After 9/11, President Bush told world leaders that either you’re with us or against us in fighting terrorism. There was no middle ground. In fighting the financial crisis, that determination seems to be lost in the free market and sanctity of contracts ideology. While it is clear that Treasury Secretary Paulson is choosing winners and losers in the TARP program, none of the winners are being forced to be with us on mortgage modifications. And few financial institutions are patriotic enough to voluntarily modify mortgages for the national interest.
The New York Times “Mortgage Threat From Hedge Funds Irks Democrats” reports that multiple hedge funds threatened legal action against banks that renegotiated mortgages in a manner not in their financial interest. Greenwich Financial Services and Braddock Financial are failing to realize that the current Administration is reaching its end, and the new Administration is likely to change the focus from top down to bottom up in the rehabilitation of our financial system.
House Financial Services Committee Chairman Barney Frank sent a letter to these funds stating: “For the hedge fund industry, which has flourished from much of the past decade, to take steps so actively in opposition to what is currently in the national interest is deeply troubling.” Up to this point, Congress has been ineffective in forcing Paulson’s hand on mandatory mortgage modifications. In fact, the Administration is now willing to pay for cooperation by absorbing losses. Interesting, they are willing to force National City (NCC) into PNC’s (PNC) hands and give PNC a $7.7B TARP bonus for cooperating, without demanding any mortgage modifications.
Fortunately, I wrote in "Countrywide Settlement Benefits Bank of America and the Country" that the courts are paying little credence to the President’s ideology when deception and predatory lending are involved. The Democrats want bankruptcy judges to be able to modify mortgages on primary residences in the same manner they now can on second, vacation and investment homes. Congressman Frank and Senator Dodd are smart enough to know that the legal blockades must be broken down before any meaningful headway can be gained in modifications.
Getting back to the national interest, General Electric (GE) appears to be much more politically astute than the hedge funds. GE has already announced its participation in the Federal Reserve’s commercial paper program and that it is willing to accept greater regulation of its financial businesses. GE is continuing to lend at the same time it is reducing leverage, and promoting environmentalism to boot. GE also said its triple-A credit rating is sacred.
It is disturbing that most financial institutions are doing little to promote the national interest, and Paulson is doing nothing to require them to do so. Paulson’s theme song is Dire Straits’ “Money for nothing, your kicks for free. (I want my MTV).”
Disclosures: Author is long (and out) NCC and GE.