WSJ: A Frightening Indictment of Our Society

by: TheLFB November 19, 2008    

TheLFB

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The Wall Street Journal published something on its Real Time Economics Blog that we found to be extremely disturbing. Call us naive, but somehow we can’t help but feel that things are far worse than imagined after reading it.

Secretary Paulson clashed with members of the House Financial Services Committee during his testimony on Tuesday morning. He’s against using TARP funds to purchase troubled mortgage assets from the banks and Representatives are, somewhat justifiably, feeling as if Mr. Paulson is not following through on the intent of the legislation.

But that isn’t what’s troubling us because we believe Mr. Paulson is acting with the best intentions at heart and we also believe that members of Congress who voted for the TARP in good faith (and went to great pains to convince others to do so) are justified in grilling the Secretary pretty hard on why tactics appeared to have changed in mid-stream.

The problem lies with the reason Mr. Paulson is reluctant to use the funds in this manner, which he of course did not allude to during his testimony.

According to the WSJ:

Within the Treasury there’s a view that if the government is going to cover half the loss, banks will modify the terms of a loan for weak borrowers they know can’t make their payments, then foreclose and get the government to make up half the loss.

In other words, the Treasury feels that the reason it can’t use the funds in the manner Congress intended is because it believes the banks would act in an unscrupulous manner in order to subvert the intentions of the United States government at a time when the economy is facing its worst crisis since the Great Depression?

If the WSJ is correct this really is a terrible indictment on our society and out of all the things which have gone wrong since the crisis started in the summer of 2007, this has to rank as one of the worst. Is there no end to the greed?

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This article has 22 comments:

  •  
    Nov 19 06:44 AM
    Hmmm sad but not unexpected. Perhaps they should have thought of these requirements when they started handing out free cash. Paulson basically gave away money without strings attached and now we all will suffer the loss. If banks could regulate themselves we wouldn't have been in this mess in the first place. Thinking they will take $25 billion and be good kids is really a dumb idea.
    Reply | Link to Comment
  •  
    Nov 19 07:00 AM
    You have heard it many times. When you can make a profit without a risk you will try!
    Some things will fail
    Reply | Link to Comment
  •  
    Nov 19 07:22 AM
    what a surprise...unscrupulou... bankers. far from a mormon oxymoroni, the idea that bankers "might not play nice" is neither revelatory nor unexpected. what incentive is there to do right when it hasn't existed in the financial markets to date? paulson's hedging on bailout t's&c's is indicative of the government's duplicity in the whole meltdown, which by the way, has little to do w/ the "credit crisis"....it's the (lack of american) jobs, stupid...
    Reply | Link to Comment
  •  
    Nov 19 07:27 AM
    Agreed... Something happened to the States.. I am an old immigrant, but moved out of the US to the old country... not really looking back... unfortunately the values i fell in love with in the good old USA are not there anymore... Or maybe I have grown older and wiser? anyway, after many years on the street, i am sad sad sad... folks like Ackman, who cover their true intentions with pretentious claims of caring for investors, and lie lie lie, are the real shame... maybe Obama somehow pulls the magic?????
    Reply | Link to Comment
  •  
    Nov 19 07:41 AM
    The root of the problem lies in a "terrible simplification". We are not dealing with a simple system with just a few levers to pull and everything will come right.

    I am a believer that the stock market behaves far more like a complex adaptive system than a simple mechanical system. It has the ability to leran in its parts and as a whole. It cannot be coerced. Market sentiment is an emergent property. And action top-down and from the centre is likely to have unintended and generally unwelcome consequences.

    But how do you manage beasts like this?

    Obama’s management style is the only way – listening, eliciting, working to know people better and to help them develop their own solutions, pulling not pushing, seducing not coercing.
    Reply | Link to Comment
  •  
    Nov 19 08:31 AM
    Well, acting in the best interests of their shareholders is the bank's mission. If this act was not clearly illegal, the banks may have a fudciary responsibility to do this to maximize shareholder value.

    A less glaring example of this would be not passing on interest rate reductions and availability of reserves freed by the Fed loaning against marginal mortgages, when that was specifically the intention of the generosity of the Treasury/Fed.

