Barofsky….’little done to abide by this legislative bargain’

Writing in the New York Times this morning, retiring TARP (Troubled Assets Relief Programme) head Neil Barofsky told American taxpayers that the bank bailout funds had not been used for the express purposes described in the original agreement between the Federal Reserve and the Banks.

Although the Obama Administration has dubbed the TARP programme “remarkably effective by any objective measure”, its Head Inspector Neil M. Barofsky refuted this view entirely in this morning’s NYT piece.

“Though there is no question that the country benefited by avoiding a meltdown of the financial system,” says Barofsky,  “this cannot be the only yardstick by which TARP’s legacy is measured. The act’s emphasis on preserving homeownership was particularly vital to passage. Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and, to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directed the department to do just that. But it has done little to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions, a shift that came with the express promise that it would restore lending.”

In other words, the homeowner relief monies were hijacked by the banks. He continues: (my italics)

“The country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior. This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions, which continue to struggle.”

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.”

But Barofsky’s concluding condemnation pinpoints with astonishing frankness where the blame lies:

“In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives. Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.”

The potentially dire ramification outlined at the end there – that crying wolf will in the end rebound – is the thing that will be thought most telling among financial commentators. But in reality, the impact among ordinary citizens both in the US and over here in the UK will be to confirm the anger at how a tiny, greedy elite not only created the crisis in the first place; it also diverted the funds it had been given for entirely selfish commercial ends.

It simply will not wash any longer for bank apologists to dismiss the greed charges as ‘bank-bashing’ – or accuse me of having failed O-Level maths. The evidence against investment banking has gone way beyond circumstantial: there people are guilty, and must broken up, rather than bashed.

The Slog has reiterated many times that the Coalition Government woefully underestimates the real anger still nascent among the electorate. When the next stage of trouble hits, those who rolled over in the face of banking misanthropy will be swept away.

Bank of America to Reduce Mortgage Balances

By DAVID STREITFELD and LOUISE STORY

Bank of America said on Wednesday that it would begin forgiving some mortgage debt in an effort to keep distressed borrowers from losing their homes.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

As the housing market shows signs of possibly entering another downturn, worries about foreclosure are growing. With the volume of sales falling, prices are sliding again. When the gap increases between the size of a mortgage and the value that the home could fetch in a sale, owners tend to give up.

Cutting the size of the debt over a period of years, however, might encourage people to stick around. That could save homes from foreclosure and stabilize neighborhoods.

“Banks are willing to take some losses now to avoid much greater losses later if the housing market continues to spiral, and that’s a sea change from where they were a year ago,” said Howard Glaser, a housing consultant in Washington and former government regulator.

The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The program is aimed at borrowers who received subprime or other high-risk loans from Countrywide Financial, the biggest and one of the most aggressive lenders during the housing boom. Bank of America bought Countrywide in 2008.

Bank of America officials said the maximum reduction would be 30 percent of the value of the loan. They said the program would work this way: A borrower might owe, say, $250,000 on a house whose value has fallen to $200,000. Fifty thousand dollars of that balance would be moved into a special interest-free account.

As long as the owner continued to make payments on the $200,000, $10,000 in the special account would be forgiven each year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity.

“Modifications are better than foreclosure,” Jack Schakett, a Bank of America executive, said in a media briefing. “The time has come to test this kind of program.”

That was the original notion behind the government’s own modification program, which was intended to help millions of borrowers. It has actually resulted in permanently modified loans for fewer than 200,000 homeowners.

The government program, which emphasizes reductions in interest rates but not in principal owed, was strongly criticized on Wednesday by the inspector general of the Troubled Asset Relief Program for overpromising and underdelivering.

“The program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway,” the inspector general, Neil M. Barofsky, wrote in his report. One possible reason is that even if they get mortgage help, many borrowers are still loaded down by other kinds of debt like credit cards.

Bank of America said its new program would initially help about 45,000 Countrywide borrowers — a fraction of the 1.2 million Bank of America homeowners who are in default. The total amount of principal reduced, it estimated, would be $3 billion.

The bank said it would reach out to delinquent borrowers whose mortgage balance was at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income.

