Cram-downs, the new "ownership society" ... by gimleteye

I suppose some readers have wondered why I've been silent on the TARP $700 billion bailout. The reason is shock. (Read all the way back, in our archive "housing crash").

I've read what is available about TARP and nothing is clear; even the costs. Not the cost of TARP, not the cost of wars in Iraq and Afghanistan, and, not the amount of money thrown at insolvent financial institutions and insurance companies and at world equity markets by the US government. (click on 'read more')

Apparently I am not alone: on November 7th Bloomberg News filed a Freedom of Information Act lawsuit against the Federal Reserve system, seeking documents related to the financial services crisis. According to Bloomberg, the Federal Reserve has already spent $1.5 trillion; not including the $700 billion. But I think I know why the Federal Reserve doesn't want to be compelled to release this information: there is a lot more backstory on manipulation of financial markets by the US Treasury than the Bush White House wants to reveal. If Bloomberg prevails, the next question is the extent to which the US Treasury has been involved in US equity markets. (cf. gold price)

Anyone with a passing knowledge of monetary policy, financial derivatives related to housing (mortgage backed securities), contractual law, and the insanity of local decision making that allowed one platted subdivision after another in farmland and a mass of unoccupied condominium towers; anyone who considered this complexity understood that "deleveraging" this mess would be extraordinarily painful.

No one at Treasury has any idea whether $700 billion is the right number, or even, what to do with it. That's why Treasury Chief Paulson had to reach for help into the ranks of Goldman Sachs and the big securitization law firms in Manhattan -- because in the places that created the crisis is the only talent to figure out if there is a way out; it is like inviting a computer hacker to do your bank's computer security after he's robbed it without a trace and put the money in Switzerland.

There is a lot we don't know about the performance of the US government in relation to a national economic emergency, and that the crisis in confidence will take years to fix. Even then, I am not sure what the toolbox looks like.

I had not heard of the term, cram-down, before hearing it on NPR the morning: in bankruptcy it means the reduction of various classes of debt to a lower amount with acceptance by the bankruptcy court. For real estate assets, the loan may be reduced, or crammed down, to the property value. The problem, now, is that there are not enough bankruptcy courts in the world to handle the volume of loans mismatched to real property. All those subdivisions that made such tidy mortgage pools: they are now like hairballs thrown up by a cat. On NPR I listened to Terry Gross interview NY Times Pulitizer prize financial writer, Gretchen Morgenson. Morgenson said that she had spoken with attorneys who have spent hours on behalf of homeowners simply trying to find out if the homeowner's original loan is part of a securitized pool or not.

The absence of financial regulation-- championed by the Republicans, Democrats and Wall Street-- means that we really don't know who owns, what; or, who owns what, to whom. It would be funny as the Abbott and Costello routine, except that it is so completely and utterly dangerous to world economic stability. It is no coincidence "Who's on First", their manic comedy, was born of The Great Depression.

I did a little google search and came up with the catch of the year: it is a blog in Slate written by Daniel Gross and posted on May 20, 2005 called, "The Cram-Down Decade". Gross ends his opinion piece: "... it may likewise seem dubious to define a decade with a phenomenon that has thus far touched only a small minority of Americans. But the housing bubble could be popping soon. And I'm confident that by Dec. 31, 2009, a large number of us will have been crammed down." Props to you, Daniel Gross.

On the other hand, woe to us. I'm still trying to figure out how $700 billion even gets close to the amount of busted insurance in credit default swaps tied to busted mortgage backed securities tied to foreclosures in platted subdivisions tied to zoning decisions by small-minded politicians in county and city commissions through the land. How little money it takes to trigger an economic collapse when all moral and ethical signposts are thrown to the wind.