    Clearly, the banking system is now a less useful instrument of monetary policy, and congress should investigate the possibility of revoking the guarantee of deposits, which is noting more that a big subsidy for the banking industry.
    Reply | Link to Comment
  •  
    Nov 19 08:56 AM
    Any first year Philosophy student can tell you what is going on. It's called "ethical egoism" which simply means is that people will act in their own self interests. If you set up a situation where people, or in this case banks, can game the system in their own self interests, they will.
    Reply | Link to Comment
  •  
    Nov 19 09:02 AM
    i see numerous references to obama as possibly saving the day...don't count on it. unlike ultra-left obmaniacs or republican fear-mongers, i apply a simple test to his proffered economic policies...do they raise taxes or not? if they do, no good will come of them.
    you can't pay for universal health care, rebates to 40% of non-tax paying americans...oh and bail out the financial and automotive sectors, by mere seduction unless the hand that one feels in their pocket is doing more than picking it...
    Reply | Link to Comment
  •  
    Nov 19 09:23 AM
    Sadly we still miss what the issue is and why Americans distrust politicians in general. Obama won because 1/2 of Americans were sick of the bush policies. If politicians would listen to the voters they might understand. We don't mind the bailouts. What we have issues with is leaving the same incompetent managers in place. Bailout the big 3 automakers? It is doomed to fail unless you remove the problem. Yes we need to clean house in America of our "good old boy" CEO's. I have never heard of an employee causing a business to fail. Only the failure of management can cause that.
    Reply | Link to Comment
  •  
    Nov 19 09:24 AM
    Number one rule to banking success is never loan more than the collateral. At lease that is what the successful small town family owned banks subscribe to. You don't see them failing. What makes this rule so hard to follow? The American public as a whole has lost all ability to reason and common sense has gone the way of the dodo bird...lol
    Reply | Link to Comment
  •  
    Nov 19 09:29 AM
    Great article. If this was a truly free market like that pathetic soul George Bush imagines it is, then all of these banks would have failed by now. I don't profess to know where all of this is going to lead, but it aint going to be pretty.
    Reply | Link to Comment
  •  
    Nov 19 09:33 AM
    This is why full nationalization of the banks is needed at this time. It's the only solution.
    Reply | Link to Comment
  •  
    Nov 19 09:37 AM
    Banks manipulating government?!? I am shocked!! Get real, this has been happening for at least 100 years as far as I know, and I'm no historian. Who do you think set up the Fed in the first place?? Of course the banks want to recover their losses, and of course they will use the U.S. government as a tool. Read "Bankers Shake Down Congress and the G-20" for a more original and less contrived take on the issue. www.counterpunch.org/h...
    Reply | Link to Comment
  •  
    Nov 19 09:57 AM
    no; there is no end. the "shareholder"... argument can be made by any company or hedge fund (investors=shareholder... to justify nearly any activity, even a clearly destructive one. there is no longer truth, no longer shame, no longer personal accountability (Sen. Stevens, Dodd, Craig etc; Newt, Frank, White House)

    it's the ultimate fruition of Tom Wolfe's "Me Generation," my own generation, now fully of age. another gen is up at last. pray they do better.
    Reply | Link to Comment
  •  
    Nov 19 10:00 AM
    There is a better rationale for not redoing mortgages now. We are losing workers at a rate of 250,000 per month, a rate of 3,000,000 annually. Foreclosures next year will be greater than this year. Home values will continue to decline for at least another year, 30% or more. Even if you rewrite a loan at today's value, the borrower will again be waaaay underwater next year.

    If we're going to FIX a problem, let's fix it, not just throw a bunch of money away on a temporary bandaid.
    Reply | Link to Comment
  •  
    Nov 19 10:20 AM
    And, while we are at it, we need to clean house in Congress as well.


