Bernanke to Banks: Take the Hit

Will "Helicopter Ben" become "Bailout Ben"? My initial read of the FOMC Chair’s speech today suggest he will not. But he has asked fro some rather extraordinary actions from banks and other lenders.

What the Chairman proposes are efforts to 1) help distressed borrowers refinance; 2) loss-mitigation arrangement between the lender and the distressed borrower; and 3) the possibility of writing down principle.

That last one really caught my eye. Here’s the money quote:

"In my view, we could also reduce preventable foreclosures if investors acting
in their own self interests were to permit servicers to write down the mortgage
liabilities of borrowers by accepting a short payoff in appropriate
circumstances

For example, servicers could accept a principal writedown by an
amount at least sufficient to allow the borrower to refinance into a new loan
from another source.  A writedown that is sufficient to make borrowers eligible
for a new loan would remove the downside risk to investors of additional
writedowns or a re-default.  This arrangement might include a feature that
allows the original investors to share in any future appreciation, as recently
suggested, for example, by the Office of Thrift Supervision.  Servicers could
also benefit from greater use of short payoffs, as this approach would simplify
the calculation of expected losses and eliminate the future costs and risks of
retaining the troubled mortgage in the pool." (emphasis added)

That’s pretty astonishing talk from a sitting Fed Chair.

To reiterate, the Chairman of the Federal Reserve is advising financial institutions to take a hit, write down principal, both their own and the common good.

These are indeed strange and interesting days . . .

>

Source:
Reducing Preventable Mortgage Foreclosures
Chairman Ben S. Bernanke
Independent Community Bankers of America Annual Convention, March 4, 2008
http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm

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  1. scorpio commented on Mar 4

    as crazy Tom Berenger says to the wounded soldier in Platoon: “take the pain. TAKE THE PAIN!!!!”

  2. tyaresun commented on Mar 4

    Can anyone tell the difference between Ben Stein and Ben Bernanke anymore?

  3. Kp commented on Mar 4

    I’d imagine a bailout for the banks by the Fed would be much more palatable for folks if the banks were to bail them out first.

    Looks like I am paying for this shit either way. I didn’t do anything stupid with my finance through out this whole mess…am I too late?

  4. x-man commented on Mar 4

    lawsuit clusterfuk; the ultimate cat wrangle; goat rodeo in the octagon…

    no way it happens–how to get pensions, fcb, hedgies, towns in norway to agree to get cornholed?

    it does show the level of desperation tho

    in the words of Jimmy Morrison: no one here gets out alive

  5. Mr. Beach commented on Mar 4

    Once again, Bernanke is proving himself to be a Wall St. amateur.

    As we all know, it isn’t so simple. Mortgages were sold to MBS pools, which were sliced, tranched and resold to CDOs, some of which were once again sliced and tranched and sold to otheCDOs. Default swap contracts were written at various stages. Investors are on all sides of these positions — both long and short.

    Of course fees were collected at every step of the process.

    It is impossible to do as Bernanke suggests: who would do it? The servicers merely service the mortgage for MBS pools. There isn’t a single entity authorized to approve a writedown.

    At this point, Bernanke is a political puppet. Unwilling and unable to say and do what needs to be done.

    It is sad to see Bernanke’s intellectual fall from grace. He will be ridiculed in less than 10 years time. He will be this century’s Arthur Burns. Perhaps we should call him “Burn-anke”

  6. pmorrisonfl commented on Mar 4

    Now if I can just work out a deal writing down my 3 million dollar mansion to 150K, I can pay it and the Mercedes off with the interest off the cash I got out of the deal 2 years ago.

    Oh, wait, I was too responsible for that. Maybe I can usemy rebate check to pay for the tax increase required by federalizing the GSE’s. I hope my landlord doesn’t raise my rent. I alternately feel smart and stupid for selling our home in Fort Lauderdale last August.

  7. Max commented on Mar 4

    He’s giving away other peoples’ money? Like he can’t print enough of his own to give away.

    If this becomes the New Rule of Mortgages then no one will play again.

  8. Greg0658 commented on Mar 4

    today on my fav cable tv money station
    why is this home mortgage fallout on Wall Street banks and not Main Street banks?

    ummmmm?

