A couple of years ago I was reading Treasury Secretary, Timothy Geithner’s Wikipedia Bio.(1) I was surprised to read that Mr. Geithner served as a Treasury Department Attaché in the U.S. Embassy in Tokyo, Japan during the early years of what has become known as “Japan’s Lost Decade” (A “Lost Decade” which is now approaching its second decade anniversary).(2)
It’s widely recognized that Japan’s “Lost Decade” was a consequence of the deflation of an asset bubble.* Since reading how Geithner was in a unique position to witness the formation and the consequences of a severe asset bubble, and because I believe he has no doubt followed the efforts of the Japanese Government to stimulate its way out of its economic doldrums, I’ve found Mr. Geithner’s policy positions a little strange.For me, the strangeness of Treasury Secretary Geithner’s policies took on an even more strange dimension this morning.This morning I was watching a video of a May 11, 2009 New Yorker Summit presentation of a conversation between Nassim Taleb, Robert Shiller(3) and Nick Paumgarten. At about 4.5 minutes into the video Robert Shiller describes how, after being on the New York Federal Reserve Bank’s “Academic Advisory Panel” for 14 years, Timothy Geithner ‘fired’ him (presumably for Shillers presentation to the panel on asset bubbles). Shiller’s ‘firing’ took place shortly after the first meeting of the "Academic Advisory Panel" after Geithner’s appointment as President of the New York Fed.* As much as most economists agree on anything, most economist’s attribute Japan’s “Lost Decade” to the [changed] wealth effect and loss of confidence which followed the late 80’s early ‘90’s bursting of the Japanese commercial real estate bubble, which had inflated excessively during the early-to-mid 1980’s.I copied the portion of the longer video in which Professor Shiller describes what he interpreted as being fired by Timothy Geithner. If you are interested, you can see the video clip here:The complete video of the May 11, 2009 New Yorker Summit discussion between Nassim Taleb, Robert Shiller and Nick Paumgarten can be found here:Footnotes:(1) Timothy Geithner - Wikipedia, the free encyclopedia, at: http://www.bing.com/search?setmkt=en-US&q=Timothy+Geithner+Wikipedia(2) Japan’s “Lost Decade” at: http://en.wikipedia.org/wiki/Lost_Decade_(Japan)and Japan announces “new dimension” in quantitative easing wsws.org Saturday 6th April, 2013, at:(3) Robert Shiller is an economics professor at Yale University. He is the author of a book Irrational Exuberance (published in 2000) which describes the role of excessive confidence in the development of economic bubbles. Professor Shiller expressed concern about the stock market bubble before that bubble burst bubble, and he was one of the earliest, if not the earliest, to warn us of the real estate bubble. He is co-developer of the S&P Case-Shiller Real Estate Price Indeces. [see, http://www.irrationalexuberance.com/definition.htm ]
On November 5th 2012 (the day before the election) President Obama spoke to a group in Columbus, Ohio.After hearing an excerpt from the speech I began to wonder if he actually believes what he said, or if he's just rearranging history to suit his goals. I hope you will watch the video at the following hyperlink to its end. I think I ask some relevant questions in the last minute, or so.Economics professors will tell you that one of the best ways to create jobs, and to stimulate an economy, is support home building. (Think of all the trades, products and services that are required to build and furnish a home.)But, I've never heard of any economics professor who advocated a long-term policy of providing loans to people who couldn't afford to repay the loans (However, I think some of what are called "Keynesian Economists" seem to favor such policies over as a short term prescription for economic stimulus.)I’ve come to believe that many of the policies embraced by President Bill Clinton produced great economic results during (and, for awhile after) his administration. But, as those policies and political pressures went to excess, they eventually led to the housing bubble and the financial crisis.It seems, the financial bubble that burst during the last year of George W. Bush's administration was a long time in the making.Just a thought . . . .
The change to mark-to-market accounting for certain classes of financial assets (GAAP) has been delayed by Financial Accounting Standards Board (FASB) - with pressure from the U.S. Congress and bank lobbyists (see: http://online.wsj.com/article/SB124396078596677535.html). So, the necessity to actually account for these bank assets' true market value is currently suspended.
If a mortgage owner is a bank and the bank forecloses, the process for re-pricing the asset begins. And, the amount of the loss on the asset would then reduce the calculated bank reserves and force the regulators to require the bank to add more reserves. Under present market conditions this would not be a good thing for the bank, or for the U.S. Government. (Under present conditions banks which could not raise more reserve assets would be forced into FDIC receivership). And, if banks actually began to foreclose rapidly on all borrowers-in-default the calls for Government Sponsored Agency (GSA) loan insurance payoffs would further complicate the bail-out of the GSA's. Also, the demand for private mortgage insurance payoffs would put further stress on private mortgage insurers and impose additional stress on the financial system in general (and probably require private insurers to increase their required reserves).
