Compromise
Fascinating development as the United States Senate reaches a compromise with the second house of the legislature known as Citigroup:
Democratic lawmakers have reached a deal with Citigroup Inc. on a plan to let bankruptcy judges alter home loans in an effort to prevent foreclosures and urged other lenders to follow suit.
The lawmakers aim to attach the plan to President-elect Barack Obama’s economic stimulus legislation, and said Thursday the change in bankruptcy law could ease the foreclosure crisis that has dragged the economy into the worst recession in decades.
The compromise between Citigroup and Sens. Richard Durbin of Illinois, Charles Schumer and Christopher Dodd of Connecticut, would be limited to loans made before the bill is signed. Obama has said he backs the concept.
In a related news, they’re doing a recall on civics textbooks that have led generations of schoolchildren to believe that congress just gets to decide what the laws are without “negotiating” with major corporations. And, yes, the congress did give billions of taxpayer dollars to Citigroup just a few weeks ago.
57 Responses to “Compromise”
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January 8th, 2009 at 9:49 pm
So let me get this straight. We, the taxpayers, loan 5-10B to GM, and as a condition, the UAW cannot strike so long as those loans are outstanding.
Meanwhile, we loan Citi, at least $247.B, and we have to get their permission to pass legislation allowing bankruptcy courts to alter mortgage terms. WTF
January 8th, 2009 at 9:51 pm
I watched their press conference on CNBC this afternoon and it was the most absurd thing I have ever seen. At first, i thought they had convinced Citi to go into some voluntary effort to allow this on loans they own. Then I realized that they were talking about a bill! Why should Citi even have a freakin’ say? Especially considering that we just gave them a huge bailout and what I got in return was a notice in the mail that the interest rate on my credit card is going up and if i don’t like it i can cancel the account – which of course i did. But what I wanted to do is tell them to go fuck themselves and walk away from my debt. If this continues much further, that’s exactly what I’m going to do…
January 8th, 2009 at 10:03 pm
LOL banana republic
January 8th, 2009 at 10:05 pm
Allowing bankruptcy judges to modify mortgages will lead to higher mortgage rates for everyone in the future*, because lenders will have to charge a premium to compensate them for the risk of having a bankruptcy judge change the terms of the loans on them.
*Unless, of course, the federal government subsidizes this risk away.
January 8th, 2009 at 10:08 pm
Finally they cut the middle men, the lobbyists. But when will megacorporations CEOs be finally allowed to speak from the Senate floor, and use filibusters if necessary?
January 8th, 2009 at 10:12 pm
I guess it helps to have a former Clinton cabinet member and current Obama economic adviser on Citigroup’s board of directors. Maybe that turd is earning his salary after all.
January 8th, 2009 at 10:18 pm
Chuck Schumer, who is my Senator, is a pretty good senator on any matter that does NOT involve the financial industry, especially the giants of the field. if you’ve heard him talk about his role in the Senate on these matters, you realize he actually defines his role as being in the tank for this industry. its the New York equivalent of GM and Chrysler for Detroit. Its the lifeblood of the state’s economy….
yes. that’s why it is NUTS to allow him a major role on these matters, just as Michigan’s auto-industry-representatives and Senator wonderboys supervised and legislated that industry’s collapse and the near collapse of our air quality and climate at the same time– a true Lose-Lose (or lose-lose-lose) magic trick.
he advocated and largely engineered the end of Glass-Segal and other financial regulations, and has ever since the collapse caused by his actions (more than George Bush’s by a long, long shot), he has consistently acted ONLY to protect those wondrously self-admiring, irresponsible (and as it turns out, moronic) masters of the universe.
really, WHAT is Dodd doing in the same room as this man? or worse, this man and Citibank!?!?
Citi may ultimately escape criminal charges, but if they do it won’t be because they deserve to be free. certainly, they do not deserve Schumer and Dodd creating them the fourth branch of govt.
yeesh.
January 8th, 2009 at 10:19 pm
When I say turd, I mean it as in useless person, not as in excrement, which is also useless, except when it flows from Steve Sailer’s ass to my hungry mouth.
January 8th, 2009 at 10:26 pm
really, WHAT is Dodd doing in the same room as this man? or worse, this man and Citibank!?!?
Isn’t Dodd from Connecticut? I.e the Mecca, the El Dorado for hedge fund managers. Dodd is as much in the tank as Schumer.
