Opinion

Felix Salmon

Media buyer of the day, Gates Foundation edition

Felix Salmon
Nov 18, 2011 22:52 UTC

I’ve been thinking a lot of late about brands and media — as have people like Noah Brier. If you want to build your brand online, the best way of doing so is not to rent media, but rather to own it. To use Noah’s distinction, you want a sustained product, rather than a temporary campaign. Here’s Noah:

How does this look? On the extreme end it’s BabyCenter, RedBull.com or AMEX OPEN Forum, those brands are so far out ahead of everyone else from a publishing standpoint it’s just amazing. And look at the value they’ve created for themselves: Their sites are big enough that other brands want to advertise on them to reach the audience they’ve amassed. Not necessarily the most important thing for the brand, but a pretty good statement about what they’ve accomplished.

Now what happens if your aims are a not selling baby stuff, or fizzy drinks, or financial products? In fact, what happens if your aims aren’t selling anything at all?In that case, you might not mind if someone else were doing the publishing, just as you managed to achieve your goals at the same time. Which brings me to a very interesting $2.5 million grant from the Gates Foundation, which is sponsoring the Guardian’s global development microsite for three years.

The Gates Foundation actually launched the site in 2010, spending an undisclosed sum to do so; the new grant keeps the site going for another three years. As part of the deal, every page in the site — be it blog post or news story — gets prominently branded with the Gates Foundation logo, right at the top of the column where all the editorial content goes. (In fact, the logo is significantly larger than the Guardian’s own logo at the top of the page, although the site looks and feels like the rest of the Guardian site, and lives at guardian.co.uk.)

From an old-media perspective, this is a fantastic deal for the Guardian, which retains full editorial control:

The world’s news organisations can no longer rely solely on advertising and sales revenues. So, as we look beyond traditional sources of funding, the backing of third parties who are willing to support our journalism while respecting our editorial freedom enables us to explore important subjects that may too easily be neglected elsewhere. Sponsorship of individual sections and pages already exists in other areas of guardian.co.uk, and can make possible the otherwise impossible. Without sponsorship, a project such as our global development site would simply not have been realised with such depth and ambition.

What the Guardian doesn’t say, here, is that $2.5 million is what’s technically known as a shit-ton of money. It’s vastly more than it could ever get from ad revenues on a niche site like this — even at a $20 CPM, you’d need to serve up 125 million pageviews over three years to get that much money. Global development issues have a substantial audience, but not that substantial.

More importantly, $2.5 million is significantly more than it costs the Guardian to put together a micro-site like this — this deal is profitable, for a media organization which, like most, is in desperate need of profits. In fact, it’s a twofer for the Guardian, which manages to improve its revenues and also beef up its editorial offerings in one go.

Looked at from the point of view of the Gates Foundation, there’s real value here. For one thing, all of the content automatically gets a lot more credibility than it would if it were published by the Gates Foundation directly, especially given the suspicion with which it’s already regarded. And frankly, publishing well-written, agenda-setting material for a mass audience is not one of the Gates Foundation’s core competencies: if they tried to do it, there’s a good chance they wouldn’t do it very well. (Non-profits in general seem constitutionally incapable of getting out of their wonky high-serious comfort zone.)

And the way these deals are structured, they do a pretty good job of minimizing the sulfurous smell of advertorials and “sponsored content” which has a habit of lingering in even the glossiest sponsor-driven site. Which isn’t to say that they’re not criticized. The Seattle Times did a 2000-word investigation into the Gates Foundation’s media sponsorships earlier this year, and found it quite easy to find critics:

Gates-backed think tanks turn out media fact sheets and newspaper opinion pieces. Magazines and scientific journals get Gates money to publish research and articles. Experts coached in Gates-funded programs write columns that appear in media outlets from The New York Times to The Huffington Post, while digital portals blur the line between journalism and spin…

“Even if we were to satisfy ourselves that the Gates Foundation were utterly benign, it would still be worrisome that they wield such enormous propaganda power,” said Mark Crispin Miller, professor of media, culture and communications at New York University…

“It would be naive to believe big-money foundations don’t play the same game that corporations and other special interests do,” said Marc Cooper, assistant professor at the University of Southern California’s Annenberg School for Communication & Journalism.