    1> generousness – a home for everyone and everyone in a home from the Fed level
    2> camouflage for DotComs, Enron, Healthcare South, Tyco, Worldcom, 9/11 failout
    3> WTOs march to the Amero
    4> creative destruction to begin a better plan out of this defunct system
    5> something I didn’t think of

  9. Pat G. commented on Mar 4

    This is just government rhetoric. In the end he’ll cut more and we’ll all take the hit.

  10. mw commented on Mar 4

    How many more “hits” can the banks take before they become “LETHAL”?..

  11. wally commented on Mar 4

    What Ben is asking is that banks give gifts to some people, but not others.

    It is a bit hard to see how that might work in practice.

  12. Marc commented on Mar 4

    I think you guys are missing the point. What Ben is probably trying to say is that the banks need the mortgage holders (past, present and future) just as much as the mortgage holders need the banks. If both parties act only in a short-sighted, greedy manner, then the whole system gets FUBAR.

  13. JasRas commented on Mar 4

    It’s a new US Treasury Product:

    “From the makers of TIPS, now the TRP: The Treasury Reduction of Principal Mortgage” now we protect you from inflation and deflation! Don’t worry about buying something at the peak anymore, with a TRP we’ll absorb the declining value so you don’t have to!

    Yeah, that’s just great…

    After reading the mandatory reading Barry assigned us over the weekend, I’m feeling really positive

  14. Greg0658 commented on Mar 4

    what would the < fallout / benefit > be to halve the remaining principle for the folks playing by the rules all this time?

    should I hit Post and fill in the spam code?

  15. John Badalian commented on Mar 4

    I think Ben wants to assert a tough-guy posture, but actions scream louder than words. Just look at the Term Auction Facility (TAF). According to that wise Grizzly Bear, James Grant (and his asscociate Ian McCulley) “a bank can borrow against 85% of the par value of a triple AAA rated CDO, and 80% of the par value of a non-triple-A CDO”(Interest Rate Observer, February 22, 2008). Grant quotes strategist Christoper Wood (at CLSA) who stated in the Financial Times that “the banks are increasingly giving the Fed the garbage collateral noboby else wants to take”. Sounds like someone’s gonna take a hit alright. Anyone care to guess WHO???

  16. Douglas Watts commented on Mar 4

    Seriously, tho … I wonder if this would destroy the legal claims of municipalities who are now going after Merrill Lynch et al. for selling this garbage (ie. Springfield, Mass.). I imagine that state AGs and municipalities might have a problem with this.

  17. Portland Refugee commented on Mar 4

    “Its not about the money. Its about THE MONEY”

  18. Stuart commented on Mar 4

    Some pretty good comments from Jim Sinclair.

    The System is Broken

    There is no question about this fact regardless of the camouflage spin. The system has been derailed by the popular and profitable OTC derivatives now melting down and taking institutions and people along with it. There is absolutely no positive impact from present low rates, and will be none even at near zero.

    Let me explain to you why there is so much fear and distrust between financial institutions, then you will see why the one time handout of money and interest rates dropped to zero have no hope of doing much more than giving one month of some improved statistics.

    Lets assume you have entered into an OTC derivative whereby you own (long) the Dow Jones index at 10,000. You are still in the position. Today’s action is your last straw. You decide to take your $1 billion profit.

    There is no clearinghouse. You do not get paid every day as a winner, and do not pay out every night when losing. No one in an OTC derivative has a margin maintenance requirement. You just hold a special performance contract upon which the financial integrity depends on the loser in the arrangement.

    Tomorrow you inform the party obligated to deliver you the Dow index at 10,000. You would anticipate the other side would simply buy you out of the obligation, having hedged their obligation somewhere else.

    The problem arises when the party to the arrangement required to perform simply cannot because of outrageous markdowns and the flight of capital. They have quite simply lost the ability to make good on these many obligations.

    So there you are with a one billion dollar profit taken into your earnings statement that does not exist.

    As a result both you and your counter-party have problems financially and need to restate your financials.

    Now distrust between counterparties is rampant for very good reasons.

    I have simplified this so that it is understandable.

