Larry Summers

“A Public Service,” My Fannie

I wanted to juxtapose two stories about Fannie Mae. The first, from this WaPo story reporting that the Administration has decided to keep some kind of federal entity guaranteeing mortgages. The story itself is interesting–as are Dean Baker’s post criticizing the underlying decision.

What I found particularly interesting, though, were the comments from the usual suspects about the role they perceive Fannie and Freddie as playing.

Two top Obama advisers, HUD Secretary Shaun Donovan and Treasury Secretary Timothy F. Geithner, think the government should maintain an outsize role in the housing market, administration officials said.

Donovan thinks federal support for housing fulfills a public service, while Geithner has been focused on the need for the government to have a way to keep the mortgage market operating during a financial crisis.

Other advisers, however, opposed a continued government role over the long run. Austan Goolsbee, who this month left his job as chairman of Obama’s Council of Economic Advisers, argued that the federal role in housing distorts the free market. By subsidizing mortgage investments, he argued, the government drives capital away from other types of investments — for example, those in companies developing environmentally friendly technology. He also warned that the government is putting enormous sums of taxpayer money on the line while conveying little actual benefit to home buyers.

In a meeting with the president, Goolsbee said that the government had finally brought Fannie and Freddie’s excesses to heel by taking over the companies and that it would be a mistake to let them loose in the market again, said a person familiar with the meeting. Goolsbee likened the companies to a villain held in a special prison who shouldn’t be freed just because he promises to help the poor, the source recounted.

Lawrence H. Summers, who was director of the National Economic Council until early this year, argued that, over the long term, it didn’t make sense to have a government-backed agency providing guarantees to the mortgage market but that Fannie and Freddie still play a crucial role.

“My position was that we needed to maximize activity in the short run to support the housing market,” Summers said in an interview. “Discussions of scaling down Fannie and Freddie were vastly premature under the circumstances of a collapsing housing market.” [my emphasis]

Compare those comments–particularly those favoring the GSEs from Donovan and TurboTaxTimmeh–with the description of the way Fannie Mae is fleecing the taxpayers and ruining communities by pushing servicers to foreclose even though homeowners are seeking a modification, an approach that violates Fannie’s own stated policy.

The documents show Fannie Mae has told banks to foreclose on some delinquent homeowners — those more than a year behind — even as the banks were trying to help borrowers save their houses, a violation of Fannie’s own policy.

Fannie Mae has publicly maintained that homeowners would not lose their houses while negotiating changes to mortgages under the federal Home Affordable Modification Program, or HAMP.

The Free Press also obtained internal records revealing that the taxpayer-supported mortgage giant has told banks that it expected them to sell off a fixed percentage of foreclosed homes. In one letter sent to banks around the country last year, a Fannie vice president made clear that Fannie expected 10%-12% of homes in foreclosure to proceed to sale.

[snip]

“Fannie just wants to clean up its balance sheet and get these loans off the books while taxpayers are eating these losses,” [Valpariso University Law Professor Alan] White said, referring to the multibillion-dollar federal bailout of Fannie Mae in 2008 and the rising cost to taxpayers.

“And Treasury and the FHFA are letting them get away with it. It’s a huge waste. Wealth is being destroyed, people are losing houses needlessly, and taxpayers are losing money.”

[snip]

According to White, the Valparaiso professor, foreclosing on a home typically costs Fannie Mae far more than a successful loan modification. But, he and others say, Fannie is willing to absorb higher losses because it knows taxpayers — not Fannie Mae — will eventually reimburse the loss.

In other words, even as Donovan and Timmeh appear to have won the argument on sustaining Fannie and Freddie (or something like them), what was implicitly clear (I’ve been hearing this accusation since 2009) has been proven: that the GSEs have been using their government backing to stiff taxpayers and ruin communities. (Kudos to Goolsbee who got it mostly right on this one: the taxpayer backing is providing little of value to taxpayers.)

It’s as if none of these folks overseeing Fannie know how badly it is screwing American communities. Or perhaps they don’t care?

On Gate-Keepers and Pragmatists

At the beginning of Obama’s term, when he talked about governing as a pragmatist, I perhaps foolishly believed he meant not pragmatism as DC understands it–as a principle-less squishy middle–but as the Pragmatist school of philosophers would mean it–as someone fundamentally open to and respectful of the ideas and viewpoints of all. Mind you, it was clear that his top advisors–especially David Axelrod–used the word pragmatist in the tired old DC way. But out of whatever idealism or naivete, I believed a smart guy from Hyde Park like Obama, who fancied himself an education reformer, couldn’t help but to have internalized the tradition of Dewey.