    On Nov 19 09:23 AM ttown wrote:

    > Sadly we still miss what the issue is and why Americans distrust
    > politicians in general. Obama won because 1/2 of Americans were sick
    > of the bush policies. If politicians would listen to the voters they
    > might understand. We don't mind the bailouts. What we have issues
    > with is leaving the same incompetent managers in place. Bailout the
    > big 3 automakers? It is doomed to fail unless you remove the problem.
    > Yes we need to clean house in America of our "good old boy" CEO's.
    > I have never heard of an employee causing a business to fail. Only
    > the failure of management can cause that.
    Reply | Link to Comment
  •  
    Nov 19 10:46 AM
    The bail out of the three automakers should be conditional on the three most important factors.(1). their employment expenses should be curtailed to a reasonable level of 50% even lesser than the Japanese automakers. (2) These three auto makers should restrict their manufacturing plan to make small cars only thus contributing to national economy by cutting down on oil imports.(3) Their finance should reflect well controlled loans from major banks,.
    Reply | Link to Comment
  •  
    Nov 19 12:17 PM
    GREED and POWER are king. Let only the slaves (John Q. Public) suffer.
    When does government examine the bank executives for their highly questionable dealings and strongly prosecute and fine those found guilty?
    To me, a derivative is no more than a bet (gamble), on a bet, on a bet.
    Where were the bank examiners, the CPA auditing firms, and internal auditors when these type tranactions were taking place. Investing in derivatives means the bank(s) have two much excess cash and feel they can gamble for high risk returns to justify P & L performance on which they can drive up stock prices, ie increase their compensation, bonus, and options profits. The past top executives of Fannie and Freddie should be held responsible for their "dealings". There were many tip offs to the horrendous situation there but ignored by Frank, Dodd, Ried, and Pelosi. The government needs to hold these people responsible much less the outside CPA auditing firm.
    Reply | Link to Comment
  •  
    Nov 19 12:20 PM
    When congress keeps saying that mortgages must be modified, what exactly do they mean?

    The banks don't seem interested in modifiying loans based on the article below, the folks holding the sub prime loans aren't interested since they will be made whole "they hope" through Credit Default Swaps, and the majority of people in trouble can't be helped because they have multiple credit issues weighing them down, and now the 250,000 plus people per month losing their jobs can't be helped because they can't even pay a modified mortgage. The very slight segment that could benefit from loan modification, will not help prevent house prices from falling another 24%, and if that happens,

    GAME OVER!!!!!!
    Reply | Link to Comment
  •  
    Nov 19 03:53 PM
    this result is a natural extension of the law of unintended consequences. If knowledge is the avg IQ multiplied by time, then two smart guys (Paulson & Bernanke) thinking for a month don't come close to thousands of dumb bankers thinking for a day.

    someone famous said it's your duty to pay as little tax as possible. when the govt is handing out free money, isn't it your duty to try and get some.

    these are both reasons for the govt to step back from direct involvement. they can only make matters worse. their indirect involvement of a virtual zero Fed funds rate and turbo-charging the printing presses is going to be hard enough to figure out and fix down the road.
    Reply | Link to Comment
  •  
    Nov 19 04:26 PM
    Lets see, our economy can be run by greedy and corrupt CEOs and hedge fund managers - or - it can be run by stupid and corrupt politicians and bureaucrats - or - by a combination of the two. Don't worry about how the country is run - that's hopeless. Instead, worry about how your own personal economy is run - it's your only hope!
    Reply | Link to Comment
  •  
    Nov 19 05:40 PM



    On Nov 19 04:26 PM henarl wrote:

    > Lets see, our economy can be run by greedy and corrupt CEOs and
    > hedge fund managers - or - it can be run by stupid and corrupt politicians
    > and bureaucrats - or - by a combination of the two. Don't worry
    > about how the country is run - that's hopeless. Instead, worry about
    > how your own personal economy is run - it's your only hope!

    Interestingly, Susan Hockfield, the President of MIT, sent a letter to all its alumni about the current financial environment and the effect on the Institute. There are many interesting things about this email.

    First, how seriously the Institute takes the present recession:

    "The global economic contraction will likely compromise all of the Institute's major revenue streams."

    Next, the recognition of the impossibility of forecasting:

    "The continuing uncertainty about the length and depth of the economic downturn makes accurate predictions impossible."

    Then, while not mandating budget cuts, the importance placed on immediate reductions:

    "Achieving significant savings this year can help prevent more painful future choices; early savings will compound, so that a dollar saved today gives greater long-term budget relief than one saved a year from now."

    Above all, the emphasis on working together to develop a long-term approach:

    "We will set in place a broad, deliberate, inclusive process, in which all branches of the Institute will work together in the coming year to reassess our priorities and the use of our resources."

    But why send this to all the alumni, unless of course it carries the broader message... and these thoughts could be appropriate to "your own personal economy", too
    Reply | Link to Comment
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