Faced with the Mortgage Crisis, the Investor Class Acts to Protect…Itself

Neil Irwin wrote a piece in today’s WaPo on Treasury Sec Henry Paulson’s response to the mortgage crisis that is so glowing with praise it could probably be seen from Mars with the naked eye, assuming there was a naked eye on Mars. This crisis, precipitated by a mostly unrestricted financial industry that indulged itself by conning people into these deals with shady math, unethical sales techniques, and illegal lending instruments, threatens to bring down the US economy and potentially the global economy as well.

The core of the problem is the skyrocketing rate of foreclosures and bankruptcies as tens of thousands of people are on the brink of losing their homes through default. And what does Paulson do? He runs to bankruptcy and foreclosure experts for advice, then designs a program to help bail out the homeowners and stabilize the freefall, right? Not even close.

Instead, he arranges to bail-out the banks whose greed and disrespect for the law made this mess in the first place. Naturally. The guy’s an investment banker, so whose butt would you expect him to save? Yours? Neil thinks this is just dandy.

Now, as crises in the mortgage and financial markets raise fears of a recession, he has moved forcefully to try to prevent the worst outcomes. Using the skills he developed during three decades at Goldman Sachs, he persuaded banking executives to create a private fund that could buy up investment instruments so that their collapse would not infect the broader economy. His staff is developing policies to stem the flood of foreclosures anticipated in the coming months.

(emphasis added)

By doing what, exactly? Irwin doesn’t say but he’s eloquent on the subject of Paulson’s efforts to save himself and his cronies. First, he asked the ‘experts” for guidance – bankruptcy and foreclosure experts? Of course not.

Paulson drew on more than 30 years of high-level contacts. He called James Dimon, chief executive of J.P. Morgan Chase, to educate himself about the market for mortgages, a business that has not been of major interest to Goldman Sachs. “He doesn’t know the consumer mortgage business like we do,” Dimon said. “It’s ‘What are the spreads, what could be ameliorated, what could be fixed, what policies make sense? Do you think this will help, do you think that will help?’ “

He called American Express chief executive Kenneth I. Chenault to learn whether businesses and consumers were reducing their spending. (They weren’t, at that point.) He called James W. Owens, chief executive of the construction-equipment company Caterpillar, to ask how the problems were affecting industrial firms.


In September, as the damage mounted, he invited senior executives from Citigroup, J.P. Morgan Chase and a dozen other major banks to a series of meetings at Treasury to discuss a kind of self-bailout. Some of the banks were facing serious problems with what are known as structured investment vehicles. These off-the-balance-sheet funds had invested heavily in the market for subprime mortgages, which are made to borrowers with shaky credit histories. If these funds collapsed, major banks might have to cut back dramatically on loans to preserve cash.

Can’t have that. So he convinces his buddies to put cash into adjusting the mortgages to make the payments they gouged from their victims more affordable for these ripped-off consumers, which would both save their homes and start cash flowing into the system again.

I’m kidding. What he does is, well, read it yourself.

The banks agreed to create a $75 billion fund that would stand ready to buy up or lend against securities from those troubled structured investment vehicles. Paulson described his Treasury team’s role as one of getting private companies to do a deal that was in their mutual interest, and noted that no taxpayer money would go into the fund.

But by using his clout to get executives talking, Paulson may have set a precedent for government intervention to rescue financial institutions in trouble, which could encourage financiers to take more irresponsible risks.

(emphasis added)

In other words, like Bernanke’s Fed, he arranged for the banking system to protect itself, and no price is too high to pay for that. Since August, the financial industry has poured almost $$$200BIL$$ into itself to shore up “the market” while a mere $80M has been set aside to help people in trouble restructure their mortgages.

Sense a little lack of balance in that, do you?

At the same time, Paulson’s close friends are gearing up to fight Miller-Sanchez, a bill that will allow bankruptcy court judges to rewrite mortgage loans, that they characterize as “dangerous” because it would “create uncertainty over the value of an asset”.

Yes, of course. That’s more important than preventing a fucking Depression. After all, he has to make sure financiers don’t take ever more dangerous and “irresponsible” risks to keep those profits flowing. Don’t think much of his friends, do he? Seems he feels it necessary to save them from their own blind greed. By feeding them more money. Even the usually corporate-friendly AEI isn’t so wild about it.

“They’re trying to avoid a fire sale of these assets,” said Kevin A. Hassett, a senior fellow at the American Enterprise Institute. “But sometimes you need to have a fire sale if you’ve had a fire.”

The sad truth is that the financial leaders of the US corporatocracy are so used to believing that the rich are the only ones that matter in the economy that what ordinary people need and the role they play in keeping it all humming aren’t even on their radar any more. They’re convinced that by saving themselves, they’ll eventually save us but it’s just a rationale to excuse a monumentally selfish absorption.

The fact is, if we go, they go. The sooner they figure that out, the better for all of us.

Mr Irwin? Try stepping outside the Wall Street bubble one of these days. You might learn something to your advantage.

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