This goes back to what Matt was saying about military industrial heavy district Congressmen monopolizing membership in the Arms Committee, only adapted to the financial industry.
January 8th, 2009 at 10:27 pm
Dave: doesn’t seem likely, since the bill is explicitly limited to loans that have already been made. Sure, you could say that the risk of another economic implosion down the road necessitating another bill to rescue vast swathes of mortgage holders will be priced in, but I would think that the risk being priced in for that hypothetical case would be that of the big implosion, not the potential reactions to it.
All: the only reason this might be even Kind of okay ( negotiating with citi) is that their agreement means they won’t use every resource at their disposal to fight it like jackals. Might.
January 8th, 2009 at 10:37 pm
You guys actually missed the point…
Yo Matt, the whole thing was a cover for what actually does need a law–they want to replace loan forgiveness as a penalty for predatory loan practices and other unsavory behavior with fines.
Remember that Washington Mutual story about how much they didn’t care about ability to pay? Also, read, or reread, the Michael Lewis article in Forbes that described the motivations to create housing debt.
There are a *ton* of loans out there that will not survive scrutiny. Which makes this attempt to attach the provision an *extremely* high priority action.
January 8th, 2009 at 10:41 pm
Well the headline is silly. The concept has some good points. There is a problem however.
While mortgage backed securities had prospectuses dozens of pages long in fine print there is actually no settled law on who actually holds title to a mortgage that has been securitized. Just because some lawyer said title was held in this tranch or that doesn’t make it so. There also is no law or even process to determine who takes the haircut if a judge alters a mortgage. Well the whole concept of a judge altering a contract from the bench is absurd.
Well maybe not so much if you accept the fact we are no longer a nation of laws.
While C’s inclusion in the legislative process is interesting it’s how things are done now. It isn’t illegal, just unseemly. The bigger issue is that securitizations were not actually legal at all. Having judges rejigger flawed contracts only doubles the absurdity.
We are doomed.
January 8th, 2009 at 10:57 pm
In case you didn’t know. C is bankrupt. Rubin should probably be in jail. He and all the board are should be prosecuted as criminally liable for the bankruptcy. Of course we know they have gotten XX billions in direct and indirect cash from the Treasury and have swapped XX billions of distressed debt for US Treasury Securities with the Fed. The Fed almost certainly doing this illegally as huge swaths of said securities tendered do not pass muster as to the quality the Fed stipulated at the programs outset.
But then again, why should law have anything to do with it?
January 8th, 2009 at 11:01 pm
Just a few observations: Schumer, Dodd, and Durbin are “senior” Democrats in the sense of at the top of a patronage-chain more intelligent and less corrupt Democratic Senators. Some other Senators are actually older.
Their pimping for large donors to the DSCC is their entire claim to “leadership”. This is not to criticize them.
The “junior” Democratic Senators are professional office-seekers who support trickle-down patronage, economics, … whatever, and know virtually nothing about anything but (a) negotiating deals with the GOP and (b) running for office.
They always wanted “to be” Senators, but they have not clue what “do do”. They are risk-averse (cowardly) and ignorant (stupid). Semi-genius Newt Gingrich will roll them up in 2010.
::JRBehrman
January 8th, 2009 at 11:10 pm
Okay…
1) My thought that this was about preventing loan forgiveness might be incorrect. The whole thing is pretty hard to tell what is actually going on.
2) One part of what is going on, it *seems* like this is a partial repeal of the 2005 bankruptcy bill wrt Chapter 13 bankruptcies. The 2005 bill took away the power for judges to do cramdowns, or so I’m reading. The banks still like this provision, and they want to preserve the law for the future, hence only *past* loans will get the benefit of this proposed amendment.
3) Cramdowns *only* affect the interest rates, and not principal. That makes any benefit to the mortgaged people rather minimal.
January 8th, 2009 at 11:16 pm
The GOPocratic power duopoly is election proof.
January 8th, 2009 at 11:23 pm
And I, for one, *welcome* our new financially responsible overlords!
(/Kent Brockman voice)
On the other hand, this may not be all that different from Bill Clinton’s reported first-term outburst, “You mean my reelection hinges on a bunch of fucking bond traders?!?”
And on the famous economist’s *third* hand, I seem to remember a principle of poker: if you can’t spot the sucker at the table after half an hour, it’s you.