Cooper actually isn’t troubled by the Gates Foundation, but his point is well taken: if the Gates Foundation can do this kind of thing, other organizations can too. If, that is, they have a lot of money: the foundation’s direct funding for media and media programs, has now reached the $50 million level, and includes $3.6 million to the PBS NewsHour, $3.3 million to Public Radio International, $5 million to NPR, $1 million to Frontline, and $1.5 million to ABC. More controversially, the foundation gave a $500,000 grant to the Brookings Institution so that it could “re-engineer media coverage of secondary and postsecondary education.”

It also helps if you’re all non-profits: most of the recipients of Gates Foundation grants, including the Guardian, PBS, PRI, NPR, and Brookings, fall into that category. The Gates Foundation is clearly happier dealing with other non-profits, and I suspect that places like the Guardian are much happier letting the Gates Foundation “support” a large chunk of their editorial copy than they would be with, say, Monsanto doing the same thing.

The one weird thing about the Gates Foundation’s media partnerships is that the foundation doesn’t seem to value the exposure it’s paying so much for. It’ll go into great detail about how it wants to “build understanding and stimulate conversation around challenges of inequity”, but will tell you, if asked, that “we do not view these partnerships as advertising”. Which is a little bit weird, because the Gates Foundation branding is extremely prominent on the Guardian microsite, and the foundation also accepts all the broadcast recognition that comes with sponsorships on NPR or PBS.

This exposure — at least in context like the Guardian’s microsite — is more valuable than traditional advertising, for the reasons Noah laid out and because it positions the Gates Foundation as an entity which is providing great independent content, rather than one simply pushing its own message. Is all that value really going to waste? I doubt it, somehow — I suspect that somewhere along the line, the foundation was quite active in negotiating its logo placement on the site.

I’d love to see a little more transparency on this front: what value does the foundation think its getting out of that logo placement, and the NPR announcements that it sponsored some show or other? And if the logos and the announcements went away, how much would that reduce the amount of money the foundation was willing to give? Because somewhere in here there’s a model, I think, which can be applied to media buyers who aren’t the Gates Foundation. And I’d love to see how it works.

COMMENT

“Non-profits in general seem constitutionally incapable of getting out of their wonky high-serious comfort zone.”
Funny, since as you later point out, the Guardian and other media organizations the GF gives money to are non-profits.

Posted by TGGP | Report as abusive

Child poverty charts of the day

Felix Salmon
Nov 18, 2011 17:19 UTC

These charts come from the Census Bureau’s new report on child poverty in America. The first one shows how it has been increasing rapidly since the recession hit — the crisis might have been caused by Wall Street, but it has had its most devastating effects among poor and blameless children.

poverty2.tiff

This is a huge increase: between 2008 and 2010, the number of children in poverty increased by 3.2 percentage points, from 18.4% to 21.6%. Which means the number of children in poverty increased by more than 17%, to 15.7 million.

It’s worth mentioning that these are apples-to-apples comparisons using the old poverty figures rather than the new ones, and the new poverty figures show a lower child poverty rate. Under the Supplemental Poverty Measure, the number of children in poverty is “only” 13.6 million. But I’m reasonably sure that if and when that measure gets calculated for 2008 and 2009, it’ll show a rate of increase just as high as we’re seeing in the old one. And I doubt the distribution across the country would be any different, either:

distribution.tiff

Does anybody, this election season, have a plan for reducing the rate of child poverty, especially in the south? In ten different states, including Texas, one child in every four is born into poverty. This is obviously unacceptable — but it’s equally obviously being swept beneath the political carpet. Not only don’t poor kids vote, their parents don’t tend to vote much either. And few of them live in swing states. And, fixing this kind of thing takes far more political capital than anybody seems to have spare right now. So expect the child-poverty crisis to continue to get worse rather than better. No matter what happens to the economy as a whole.

