Why Citi Turned Around on Mortgage 'Cramdowns' (Updated)
The latest data show one out of ten homeowners in the United States is either late in making a mortgage payment or in such serious arrears as to risk foreclosure. Last week, congressional Dems breathed a sigh of relief when Citigroup dropped its opposition to a proposed change in the bankruptcy laws allowing distressed homeowners to do what owners of commercial property and second homes can already do when they can't pay up -- use bankruptcy proceedings as a means of working out better deals. (It's called a "cramdown." The practical effect wouldn't be hundreds of
thousands of bankruptcy judges striking new deals, as conservative lawmakers predict; the mere option of going into bankruptcy would give homeowners more bargaining leverage with mortgage lenders in striking better deals.)
As long as Citigroup opposed this measure, it didn't stand a chance. Citi's clout in Washington is legendary. But on January 8, Citigroup's CEO, Vikram Pandit released a statement saying that Citi "believes it will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers." The announcement was greeted with kudos by House and Senate Dems. The bankruptcy provision is now moving, and is likely to be attached to the stimulus bill.
What happened?
Until last Thursday, Citi had been a leader of the Bankruptcy Coalition of the Financial Services Roundtable, an industry group that had staunchly opposed the bill -- along with Bank of America, JP Morgan Chase, and Wells Fargo.
Could it be that Citi's Pandit knew last week that he'd soon need even more help from Congress than the $45 billion bailout the bank already received? Shares of Citigroup had seemed to regain their footing after the bailout. But then, this Monday, all hell broke loose. Citi shares plunged 17 percent, as investors got word of a deal Citi was cooking to sell its valuable Smith Barney brokerage unit to Morgan Stanley. The drop in Citi
shares brought the stock back to the lowest level since the government gave Citi its first dollop of bailout funds last November. Citi is losing capital at an astounding rate -- nearly $100 million a day in the fourth quarter alone. The firm is expected to report its fifith consecutive quarterly multibillion loss next week.
Citi has already got the sweetest bailout deal of any big bank, but the probability seems high that it will want more bailout money. This is the easiest explanation for Pandit's turnaround on the cramdown legislation -- something the Democratic Congress and distressed homeowners very much want.
In other words, the Wall Street bailout has had exactly the same effect for Congress that the proposed bankruptcy provision would have for homeowners -- it has increased its bargaining power over those who ordinarily pull the strings. The massive tax-payer financed bailout of Wall Street, largely a product of Wall Street's power in Washington, seems to be weakening the Street's ability to veto financial legislation it doesn't like. I'm not sure whether this is something we should be celebrating as a small victory for democracy, or condemning as an extortionate price for reducing Wall Street's grip.
Updated version since Citi posted its losses - 1/16/2009
You've got to spend money to make money.
January 16, 2009 11:34 AM | Reply | Permalink
About damn time. These MOFOs need their asses kicked.
January 16, 2009 11:34 AM | Reply | Permalink
Dear Mr. Reich,
You are more respectable than the entire Bush cabinet combined. Still, it's disturbing that
To me, the fact that Congress feels the need to negotiate with Citigroup, combined with the way you, a former Labor Secretary, admiringly report Citigroup's "legendary" power, proves that Citigroup has way too damn much power.
Instead of being grateful to Citigroup for generously permitting it to pass legislation, Congress should assume the posture of a loving but sleep deprived parent. Citi made a stinkie, and Congress shouldn't negotiate whether Citi wants its diaper changed. Hold your nose, lay out the wipes, and just get the mess cleaned up.
January 16, 2009 12:29 PM | Reply | Permalink
To me, the fact that Congress feels the need to negotiate with Citigroup, combined with the way you, a former Labor Secretary, admiringly report Citigroup's "legendary" power, proves that Citigroup has way too damn much power.
Well, they just have the right to lobby Congress based on the First Amendment.
Any group with a powerful enough lobbying arm can force Congress into some sort of negotiation.
January 18, 2009 8:36 AM | Reply | Permalink
Citi's clout in Washington is legendary. Robert Reich
If that assertion is correct the Washington elite is even more stupid than most of us have imagined.
Citigroup is in its death throes and everyone knows it. Bob Rubin is gone; Vikram Pandit is doing his best to go off into the sunset as a great American patriot and more than willing to sacrifice shareholder interests to the benefit of his "legend".
Amazing how long it takes people to understand that the world has changed.
January 16, 2009 12:55 PM | Reply | Permalink
Bob, why oh why aren't you in the Cabinet?
Please, please, please reassure us that Geithner, Summers, et al, aren't just retreads from the same financial world that brought us this fiasco.
January 16, 2009 1:07 PM | Reply | Permalink
He can't do that, because they are.
January 17, 2009 2:08 PM | Reply | Permalink
Is it possible that they think they can work out better deals with homeowners through renegotiation than either bankruptcy reform or foreclosure? In other words, if you can keep someone paying a $225K mortgage (marked down from $375K), that might be better than a bankruptcy court decision cramming down the mortgage to $180K or a foreclosure and sale at $190K (with a bunch of foreclosure expenses). Citi just sees which way the wind is blowing.
January 16, 2009 1:07 PM | Reply | Permalink
Citigroup should be ashamed of themselves. They were deliberatelt making life difficult for homeowners when it was uncalled for. The financial institution is disgraceful! They deserve whatever bad luck comes their way. Common sense should tell them it is better to work with homeowners than it is to have their homes in foreclosure. They will then have an empty house that will fall in desrepair. What are they thinking
January 16, 2009 1:19 PM | Reply | Permalink
A few things:
1. Why in God's name are taxpayers (who are on the hook for Citi's losses) in favor of writing down Citi's assets, when they have to backstop the losses? I can see why Citi doesn't care (now that the taxpayer is on the hook), but WE ought to be fighting tooth and nail for every last cent.
