The Handyman's Tale

The newest "Save-the-Banks" plan has been circulating the Internet with varying degrees of official sanction for a few days now, but I've so far held off on posting about it because a) I wanted to make sure I understood the gist of it, b) I wanted to make sure the more informed from whom I steal my opinions had time to understand the gist of it, and c) I'm generally getting a little bored of the whole "here's another trillion dollar plan that is just as indispensable and sure to work as the other trillion dollar plan and come on you know it's totally different this time" routine.

But after much back-and-forth over the new Geithner plan (more back than forth, I've noticed), here's what it comes down to: the government is going to buy the so-called "toxic" assets from the banks.

If you think that sounds an awful lot like the first Paulson plan in which the government was also going to buy the so-called "toxic" assets from the banks, that's because you're a philistine and do not properly understand the intricacies of modern finance.

Let me illustrate with a really shitty parable*:

Once upon a time, the house we all call America faced a terrible trouble. While in golden days past water had flown through its pipes cool, sweet, and abundant, now there was nothing for those who thirsted for that salubrious liquid(ity) but dust from the tap and a terrible groaning behind the walls.
At the end of their collective wits, the residents of America called Plumber Paulson to investigate. After negotiating a handsome fee, Plumber Paulson determined that America's pipes were blocked most terribly.

"But what is it that blocks our pipes so?" cried the denizens of America house. "Surely it must be the waste which we have been depositing there for near-now a decade with reckless abandon!"

"Heavens no!" Plumber Paulson chortled with giddy amusement. "It is not feces that impedes the flow of your pipes, but gold! Pure, unadulterated gold! And, for a handsome fee, I shall put very much of your money down the toilet and in doing so dislodge that gold which I can then place upon your mantle for all to enjoy."

Rejecting Plumber Paulson's scheme as an absurdity, the Americans sought another opinion on the matter. Finding Handyman Geithner available, they brought him into America house to examine the pipes. After much careful consideration and deliberation (in which time the plumbing system began to back up quite aggressively and with disagreeable results for everyone), Handyman Geithner summoned the residents of America house and announced his plan. The room was hushed and with much empathy and warmth in his eyes, Handyman Geithner spoke:

"I have concluded that it is not feces that impedes the flow of your pipes, but gold! And, for a handsome fee, I shall put very much of your money--"

But before the handyman could finish, there was an uproar amongst the people of America house. Perplexed and wounded, Handyman Geithner waved his hands and plead for time to explain further.

"You see, my plan is quite different from Plumber Paulson's. If you only you will hear of it in its entirety."

Suspicious though they were, the Americans were nonetheless a reasonable group of people, and so allowed Handyman Geithner to continue.

"As I was saying," the handyman said with evident irritation and hurt-feelings, "For a handsome fee, I shall put very much of your money into the hands of a dear friend of mine Fund Manager Chad who will in turn retrieve that gold and, after taking a handsome fee, will place it upon your mantle for all to enjoy."

Recognizing that the plan was indeed quite different, the Americans were nonetheless confused by such complicated matters. "But what if the blockage is not gold, but waste as we have assumed all along?" One asked incredulously." We do would not then want it to be placed upon our mantle."

"And what of your dear friend Fund Manager Chad?" Another asked. "What shall happen if he does not use the money in an effective manner? Will he still be rewarded a fee, and if so, who is to pay it?"

But Handyman Geithner simply laughed with much merriment. "Leave the details to me," he said with confidence and a wave of the hand. "I know what I'm doing."

*For an actual explanation, click here.

Fannie and Freddie and JP and Stanley and...

Good news on the housing front:

Government-controlled mortgage finance companies Fannie Mae and Freddie Mac said Friday they have immediately suspended all foreclosure sales involving occupied single-family and 2-4 unit properties through March 6. This is to give troubled borrowers more time to work with loan servicers to avoid losing their homes.
...
Meanwhile, Citigroup, JPMorgan Chase and Morgan Stanley said they had placed a moratorium on foreclosing on some home loans to give the government time to launch a $50 billion mortgage relief program. (Soure: CNBC)

As far as I can interpret this, this is a sort-of-kind-of thumbs up from the major banks to the Obama plan to restructure troubled mortgages and subsidize homeowners who are underwater. At the moment, no bank wants default on a massive scale and no bank wants to seize property only to have to sell it into a trouble market (see my previous post). But now that Obama's plan is seen as a kind of inevitability, the Banks may be holding off, assuming that Obama's plan is going to make such widescale foreclosure activity unnecessary. That's my take on it anyway, but I'm honestly not that sure.

The move may be partly political as well:

"I've talked to all the major servicers—both the big bank ones and the big independent ones—and they are all ready to go, they're chomping at the bit,'' Lockhart, the director of the Federal Housing Finance Agency, said. "The other thing they're asking for standardization.''

On top of that, following Fannie and Fredie's lead by temporarily suspending foreclosures and working with the administration probably generates some profitable good will. If the banks are going to be forced into taking a haircut in the near future, maybe they all want to make sure that each one is coming out equally mutilated.

As for the eventual success of that particular aspect of the Obama/Geithner plan, not everyone is so optimistic:

Another "evolving plan". I think they will discover that there is no easy method for successful loan modifications (as FDIC Chairwoman Sheila Bair discovered when they took over IndyMac). I guess the plan is to buy down loans with the $50 billion - or pay a portion of the monthly payment.

The details will be interesting. I'm curious - how do you measure success when the borrowers aren't already in default? (Source: Calculated Risk)

We'll have to wait and see.