COMMENT

So sad to realixe that child poverty is growing. And it’s only in America. It’s really depressing to think of Africa, for example.

http://convertyoutubetomp4.net/
Youtube to mp4

Posted by Gabrielle88 | Report as abusive

The return of obvious graft

Felix Salmon
Nov 18, 2011 15:26 UTC

It’s almost comforting to find a spate of financial scandals which involve simple, easy-to-understand illegal and unethical behavior, after all these years rummaging around in synthetic mezzanine collateralized debt obligations and the like. Three have particular salience right now:

  1. The Congressional insider-trading scandal. Spencer Bachus is the poster boy here: one minute he was getting highly confidential briefings from Hank Paulson and Ben Bernanke on the parlous state of the economy; the next he was loading up on contract options on Proshares Ultra-Short QQQ, a synthetic ETF designed to maximize profits when the stock market falls, and which is emphatically for day traders only.
  2. Olympus, which now seems to have channeled more than $2.5 billion to yakuza crime syndicates, including the country’s largest, the Yamaguchi Gumi.
  3. MF Global, which increasingly looks as though it stole money in customer accounts.

There are lots of different flavors of wrongdoing in the world of finance. At companies like Enron, it’s illegal and extremely complicated. With individuals like Bernie Madoff, the scheme can be large and complex, but at heart the idea is pretty simple. And at banks like Goldman Sachs and Citigroup, which are paying the SEC hundreds of millions of dollars to settle charges that they did bad things in the synthetic CDO market, there’s an ongoing debate about whether their actions were wrong or illegal at all, and a huge chunk of Wall Street continues to believe that they weren’t.

With these latest allegations, however, we’re moving back to the kind of obvious wrongdoing uncovered by Ferdinand Pecora in the early 1930s. The world of global finance has certainly become more sophisticated and complex since those days, but the easy and obvious graft never disappears.

COMMENT

Remember, it’s not illegal if a 1%er does it.

Posted by msobel | Report as abusive

Counterparties

Nick Rizzo
Nov 18, 2011 00:24 UTC

Banks “are devising complex and potentially risky” deals to keep borrowing from the ECB — WSJ

Congress’s 10 favorite stocks, and which members hold the most (it’s mostly Kerry) — Ritholtz

Why the missing MF Global customer money is like a “lost child” — Dealbook

The Nevada AG brings felony charges in a robo-signing case — WSJ

26 reporters arrested in the Wall Street protests and what they do — The Awl

TechCrunch’s CEO is leaving AOL — BI

2.5 stars: Yelp files for a $100 million IPO — Fortune

And the ECB releases an iPhone game, but the whole goal is keeping inflation low. Of course — Reuters Macroscope

Many more great links are available each day from Counterparties.com.

COMMENT

I realised as soon as I was notified regarding the debit card substution that it was another plot to line the pockets of BofA, since there are financial penalties for making mistakes with debit cards and would definitely be harmful to people with no bank accounts-in other words, people who can least afford it. I immediately signed up for direct deposit as I didn’t want BofA to have my money for one minute more than was absolutely necessary, but they still have it for at least 24 hours for “processing”. I was so incensed at the blatant and shameless rip-off that this scheme represented that I called Representative Jerry McNerney’s office and e-mailed Senators Barbara Boxer and Diane Feinstein to complain although this doesn’t harm me as much as it would the people in dire straits (I am currently on unemployment but have no dependents). Let’s see whether or not the California legislature addresses this issue-the Democrats might but the Republicans sure won’t.

Posted by rossanne | Report as abusive

California’s unemployment debit cards

Felix Salmon
Nov 17, 2011 23:43 UTC

On Monday, I wrote about the unemployment debit-card scandal, based on articles by Janelle Ross and Kate Berry. But Berry’s article has been down since Tuesday, replaced by a placeholder saying only that “an updated version of this story will appear soon”. And the state of California, in particular, was extremely unhappy with Berry’s coverage. So today I had a long conversation with the Californian department of employment development, trying to understand exactly what’s going on there.

The conversation was a bit frustrating, because the questions I was asking weren’t fully aligned with the answers they wanted to give. The Californians were very keen on telling me how much better their debit cards are than the old paper-check system — something I completely agree with. And they’re also very proud of the fact that it’s possible to use their debit cards without incurring any fees. That’s great, too.

