USA that's bankrupt.

Your theme, punishing the banks, is one that I fully endorse. This wouldn't be in front of a
bankruptcy judge, it would be Obama going head to head with the banks saying, you made this
lousy meal, you eat it. They'd eat it and then probably collapse but the interlude would bounce
the economy, by my theory. Then the federal government would nationalize the banks.

But we're through the looking glass. We're pretending to have debt in a financial structure where
money means nothing. We're beyond upside down, we're sunk. It's too much of a shock to state the
obvious so we're acting like we owe money to the banks when the banks have just undergone the first
perfect storm with the housing bubble and derivatives.

The next storm will be credit derivatives. This market represents a factor of many times the size of
the subprime loan mess. "The $62 trillion dollar credit derivatives market is 50 times the size of
the subprime mortgage derivatives market, and is indeed larger than the entire global economy."
David Amerman in The Money Party (6)



The size of the subprime derivatives, the current crisis, is far
left. Credit swap derivatives are in the center, and the global
economy is on the right. We're totally screwed.
Amerman

To avoid a panic, it makes perfect sense to have Geithner deliver the bad news to the banks, beat them
up pretty good, and create some space while the people who are dealing with reality plan for the
decimation of banks in general.

Strange world created by the greed of the "Davos people."

Greed isn't good, it's a total disaster.

[Phoebe Loosinhouse]

16. Gotcha! nt.

[Hubert Flottz]

22. The greed has overtaken and overpowered the greedy...

They wanted it all and they wanted it now.

It's hard to feel sorry for those people who could or would, never feel sorry for anyone else.

[autorank]

25. Ya think;)

They'll get it all, the bad debt from the intentionally deceptive loans they sold.

I'll feel bad in an aloof sort of way;)

:hi:

[stevedeshazer]

17. It's like a jubilee

http://en.wikipedia.org/wiki/Jubilee_(Christian)

~The concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical book of Leviticus, a Jubilee year is mentioned to occur every fifty years, in which slaves and prisoners would be freed, debts would be forgiven and the mercies of God would be particularly manifest. In Christianity, the tradition dates to 1300, when Pope Boniface VIII convoked a holy year. Christian Jubilees, particularly in the Catholic tradition, generally involve pilgrimage to a sacred site, normally the city of Rome. At various times in Church history, they have been celebrated every 50 or 25 years.~

Sorry for the diversion into religion because I'm not religious, but this is a historical concept that goes way back, prior to the Christian version.

But the concept of debt forgiveness is the only way to restart the economy and to free up money when EVERYONE save a select few are in debt.

I'm for a New Jubilee.

[autorank]

20. That would be like having a "blessed day"

I think the religious analogy is perfect. The situation we're in has nothing to do with economics.
It's all about superstition and cynicism. It's as though they've appointed themselves God, knowing
that they were not, and then began making up a scenario that they sold in order to "super size" their
wealth. Mission accomplished but they've put created a world where their scheme has caused great
harm and exposed the financial elite for what it represents - fraud.

Screw these clowns, they need to meet their judge and jury, an angry public.

Other than that, how are you?

[DCKit]

2. So the professionals (who should have known better) would eat up to 50% of these loans?

Guess it's better than a fire sale, and well deserved, to boot. It also means that our grandchildren, as taxpayers, won't be bailing them out for the next eighty years.

[autorank]

6. They'd eat it raw

And, imho, that would be it for the banks. There only two big ones left and they're both turkeys.

Time for a real Bank of the United States (bye bye Fed!)

[williesgirl]

3. Thanks for posting, hopefully this might help DUers in trouble. rec'd

[autorank]

7. Thank you!

It should help all of us as a key part of righting the capsized ship of our economy.

[ihavenobias]

4. That is very interesting.

I shared your concerns about TG, so let's hope we were wrong.

K & R, to the greatest.

[autorank]

8. Thank you Senor no bias!

Shared concern here too -- but this makes perfect sense.

Obama will do something for homeowners and I'll bet it's the biggest benefit out there.

This would not cover everyone but quite a few. Gets money into the economy right away
and puts a hold on the massive insecurity of the public. It may be the end of private or
publicly held banking enterprises but so what. They blew it!

[Me.]

10. So Is There A Real Chance Of This Happening

My take on Obama is that he's several steps ahead of most of the brainiacs running things and cool enough to let the game play out. His strategy all along may very well be to corner them with their own excesses. McCaskill has been out reading the riot act, all independent like, to the bankers. But when I think of her I think about how she was an early ally of his. If this is the deal with Geithner I give Obama credit to replace the scorn I felt at the pick.

[autorank]

12. Something big has to be done for homeowners

What's left to do? Let the banks do it;)

This is speculation. But something has to be done very soon. This would be the
real stimulus program.

[Me.]

13. Fingers Crossed

It would be delicious, amongst other things

[bluesmail]

11. I'll bet the masters of our universe have a back-up plan. Otherwise

Gobama. (Sorry, I meant President Obama). Reality has to become just that and soon because This president may be our last and final hope.

[galileoreloaded]

14. Couple questions with cramdowns......

so, instead of the appraiser being hired based on his reputation of being homeowner friendly (RE: appraise high when the bubble was blowing, so you could meet your loan to value percentages), the appraiser is now rewarded with more business (from the BK attorneys) by giving low values. Now imagine you have lived next door for 20 years, and the "new" appraisal comes in.

Also, who will pay the difference or the charged off amount that Chase, Citi, Wells Fargo, etc. had to eat??? You and I, via TARP 2,3,4,5,6.

I don't know what the answer truly is, but I hope someone at the top has at least plumbed the depths of this idea and we all don't get caught by the law of unintended consequences.

[autorank]

18. The banks are dead on their feet. They just haven't fallen over yet.

Let us all hope someone at the top is thinking this through. I'm confident that they are but the
outcome will be of real interest. The banks are headed for a total crash. Before that, they're
useful entities to take the hit for home owners. Then they go. Someone at some point has to say,
"Look, the whole economy is a house of cards. Let's start over." That's when the fun starts.

See http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4975625&mesg_id=4976232

The consequences, I suspect, will come from looking to the real purpose of a society, productivity,
creativity, protection of citizen rights and the well being of citizens. There's plenty to do like
save the planet, for example, and it is a global enterprise. We need to get out of this "Alice in
Wonderland" fog and it may just call for a transitional figure to act like the Queen of Hearts.
Then we emerge into a new era of well being and expanding benefits to all ... and the comet hits;)

[shifting_sands]

19. You might be right

Great article Autorank, very clear. I heard this idea floated the other day by Joe Biden on NPR. He presented it as just an idea and I've not seen anything regarding it since but your remarks puts it in perspective and a doable proposition. He wasn't specific about the details but neither was he vague about the idea. I hope this works out, there are millions out there paying for a house whose worth is dropping every day and will continue to drop for a bit of time.

[autorank]

21. Thanks!

Biden floated a cramdown -- damn. I may be right. He's from the credit card capitol of the USA.
That sounds like seeding or some sort of trial balloon. If they do it, Geithner would be the "good cop"
and Summers, the bad. 'You can deal with me or I'll have to get Larry' (crashing noises in the back-
ground as Summers destroys a near by office in a rage;) I know they're going to do something major
for home owners. This is the broadest coverage available, it seems to me.

We need to get out of this nonsense world and focus on real tasks but it is such an historic moment,
it's quite something to observe. At the same time, the tragedy visited on those who lose their homes,
jobs, etc. is an immediate outrage that cries out for justice.

[autorank]

23. Kick

:kick:

[KoKo]

24. interesting...kick...