Kevin Drum

Mortgage Rescue Wonkery

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| Sun Nov. 16, 2008 11:29 AM PST

MORTGAGE RESCUE WONKERY....One of the problems surrounding any plan to rescue homeowners with troubled mortgages is that most mortgages are bundled up into securities that have multiple noteholders and are governed by reams of carefully written contractual requirements. So even if the mortgage servicer wants to rewrite mortgages to prevent defaults, they probably can't. The terms of the contract don't allow it, and getting the agreement of every single noteholder is nearly impossible.

So what's the solution? The federal government doesn't have the authority to unilaterally abrogate private contracts, but via Matt Yglesias, CAPAF's Michael Barr explains a way to get in via the back door:

Servicers managing pools of loans for investors are generally barred by contract from selling the underlying mortgage loans, but the trust agreements also provide that servicers must amend the agreements if doing so would be helpful or necessary to stay in compliance with tax rules under the Real Estate Mortgage Investment Conduit, or REMIC, statute, which provide important benefits for these securitization trusts and their investors. We propose to modify the REMIC rules to ensure that servicers have the authority and incentive to sell the mortgages to Treasury.

Legislation would provide that REMIC benefits would be denied going forward if the securitization's contract provisions have the effect of barring servicers from selling or restructuring loans under Treasury's programs. Servicers would have a legal obligation to their investors to modify the agreements to stay in compliance. Servicers could then sell loans to Treasury for restructuring. Participation in the Treasury program would remain voluntary, but the key legal impediments to participation would be removed.

There's more to it, including some indemnification and accounting details, but this appears to be the main change that would allow a broad-based mortgage rescue plan to go forward. Comment is invited from anyone with the background to offer an informed opinion on whether Barr's plan would work.

And as long as we're on the subject, here's an interesting tidbit from Barr's testimony:

Under the Housing and Economic Recovery Act of 2008, an estimated 400,000 at-risk mortgages could be restructured on affordable terms with credit enhancement from the Federal Housing Administration under the "Hope for Homeowners" program....This "Hope for Homeowners" program began insuring loans in the fall of 2008, but as of mid-October had only processed 42 loans.

We sure seem to move faster when it comes to bailing out Wall Street and the auto companies than we do when it comes to helping out distressed homeowners, don't we?

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Talk Radio

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| Sun Nov. 16, 2008 10:48 AM PST

TALK RADIO....Via Digby, here is Dan Shelley, former news director and assistant program director at Milwaukee's WTMJ, telling us about his career working with his station's right-wing talkers:

To succeed, a talk show host must perpetuate the notion that his or her listeners are victims, and the host is the vehicle by which they can become empowered. The host frames virtually every issue in us-versus-them terms. There has to be a bad guy against whom the host will emphatically defend those loyal listeners.

This enemy can be a politician — either a Democratic officeholder or, in rare cases where no Democrat is convenient to blame, it can be a "RINO" (a "Republican In Name Only," who is deemed not conservative enough). It can be the cold, cruel government bureaucracy.

....Conservative talk show hosts would receive daily talking points e-mails from the Bush White House, the Republican National Committee and, during election years, GOP campaign operations. They're not called talking points, but that's what they are. I know, because I received them, too. During my time at WTMJ, Charlie [Sykes] would generally mine the e-mails, then couch the daily message in his own words. Midday talker Jeff Wagner would be more likely to rely on them verbatim.

On the groupthink/talking points front, Digby suggests that "there are some disconcerting parallels between the right wing talk radio hosts and bloggers." Do you agree?

UPDATE: Edited slightly based on feedback from Digby in comments.

