Sunday, March 15, 2009

Scarecrow Geithner

The tin man lacked a heart, the lion lacked courage, is new Obama Treasury Secretary the brain-dead scarecrow? It appears so.

Since assuming office in the aftermath of his embarrassing revelation that he was unable to keep track of what taxes he owed and, subsequently, was in arrears on his taxes--a mistake that he pledged to correct only after receiving word of his pending nomination for Treasury--Timothy Geithner has swung and missed often.

The problems for Geithner the Treasury Secretary began the moment he stepped into his new role as he frequently came across as either underwhelming or outright obtuse on matters about which someone who had served as Chair of the New York Federal Reserve Bank rightly ought to be expected to be conversant. Instead, Geithner appears intent on reincarnating the lost years of the Paulson Administration. How unfortunate for the American public, and much of the rest of the World.

Geithner signaled his mental challenges this past week by coming to the verbal rescue of AIG--the company that helped bring the United States one its worst financial disasters ever. Having already received $180 billion in federal assistance to help bail it out of a mess of its own devise, AIG was reportedly preparing to pay out $170 million in bonuses to executives operating in the derivatives branch of the company.

Ostensibly, bonuses serve as rewards for work well done. Apparently not on Wall Street, and particularly not at AIG. According to AIG, the bonuses that it is paying out this year are a combination of merit and contractual bonuses, the latter, according to AIG, legally bound upon the company. As a consequence, despite the acknowledged criticism of the public at large, AIG intends to dish out the hefty loans, in spite of it recent request for additional government funds.

There are many thoughts that ought immediately to rush through the head of a rational observer regarding AIG's revelation. The most salient would be why AIG will be paying non-contractually mandated bonuses following a year in which the company lost $62 billion, a record for a U.S.-based company, and probably a record anywhere.

The second thought that ought to occur to the rational observer is that there cannot be, of course, any such thing as a contractually obligated bonus at AIG. At least not this year. No matter the terms of the company's contracts, practice alone would allow breach of the relevant contracts if only to remove any bonus stipulations. No judge in the land would uphold a challenge to such an abrogation given the assistance that the U.S. government and taxpayers have given AIG merely to keep it from filing for bankruptcy.

Yet AIG maintains that it is obligated to pay certain bonuses--as it also maintains its arrogant position that it cannot disclose which bonuses are required and which are discretionary.

AIG has acted boorishly. That's no surprise given how amateurishly its membership ran one of the world's largest firms.

What is surprising, though less so as the days pass, is the response from Treasury Secretary Geithner regarding AIG's bonuses. Geithner echoed AIG's claims that certain AIG bonuses were contractually mandated and chose not to distinguish between those that were "mandated" and those that were not. In an attempt to justify this obfuscation, Geithner stated that it is important that AIG not have to constantly look over its shoulder wondering what the government planned to do next. "They need to be able to attract the best," Geithner concluded. "Bonuses are part of that."

As the rational world shook its collective head wondering what options are out there for the best and brightest who are put off by the lack of an AIG guarantee of a seven-figure bonus, Geithner raised his eyebrows and said "trust me."

As I said, this sounds an awful lot like the Hank Paulson story.

Friday, February 20, 2009

Obama Housing Policy Encourages Bad Consumer Practices Without Adequately Addressing Housing Crisis

After rushing through the passage of a nearly $800 billion stimulus aid package, President Barack Obama immediately announced measures intended to help stabilize one of the strident forces behind the current economic crisis, the weakening housing market. For those hoping for stability, however, there is again too little meat in the Obama plan to produce the desired effect and far too much pandering to a core Democratic constituency.

President Obama's housing plan has two primary components, neither of which--despite Administration attempts to create fact from fiction--will do much of anything for the average homeowner.

The first component of the Obama housing policy is the implementation of a $75 billion spending plan aimed at forestalling home foreclosures for nearly five million Americans currently facing imminent home foreclosure. How that money will be spent to forestall foreclosures remains to be seen, but, even allowing that there is a bona fide plan in place for carrying out the salvage operation, there is reason to question the merit of the policy.

The Obama Administration contends that its $75 billion housing plan is a win-win for all homeowners. Those who receive assistance and stave off foreclosure clearly win, the Administration contends, while those who do not receive assistance but still own their home will, on average, realize a $6,000 positive differential in the value of their home by virtue of the higher overall property values created by reducing the number of foreclosed homes.

This is where any clear-thinking individual's mind ought already to have exploded.

By ensuring that the vast majority of those facing home foreclosure will not face that peril, the Obama Administration is caving to the very same politics that created the housing and economic mess in the first place. Saving from foreclosure those who made poor investments in their homes does nothing to ensure against those same homeowners repeating the same mistakes in the near future and even encourages those homeowners to take actions without consideration of the financial consequences down the road.

Particularly troubling in this respect is the Administration's decision to funnel an additional $200 billion each to Freddie Mac and Fannie May to help prop up the Administration's housing stabilization program. That brings the total cost of the policy to $475 billion for roughly five million homes--approximately $95,000 per home. That figure might seem low until one considers that average home price of the homes that will receive protection under the Obama plan is approximately $75,000-80,000. The numbers simply do not add up.

Adding insult to financial loss, Obama Administration HUD Secretary, Shaun Donovan, had the temerity to chide critics of the scant-reaching, over-paying housing policy. "What critics need to understand," Donovan pontificated, "is that the plan will, on average, create an additional $6,000 in home value for every homeowner in America."

Donovan's contention is pure fiction, of course, and absolutely irrelevant in any case as far as the policy's intended purpose of stabilizing the housing market is concerned. Assuming, for the sake of argument, that Donovan is correct, adding value--or, more correctly, halting further erosion in home values--does nothing for homeowners, most of whom have little if any intention of attempting to sell in the current market.

More to the point, Donovan's claim is true, even accepting his figure, only if one considers homes across the United States in the aggregate. It is entirely meaningless to the property value of someone living in Iowa, for example, whether there are more home foreclosures in Florida, Michigan, Nevada, or anywhere else in the country. While fewer foreclosures in one location will have a direct effect on the home values of those living nearby, it will have almost zero effect on homeowners in areas not affected by foreclosures--the vast majority of neighborhoods across the United States. To argue in the aggregate, then, is both disingenuous and dishonest. And it smacks an awful lot of politics as usual.

Of course, that Donovan would push the Administration's policy in such a fashion is not necessary surprising. After all, Donovan's roots are in the affordable housing industry and he has long been a champion of federally subsidized housing. But that does not explain why, when a far better option is on the table--one that would provide 4% mortgages to all homeowners and homebuyers, with sensible lending restrictions requiring proof of ability to pay off the mortgage--the Obama Administration has opted for a housing policy that does little if anything to address one of the undergirding weaknesses in the economy while encouraging even worse consumer practices than those that helped create the current economic ills.

Perhaps, as we have already seen with the $800 billion stimulus plan, party remains thicker than good policy.