Another reason banks might avoid foreclosing on a borrower-in-default is that judges are becoming a bit cantankerous. Judges have begun to force loan modifications, mandate cram-downs, and in the absence of good physical documentation proving a bank or investor actually owns the loan, some judges have even awarded property to the (supposed) borrower when the loan documentation is missing, flawed or incomplete.
It seems that the rush to originate loans, slice-and-dice loan tranches, construct CMO derivatives, track ownership, and re-register frequently traded CMO's (in the electronic registration system) led some necessary loan details, and even some complete documentation, to "go missing". So banks and investors are beginning to see foreclosure as a risky and potentially expensive option. (see: 10/24/09 NYT article by Gretchen Morgensen titled, "If Lenders Say 'The Dog Ate Your Mortgage' " at> http://www.nytimes.com/2009/10/25/business/economy/25gret.html )
Another subtlety, as long as the bank allows the borrower-in-default to stay in the home the mortgage investor (bank or CMO investor) is not as greatly exposed to losses from theft, vandalism and gross depreciation of real estate value due to non-maintenance of the property.
Also, by not foreclosing on borrowers-in-default the lender avoids becoming the owner of the property and thus avoids direct liability for property taxes, HOA Fees, and some of the more recently imposed municipality assessments levied against investors who now own foreclosed property (see: http://www.dlapiper.com/miami-dade_foreclosure_ordinances/ for another example see mosquito abatement fees in some areas of California - Indio, Palm Springs, Stockton, Mountain House, etc.)
If the "shadow inventory" came to the market all at once demand would be even further overwhelmed by supply causing even more significant price erosion.
It’s logical . . . perhaps corrupt, but logical.
1. See CoreLogic.com at: http://www.corelogic.com/search.aspx?q=shadow+inventory
2. The Case-Shiller S&P Home Price Index is published on the last Tuesday of the month with a two month time lag in reporting for data gathering and data analysis, at: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en...
3. Also see, YouTube video The Impact of The Delay in Implementing FAS#157 at:
4. And, watch the YouTube video The Short Sale Conundrum - Mortgage Servicers’ Misaligned Incentives at:
5. Re: Was the strategy for delaying the pain learned during Japan's 'Lost Decade'? “Geithner worked for Kissinger Associates in Washington for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attaché at the Embassy of the United States in Tokyo.” From Wikipedia, Timothy Geithner at: http://en.wikipedia.org/wiki/Timothy_Geithner
6. Watch a brief segment of Georgetown Law Professor Adam Levitin's Congressional testimony titled, "Regulators Don't Want to Know" at:
In this PBS NewsHour video-clip aired January 21, 1998 President Bill Clinton points to his accomplishment of having his 'regulators' force banks to grant loans to applicants to whom the banks would not have otherwise granted loans.
In this video-clip President Clinton, claims that 85% of the loans issued under the guidelines of the (then 20 plus year old) Community Reinvestment Act were issued during his first five years in office.
Is it any wonder that the GSE's, Fannie Mae and Freddie Mac, under direction from Clinton and his two administration's HUD Chairmen, Henry Cisneros, and later Andrew Cuomo, continued lowering the standards for loans they would purchase from mortgage originators?
And, is it any wonder that investment banking interests devised ways to 'package' large numbers of mortgage loans into "tranches" of different risk level in order to diversify the risk they were being pressured through regulatory mandate, and political persuasion, to accept?
Notice that Clinton mentions this activity was not necessarily an affirmative action or civil rights oriented activity, but rather that it had significant impact on the economy. . . .
See, The Community Reinvestment Act, at: http://en.wikipedia.org/wiki/Community_Reinvestment_Act
Bill Clinton's Drive to Increase Homeownership Went Way Too Far By Peter Coy -pub. in Bloomberg BusinessWeek 2/28/2008, at: http://www.businessweek.com/the_thread/hotproperty/archives/2008/02/clintons_...
Bill Clinton, Wanted For Crimes Against Our Economy By Jim Newman pub. 2/27/2012, at: http://kayleighmcenany.com/2012/02/27/jim-newman-bill-clinton-wanted-for-crimes-against-our-economy/
Key words search for: Janet Reno threatens banks
Why is there a ‘shadow inventory’ of homes?
In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced. So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.
But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).
By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.
Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)
* See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting
Federal Regulators Don't Want To Know