Iraq SOFA Update

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| Sun Nov. 16, 2008 9:38 AM PST

IRAQ SOFA UPDATE....This took longer than I expected, but the Iraqi cabinet has voted almost unanimously to approve the latest draft of a security agreement that governs the continued presence of U.S. troops:

All but one of the 28 cabinet ministers who attended the two-and-a-half-hour session voted for the agreement and sent it to Parliament for consideration

....The draft approved Sunday requires coalition forces to withdraw from Iraqi cities and towns by the summer of 2009 and from the country by the end of 2011. An earlier version had language giving some flexibility to that deadline, with both sides discussing timetables and timelines for withdrawal, but the Iraqis managed to have the deadline set in stone, a significant negotiating victory. The United States has around 150,000 troops in Iraq.

....In a crucial development, Grand Ayatollah Ali al-Sistani, the most influential Shiite cleric in Iraq, indicated on Saturday that he would support whatever decision is arrived at in Parliament as representative of the will of the Iraqi people. Shiite officials who met with the ayatollah said eh found the latest draft acceptable, if not perfect.

Approval by parliament is likely to follow fairly quickly. This is good for the Iraqis, who really do need the U.S. presence for a little while longer; good for George Bush, who's getting a slightly longer timetable than Barack Obama would have negotiated; and good for Obama, since this essentially makes his decision to withdraw into a bipartisan agreement. After all, conservatives can hardly complain about Obama following a timetable that was negotiated and approved by Bush. Obama has enough on his plate already, and taking this issue off the table ought to be a considerable relief to him.

The South

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| Sat Nov. 15, 2008 10:11 PM PST

THE SOUTH....For many years, the Democratic Party controlled the agenda of American politics and Southerners controlled much of the Democratic Party. So the South had enormous political influence.

Later, most Southerners switched to the Republican Party, but by then it was Republicans who controlled the agenda of American politics. So the South still had enormous political influence.

As of January 20th, however, the Democratic Party will control the American political agenda once again. But Southerners are still Republicans, which means that their political influence will be nearly nonexistent.

In other words, for the first time since Reconstruction, the South will be almost completely shut out of national power. There are still a few liberal Southerners who belong to the Democratic Party, of course, but the reactionary, traditionalist South is, for the time being, nearly powerless. They will not control anything, their caucus is a discredited rump, and their influence will be negligible. There is no reason to fear them or to care what they think. Their power to filibuster, itself guttering and only barely alive following the 2008 election, will be all they have left.

This is the first time this will be true in well over a century. So say it again: The South will have essentially no influence over the course of American politics for the next eight years. We live in momentous times.

The Housing Bust

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| Sat Nov. 15, 2008 10:32 AM PST

THE HOUSING BUST....Matt Ygelsias says it's not really the housing bubble that's responsible for our economic woes:

Even though the deflation of a housing bubble would lead to economic problems, it's just not the case that "the economic crisis" (as folks have taken to calling it) was primarily caused by the rise and now fall of an asset bubble in the housing sector. Such bubbles and their collapse are problematic, but also somewhat banal. We had one just a few years back when the dot-com stock bubble collapsed. That provoked a recession and the loss of a lot of paper wealth in the stock market, but there was no crisis. There was no crisis because the big movers and shakers of the finance world didn't build a giant house of cards built on the assumption that tech stocks would continue to rise in value indefinitely. Some people made bad bets along those lines, of course, but nothing close to the scale of what we've seen recently.

And the essence of the crisis is right there. Not in the deflation of the bubble as such, but in what was done on top of the bubble with leverage and so forth so as to create a situation so precarious that credit markets were on the verge of total collapse a little while back.

Superficially, this seems plausible. In the U.S., the dotcom bust destroyed about $7 trillion in wealth, while the housing bust has destroyed (so far) about $5 trillion in wealth. So it seems like the difference in effect must be due to all the derivative speculation piled on top of the housing bubble.

There's a lot to that, but it's not the whole story. The housing bust really is different for several reasons:

  • Dotcom wealth was mostly held by individuals and funds. Mortgage debt is mostly held by banks, and when it disappears it causes massive capital losses in the banking system. Those losses (again, so far) appear to be about half a trillion dollars or so, but half a trillion dollars in lost bank capital reduces lending capacity by $5-10 trillion or so. The lost capital causes bank failures and a loss of trust in the system, while the reduced lending capacity causes a huge credit crunch, something that just didn't happen during the dotcom bust.