These requirements will, the bank hopes, restrain any notion that it is offering easy bailouts to those who might otherwise be able to pay. “The customers who will get this offer really can’t afford their mortgage,” Mr. Schakett said.

Early reaction to the program was mixed.

“It is certainly a step in the right direction,” said Alan M. White, an assistant professor at Valparaiso University School of Law who has studied the government’s modification program.

But Steve Walsh, a mortgage broker in Scottsdale, Ariz., who said he had just abandoned his house and several rental properties, called the program “another Band-Aid. It probably would not have prevented me from walking away.”

Even before Bank of America’s announcement, reducing loan balances was growing in favor as a strategy to deal with the housing mess. The percentage of modifications that included some type of principal reduction more than quadrupled in the first nine months of last year, to 13.2 percent from 3.1 percent, according to regulators.

Few of these mortgages were owned by the government or private investors, however. Banks tended to cut principal only on mortgages they owned directly. Wells Fargo, for instance, said it had cut $2.6 billion off the amount owed on 50,000 severely troubled loans it acquired when it bought Wachovia.

Bank of America said it would be offering principal reduction for several types of exotic loans. Some of the eligible loans are held in the bank’s portfolio, but the program will also apply to some loans owned by investors for which Bank of America is merely the manager.

The bank developed the program partly because of “pressure from everyone,” Mr. Schakett said. Even the investors who owned the loans were saying “maybe we should be doing more,” he said.

Substantial pressure came from Massachusetts, which won a significant suit last year against Fremont Investment and Loan, a subprime lender. The Supreme Judicial Court ruled that some of Fremont’s loans were “presumptively unfair.” That gave the state a legal precedent to pursue Countrywide.

“We were prepared to bring suit against Bank of America if we had not been able to reach this remedy today, which we have been looking for for a long time,” said the Massachusetts attorney general, Martha Coakley.

Bank of America agreed to a settlement on Wednesday with Ms. Coakley that included a $4.1 million payment to the state.

Reducing principal is widely endorsed, in theory, as a cure for foreclosures. The trouble is, no one wants to absorb the costs.

When the administration announced a housing assistance program in the five hardest-hit states last month, officials explicitly opened the door to principal forgiveness. Despite reservations expressed by the Treasury, the White House and Housing and Urban Development officials have continued to study debt forgiveness in areas with lots of so-called underwater homes, according to two people with knowledge of the matter.

On a national scale, such a program risks a political firestorm if the banks are unable to finance all the losses themselves. Regulators like the comptroller of the currency and the Federal Reserve have been focused on maintaining the banks’ capital levels, which could be hurt by large-scale debt forgiveness.

“You have to be very careful not to design a program that would change people’s fundamental behavior across the country in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay,” Michael S. Barr, an assistant secretary of the Treasury, said early this year.

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Bank of America’s announcement came within hours of a fresh report that underscored the renewed weakness. Sales and prices are dropping, leaving even more homeowners underwater.

Sales of new homes fell in February to their lowest point since the figures were first collected in 1963, the Commerce Department said. Sales are about a quarter of what they were in 2003, before the housing boom began in earnest.

“It’s shocking,” said Brad Hunter, an analyst with the market researcher Metrostudy. “No one would ever have imagined it would go this low.”

Thanks for the memories.

WASHINGTON — Word was leaking out that President Bush had bought a new house in Dallas, workers were building the inauguration stage for his successor right outside his front door and his top aides were helping the new guy to prepare to take over.

Still, on Tuesday alone, Mr. Bush hired 18 people “to serve in his administration,” a White House news release said.

The appointments and nominations mostly involved multiyear terms to small boards and commissions that most Americans have never heard about.

But they highlight both the vestiges of power Mr. Bush can still exercise to leave a lasting mark on government, and the external limits to that power that are, in large part, the result of eight bruising years of partisan warfare.

All told, Mr. Bush has made roughly 30 personnel moves since the November election, some in nominations that will require Senate approval, and others in direct appointments that will last well into President-elect Barack Obama’s term and beyond.

