Bernanke to Banks: Take the Hit
Will "Helicopter Ben" become "Bailout Ben"? My initial read of the FOMC Chair's speech today suggest he will not. But he has asked fro some rather extraordinary actions from banks and other lenders.
What the Chairman proposes are efforts to 1) help distressed borrowers refinance; 2) loss-mitigation arrangement between the lender and the distressed borrower; and 3) the possibility of writing down principle.
That last one really caught my eye. Here's the money quote:
"In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances.
For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool." (emphasis added)
That's pretty astonishing talk from a sitting Fed Chair.
To reiterate, the Chairman of the Federal Reserve is advising financial institutions to take a hit, write down principal, both their own and the common good.
These are indeed strange and interesting days . . .
>
Source:
Reducing Preventable Mortgage Foreclosures
Chairman Ben S. Bernanke
Independent Community Bankers of America Annual Convention, March 4, 2008
http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm
Tuesday, March 04, 2008 | 05:30 PM | Permalink
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as crazy Tom Berenger says to the wounded soldier in Platoon: "take the pain. TAKE THE PAIN!!!!"
Posted by: scorpio | Mar 4, 2008 5:30:03 PM
Can anyone tell the difference between Ben Stein and Ben Bernanke anymore?
Posted by: tyaresun | Mar 4, 2008 5:33:41 PM
I'd imagine a bailout for the banks by the Fed would be much more palatable for folks if the banks were to bail them out first.
Looks like I am paying for this shit either way. I didn't do anything stupid with my finance through out this whole mess...am I too late?
Posted by: Kp | Mar 4, 2008 5:35:15 PM
lawsuit clusterfuk; the ultimate cat wrangle; goat rodeo in the octagon...
no way it happens--how to get pensions, fcb, hedgies, towns in norway to agree to get cornholed?
it does show the level of desperation tho
in the words of Jimmy Morrison: no one here gets out alive
Posted by: x-man | Mar 4, 2008 5:37:53 PM
Once again, Bernanke is proving himself to be a Wall St. amateur.
As we all know, it isn't so simple. Mortgages were sold to MBS pools, which were sliced, tranched and resold to CDOs, some of which were once again sliced and tranched and sold to otheCDOs. Default swap contracts were written at various stages. Investors are on all sides of these positions -- both long and short.
Of course fees were collected at every step of the process.
It is impossible to do as Bernanke suggests: who would do it? The servicers merely service the mortgage for MBS pools. There isn't a single entity authorized to approve a writedown.
At this point, Bernanke is a political puppet. Unwilling and unable to say and do what needs to be done.
It is sad to see Bernanke's intellectual fall from grace. He will be ridiculed in less than 10 years time. He will be this century's Arthur Burns. Perhaps we should call him "Burn-anke"
Posted by: Mr. Beach | Mar 4, 2008 5:51:47 PM
Now if I can just work out a deal writing down my 3 million dollar mansion to 150K, I can pay it and the Mercedes off with the interest off the cash I got out of the deal 2 years ago.
Oh, wait, I was too responsible for that. Maybe I can usemy rebate check to pay for the tax increase required by federalizing the GSE's. I hope my landlord doesn't raise my rent. I alternately feel smart and stupid for selling our home in Fort Lauderdale last August.
Posted by: pmorrisonfl | Mar 4, 2008 5:53:22 PM
He's giving away other peoples' money? Like he can't print enough of his own to give away.
If this becomes the New Rule of Mortgages then no one will play again.
Posted by: Max | Mar 4, 2008 5:57:47 PM
today on my fav cable tv money station
why is this home mortgage fallout on Wall Street banks and not Main Street banks?
ummmmm?
1> generousness - a home for everyone and everyone in a home from the Fed level
2> camouflage for DotComs, Enron, Healthcare South, Tyco, Worldcom, 9/11 failout
3> WTOs march to the Amero
4> creative destruction to begin a better plan out of this defunct system
5> something I didn't think of
Posted by: Greg0658 | Mar 4, 2008 6:05:42 PM
This is just government rhetoric. In the end he'll cut more and we'll all take the hit.
Posted by: Pat G. | Mar 4, 2008 6:10:54 PM
How many more "hits" can the banks take before they become "LETHAL"?..
Posted by: mw | Mar 4, 2008 6:21:53 PM
What Ben is asking is that banks give gifts to some people, but not others.
It is a bit hard to see how that might work in practice.
Posted by: wally | Mar 4, 2008 6:30:32 PM
I think you guys are missing the point. What Ben is probably trying to say is that the banks need the mortgage holders (past, present and future) just as much as the mortgage holders need the banks. If both parties act only in a short-sighted, greedy manner, then the whole system gets FUBAR.
Posted by: Marc | Mar 4, 2008 6:35:36 PM
It's a new US Treasury Product:
"From the makers of TIPS, now the TRP: The Treasury Reduction of Principal Mortgage" now we protect you from inflation and deflation! Don't worry about buying something at the peak anymore, with a TRP we'll absorb the declining value so you don't have to!