  • Dotcom wealth was fairly transitory. Most of it was built up over the space of 18 months or so and was lost just as quickly. What's more, a lot of it was in the hands of rich people and venture funds, so its loss hit a relatively narrow segment of the population and thus had a substantial but not catastrophic effect on spending.

    Conversely, housing wealth is spread very widely among ordinary consumers, many of whom were using their homes as ATM machines. When that got cut off, it hit consumer spending hard. Additionally, housing wealth for most people is psychologically far more permanent and far more important than a brief spell of prosperity caused by a stock market bubble. So even beyond the direct shutdown of the HELOC ATM, the wealth effect from the housing bust has been more damaging to consumer spending than the dotcom bust.

  • Unlike the dotcom crash, which was fairly self-contained, the housing crash has precipitated a stock market crash all its own. I'm cheating a little bit here since part of this is a result of all the side bets and financial manipulation, but at least part of it is purely a result of the housing bust. So add on another $4-5 trillion in wealth effect problems directly attributable to the housing bust.

  • The dotcom crash came at the end of a period of broadly rising wages. The housing crash came at the end of a period of broadly stagnant wages. So even if the housing crash had been just a housing crash, it still would have affected the U.S. economy more severely than the dotcom bust.

  • The dotcom bust was ameliorated by the rise of the housing bubble. This time, there's no other bubble in sight. It's just a pure crash.

That said, there's no question that all the side bets and opaque financial instruments that swirled around the housing bubble made it far worse than it would have been all by itself. But even without all that stuff, it still would have been different. Not only did it affect consumers much more directly, but within the banking system housing and mortgages simply have a far bigger and more important role than equities,

Further comments and corrections are welcome since my usual caveat applies here: I'm still trying to figure all this stuff out, and I haven't managed to do it yet. What else am I missing?

Sweat Shops

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| Fri Nov. 14, 2008 7:40 PM PST

SWEAT SHOPS....For some reason the blogosphere is alive today with talk of teachers unions and tenure. I don't really have much of a dog in this fight, but here's an email a teacher sent to Andrew Sullivan:

I cannot stress enough that the success of our school is in large rooted in the fact that there is no teachers' union presence here.

Teachers at my public charter school, including myself, routinely put in 12 hour days. We spend the time perfecting lessons, tutoring students, grading work, and working with families. We do it because we are dedicated to our jobs and want to close the achievement gap.

I hear this kind of thing a lot, but look: this isn't a weakness of unions, it's what they're for. Whatever faults teachers unions may have — protecting incompetents, fighting accountability, and resisting merit pay among them — insisting on an 8-hour day isn't one of them. What's more, punishing hours aren't a broad-based answer to our educational problems anyway. There are some teachers, at certain stages of their careers, who may be willing to put in 12-hour days in service of the greater good, but there aren't 3 million of them. And there's no reason there should be. This isn't charity work, after all. It's a job. Maybe there are other union demands that are objectionable in one way or another, but demanding a 40-hour work week for a position that pays roughly a median salary is hardly some kind of thuggish big labor cramdown.

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Striped Pants-Suit Update

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| Fri Nov. 14, 2008 5:04 PM PST

STRIPED PANTS-SUIT UPDATE....Martha Raddatz of ABC News reports that Barack Obama really does want Hillary Clinton to be his Secretary of State:

A source with knowledge of the transition process describes the meeting as not a hard offer. Obama is more cautious than that....He said that he knew how much she cared about health care but said there are other challenges, and wanted to reach out to her about secretary of state.

....Obama does not want to be seen as being rejected by her, but it is "hers to turn down," one source put it.