Thus far in Obama’s term, it hasn’t worked out that way.

That’s because, regardless of what Obama believes or has internalized, Big-P Pragmatism requires a certain kind of process–an openness to multiple viewpoints–and such process has not existed because of the gate-keepers at Obama’s White House thus far.

Now, to Obama’s credit, every single account of Obama’s decision-making includes some description of what a good listener he is. There’s always the scene where Obama listens intently to the disparate viewpoints on a subject, makes those people believe he has heard them with respect, and then makes his decision.

There are the multiple stories that relate events that take place before such sessions, wherein someone–most often Larry Summars but also Rahm–instructs a person in no uncertain terms that they will not be able to present their viewpoint to the President. There are even stories about minor progressive successes–such as Elizabeth Warren getting Obama’s support for the Consumer Finance Protection Board–that include a person finding a clever way around Summers or Rahm.

Now there’s always the very real possibility that for all that Obama fancies himself a Pragmatist, his unacknowledged very real ideological stances won the day. It may well be that Obama will never succeed in behaving as a Pragmatist because he’s just a lot more ideologically centrist than he thinks he is.

But a significant part of the problem is that for most of his term (I suspect, but don’t know, that Pete Rouse was much better on this point), he has had gate-keepers who either are fundamentally ideological beings (Summers) or are the squishy DC kind of pragmatist (Rahm), who prevented him from pursuing a process that allows real pragmatism.

Which brings us to Bill Daley.

I oppose Bill Daley because he has been, ideologically, on the wrong side of just about every issue. I oppose him because the last thing Obama needs is another bankster in the White House. I oppose him because the optics are horrible. I oppose him because when the next JPMorgan scandal hits–there are a number brewing–it will taint the White House by association.

But given my understanding of Obama’s failed pragmatism, I do take Howard Dean’s comments on Daley seriously.

The core issue is the contempt that not just the progressives were treated by–a lot of people were treated by–a bunch of senior advisors around the President who’ve been here for 20 years and thought they knew everything and we knew nothing.

[snip]

It was more than just Gibbs or Rahm, it was the whole mindset that was going on there. That will change dramatically especially if Bill Daley comes in, who I don’t agree with a lot of stuff politically but I do think a) he’s a grown-up and b) he gets that you don’t treat people like you know everything and they don’t.

Now, Dean is a pragmatist (though with none of the intellectual conceit about being one that Obama has). And so while I disagree with Dean’s characterization that Daley qualifies as someone from outside of Washington, I am very struck by Dean’s description of contempt being the key issue here.

The Chief of Staff’s job is to serve as a gate-keeper. Any Chief of Staff (or Economic Advisor in Summers’ case or Vice President in Cheney’s) can use that position to ensure that only their ideologically-favored choices are presented to the President. Or he (always he, it seems) can make an effort to serve the President’s claim to real pragmatism.

I’m not all that optimistic about Daley. All the myth-making about Obama’s bad relationship with the business community and the seeming certainty that hiring a bankster like Daley will fix that suggests that the whole point of this is about even further narrowing the ideological gate through which ideas and people get presented to the President.

But it is true that Obama’s real skill at listening isn’t worth a damn thing if Rahm or Summers are guarding his door. Let’s hope Daley will change that.

Team Auto Never Talked to Team Healthcare Reform

In Steven Rattner’s book, he describes newly elected Barack Obama asking his advisors “Why can’t [the US automakers] make a Corolla?” Implicitly, of course, he was asking “why can’t they make a Corolla in the United States.” His economic advisors, according to Rattner, admitted they didn’t know: “We wish we knew.”

The correct answer to the question would point to a number of things. Executive stupidity would be one important cause. Legacy costs would be another. Market structure and profitability requirements would be another. Weak branding would be another. You could even–pointing to the Ford Focus–argue that one of “them” can make a Corolla, or something reasonably competitive.

But one of the factors that partially explains why American manufacturers can’t make a Corolla would be healthcare costs. (With Toyota’s move of the Corolla-based Matrix production to Canada, you could even argue that Toyota can’t make a Corolla anymore, not here, anyway, even putting aside the quality problems the Corolla has had of late.)

Now, back on the campaign trail, Obama admitted that healthcare is one of the things that makes our companies less competitive. And in his big address to Congress on healthcare on September 9, 2009, Obama even singled out the auto industry as one which our exorbitant healthcare costs made less competitive internationally.

Then there’s the problem of rising costs. We spend one-and-a-half times more per person on health care than any other country, but we aren’t any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages. It’s why so many employers – especially small businesses – are forcing their employees to pay more for insurance, or are dropping their coverage entirely.