    Respectfully yours,
    Jim

  19. Ben commented on Mar 4

    Dear Ben,

    Please bail me out!

    Yours,
    Ben

  20. Douglas Watts commented on Mar 4

    Mish says:“Bernanke is essentially saying there would be no problems if we did not have any problems.”

    worth a look.

  21. Steven J commented on Mar 4

    Looks like he’s trying to convince “the market” (who?) to give consumers a reason to stick with the mortgage payments. If you give buyers equity, will it keep them from putting the keys in the mail?

    Thanks, Boomers!

  22. B. Walthrop commented on Mar 4

    Is this such a bad idea? As I understand it, Ben is asking the banks to purchase the mortgages out of the MBS/CDO pool, forgive a portion of the principle (taking the loss now) in order for the home debtor to be able to re-finance at a 30 yr fixed that they can afford. This might (just maybe) put a bit of a floor (albeit at a lower level) on residential real estate. It would keep the IB’s from continuing to hide the sausage and mark to myth. At least the losses would be more transparent, and some level of trust might be restored. It also puts the losses on the financial wizards who are primarily (not exclusively) responsible for the last 4 years of reckless lending.

  23. Winston Munn commented on Mar 4

    Don’t look now, but Bernanke with his comments just initiated DEFCON 1 in the financial sector.

    Too bad this CFOTFM (Clusterfuck Of The First Magnitude) occured in the Shadow Banking System, and Ben isn’t a member of that club.

    So who’s he gonna call, Shadow-busters?

  24. Craig K commented on Mar 4

    all this talk about forgiving is nice but since the loans are all over the place (read that it’s impossible to know who actually owns your loan), who knows who is supposed to forgive what loan?

  25. David commented on Mar 4

    As Jim Cramer said on his show tonight, were here to make money, not follow the Ten Commandments; as he kiss the golden bull and degraded Ben Bernanke to lower rate more.
    Well, it seems to work, because evertime Cramer does this to Ben Bernanke on his show, Bernanke lower rates.
    And evertime Ben Bernanke lowers rates, Cramer ridicule, mock, taunts, and deride Bernanke.
    This is strange behavior on the part of these two friends, I think Shakespeare got it right…
    “For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”
    Shakespeare Hamlet

    PS, By-the-way, The Ten Commandments, not the Ten suggestions!

  26. Jakob commented on Mar 4

    Folks, the banks are already doing this. It’s called a short sale. They have already figured out whatever is necessary such that the MBS holder or whomever takes the principal hit.

    Only difference with Bernanke’s plan is that the buyer and seller are the same person.

    Sad as it is, I can see the banks doing this. Saves them from bigger FC losses.

  27. rick commented on Mar 4

    why did you wall street guys have to have SIV’s anyway? So you could get a few more crumbs, hit your quarterly #’s to justify your big year-ends? You new products finally bit you in the rear- heh! We will all get thru this and someone will invent some other new derivative to stick it to some stupid bankers. Does anyone recall the phrase “condemned to repeat it”? I’m sure there was a lot of fraud on the homeowner side but I’m equally sure there was more fraud on the mortgage broker side. I wonder if Julian Simon will still take that $10 bet on commodities that he made back in the ’80’s?

  28. hidebound commented on Mar 4

    Bernanke’s next magical trick will be to ask the guys who sold the properties at the now outrageous prices to refund the cash and take back the goods. Pool installers who sucked up the refi cash spent so freely should reclaim the pool and pay back the cash — putting all the cash refunds together will allow the poor schmoo to cancel his debt. Pity about the restaurants tho!
    Will Wall Street – Main street be profitable on the other side? Did they jump in ’cause they were greedy or were they pushed — i.e. the basic economy really sucked and CDOs were their only salvation.

  29. Winston Munn commented on Mar 4

    An addendum to my DEFCON ONE comment:
    From an article by Ambrose Evans-Pritchard

    Quote: “We are becoming increasingly concerned that the authorities in the world do not get it,” said Bernard Connolly, global strategist at Banque AIG.

    “The extent of de-leveraging involves a wholesale destruction of credit. The risk is that the ‘shadow banking system’ completely collapses,” he said. End Quote.