If this is really true, I'm astonished. Since when do sitting senators give up their seats to become Secretary of State? Muskie did it at the tail end of his career, but I can't think of anyone else. It's crazy. Hillary can basically be senator for life if she wants, and we're supposed to believe that she'd give that up for a cabinet post that probably won't last more than four or five years?

And why would Obama feel like this was a great idea? I don't believe for a second this business about him being afraid that Hillary will sabotage his legislative agenda. She wouldn't. And anyway, presidents have to deal with powerful interest groups all the time, including senators with agendas of their own. The Obama-Hillary relationship wouldn't be anything new or unusual.

As for Hillary allegedly seeing this as a steppingstone toward another run in 2016, I can only say: huh? I mean, who was the last person to use Foggy Bottom as a springboard to the presidency? Thomas Jefferson? John Quincy Adams? Give me a break. No Secretary of State for over a century has used it as a way to move up the political ladder.

Plus you'd have Bill and all his globetrotting to contend with too. The whole thing is crazy. I guess that doesn't mean it's impossible, but I'll eat my hat¹ if it turns out to be true.

¹Note to the literal: I don't own a hat. However, if I turn out to be wrong, I'll eat a chocolate cake shaped like a hat. If you provide the cake.

Friday Cat Blogging - 14 November 2008

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| Fri Nov. 14, 2008 1:19 PM PST

FRIDAY CATBLOGGING....A couple of weeks ago I mentioned that my mother had procured a new kitten from a local shelter. She named her Lily, and keeps her inside the house. A couple of days ago, though, she looked outside and Lily was under the car in the driveway. But how did she get there? Cat teleportation?

No. My mother opened the door and the cat under the car zipped into the house, ran into her arms, and started purring. But it wasn't Lily at all. It was a clone.

Then, a couple of hours later, there was some meowing at the front door. So my mother opened the door and discovered an orange kitten, who zipped inside and started purring.

Perhaps you can guess the rest of this story? There's no telling where they came from, but these two are obviously littermates, obviously friendly and accustomed to living with people, and took over my mother's house within minutes. Right now they show no signs of going away, so Mom has bowed to the inevitable. The black-and-white one is named Ditto, and the orange one is named Tillamook. On Thursday night all four of her cats slept in the bed with her. "I woke up kind of sleepy," she told me. Today, the new kittens are tearing around the house, knocking things over, and fighting my mother for every scrap of food she tries to eat. Things are getting lively in Garden Grove these days.

More is More

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| Fri Nov. 14, 2008 1:05 PM PST

MORE IS MORE....Apparently John McCain was right about something after all: We really should adopt lower corporate tax rates just like Ireland. But there's a bit more to the story. Matt has the details here.

Bailing Out GM

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| Fri Nov. 14, 2008 12:29 PM PST

BAILING OUT GM....The basic argument against bailing out GM (and Ford and Chrysler) is fairly simple: They're dinosaurs who can't compete, don't make good cars, have a terrible corporate culture, and will never get better. If we're willing to bail out companies like these, where will the bailouts stop?

The basic argument in favor is also fairly simple: Even if all that stuff is true, and even if in normal times we'd let them die, right now we're on the edge of a truly catastrophic recession. Killing them off, along with the 2-3 million jobs they support, could be just the catalyst that turns a catastrophic recession into a full-blown depression. We'd be cutting off our economic noses to spite our free market faces.

But would Chapter 11 reorganization really be all that terrible? Maybe not. Maybe the companies would shed a few jobs, but in the end come back leaner and stronger. That's an argument that strikes me as persuasive, but what if it turns out that Chapter 11 isn't an option? Jon Cohn explains:

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation.

If this is true, it probably tips the scale in favor of a bailout — especially given the cost, quality, and labor reforms that all three automakers have already put in place over the past few years. Maybe. For now, I'm just passing this along, but I'll keep my eye out for anyone else either confirming or debunking the Chapter 7 scenario.

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