Yet, unlike some of the contentious, late regulatory moves by the president, none of the appointments, and reappointments, have raised a peep of protest from the Democrats, Mr. Obama, or even the liberal interest groups that have so closely monitored his personnel decisions.

In part, Mr. Bush’s ability to make confrontational or highly ideological appointments is somewhat limited by the Democratic-controlled Congress in ways his predecessors were not.

For instance, in late December 2000, President Bill Clinton got around a standoff with Republicans by appointing a federal judge, Roger L. Gregory, when Congress was in recess. (Under provisions set out in the Constitution, the recess appointees can stay in their positions without Senate confirmation until the end of the next session of Congress.) Eight years earlier, the first President George Bush used the Congressional recess to beat back a constitutional challenge from the United States Postal Service’s board of governors by appointing a longtime friend to sit on the board, tipping the balance of power in his favor. But the current president will have no such option: For the last year or so, the majority leader, Senator Harry Reid of Nevada, has sought to keep the Senate in session to prevent such appointments.

Even during holiday weeks, when most lawmakers have left Washington for their home districts, Mr. Reid has assigned a member to stay behind and gavel the empty chamber into session.

Proving that the intragovernmental bitterness is not fading with the end of Mr. Bush’s presidency, Jim Manley, a spokesman for Mr. Reid, said Mr. Bush had only himself to blame for Mr. Reid’s maneuver. “The only reason why we got into this situation was because of the complete unwillingness of the president to treat Congress as a co-equal branch of government,” he said.

Tony Fratto, a spokesman for Mr. Bush, said the president might have been inclined to make outgoing recess appointments were it not for Mr. Reid’s legislative blockade.

“Given the fact that the Senate was so intransigent on so many nominations, we certainly would have liked to have used the option of recess appointments,” Mr. Fratto said. “This process is broken, absolutely broken. The majority leader has taken it to the point of abuse.”

But there are some areas of cooperation that would preclude the need for recess appointments. Democratic leaders support the confirmation of Mr. Bush’s choice as the inspector general overseeing the allocation of money for the economic bailout plan, Neil M. Barofsky, a federal prosecutor from New York.

And a deal is in the works to confirm the four people Mr. Bush reappointed for six-year terms on the board of the Inter-American Foundation, which makes grants to businesses and organizations in Latin America and the Caribbean. Among them is Roger W. Wallace, a supporter and major fund-raiser for Mr. Bush.

There are also appointments that require no Congressional approval but have terms that run for years. None of those have created much of a stir, either.

Mr. Bush nominated six people for four-year terms on the Nuclear Waste Technical Review Board, which is charged with scientifically evaluating Department of Energy plans to store nuclear waste at Yucca Mountain in Nevada — a plan Mr. Bush has supported and Mr. Obama has opposed. But the board’s members, while appointed by the president, are recommended by the National Academy of Sciences, and their recommendations are not binding. (If anybody was going to raise a flag on the appointments it would have been Mr. Reid, who represents Nevada and passionately opposes the Yucca plan; his office said it had no complaints on the matter.)

“We are apolitical,” said one of the people reappointed to the panel, Andrew C. Kadak, a professor atM.I.T. “Whoever is president, we are indifferent to that — we are attempting to see that the work that the D.O.E. is doing is technically correct and appropriate.”

On Dec. 2, Mr. Bush made seven appointments to the Commission to Study the Potential Creation of a National Museum of the American Latino. But the board of 23 is bipartisan in nature. And, given that the title of the commission includes the word “potential,” the appointments were met with a certain lack of urgency in the Capitol.

That same day, Mr. Bush appointed a longtime family friend and former business partner, Fred V. Malek, to the board of visitors of the United States Military Academy. Mr. Malek, who was a partner with Mr. Bush in the Texas Rangers baseball team, will serve for three years. A West Point graduate, he has donated generously to its campus; his appointment, like the others, provoked no complaint.

Mr. Fratto pointed out that Mr. Bush’s term is a full four years — not 3 years, 10 months and 4 days — and the president will not pull punches as he makes potentially still more appointments. “We actually do have not just the authority,” he said, “we have an obligation to do what we think is best for the country up until 11:59 a.m. on January 20.”