I am not going to write about the debt ceiling deal today. The debt ceiling deal is bad, but I am going to think about the debt ceiling deal for a little while and maybe I will write about it later. Today I am going to write about things that happened in the first half of 2009 that helped set the stage for the debt ceiling deal.
Some disclosure might be helpful. I supported Barack Obama during the 2008 primaries and in the general election. I took most of a day off work and stood in line to see him when he came to town. I gave him a substantial amount of my time and money - more than I spent in the previous six presidential campaigns combined.
In April of 2009 I began to think I made a mistake. That's when it became clear to me that something called "mortgage cramdown" would not be part of the bankruptcy reform law.
Of course there were earlier troubling signs, like when President-elect Obama announced he was appointing people to run the economy who had helped cause the banking crisis. Larry Summers. Tim Geithner. Robert Rubin in the background. These folks were 100% on board with the Clinton-Bush-Greenspan program of predatory financial deregulation. As of January 2009 they showed no sign of changing their loyalties or recognizing their mistakes.
But in January of 2009 I tried to give the President-elect the benefit of the doubt.
Then I saw how the President tanked bankruptcy reform.
I want to be as clear as I can - I say the President "tanked" bankruptcy reform. "Tank" as a verb was a term of art among corrupt 20th century boxing promoters. A derivative usage is "in the tank," meaning corruptly influenced. That is what I mean when I say President Obama "tanked" bankruptcy reform. By the end of this post I will go a step further and say President Obama and his economic team are "in the tank" for the bankers.
The President's apologists, if there are any left, will undoubtedly argue that the President did not "tank" bankruptcy reform - he was just busy promoting his successful health insurance initiative. Whatever you think about the fierce urgency of mandating universal payments to private health insurance corporations (without a public option) in 2014 or thereabouts, in April of 2009 the President did not need to choose between mortgage cramdowns and his plan to subsidize private health insurance corporations.
To begin with, the President's health insurance initiative was in the capable hands of Max Baucus in early 2009. The President made a couple of speeches about health insurance during the first half of 2009, but he did little else until July, when he suddenly noticed that Congress was getting close to taking a recess without a bill coming out of committee.
More importantly, however, the bankruptcy reform law would not have detracted from the health insurance program at all. If anything, having a judicial alternative for mortgage modification would have given the administration more leeway to focus on subsidizing private health insurance corporations later in the year. In order to see why, it is necessary to understand what a "mortgage cramdown" is.
Why You Should Care About Mortgage Cramdowns
Calculated Risk is one of the nicest and most sensible individuals on the internet. His co-blogger Tanta, who died shortly before President Obama's inauguration, was as sensible as Calculated Risk but somewhat more sarcastic, and as a consequence was perhaps slightly less nice to certain people on some occasions. Tanta explained the importance of mortgage cramdowns in 2007. Among other things, she said:
You can think of Chapter 13 [bankruptcy as] a kind of loan modification: the court establishes a 3-5 year repayment plan for all the borrower's debts, with the unpaid remainder discharged at the end of the repayment plan period. In Chapter 13, the debtor can keep a mortgaged home, as long as he continues to make mortgage payments throughout the plan period, and makes up any past-due amounts (including fees) during the repayment period as determined by the repayment plan. If the borrower does not or cannot continue to pay the mortgage . . . the lender can foreclose.
However, secured debts can be restructured or modified in a Chapter 13 bankruptcy, and secured creditors, except the mortgage lender on a principal residence, can be subject to what is called a "cram down." This happens when the amount of the debt is greater than the value of the collateral securing it; the court reduces the value of the secured debt to the market value of the collateral, with the remainder being treated as unsecured (and subject to the same repayment plan/discharge terms as any other unsecured debt). The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.
In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.
Note especially the bolded phrase (bolded again here because it is really, really important) "secured creditors, except the mortgage lender on a principal residence, can be subject to what is called a 'cram down.'" Cramdowns are routine in bankruptcy. They apply to everybody except working people trying to save their homes. If John McCain wanted to modify the mortgage on his second through seventh homes in bankruptcy he could get cramdowns. When a Donald Trump entity wants to restructure a secured loan for a busted out condo project, it can get a cramdown. When a financial oligarch wants to restructure a secured yacht loan, he or she can get a cramdown.
There is no legitimate reason why home mortgages should be treated differently. Bankers who make home mortgage loans at reasonable prices to people who can pay them back have nothing to fear from home mortgage cramdowns. As Tanta explained:
In fact, I have some sympathy with the view that mortgage lenders "perform a valuable social service through their loans." That's why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you're a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are "affordable" only for a year or two, if you face having that loan restructured in Chapter 13. If you are aware that your mortgage loan can be crammed down, I'm here to tell you that you will certainly not "forget" to model negative HPA in your ratings models, and will probably pay more than a few seconds' attention to your appraisals. You might even decide that, if a loan does get into trouble, you're better off working it out yourself, via forbearance or modification or short sale, rather than hanging tough and letting the BK judge tell you what you'll accept.