It’s why so many aspiring entrepreneurs cannot afford to open a business in the first place, and why American businesses that compete internationally – like our automakers – are at a huge disadvantage.

Which is why I was surprised to see no discussion about healthcare (as opposed to VEBA, the fund the UAW now uses to pay for retiree healthcare) in Rattner’s entire book.

None.

It seemed odd to me that, at a time when our country was rethinking our healthcare system, and at a time when the government was spending a boatload of money to try to make our auto companies competitive again, the teams pursuing those initiatives wouldn’t at least touch base, to test whether healthcare even addressed the problems that contributed to the automakers difficulties.

So I asked Rattner during the book salon.

emptywheel: Aside from a technical discussion of VEBA (for those not familiar, that’s the fund that the Big 2.5 negotiated with the UAW, which the UAW now uses to pay health benefits for retirees, which was a critical issue during negotiations), there was virtually no discussion of health care costs and the way that contributes to profitability (or lack thereof) for car companies that manufacture in the US, as reflected most obviously in Toyota’s repeated decisions to source from Canada because it offers the best mix of highly skilled workers and affordable health care.

Is that in fact right? No one talked about the burden health care costs put on manufacturing in his country during the bailout? I find that particularly shocking given that the bailout took place at the time when all the policy decisions on health care reform took place, and if anything, health care reform will make manufacturing health care costs worse.

Rattner: I wasn’t involved in the broader discussions about health care reform, nor am I a health care expert. We were certainly aware of the burden that health care costs put on the Detroit 3, but the creation of the VEBA’s solved that problem with respect to the retirees.

emptywheel: Right. But in all your coversations [sic] with Geithner and Summers and Rahm, was there honestly never a discussion about health care? No comment about ways the health care reform could have been formulated to contribute to the success of the bailout (and, more importantly, make sure that the effort ended up keeping the jobs that were saved in the US).

Rattner: No. There simply wasn’t time.

I understand the time constraints of all this. Though one of the parts of healthcare reform that will most directly affect the automaker healthcare costs, in a bad way, is the excise tax, and that wasn’t finalized until months after Rattner left government, which left five months for him to remind his buddies in the White House that their plan for healthcare was not going to bring down costs for US manufacturing companies, and it might well make them higher. Furthermore, it seems like an important enough issue–given the investment in both programs–to make time to address this issue.

Then again, I guess the healthcare team was too busy talking to Pharma to make time to talk to manufacturing.

Obama Has Made Civil Liberties AND Foreclosures Worse

Greg Sargent and Steve Benen have interesting taxonomies of the Democrats who should buck up and clap louder. I think both bring some needed nuance to the discussion. As part of that, both include some kind of category of lefties who oppose Obama to defend important principles. Sargent doesn’t limit that category to any one policy issue.

The second group on the left constitutes high-profile commentators, such as Rachel Maddow and Glenn Greenwald, who are mounting a detailed, substantive policy critique of the Obama administration on issues that are important to them. These folks see their role as advocates for a particular policy agenda, and they don’t hesitate to whack the White House when it commits what they see as grave policy missteps. For them to hold their fire because the White House wants them to would be an unthinkable betrayal of the role they’ve carved out for themselves. This is the “professional left” Robert Gibbs sneeringly alluded to — even though Obama himself has said he craves such criticism.

But Benen does (and he cites a Kevin Drum post in the same vein):

Kevin Drum notes, “If you’re, say, Glenn Greenwald, I wouldn’t expect you to buy Obama’s defense at all. All of us have multiple interests, but if your primary concern is with civil liberties and the national security state, then the problem isn’t that Obama hasn’t done enough, it’s that his policies have been actively damaging. There’s just no reason why you should be especially excited about either his administration or the continuation of the Democratic Party in power.”

Right. Glenn not only has a legitimate beef, I honestly can’t think of anyone who’s offered a persuasive argument to counter Glenn’s criticism. I don’t know, however, how large a group of voters we’re talking about that disapproves of the president based primarily (but not exclusively) on concerns over the national security state.

I’d argue that if Glenn’s contingent represents one group of the disaffected, the other two general groups of center-left critics are (2) those who believe the president’s accomplishments have been inadequate; and (3) those who are struggling badly in this economy, and expected conditions to be better than they are under Obama.

And note that both Benen and Drum make a clear distinction between those (like Glenn, and I assume they’d include me in that camp) have a legitimate gripe, and those who are unhappy with the state of the economy.

I disagree with their argument–that Obama could not really have done much more with the economy–but I think they present it in good faith.

