Mortgage Credit News – December 18, 2009

Long-term rates are falling, a brief bout of economic optimism now replaced by renewed “Who knows?” Mortgages are 5-ish (might find a 4-prefix in your stocking) and the 10-year T-note is trying to head back under 3.50%.

The optimism crested with a surge in Producer Prices (core up .5% in November), and industrial production better than expected, up .8%. Some drew confidence from the Fed’s post-meeting assertion that “economic activity continued to pick up.”

Then core CPI came in unchanged for November, a developing crisis in Europe pushed cash to the dollar (weak nations may depart the deutsche-euro), home building is still going nowhere, and weekly unemployment claims spiked to 480,000.

The comic-opera conclusion to one of the great failures in American economic policy played out all week long. We may escape with nothing worse than wry grins and head-shaking, and we may not.

Fifteen months ago in the panicked aftermath of Lehman’s collapse, TARP was at first a vague request for $750 billion from Congress to throw at the biggest bank run in history. Designed buy up toxic IOUs, then before passage it morphed into injecting capital into banks. Too many toxics, and a 10:1 capital multiplier would work for us.

It was the right thing to do. The prior 18 months’ hosing of “liquidity” and rate cuts had failed. A bank is a simple thing: its assets (loans) minus its liabilities (deposits) equal its capital. A prudent level of capital is about 10% of assets. Lose 10% of your assets and you’re broke. In the panic from July 2007 to September 2008, firesales had cut the market value of everybody’s assets by 10% or a lot more.

However, TARP quickly resembled the 2003 conquest of Baghdad. Now we are part-owners of these banks… Does anybody have a plan for what we do now? Taxpayers would like that money back. Voters, some of them taxpayers, want the bankers to be punished, at minimum by pay cuts, embarrassment, and nit-picking. Another government problem… does anybody here know how to run a bank? Or want to?

Then, all through 2009, the bankers resisted. Huffing. How dare these politicians interfere in our businesses? Other banks by the thousand refused TARP, preferring mothballs to government castor oil. Secretary Geithner proposed new toxic extractions, but the bankers simply ignored him. He looked like he would fold, and he did.

Bankers followed the standard survival path: cancel existing loans or refuse rollover when possible, and avoid new loans. Shrink your loan assets and your capital looks better. Post-panic, existing assets recovered some value. Emboldened, the strongest banks began to buy their way out of TARP, which mean the weak had to follow.

President Obama called the bankers “fat cats” last Saturday. Then at Monday’s all-hands meeting with them Mr. Non-Confront was polite as could be. Three bankers skipped, blaming airport fog, and attended by speaker phone (try that on your anniversary). In the history of Presidential collisions with business — TR and the Trusts, FDR “a traitor to his class,” Truman and steel, Kennedy and prices, Reagan and air traffic controllers — Obama’s rout by fat cats defines the mousy end of the scale.

The end of TARP marks two things. The banking system this week coughed up $161 billion in capital that it didn’t have in order to escape, enough capital to support $1.5 trillion in new loans. The weakest of the giants (Citi, BoA, Wells) are weaker.

Second, and far more important: this crisis gave us the chance to restore control of banking, lost during the last 30 years. This was the time to insist that boards of directors and chairmen execute their duties, and put an end to imperial-CEO-bankers. The nation guarantees your liabilities, and heads-you-win-tails-we-lose has concluded. You are a public utility. Know your duty and your place. Nobody wears suspenders and Guccis at the sewer plant.

Forget all of that. Mr. Obama inherited TARP, and the nation senselessly hated it, no leader yet explaining the crisis. The failure is hardly Mr. Obama’s alone, but failure it is.