Yeah, that's just great...
After reading the mandatory reading Barry assigned us over the weekend, I'm feeling really positive
Posted by: JasRas | Mar 4, 2008 6:50:48 PM
what would the < fallout / benefit > be to halve the remaining principle for the folks playing by the rules all this time?
should I hit Post and fill in the spam code?
Posted by: Greg0658 | Mar 4, 2008 6:52:43 PM
Burnt Hanky?
Posted by: Douglas Watts | Mar 4, 2008 6:56:36 PM
I think Ben wants to assert a tough-guy posture, but actions scream louder than words. Just look at the Term Auction Facility (TAF). According to that wise Grizzly Bear, James Grant (and his asscociate Ian McCulley) "a bank can borrow against 85% of the par value of a triple AAA rated CDO, and 80% of the par value of a non-triple-A CDO"(Interest Rate Observer, February 22, 2008). Grant quotes strategist Christoper Wood (at CLSA) who stated in the Financial Times that "the banks are increasingly giving the Fed the garbage collateral noboby else wants to take". Sounds like someone's gonna take a hit alright. Anyone care to guess WHO???
Posted by: John Badalian | Mar 4, 2008 6:58:08 PM
Seriously, tho ... I wonder if this would destroy the legal claims of municipalities who are now going after Merrill Lynch et al. for selling this garbage (ie. Springfield, Mass.). I imagine that state AGs and municipalities might have a problem with this.
Posted by: Douglas Watts | Mar 4, 2008 7:01:56 PM
"Its not about the money. Its about THE MONEY"
Posted by: Portland Refugee | Mar 4, 2008 7:12:53 PM
Some pretty good comments from Jim Sinclair.
The System is Broken
There is no question about this fact regardless of the camouflage spin. The system has been derailed by the popular and profitable OTC derivatives now melting down and taking institutions and people along with it. There is absolutely no positive impact from present low rates, and will be none even at near zero.
Let me explain to you why there is so much fear and distrust between financial institutions, then you will see why the one time handout of money and interest rates dropped to zero have no hope of doing much more than giving one month of some improved statistics.
Lets assume you have entered into an OTC derivative whereby you own (long) the Dow Jones index at 10,000. You are still in the position. Today’s action is your last straw. You decide to take your $1 billion profit.
There is no clearinghouse. You do not get paid every day as a winner, and do not pay out every night when losing. No one in an OTC derivative has a margin maintenance requirement. You just hold a special performance contract upon which the financial integrity depends on the loser in the arrangement.
Tomorrow you inform the party obligated to deliver you the Dow index at 10,000. You would anticipate the other side would simply buy you out of the obligation, having hedged their obligation somewhere else.
The problem arises when the party to the arrangement required to perform simply cannot because of outrageous markdowns and the flight of capital. They have quite simply lost the ability to make good on these many obligations.
So there you are with a one billion dollar profit taken into your earnings statement that does not exist.
As a result both you and your counter-party have problems financially and need to restate your financials.
Now distrust between counterparties is rampant for very good reasons.
I have simplified this so that it is understandable.
Respectfully yours,
Jim
Posted by: Stuart | Mar 4, 2008 7:15:02 PM
Dear Ben,
Please bail me out!
Yours,
Ben
Posted by: Ben | Mar 4, 2008 7:18:03 PM
Mish says:"Bernanke is essentially saying there would be no problems if we did not have any problems."
worth a look.
Posted by: Douglas Watts | Mar 4, 2008 7:18:41 PM
Looks like he's trying to convince "the market" (who?) to give consumers a reason to stick with the mortgage payments. If you give buyers equity, will it keep them from putting the keys in the mail?
Thanks, Boomers!
Posted by: Steven J | Mar 4, 2008 7:27:29 PM
Is this such a bad idea? As I understand it, Ben is asking the banks to purchase the mortgages out of the MBS/CDO pool, forgive a portion of the principle (taking the loss now) in order for the home debtor to be able to re-finance at a 30 yr fixed that they can afford. This might (just maybe) put a bit of a floor (albeit at a lower level) on residential real estate. It would keep the IB's from continuing to hide the sausage and mark to myth. At least the losses would be more transparent, and some level of trust might be restored. It also puts the losses on the financial wizards who are primarily (not exclusively) responsible for the last 4 years of reckless lending.
Posted by: B. Walthrop | Mar 4, 2008 7:43:00 PM
Don't look now, but Bernanke with his comments just initiated DEFCON 1 in the financial sector.
Too bad this CFOTFM (Clusterfuck Of The First Magnitude) occured in the Shadow Banking System, and Ben isn't a member of that club.
So who's he gonna call, Shadow-busters?
Posted by: Winston Munn | Mar 4, 2008 7:46:36 PM
all this talk about forgiving is nice but since the loans are all over the place (read that it's impossible to know who actually owns your loan), who knows who is supposed to forgive what loan?
Posted by: Craig K | Mar 4, 2008 7:54:36 PM