But on one area, their claim that Obama couldn’t do more is absolutely false: on foreclosures.

The Administration has had no requirement to get Congress’ approval for their HAMP program. They have the money sitting, unused, at Treasury. Yet long after it became clear that HAMP was not only not helping, but was actually making things worse, after it became clear that other restructuring programs were much more successful, the Administration made little more than tweaks to the program. And then, as the number of people actually harmed by HAMP piled up, they claimed that the program had succeeded because it helped them get away (thus far) with the Extend and Pretend strategy.

But that introduces another problem with the taxonomies that make a distinction between those with a real gripe and those unfairly holding Obama responsible because the economy has not gotten better.

The failure to do something effective to prevent foreclosures–that is, being satisfied that HAMP helped Extend and Pretend rather than making a sustained effort to help actual homeowners stay in their homes–has made the economy worse. That’s by no means the biggest cause of the ongoing crappiness of the economy. But it is one cause.

So even if you buy the argument that Obama couldn’t have gotten more stimulus passed, even if you forgive Larry Summers for his “insurance policy,” and even if you ignore Obama’s decision to renominate Helicopter Ben in spite of his unwillingness to do anything about the full employment part of his job description, you still have to give Obama some of the blame for the economy. Middle class homeowners all over the country are seeing their home values continue to fall, and that’s something that the Administration could have at least tried to alleviate.

But they didn’t.

Congratulations and Good Luck to Elizabeth Warren

I’m cautiously optimistic with the dual appointment of Elizabeth Warren to be Assistant to the President to work at Treasury to set up the Consumer Financial Protection Board.

Frankly, no one knows what this appointment will mean in practice except perhaps Obama, Warren, and Timmeh Geithner. And no one knows how well Warren will negotiate the inevitable bureaucratic battles ahead, particularly with whoever replaces Rahm.

But I’m optimistic for two reasons. First, I have a lot of trust in Warren herself. She’s proven her ability to surprise her opponents in bureaucratic battles thus far. I also suspect (though don’t know for a fact) that she negotiated the Assistant to the President position as protection against anything Timmeh and Larry Summers might try. She seems to have demanded certain things with this nomination. And gotten them. And–as DDay linked earlier–she has expressed confidence that this is a win.

The President asked me, and I enthusiastically agreed, to serve as an Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau. He has also asked me to take on the job to get the new CFPB started—right now. The President and I are committed to the same vision on CFPB, and I am confident that I will have the tools I need to get the job done. [my emphasis]

So given the respect I have for Warren, I take her at her word that she will have the power to make of CFPB what it needs to be.

The other reason I’m cautiously optimistic is because the Chamber of Commerce is screaming like a stuck pig over these developments. Which, in my book, is generally a sign that something good has happened.

All that said, the appointment of Warren just means that both the White House and activists have more work to do. For the White House, not only do they need to fulfill whatever promises they made to Warren. Just as importantly, though, if they don’t actually use the fact that they finally have someone who can speak for and to the middle class (without the kind of gaffes that Joe Biden inevitably makes) to their advantage they will be really hurting themselves. Is Warren booked for the Sunday shows this weekend? If not, why not?

As for the rest of us, one of the reasons I think Warren was successful in negotiating what she sees as a successful resolution to this position is because her broad support was very clear to the White House. A wide group of people made it clear that Warren was the only acceptable candidate for this position.

If we get complacent, it’ll be a lot harder for Warren to do what she’d like to do with the position.

Progressives finally won something from this Administration. Maybe. But we’re only going to be able to keep it if we continue to make noise.

Edward Liddy’s Pitch in the WaPo

On the morning of what is sure to be a grilling by Congress, Edward Liddy has an op-ed in the WaPo. There are two significant details in the op-ed.

First, Liddy reveals that the retention contracts are over a year old.

Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago.[my emphasis]

Thus far, AIG has been hiding the date when these bonuses were put into place, saying they were put into place last spring. This confirms the bonuses were in place at least by March 17, 2008. 