    DEFCON ONE

    Again, from Ambrose Evans-Pritchard:

    Quote: “Section 13 of the Federal Reserve Act allows the bank – in ‘exigent circumstances’ – to lend money to anybody, and take upon itself the credit risk. It has not done so since the 1930s.” End Quote.

    One thing is clear – wholesale destruction of credit is n-o-t inflationary.

  30. RobT commented on Mar 4

    Has anyone told Cramer about the dollar? He’s so warped in his nominal equity value numbers.

  31. Eric commented on Mar 4

    Doesnt the Helicopter man’s plan assume that real estate will not decline further once the write down is taken. If I am a lender I would much rather foreclose and blow out the property now than forgive a portion now and watch the property decline more in the coming months and be stuck in the same boat.

  32. Winston Munn commented on Mar 4

    Eric,

    You didn’t read closely enought. The banks write down the principle so new loans can be made – by the GSEs and insured by FHA.

    Dollar-Store Nationalization and the taxpayer is stuck with future losses.

    The name of the game is “Save the Banks”.

  33. njdoc commented on Mar 4

    Comrade Bernanke would make Marx and Lenin proud. His 5 year plan to reflate the Wall Street Financial Complex through socialism for the well-to-do is remarkable. Capitalism for the elite and socialism for the rest during asset inflation and Socialism for the elite, capitalism for the rest of us during asset deflation. This era should have a new economic school named after it. Certainly it is not Moneyterism, Socialism, Keynsian, Austrian or anything else I can parse out. What do we call an economic theory whose whole premise is to protect the Wall Street Oligarchy?

  34. David commented on Mar 4

    njdoc,
    5 year plan, you hit-it-on the nail.
    Cool.
    “What’s done can’t be undone.”
    William Shakespeare

  35. Johnny Vee commented on Mar 4

    We are in serious trouble and 2008 will be a defining year.

  36. David commented on Mar 5

    Don’t give up, 2008 will be a defining year.

    “There is a tide in the affairs of men, which, taken at the flood, leads on to fortune. We must take the current when it serves, or lose Our Ventures.”
    William Shakespeare

  37. Paul in NYC commented on Mar 5

    Shakespeare also wrote this:

    “Something is rotten in the state of Denmark”

  38. Barry Green commented on Mar 5

    The effects of rate cuts from September ’07 haven’t hit yet, and there’s more and bigger waves of liquidity surging behind the first.
    Markets will hopefully start looking ahead at this. Let the next bubble begin…

  39. Jos from Europe commented on Mar 5

    THIS IS JUST STUPID!

    So if I pay my mortgage every month (and drive a simple car, eat at home, etc) I need to pay,

    BUT if I want to drive a huge SUV, want to go to restaurants every day and can not pay the mortgage anymore, I NEED TO GET A FREE GIFT FROM THE BANK!

    This is just stupid moral hazard.

    Sure some borrowers are victims of fraud, but if things went OK (prices continue to rise), you heard nobody about fraud. Now it is going from wrong, and everyone is trying to find someone else to blame. Everyone need to take their RESPONSIBILITY!

  40. Eclectic commented on Mar 5

    “That’s pretty astonishing talk from a sitting Fed Chair.”

    I’m not exactly sure if you’re being complimentary of Dr. Anke or not… but I suspect yes, in this at least.

    Indeed, it’s astonishing, but have no doubt about my compliments to him, in this.

    Dr. Benber N. Anke is providing the crystalline essense of common sense. About all I would add is a repeat of my long-standing recommendation for Congress and the White House to provide a legislated framework for these “work-outs.”

    It should be done in the form of a National Ombudsman Program given the authority to expedite this mechanism that without such a program would probably be derailed by legal and tax rules and/or state-specific real-estate or common contract law.

    For all of you who object or complain about this… “If you loan a man a dollar, he’s your servant… loan him a million dollars and you’re his slave.”

    The banks would do well to loosen the bonds that they’ve bound themselves with.

  41. wunsacon commented on Mar 5

    Hypothetically, banks might find it less costly “selling” the house to the shmo sitting in the home than selling en masse at fire sale prices in the foreclosure market.