January 8th, 2009 at 11:40 pm
This is the new paradigm. Up is down, down is up. As opposed to the Bush GOP world, where down was up and up was down. Maybe it takes insanity to correct insanity, or something. In other news, civics class is canceled, whilst Socialism becomes the new course du jour.
January 8th, 2009 at 11:44 pm
I suspect Citigroup is supporting the mortgage bankruptcy reform measure in the stimulus package as a trade-off for the big tax break it is getting in the proposed stimulus package. The tax break serves no stimulus purpose, but would enable Citigroup to offset 2008 losses against all income it earned over the last five years and recover tax payments on income going back for five years. It’s not even trickle down.
January 8th, 2009 at 11:47 pm
Look at the bright side. At least the Democrats are negotiating with their corporate sponsors rather than having the corporations simply write the laws. Big improvement over the last 8 years.
January 8th, 2009 at 11:48 pm
And, yes, the congress did give billions of taxpayer dollars to Citigroup just a few weeks ago.
It’s like Robert Rubin got elected president or something.
The upside is, is that this is what we would’ve been stuck with with Hillary… but Obama may come to his senses eventually.
max
['Or not.']
January 9th, 2009 at 12:07 am
I don’t know why they didn’t just buy common stock with voting rights in the first place.
When the first story came out about the AIG junket, Congress should have subpoenaed the AIG execs and recreated the naked pyramid from Abu Ghraib right there on CSPAN. “That’s right, we bought you! We own your ass! You’re our bitch! Now crawl on your hands and knees and tell us what a nasty, nasty little boy you’ve been!”
I think every time one of these filthy motherfuckers goes to bed with his head still attached to his body, he should thank God for another undeserved day above the ground.
January 9th, 2009 at 12:16 am
I’ll just point it out once again: Your non-Marxist conception of political economy shows its limitations.
January 9th, 2009 at 12:32 am
Kevin Carson says:
Congress should have subpoenaed the AIG execs and recreated the naked pyramid from Abu Ghraib right there on CSPAN.
Now, that’s what I call “Must See” TV.
January 9th, 2009 at 12:56 am
Regarding the AIG retreat, those are used to 1) provide incentives to independent insurance agents to sell AIG’s policies; 2) educate those agents about new products; 3) give those agents continuing ed credits they need for their licenses. This is pretty common in the insurance industry (and other industries). We, as tax payers/de facto 80% owners of AIG, can act outraged by this, and encourage those agents to sell some other company’s policies, or we can do what’s in our/AIG’s best interests and encourage them to sell AIG policies. Those insurance agents selling policies are what pays the bills for AIG.
January 9th, 2009 at 1:12 am
DaveinHackensack, you corporate shill, no one’s saying AIG doesn’t need to provide continuing education opportunities for its agents, we just don’t think they should be having them on the taxpayer dime at swanky resorts.
January 9th, 2009 at 1:17 am
You need to capitalize Congress. Yep, I sweat the small stuff.
January 9th, 2009 at 1:49 am
You need to capitalize Congress. Yep, I sweat the small stuff.
That’s an Yglesian typo, because I’m sure you meant “decapitate”.
January 9th, 2009 at 2:09 am
Matt, what fucking planet are you living on?
Congress has been owned and operated by corporations for, what, the last hundred, hundred twenty five, years, if not longer?
You really, really have no idea how the world works, do you?
January 9th, 2009 at 3:57 am
Civics textbooks that don’t go into the fact that a huge proportion of American legislation is, and has been for a century or more, the product of discussions between corporations and politicians need to be recalled and pulped. They are missing a fundamental understanding of day-to-day governance.
January 9th, 2009 at 4:02 am
Of course Democrats negotiated with Citigroup. What, did you think they’d be eager to use unilateral force to subdue Citgroup?
You don’t get to behave in a hyperaggressive manner domestically and then cave to foreign tinpot dictators. You either vote for people who prefer negotiation to the use of force, or you don’t. These are the Democrats you voted for, reflexive negotiators. Learn to love it. Supposedly, according to Matt Yglesias himself, it yields far better results than just resorting to force.
January 9th, 2009 at 5:20 am
Playing around with mortgage agreements is like playing with fire; you tamper too much with it, and you will get burned.
January 9th, 2009 at 5:20 am
Note; you can do whatever you want with the GM balance sheets without having much of a impact on the credit markets.