That’s significant because AIG first publicly admitted AIGFP was FUBAR on February 28, 2008 (h/t masaccio):

As of December 31, 2007, controls over the AIGFP super senior credit default swap portfolio valuation process and oversight thereof were not effective. AIG had insufficient resources to design and carry out effective controls to prevent or detect errors and to determine appropriate disclosures on a timely basis with respect to the processes and models introduced in the fourth quarter of 2007. As a result, AIG had not fully developed its controls to assess, on a timely basis, the relevance to its valuation of all third party information. Also, controls to permit the appropriate oversight and monitoring of the AIGFP super senior credit default swap portfolio valuation process, including timely sharing of information at the appropriate levels of the organization, did not operate effectively. As a result, controls over the AIGFP super senior credit default swap portfolio valuation process and oversight thereof were not adequate to prevent or detect misstatements in the accuracy of management’s fair value estimates and disclosures on a timely basis, resulting in adjustments for purposes of AIG’s December 31, 2007 consolidated financial statements. In addition, this deficiency could result in a misstatement in management’s fair value estimates or disclosures that could be material to AIG’s annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

In other words, if those contracts were for all intents and purposes in place before AIG publicly admitted AIGFP was FUBAR, it makes it more likely they were an attempt to lock in their riches before things started falling apart (though they were undeniably put in place at a time when AIG knew those employees had screwed things up). 

Just as notably, Liddy emphasizes the continuing risk of the CDS portfolio as the reason to continue paying these bonuses, rather than the contractual obligation that has been emphasized in Congress and the press. Continue reading

TARP, the Consumer-Driven Version?

Larry Summers just wrote a letter to Congress explaining Obama’s rationale for asking for the remaining $350 billion in TARP funds. One of the things he says Obama will do differently is get credit to consumers and businesses more quickly.

We must also do everything in our power to ensure our efforts are more directly reaching Main Street. It is neither right nor sound economic policy to allow the small businesses that are responsible for more than two-thirds of job creation and entrepreneurs who have worked hard and played by the rules to be victims of the credit crisis that they were not responsible for creating. We will work in close cooperation with Congress, the Federal Reserve and other agencies to strengthen financial institutions and restart lending for small businesses, auto purchases, and municipalities.

Undoubtedly, Congress will complain about this second request, particularly given the way Hank Paulson completely mismanaged it. But there is already fairly good proof that getting credit to consumers and small businesses will have an immediate impact on the economy.

As I noted in my review of December auto sales, the GMAC-as-bank deal that BushCo negotiated in the last days of December had an immediate and significant impact on GM’s sales.

GM said its December sales were helped by a zero-interest financing offer that its GMAC finance unit was able to make during the last few days of the month after GMAC was granted status as a bank holding company by the Federal Reserve.

This allowed GMAC to access money from the federal government aimed at helping banks and Wall Street firms. GMAC had essentially run out of cash to make auto loans earlier in the fall.

Within days of negotiating this deal (which also undoubtedly freed up GMAC to make floor plan loans to dealers), it invigorated GM’s sales.

And I wonder whether the same move isn’t also having an impact on sales across the industry.

Early industry sales results for January indicate that industry conditions might be improving slightly, Ford Motor Co.’s group vice president for marketing and communications, Jim Farley, said during an interview at the Detroit auto show.

Farley described the increase as the first positive sales “blip” he has observed in months. However, he was hesitant to predict that the trend would even last through the end of the month. Continue reading

Emptywheel Twitterverse
bmaz I am not sure you geniuses on the east coast with long arm for asking, and short arm for answering, actually give a shit about Sep of Pwrs.
9mreplyretweetfavorite
bmaz I KNOW all you DC Press Peoples are all up on everything, but after weeks of telling you, now @lawfareblog says so, can you pay attention?
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bmaz Maybe the war drum bangers for Syria, Iraq, Ukraine, Somalia+all the other asinine places in world are right; history says no. cc: @lrozen
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bmaz .@nicholsong Ooops, yeah, I fell for that BS back in the day, see: http://t.co/zj45YfdKlZ But turned out to be total bullshit. cc: @lrozen
24mreplyretweetfavorite
bmaz .@nicholsong You have something that says the current, apparent, Obama Admin. rolling desecration of the WPR is fine and dandy? Really?
31mreplyretweetfavorite
bmaz So, sorry, hope I didn't insult any of high holy 30 somethings over petty little thing like Sep of Pwrs. Cause, you know #PoliticalBullshit
44mreplyretweetfavorite
bmaz Lawdy, I JUST CAN'T WAIT for some nubes at @TNR to tell me how freakin OK+normal it is for Obama to be desecrating WPR Separation of Powers.
49mreplyretweetfavorite
bmaz @timmathews Really, that is a great location, right in the heart of New Orleans. #BonusPointsForFalseCheer?
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bmaz @SuzanneTwoTon We can't go on like this together...
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bmaz They got the guns, but we got the numbers. Going to win, yeah we're taking over. Come on! #FamousPoet #Ferguson #MichaelBrown
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bmaz @SuzanneTwoTon Woo woo woo, I feel my temperature rising.
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bmaz @OBEYshiba No no, the Carol is at the Welcome! But, Ingos, yeah.
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