    What’s to prevent shmo’s from repeating? Well, hypothetically, they can — as long as there are enough of them doing it together. But, at the point house prices stop dropping, most deadbeats will start paying their mortgages again. And, at that point, the balance of power will shift from “deadbeat” back to the bank, because in a more normal housing market the bank knows it can foreclose AND find a buyer for the amount of the loan.

    What’s interesting about the above dynamic is: it shows the power of crowds and reminds me of Soros’ writings on boom/bust and reflexivity. (Wish I were “in the biz” so I could do a better job making money off these trends…)

    I hate that I won’t be a beneficiary of this nonsense. But, I can see this playing out to the benefit of deadbeats who outbid me in 2004 for a house at a reasonable price.

  42. Mr. Gspan commented on Mar 5

    Bernanke will go down as the greatest federal reserve moron who will be rightly accused of sending the US dollar into an unrecoverable freefall …this is only the beginning of the unwinding.

  43. my vote on quote of the day commented on Mar 5

    Comrade Bernanke would make Marx and Lenin proud. His 5 year plan to reflate the Wall Street Financial Complex through socialism for the well-to-do is remarkable. Capitalism for the elite and socialism for the rest during asset inflation and Socialism for the elite, capitalism for the rest of us during asset deflation. This era should have a new economic school named after it. Certainly it is not Moneyterism, Socialism, Keynsian, Austrian or anything else I can parse out. What do we call an economic theory whose whole premise is to protect the Wall Street Oligarchy?

    Posted by: njdoc | Mar 4, 2008 10:23:01 PM

    njdoc,

    classic

  44. Douglas Watts commented on Mar 5

    Karl Marx never proposed, nor described, any “5 Year Plans.”

    The so-called “5 Year Plans” occurred in Russia 60 years after Karl Marx had died.

    Let’s keep our facts and history accurate.

    Thanks.

  45. JustinTheSkeptic commented on Mar 5

    Ludwig von Mises: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

  46. blam commented on Mar 5

    “This era should have a new economic school named after it.”

    It allready has two handles:

    Supply side or trickle down economics.

    It always involves a credit bubble engineered by a republican junta, generally in the real estate space. Real estate is a good target because the junta can derail or refuse to enforce the regulatory laws.

    Credit expansion is a method of expanding the money supply to juice demand to keep up with the “supply side” expansion. It’s really a Keynsian recessionary prescription in drag, without the countercyclical, non-recessionary surplus thing. It feels good when the beanie babies are selling for a gazillion dollars. Not so good when the beanie baby morphs into a turd.

    Throw in the other modern economic innovation, controlling inflation by reducing wage growth, and you have a whopper of a recession when the train lurches to a halt.

  47. cinefoz commented on Mar 5

    Telling banks and other mortgage lenders to solve their own problems sets a floor that will likely be the low cost option to the US and the taxpayer. It is obvious that Mr Bernanke and company are taking dramatic steps to prevent credit markets from seizing. As long as this remains status quo, then letting the incompetent face their own incompetence is a good policy.

    History supports this.

    In the S&L crisis, the government ultimately spent over net $100 billion (a lot of money at that time) bailing out the lenders. This crisis was brought about by deregulation that allowed floating savings rates to be mismatched against low rate, low income, fixed rate, and long term mortgages.

    Allowing the S&Ls to buy high income junk bonds to supplement low income mortgages ultimately caused the S&L problem to balloon from a scandal into a financial crisis. Had S&Ls not been freed to buy junk bonds that ultimately became worthless, the net loss would have been perhaps 75% less, or maybe $25 billion.

    If creative deregulation were allowed to bail out the banks, a similar interaction with some newly created type of junk financing would evolve. The ultimate cost would likely be several times higher once the new balloon burst. This would be the next asset bubble.

    In other words, creative thieves would offer to help desperate bankers in some new way involving some new financial instruments and the total long term cost would skyrocket multiple times. Investors would make huge sums until the next balloon turned into a Ponzi scheme and burst.

    Mr Bernanke is making good, possibly exceptionally good policy by allowing the bankers to solve their own problems. The real crisis is the potential seizing of credit markets. Applying creativity and resources here will better serve the economy by a huge magnitude.