However, if you just let judges impose whatever lunatic terms the poor sods who can’t pay mortgage want to have, you will seriously erode banks’ balance sheets and essentially nullify all that assistance the banks earlier got. There is a payment schedule for a reason; if the banks don’t get the cash on the date it is expecting to get the cash, and this happens on a national basis, then it’s going to face a serious cashflow problem. You can fiddle around with the mortgage terms however you like; change a 20-year $2000-a-month plan to a 35-year $1200 plan, and the bank is looking at a $800 cash shortfall every end-of-month, and if this happens on a national scale, that bank will become insolvent.
January 9th, 2009 at 5:37 am
Basic economics literacy will tell you that to alter principal at will is to threaten the very basis of contracts (and thus the constitutional provision for privacy)
January 9th, 2009 at 5:38 am
And it is hardly like UAW didn’t have a voice during the bailout talks. Actually, the reason the talks broke was was because of the disagreements between Senate Republicans and UAW. You can’t exactly say, “UAW here you can have a voice in our legislation” and then tell non-union folks to all bugger off.
January 9th, 2009 at 6:38 am
Re: Allowing bankruptcy judges to modify mortgages will lead to higher mortgage rates for everyone in the future*, because lenders will have to charge a premium to compensate them for the risk of having a bankruptcy judge change the terms of the loans on them.
That risk is already contained within the risk that the mortgage will default and the lender will be unable to sell the foreclosed property for the amount owed on the loan. I nfact, if you read netween the lines on this, that is precisely why Citi is willing to “compromise” on this: they are losing more money on foreclosure sales (which today bring in only a fraction of what is owed on the mortgage) than they would lose on bankruptcy cram-downs.
Re: The 2005 bill took away the power for judges to do cramdowns, or so I’m reading.
No, residential mortgages could not be altered under the old bankruptcy laws either.
Re: Cramdowns *only* affect the interest rates, and not principal.
No, it’s the other way around: this bill allows bankruptcy courts to reduce the principal owed.
Re: However, if you just let judges impose whatever lunatic terms the poor sods who can’t pay mortgage want to have, you will seriously erode banks’ balance sheets and essentially nullify all that assistance the banks earlier got.
As opposed to having the borrowers default outright? Um, isn’t it better for the banks to get, say, 80% of what thet were originally expecting than for them to get $0?
Re: Basic economics literacy will tell you that to alter principal at will is to threaten the very basis of contracts (and thus the constitutional provision for privacy)
Bankruptcy in general does exactly that– and this is a right recognized by the Constitution itself which grants Congress the power to enact bankruptcy legislation. You really ought read the Cosnitution before claiming something violates it. And why should residential mortgages be any more “sacred” than credit card debt– or commercial mortgages which have always allowed for cram-downs?
January 9th, 2009 at 7:29 am
And we get the standard pathetic right squad using any excuse to accuse Democrats of being surrendercrats to terrorists and libertarian children whining about how the union took their lollipop this one time.
January 9th, 2009 at 8:18 am
Basic economics literacy will tell you that to alter principal at will is to threaten the very basis of contracts (and thus the constitutional provision for privacy)
Part of the point of bankruptcy law is to allow judges to void various contracts to allow, for example, a company to reorganize and creditors to get back a portion of what they are owed.
January 9th, 2009 at 8:59 am
I think the point of the negotiation is that if Citigroup didn’t want to do it, a change in the law wouldn’t accomplish anything in practice: bankruptcy judges wouldn’t alter mortgages against the desire of the lender. So it looks bad, and structurally it is bad, but I think this is a law that’s meaningless unless the banks accept it so there has to be something like a negotiation.
January 9th, 2009 at 9:02 am
Congress has been owned and operated by corporations for, what, the last hundred, hundred twenty five, years, if not longer?
So true. We have large ag corporations writing food legislation, oil corporations writing energy legislation, etc. While it’s especially disgusting for a company made solvent through government intervention to negotiate legislation, it’s mundane Congressional policy.
January 9th, 2009 at 9:06 am
Well the whole concept of a judge altering a contract from the bench is absurd.
Well maybe not so much if you accept the fact we are no longer a nation of laws.
Chill out. First, the idea of judges altering arrangements from the bench is far from absurd. In the olden days, it was called a Court of Equity. Judge-made determinations about what is fair.
Second, there are well-established areas of contract law where equity creeps in to right wrongs. We call it the doctrine of unconscionability. Indeed, judges could easily say that that mortgages companies are estopped from imposing higher rates based on the verbal representations made by agents who sold the loan to the end-user.
