Tom Brown has launched another broadside against Elizabeth Warren and her questions for Treasury; it’s worth reading if only to understand just how weak the arguments against her really are. Here’s how he gets started:
Take, for example, her Question 3: Is the strategy helping to reduce foreclosures?
Not to put too fine a point on it but, when it comes to the government’s effort to stabilize the financial system, the absolute level of foreclosures is . . . irrelevant.
It’s weird that Brown is quite sure what the stabilization program isn’t designed to do, but never quite comes out and says what it is designed to do. He does write for a website called bankstocks.com, maybe he thinks that the purpose of the program is to increase the value of his equity. He’s wrong. It’s designed to help real Americans, by giving them access to credit and by keeping them in their homes. If foreclosures continue to rise, it will be a failure.
For a lender, the foreclose/don’t foreclose decision ought to be a matter of straight economics. A lender should not foreclose (and should offer the borrower a loan modification instead) when it expects the modified loan to generate a higher net present value of cash flows than an immediate foreclosure would. Modifications on more liberal terms would simply be a giveaway from the lender to the borrower–which is not what the TARP program was intended to fund.
There’s a micro objection to this, and a stronger macro objection. The micro objection is that Brown is living in some kind of "ought makes an is" world, where lenders don’t foreclose if they can get themselves a better deal through a sensibly-worked-out loan mod. But that’s not the world as we know it. Lenders (or, rather, servicers) simply don’t have the staff to modify loans intelligently and effectively on a case-by-case basis, so they foreclose instead; the fact that many loans have been sold into mortgage pools and securitized only serves to vastly complicate the situation.
In other words, a government plan to reduce foreclosures and encourage loan mods might well actually help the lenders, not hurt them.
Especially when you consider the macro effect of lots of lenders all deciding to foreclose. Even if Brown is right and it makes sense for any given bank to foreclose on any given loan, it still makes sense for the government to try to minimize foreclosures, because if every bank does that for every loan, we end up in house-price Armageddon. Foreclosures might be a consequence of falling house prices, but they’re a major cause of them as well, and preventing foreclosures is a great way of preventing house-price declines.
Brown’s rhetoric is all of the "what’s good for banks is good for bank customers" flavor, which gets extremely tiresome after a while, especially for anybody who, well, has ever dealt with a bank. But he marries those arguments with an extremely narrow view of what TARP can possibly be asked to do:
If Prof. Warren and her group want the federal government to tighten regulation on consumer lending, they should sign up for a different oversight board.
Why? The government represents its consituents, and its consituents are bank customers, not the banks themselves. The government now holds a large amount of equity in banks, some of which would certainly be bankrupt right now were it not for Treasury’s intervention. So it has every right to make any demands that it likes, pretty much, on behalf of its constituents.
Brown also has a peculiar take on the sweetheart deal given to AIG:
The Treasury thought it was getting a fair deal from AIG when it loaned the company $85 billion at Libor plus 850 basis points, as part of the initial bailout plan. The subsequent interest burden was so crushing the government later had to agree to easier terms, for fear of a bankruptcy.
There was zero chance that AIG was going to declare bankruptcy while having de facto unlimited access to government funds. When have you ever heard of a state-owned company declaring bankruptcy?
It’s ridiculous for Brown to say that taxpayers should have no interest in getting a fair return on their investment — after all, TARP was sold as an investment rather than a money pit. I’m sure that bankstocks.com’s Brown would love it if the government simply tranferred hundreds of billions of dollars from the public fisc to the shareholders of big banks. (I have no idea what he thinks about using TARP funds to bail out Detroit; he probably doesn’t like it, given that he’s not autostocks.com.) But he should hardly be surprised if Elizabeth Warren pushes back at any such attempt. And yes, that is her job.