  48. SPECTRE of Deflation commented on Mar 5

    The FED will not destroy itself anymore than it did during the Great Depression. No matter how bad it gets, they will do what they must. They may go kicking and screaming down the painful path, but down the path they will go, or it’s down the rabbit hole.

  49. D. commented on Mar 5

    It’s logical at the systemic level but absurd at the individual bank level. I thought free markets were about competition.

    If my bank is strong despite some bad mortgages, why would I be the first to write down my bad loans, lose my multiple and be bought up by another bank of dubious quality which has been delaying the inevitable and now would get to buy my assets at bargain prices and save their sorry butts?

    What is good for the system is not necessarily good for each bank. Banks will each make timing choices according to their competitive position. Bernanke is not promoting healthy competition here, he’s promoting a controled economy!

    Not to mention the spaghetti situation we have here. On top of everything being mixed up, the pasta has even been chopped up! Who knows what’s where and who owns what?

  50. Chance commented on Mar 5

    When everything else goes wrong, we can count on Chairman Bernanke.

  51. cinefoz commented on Mar 5

    To put it differently, Assume that the credit markets are an interstate highway and bad loans are a multi-car pileup. The pileup is blocking the road. If the road isn’t clear, then all traffic using it grinds to a halt.

    Keeping the road clear is the first priority.

    In order to clear the road, you need to push the crashed vehicles aside. They can be cleaned up later. Gapers will gawk and traffic will slow for a while as cleanup progresses, but traffic will be moving. Eventually, gapers will look for something new to gawk at and the pileup won’t even be noticed, providing the road has been made clear.

    The road is the credit market. The pileup is made from idiot bankers and their retard friends who paid out on liar loans and similar bits of creative financing. As with any car wreck, a top priority is to clear the road so the entire network isn’t jammed. Mr Bernanke has helped push the roadblock aside. He is clearing the road for others to resume use of by keeping credit markets open. Gapers will eventually resume full speed.

    The Idiots will have to pay for their own tow trucks.

  52. D. commented on Mar 5

    cinefoz:

    the problem is that many of the next ones who could move ahead ARE IN THE PILE UP. Some of them only have fender benders and can still drive.

    Nice try with the analogy. We can all make analogies that reflect our view of the world just like we can create any equation to get to a specific number.

  53. DonKei commented on Mar 5

    Contrary to the WSJ take on Bernanke’s speech, this doesn’t get at the root of the problem. Just because a homeowner is underwater in a house doesn’t mean they will quit paying. Most folks that finance cars are underwater when they drive them off the lot, but they still pay–for the same reason an underwater homeowner would–they need the asset badly enough to not care whether it was a good investment.

    The root of the problem is that in addition to being underwater, they don’t have the cash flow to service the debt, and probably never did. By imposing a haircut on the lenders, perhaps that will lower payments enough to make it affordable.

    I doubt it. There is a saying in the credit industry–once a “C” customer, always a “C” customer. The subprime borrowers don’t know how to manage money, or they wouldn’t be subprime. No amount of cramming down their debts will teach them how to manage money, and so far as this cram down would only be relevant if the borrowers weren’t paying, it will self-select the ones least likely to pay no matter what is the underlying equity.

    Any bankruptcy lawyer in the business long enough has a surfeit of repeat customers. Even after cram-downs, re-organization, discharge, the serial filers still manage to screw up their finances.

    Bernanke’s idea just postpones the inevitable foreclosure, and thereby prevents prices from finding a bottom so that in Cinefoz’s analogy, the wreck can be cleared and the credit highway can get back to speed.

  54. Graffiti Grammarian commented on Mar 5

    When is Ben going to tell the banks to take a haircut on my credit card debt?

    And my student loans — what about those, Ben? Surely I deserve to have less outstanding on my ivy league debt just as much as some shady character in a McMansion in Boca deserves it!!!

    Right??? Right??? I mean, the Fed is not suggesting that the banks reward poor financial decisions at the expense of people who made good calls?

    RIGHT?????????

  55. Allan commented on Mar 7

    Bankers are known for having bleeding hearts.

Read this next.

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