This is far from the “end of the rule of law”. That happened back in the 17th century.
January 9th, 2009 at 9:15 am
this just goes to show that the rot is much, much deeper than anyone is letting on. every scintilla of US economic “growth” of the past decade or so has been a lie. we have created practically no real new value or wealth in that time, assets just went up in ‘value’ as a result of the proper shuffling around of numbers on paper, and the chanting of strange incantations whilst doing so. there is no end to the amount of money that Citigroup, let alone the others, all need because truth is, they barely have any. any at all.
January 9th, 2009 at 9:20 am
if your civic text books were telling you that congress had the power to alter the conditions of contracts willy nilly then it begins to explain what an utter ignoramus you are.
January 9th, 2009 at 11:07 am
JonF, I don’t think you’re right as to what the bill actually does, but everything I’ve managed to find that has details were second-hand. Do you have first-hand details?
January 9th, 2009 at 11:38 am
Not if activist hacks choose to just apply the law to people who shouldn’t be benefitting from it.
January 9th, 2009 at 11:46 am
My understanding is that the market and regulatory conditions which regulate the personal mortgage market are rather different from the commercial once; it is, as far as I can discern, not an apples-to-apples comparison.
By the way, even though you pointed out that bankruptcy law does allow companies to re-negotiate contracts, I am still concerned about the long-term impact of this bill, given that a house is, essentially, secured senior debt. I don’t remember secured debt being negotiable in bankruptcy courts; unsecured debentures, yes.
January 9th, 2009 at 11:56 am
Hold on; my bad. I was a bit off there.
But still, just letting judges void contracts from the bench, when the two sides are not equals as would be the case in a corporate case, allows for too much leeway to benefit the individual at the expense of the lender. It just leaves a bad taste in my mouth.
There is also the risk of serious moral hazard from this.
January 9th, 2009 at 12:11 pm
“DaveinHackensack, you corporate shill, no one’s saying AIG doesn’t need to provide continuing education opportunities for its agents, we just don’t think they should be having them on the taxpayer dime at swanky resorts.”
Do you want to have a chance at making money on your AIG investment or not? If you do, then reward the agents who sell AIG’s policies. Otherwise, they’ll sell another company’s policies. It’s that simple.
“That risk is already contained within the risk that the mortgage will default and the lender will be unable to sell the foreclosed property for the amount owed on the loan.”
That’s a different risk, and one that can be ameliorated by requiring higher down payments, getting more accurate appraisals, etc.
January 9th, 2009 at 2:07 pm
Myles, generally the lender has the advantage in any of these cases, unless the borrower is a corporate megaborrower (you know the saying, “If you owe a million dollars and can’t pay, you have a problem; if you owe a billion dollars and can’t pay, the bank has a problem.”)
The bankruptcy court both provides protection for the borrower which would otherwise give a natural advantage to the lender, as well as making it easier and faster for a lender to get back a portion of his money. This is particularly relevant in cases where a large number of mortgages were simply mispriced, being based on simply incorrect values of the home and the “soft landing” of bankruptcy courts makes sense.
As for the bad taste it leaves in your mouth, go have yourself a good cry about it. No one’s interested in living in libertopia.
January 9th, 2009 at 8:32 pm
Thanks Tyro,
amazing how entirely misinformed people are about bankruptcy, contract law, the role of judges, and the power of Congress. and how confident they are that the law, or even the Constituion itself, must think the way they do.
the whole entire point of bankruptcy is to explode existing -quite legal and proper–business relationships and valuations, and to provide for a judge–presumably an independent, third party –to make the best deal for all parties out of what would otherwise be chaos, quite possibly damaging all parties severely with no real value left. There is a type of bankruptcy–chaper 7 is a famous example–that accepts destruction of the borrower’s stake as a basic premise, and which also assumes that the creditors will have to take whatever an auction nets, like it or not. the more gentle chapters 11 and (for individuals with an income) Chapter 13, expressly mean to preserve as much value for all parties as can be had, but almost always by stretching out greatly the terms of repayment.
all forms of bankruptcy, in other words, smash some of the most fundamental precepts of the original deal–
even including whether some debts will be paid at all. That’s indeed what the legal device of bankruptcy was created to do.
i notice that in this dispute, as is pretty common in political and financial arguments, people automatically assume that whatever they think is best MUST be what the Constitution says. That document, like its lonely partner the Bible, seems to be used as an authority most often by people who only have passing acquaintance with it.
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