2. The more power government exercises in finance, the more effort financiers go to to control government. This symbiotic relationship is a major cause of this mess. And it appears that the expansion of this relationship will be a symptom.
January 16, 2009 2:51 PM | Reply | Permalink
Yes, indeedy!
It's called rent-seeking and regulatory capture.
Presumably, someone got something by spending $2.4 billion on 14,470 lobbyists last year.
January 16, 2009 8:56 PM | Reply | Permalink
Hmmm on #2 - since the classic definition of fascism is when large corporations become extensions of government (and government authority becomes centralized in one person - we're getting there on that one.)
(Spengler would add that in a fascist state there is contempt for the masses, democracy is impossible, anti-intellectual viewpoints exist and persist, and there is great admiration for strong and aggressive leaders) all of which evokes another hmmm.
January 17, 2009 1:03 PM | Reply | Permalink
The United States isn't close to fascist, although we are quickly treading toward a corporatist quasi-Socialist view of economics (being alarmist about which, by the way, is a big part of what I do here).
Fascists at least make the trains run on time.
January 21, 2009 12:07 PM | Reply | Permalink
I'd go with the 'extortionate price' on this one.
I'd add in 'obscene', 'corrupt.'
My take on the Wall Street bailout is that Paulson, Bernacke, Cox, and all the rest are people whose egos and financial resources have been fed by a system of corruption so widespread and socially acceptable that they don't even see the mess they're in.
I don't see how anyone spends years on Wall Street moving up the corporate ladder, and then can retain the kind of creative perspective and open-minded thinking required to do the following:
1. recognize and admit the personal and institutional corruption
2. start calling it for what it is
3. figure out how to clean it up
4. recognize that life is going to be fundamentally different afterward.
IMHO, no one associated with the Bush administration has the kind of integrity, guts, and courage to openly admit that this whole disaster is the culmination of years of corruption that very important players ensured could remain in place.
In ecology and biology, it's well known that when parasites take over, they can eat up a 'host' in a very short amount of time -- right down to the tendons, ligaments, and bones. You'd be lucky to find a skeleton after the fact.
That's my take on what's in process here.
IMHO, continuing to imagine that some juicy, big fat cow is still going to be there for the eating is just delusional and only makes people despairing, hopeless, and unethical.
Better to say: hmmmm. No more cow.
Maybe we should learn to fish.
We shouldn't have had to pay blackmail to Citi for the privilege of seeing clearly.
Grieve the carcass and move on.
January 16, 2009 3:08 PM | Reply | Permalink
Some postulations...
If someone's in dire straits financially, 2 things can happen: she can struggle through it, or file bankrtupcy.
If the consumer decides to try to handle things without filing for bankruptcy, she has the power to decide which one of her creditors gets paid and when. Therefore, before bankruptcy, a mortgage lender can access both (a) the consumer's liquid assets and (b) the mortgaged property. Generally, a consumer will decide to pay her home loan down first (and keep her house) rather than the credit card bills. So the mortgagee would end up getting more money than it would get in bankruptcy, generally, when it has to share with other creditors.
But these are un-general times. Why pay down a mortgage on a house that's worth less than you bought it for? So maybe the consumer does decide to pay the credit card debts off first, leaving the mortgagee to foreclose. and get its 2 bucks, because the housing prices have been plummeting. Not a happy situation for Citi.
Of course, a consumer can file for bankruptcy when she's struggling with the bills. Rather than the consumer getting to decide who gets paid and when, the Court and "preference" laws (stating who must get paid and when) make those determinations. Secured lenders are usually at the top of the list; unsecured lenders, like credit card lenders, are more towards the bottom. Anyway, for a mortgage lender, bankrutpcy means a guaranteed slice of the consumer's estate--*probably* more than what it would get for the house at a sheriff's sale these days. So bankruptcy doesn't seem quite so terrible anymore, even with the cram-down.
January 16, 2009 7:45 PM | Reply | Permalink
If someone's in dire straits financially, 2 things can happen: she can struggle through it, or file bankrtupcy.
State law varies. In some states the alternatives are as you say. In other states, the mortgage is only secured by the mortgaged property. In those "non-recourse" states, such as California, the mortgage holder cannot attack the other assets of the homeowner and cannot force the homeowner into bankruptcy.
So if you have a $400K mortgage on a house now worth $300K, your best strategy is to keep paying your credit card balances and your auto loan off, while not paying your mortgage. Odds are that you will be able to live in the property about a year before being evicted following a period of delinquincy and the foreclosure process. You may be able to reset the calendar by making a payment or two. At that point you rent, but no bankruptcy is involved.
Banks which hold a majority of their mortgages in non-recourse states would probably just as soon have the bankruptcy law changed to allow adjustment of principle - they are already experiencing a large number of "walk aways" or "jingle mail" (where the homowner moves out and mails the keys to the mortgage servicer).
Banks in other states would be a lot less happy with the change to bankruptcy laws, since they can force the homeowner into bankruptcy in an attempt to retrieve the full amount of their principal.
Many of the states with high numbers of foreclosures are non-recourse states.
January 16, 2009 8:41 PM | Reply | Permalink