I have a few problems with Jane Hamsher’s latest piece on Tim Geithner, where she says, among other things:
Timothy Geithner’s new TALF plan, like all his other plans, seems designed to shovel billions into the coffers of the very same bankers who got rich on the mortgage bubble. When the public gets a glimpse of the tip of this giant iceberg, as they did with the AIG bonuses, they’re dismissed as angry rubes who Just Don’t Understand How Things Work. But his latest scheme is proof that they are absolutely right.
It’s going to take a little bit of effort to explain why her analysis upsets me. Let’s start off with the fact that right at the top she identifies the ‘new TALF plan’ as the topic under discussion. But she then immediately moves to discussion of former Countrywide executive Stanford Kurland. Now, Mr. Kurland, who was recently profiled in the New York Times, is someone we would all like to see in prison. No mortgage lender was more irresponsible in vetting their customers than Countrywide. Their lending practices were lax, involved fraud, and contributed massively to the foreclosure crisis and the ensuing economic meltdown. Mr. Kurland walked away from this mess with $200 million in stock and has now set himself up as CEO of a new company that is profiting by buying up (at a steep discount) the same bunk mortgages that his company created.
PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.
Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.
This PennyMac company is actually doing something of a public service by helping refinance these balloon-payment loans and preventing the spread of the foreclosure crisis. But that doesn’t change the outrageous situation where Mr. Kurland gets rich on both ends of this financial crisis. But, rather than get bogged down in the fairness of this whole thing, let’s focus on the fact that Mr. Kurland bought these mortgages from the FDIC as part of an effort the clean up the books of First National Bank of Nevada. Is that part of Tim Geithner’s TALF plan that he rolled out today? No, it is not. It is actually part of an actual case of bank nationalization. The FDIC stepped in and nationalized the First National Bank of Nevada and, as part of cleaning up its books, it sold off a bunch of their toxic mortgages to Mr. Kurland’s company. Ms. Hamsher is taking an example of bank nationalization and using it to criticize Secretary Geithner for coming up with a plan that does not do bank nationalization. Watch what Jane does next:
Despite Geithner’s contention that banks are simply “burdened with bad lending decisions,” most Americans understand at this point that there was serious fraud involved in the inflation of the mortgage bubble. The Justice Department and the FBI are currently investigating Countrywide for accounting fraud, insider trading and consciously lending money to people they knew couldn’t afford to repay it. Meanwhile, AIG is suing Countrywide because they have to pay off hundreds of millions of dollars in insurance claims because Countrywide just flat out lied about the mortgages they were issuing…
The first thing that strikes me about this paragraph is that it acknowledges that Countrywide (and presumably, Mr. Kurland) are currently under investigation by the Justice Department and the FBI for multiple violations of the law. They are also being sued by AIG and, as the New York Times makes clear, they are also being sued by several other entities:
But lawsuits against Countrywide raise questions about Mr. Kurland’s portrayal of his role. They accuse him of being at the center of a culture shift at Countrywide that started in 2003, as the company popularized a type of loan that often came with low “teaser” interest rates and that, for some, became unaffordable when the low rate expired.
The lawsuits, including one filed by New York State’s comptroller, say Mr. Kurland was well aware of the risks, and even misled Countrywide’s investors about the precariousness of the company’s portfolio, which grew to $463 billion in loans, from $62 billion, three times faster than the market nationwide, during the final six years of his tenure.
Far from letting Mr. Kurland off the hook, multiple state and federal agencies are hot on his trail. Given that, though, we have a right to ask why the FDIC was willing to do business with a man who is under such a cloud. Their answer is telling.
Federal banking officials — without mentioning Mr. Kurland by name — added that just because an executive worked at an institution like Countrywide did not mean he was to blame for questionable lending practices. They said that it was important to do business with experienced mortgage operators like Mr. Kurland, who know how to creatively renegotiate delinquent loans.
We’re back to the root of the problem with trying to fix the economic meltdown without unjustly rewarding the people that created it. There is a limited universe of people with both the experience and the capital to buy up and manage the toxic assets. The more money people made off creating this misery, the more likely they are to be flush enough with cash to take risks on fixing it. Secretary Geithner is relying on public private financing to take up some of the slack and a modicum of the risk, but a big percentage of the public private financing available is tainted in some way, providing critics with slam-dunk avenues to whip up outrage. Nevertheless, Mr. Kurland could just as easily wind up in prison as make a new fortune off this mess. Consider this when reading Ms. Hamsher’s next point:
Stanford Kurland and the Countrywide Crew have never been held to account for their part creating this financial crisis, and now Geithner’s plan makes them rich all over again. Geithner seems to believe that there is an elite class of bankers in this country who must make money no matter what happens, who should never be held to account, and whose interests should always come first in any plan the government devises.
First, Mr. Kurland is under active investigation by (among others) the Obama Justice Department, so he could still be held to account. Second, Mr. Geithner’s plan (TALF) has nothing to do with making Mr. Kurland ‘rich all over again’. Third, it isn’t Geithner who determines that elite bankers benefit coming and going, but the reality of a situation where the only people with private capital available to partner with the government are people that got rich over the last decade and didn’t lose all of their money in the downturn. And that means that people that bet against the housing bubble or who managed to get out just in time are the people who stand to get rich now in helping to solve the problem.
Jane concludes:
Do you get a chance to make money in this “off-the-charts good” investing opportunity? Noooo, these loans that nobody has to pay back aren’t being offered to the public.
The public understands what’s going on all too well. The same thieves are back again to pick their pockets in broad daylight, thanks to the tireless efforts of Timothy Geithner on their behalf.
Again, the ‘off-the-charts good investment opportunity’ that Jane is referring to is not TALF, but the buying up of toxic assets from a nationalized bank administered by the FDIC. That’s exactly the kind of arrangement that so many on the left are urging on Geithner. The reason you and I are not being offered sweetheart deals to buy toxic assets in either the nationalization process or the TALF process is not because Tim Geithner wants to screw us, but because we don’t have the money to buy them. In reality, any of us can start a hedge fund and be eligible to participate if we can convince other people to let us manage their money. And, finally, it isn’t Geithner’s or the FDIC’s choice (because they have no other options) to let the thieves pick our pockets again (if that is even a fair characterization). That decision is thrust upon them by reality, whether they are nationalizing or not.
I don’t write this to pick on Jane Hamsher. But I did find her essay to a good example of the ways people are picking up a general and justified sense of outrage and distorting the facts to make Tim Geithner look bad. His plan can and should be critiqued, but a good critique uses fair arguments. I don’t think Jane’s argument was fair.
