The Stealth Battle Between Bernanke and Paulson

The Wall Street Journal's “Treasury Plans to Press Lenders” and “Subtle Ben (Bernanke) Inches Closer to Barney (Frank)” describe the not so subtle, under the radar battle being waged between the Federal Reserve and the Treasury. Chairman Bernanke has made many speeches supporting an FHA program to trade mortgage guarantees for mortgage principal write downs. Both the Fed and the FDIC are calling for a systemic approach to process mortgage modifications quickly and efficiently, although they differ in methodology. Secretary Paulson has taken to obstructing a systemic approach at every turn. Paulson continues to say that mortgage principal write downs should only be done on a case by case basis.

Paulson has proved to be the more powerful influence, but he is losing the public relations fight. The Treasury has warned bankers and mortgage servicers that unless they adopt some set of rules for “voluntary” mortgage modifications, the “socialists” will overwhelm them (my words). The Treasury hosted a six hour meeting yesterday with ten major industry participants. Included were: Bank of America (BAC), Countrywide (CFC), Fannie Mae (FNM), Freddie Mac (FRE), and J.P. Morgan (JPM).

The message the Treasury purveyed was that through small concessions, the industry could avoid aggressive actions by the Democrats, and by consequence the wrath of tightening Fed regulation. The only concessions the Journal cited were a five day acknowledgment of a loan modification request and a possible answer in five days. The Journal also reported that the Treasury is trying to facilitate compromise between first and second mortgage holders.

The timid endorsement by Bernanke has given Congressman Barney Frank credibility. The House is preparing to vote on a $300B plus package of FHA loan guarantees. The clock is running out for Paulson.

Disclosures: Author is long CFC, FNM and FRE.

Comments

[sivere:]

Congress is the one who has authority to act, per the constitution. Let them

TakeBackTheFed.com

2008 May 07 10:30 AM

[Tom Lindmark:]

Don't you think the clock has run out? The socialists were never going to lose the PR war. Responsible adults are the only thing that could have stopped this. When Bernanke showed his colors and threw in with Frank he gave them the veneer of authority they needed to advance the plan.
Get ready to pay up.

2008 May 07 11:51 AM

[whidbey:]

We are likely missing the point of the debate: Things that Treasury sees are more tenuous than what the Fed sees. For example, the Fed knows it has limited resources to maintain liquidity, while Paulson sees only the destruction of banks, lots of banks, but not all banks, just the dumb commercial banks and many of the investment banks (not his alma mater), and many hedge funds. What is the use of having Hank at court if he surrenders his peers?

2008 May 07 12:20 PM

[flow5:]

Nothing stealth about it. Paulson is an empire builder. Almost all of the Treasury functions should be under the Board of Governors purview.

2008 May 07 01:22 PM

[Jason Rines...:]

Sorry, I am not in the socialist camp. I favor Paulson even if it means all banks collapse simealtanously, rioting occurs but leaders emerge whom will rebuild our global credibility and the opportunity to earn wealth without wondering who is going to pilfer it next. What is the worst case, government wheat pasta and cheese? Fine, I'll take it but give me back an honest free market where I can make decisions and prosper or fail based on them rather then making sure I am in the right click when the musical chairs stop.

2008 May 07 11:24 PM

[icandoitdon:]

i think bernke understands that housing stabiity is required before financial stability returns and that the problem is too big for the fed to handle alone. translation: taxpayer bailout.

that's the kind of capitalism that exists in this country now: we take the profits, you take the losses. guess who "we" and "you" are....

2008 May 08 12:52 AM