The version of mortgage cramdown legislation on the table in early February of 2009 would have given ordinary homeowners roughly the same bankruptcy options everyone else gets. More importantly in hindsight, mortgage cramdown legislation probably would have done more to clear the massive backlog of financially distressed homes than any other program that was ever on the table. Certainly more than any of the pathetic programs that actually got enacted.
How To Sell Out Working People
One of the most interesting things about the mortgage cramdown episode is that it set a pattern for how this administration treated campaign promises and progressive initiatives.
Step one was for the administration to let it be known the initiative was favored, without giving any specifics or participating in the legislative process in any meaningful way.
Step two was to unleash the Blue Dogs in the key committees. With mortgage cramdown, the President and his savvy banker friends unleashed former investment banker Ellen Tauscher, who bragged about New Democrats flexing their muscles to get the bill watered down. The President later appointed Tauscher to be an Undersecretary of State.
Step three was to hand off the nearly useless, watered-down bill to Harry Reid and keep a safe distance away while it died an ignominious death in the Senate.
The President's apologists will undoubtedly argue that bankruptcy reform was a congressional matter, and that the President could not control the outcome. My response is that the President didn't even try. Look at what the President does on issues he cares about, like cutting social security. President Obama has had social security "reform" in his sights since the beginning of his term, sending out catfood commissioners to do battle against it even though it is clearly not a pressing fiscal issue at all. President Obama will play golf with John Boehner, meet with Republicans on a daily basis, create a fake crisis, or whatever else it takes to get a shot at cutting social security.
On mortgage cramdowns, by contrast, President Obama has done exactly nothing. President Obama tanked bankruptcy reform, and anyone who is not a banking lobbyist is worse off because of it.
Some folks may also feel sympathy for the President because he had an awful lot on his plate in January and February of 2009. The thing is, the President tanked bankruptcy reform again and again over the next two years, although with less publicity.
Mortgage cramdowns would be good policy and good politics, especially given how unpopular the banks are and how badly they acted, both before and after the financial crisis. The banks desperately need judicial supervision.
I am Experiencing Cognitive Dissonance - What the Heck is Going On Here?
The President's continuing failure to back mortgage cramdowns seems to make less and less sense as time goes by. The mortgage modification programs put forward by the Treasury department and run by the banks have been a near total failure. People are still being thrown out of their houses because, although the banks cannot recover much from selling the foreclosed houses, in most cases the banks can recover from Fannie Mae, Freddie Mac, or whatever other government-backed entity has become responsible for making good on the loan. This is an ongoing taxpayer-funded bailout that dwarfs the TARP legislation.
So how could a smart, politically moderate fellow like Barack Obama oppose such an obviously sensible method to help homeowners and reform mortgage lending? Especially when bailing out the banks is so costly and Barack Obama is so concerned about the deficit? Surely there must be some logical reason for it? Unfortunately, there are three reasons: (1) mortgage cramdowns would force megabanks to admit they made a lot of very bad loans, (2) bankruptcy proceedings have an embarassing tendency to expose the flaws in mortgage-backed securities created by Wall Street banks, and (3) the Obama administration works for the bankers.
Forcing megabanks to admit how many bad loans they made is unacceptable to this administration, and exposing Wall Street banks to liability for the mortgage-backed securities fiasco is even more unacceptable. The Obama administration's entire economic program is built on preventing Wall Street and the megabanks from having to admit either past wrongdoing or present insolvency.
In the financial press this is often called "extend and pretend." The idea is to pretend the big banks are sound and have money so they can continue skimming a percentage off of every transaction in the economy until they are sound and have money again. Therefore mortgage modifications cannot be done in a public forum like a bankruptcy court. Mortgage modifications must be dealt with in secret, preferably through a system like HAMP with no rules, endless lost forms, and lots of voicemail hold music.
It makes sense if you force yourself to really think about it.
Conclusion - We Were Sold Out
I said in the introduction that as of January 2009, President Obama's economic team showed no sign of recognizing the mistakes that led to the financial crisis. I now believe this is because President Obama's economic team did not make any mistakes. President Obama and his economic team did exactly what they intended to do. President Obama and his team work for the predatory financial oligarchs, and on balance President Obama and his team have succeeded in making the financial oligarchs richer and more secure. They have done this, in part, by making the rest of us poorer and less secure.
President Obama and his economic team sold us out on mortgage cramdowns, plain and simple. Of course, it's not too late for Congress to pass a mortgage cramdown law, but it is extremely likely the Obama team would sandbag it again, or even actively oppose it if it seemed likely to pass. As I said before, I would like to be proven wrong about this, but the evidence so far overwhelmingly indicates I am right.
What should we do about it? I'm in favor of running a candidate in the Democratic primary who will fight for the interests of the bottom 99% of the income distribution. The purpose of the campaign should not be a suicide mission to send President Obama a message or move the Overton Window. The purpose of the campaign should be to beat President Obama in the primary and elect a real Democrat.
But that can't happen until ordinary Democrats accept the fact that President Obama has sold them out. Future posts under this heading will deal with other occasions when the President sold out working people in favor of the predatory financial oligarchs, assuming I don't get assassinated by a Predator drone. (Funny thing about our predatory financial oligarchy and our country's increasing reliance on Predator drones. I hope it's a coincidence.)