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post #1 of 2 (permalink) Old 02-14-2009, 11:10 AM Thread Starter
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The Committee on Doubt and Uncertainty



A day in the life of House Financial Services.

Anyone trying to understand why the credit mess keeps getting messier needs only to have sat through Wednesday's hearing of the House Financial Services Committee. The eight bank CEOs were mere props. The stars were the politicians, who managed to demand more loans for consumers while simultaneously giving lenders new cause to wonder if they'll ever be repaid. This gathering of the esteemed Committee on Doubt and Uncertainty occurred as markets desperately need less of both.

Chairman Barney Frank's hearing was intended to flay the CEOs for not lending enough. It fell flat as political theater because banks have actually increased their lending in recent months. The people who aren't lending more are investors in nonbank financing such as asset-backed securities.

In fact, the nonbank credit market is normally much bigger than bank lending. But new issues backed by auto loans, credit cards and the like have been rare this year, as markets wonder how the government's next move will change the value of such investments. Buyers and sellers of existing securities are "sitting on the sidelines," according to Asset-Backed Alert, waiting for still another Washington recalibration of risk and reward.

Most investors who lend in these markets are not recipients of financial bailout money, so Congress can't simply browbeat them into making another big bet on the American consumer. They've been burned badly. They need reassurance that our capital markets operate with a consistent set of rules. The Committee on Doubt and Uncertainty offered only the assurance that the rules will keep changing.

Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.

Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits.

The safest bet is a huge new rescue of those who borrowed too much, and Mr. Geithner has already promised another $50 billion of your tax dollars. Meanwhile, Mr. Frank made clear that Congress's obsession with promoting homeownership is alive and well. He explained that his foreclosure moratorium pending the Geithner plan is to avoid a circumstance akin to a soldier who is killed after a ceasefire agreement but before the news has reached the front. Readers who don't equate moving into a rental with death in combat should direct their comments to Mr. Frank's office.

Maxine Waters (D., Calif.), for her part, demanded to know why some banks don't modify loan terms until borrowers are 60-days delinquent. Heck, why stop at mortgages? Shouldn't lenders convert all of their money-making contracts into losers?

If potential investors weren't frightened enough, Nydia Velazquez (D., N.Y.) then seized the microphone. She demanded to know if the assembled CEOs would back "cramdown" legislation, which rewrites the bankruptcy code to allow judges to reduce the amount people owe on their mortgages. So investors who might have jumped back into housing now must calculate the odds that this provision will pass the Senate, and if it does, how much bankruptcy judges will reduce their overall returns.

Goldman Sachs CEO Lloyd Blankfein pointed out that a potential consequence of bankruptcy cramdowns is that "less capital flows into this market." The only CEO who sided with Rep. Velazquez was Citigroup's Vikram Pandit, who also agreed with nearly everything the politicians had to say. This is what a CEO does when his bank becomes a de facto ward of the state, as Citi now is. Unfortunately, Mr. Pandit's support for cramdowns will only discourage nongovernment investors in housing markets.

All in all, just another day's work for the Committee on Doubt and Uncertainty, which continues to believe that proposing more ways to punish lenders will somehow produce more lending.

House Financial Services Committee Fails to Instill Confidence in Nonbank Lenders - WSJ.com

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post #2 of 2 (permalink) Old 02-14-2009, 12:12 PM
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