Where we part ways is the issue of direct debit. California has a lot of unbanked people –  1.2 million, by one count. Many of those people are eligible for unemployment and disability benefits, and it’s important to do well by them. For those people, the debit card is great. On the other hand, there are 37 million people in California as a whole, and seems a little bit silly, to me, to design the entire unemployment system around the unbanked, when the unbanked are massively outnumbered by people with bank accounts. After all, the whole point of unemployment insurance is that you get it when you’re laid off from your paid job. And if you have a paid job, you’re very likely to have a bank account.

It’s my contention that if you have a bank account, then it’s a no-brainer that you should have your unemployment or disability benefits paid directly into that account by direct debit. But none of the Californians were inclined to agree with me on that front. “Our focus on everything we put out is to tell our claimants how to avoid fees,” said Sabrina Reed, project director for the electronic benefits project, talking about things like the nine-minute YouTube video explaining how to use the debit card. The direct-deposit part of the video starts at the 6:40 mark, where it presents direct debit as “another option”; we then cut to a woman holding a newborn who says that “with a new baby it was a good option for us to do direct deposit, because it’s hard to go to the bank”.

At no point does the state of California ever come out and say that direct deposit is a good option; it’s just an option, offered to those who would like to take advantage of it. “Many people like the convenience of using the card,” Reed told me. “People who are savvy enough to use direct deposit sign up for direct deposit.” When I asked whether, in the interests of education, it might be a good idea to encourage Californians to sign up for direct deposit, she replied by saying that “you’re making a presumption we’re not making”.

Let me rewind here for a second. In my original post, I quoted Berry’s article which in turn quoted representatives from both California and BofA, talking about the fact that California does not offer direct deposit. The truth is that direct deposit is an option — but you always have to get a debit card, and then if you want direct deposit, you need to work that out not with California but rather with BofA. And BofA has no incentive to make the direct deposit option easy or convenient or attractive — because BofA makes all of its money from the retained balance on the debit cards, and from the interchange fees it gets when those debit cards are used. If you set up direct deposit so that there’s no balance on the debit card and you never use the card to buy anything, then BofA won’t make any money off you.

Reed understands that BofA will never push the direct-deposit option — but she also sees no reason for California to push it, either. In fact, she says, people getting Californian unemployment benefits “have a better debit card process than you and I have with our banks”. And she came up with a clever example of why someone with a bank account might not want to transfer all the money over using direct deposit: if that person had a third-party ATM on their street corner, then it might be cheaper to withdraw money from that ATM using the California debit card, rather than using their bank’s ATM card. “It’s a personal choice for every individual,” said Reed. “While direct deposit may be convenient for one person, it may not be for another.”

Now it’s easy to be a bit suspicious of California’s motives here. The state has entered into a revenue-sharing plan with Bank of America, under which BofA remits back to California some percentage of the total unspent balance on the debit cards each period. The fewer people using direct debit, the more money Bank of America makes — and the more money California makes, too. The money isn’t huge — it’s about $10 million a year. But if direct deposit was easier, or was encouraged more, then California might have to start paying BofA to run this scheme, rather than getting a multi-million-dollar rebate every year. (Reed is a huge fan of high interchange fees, and hates the Durbin amendment, even though benefits debit cards were exempted from it: it’s “ultimately going to hurt the taxpayer”, she says.)

More generally, if you have a bank account, of course you should sign up for the direct-deposit option. The whole point of having a bank account is that it’s the single place through which all your transactions flow, and people on unemployment or disability benefits generally get most of their income from those schemes. The debit card can’t be refilled by anybody other than the state of California — in no sense is it an alternative to a bank account. The money on the card should be used to avoid overdraft fees; it should not simply sit unused on the card.

Reed gave me a long explanation of why it makes sense to California to outsource the direct-deposit function to BofA, and I’m pretty much convinced on that front. I do believe it’s cheaper and more efficient for California to outsource these things than to try to do them itself. But I also believe that if California wants to do right by its claimants, it should ask them to provide their bank account details when they sign up for benefits, and tell BofA to sign them up for direct deposit as the default option.

By all means give people the option to opt out, and to keep their benefits on a prepaid debit card if they’d rather do that or if they don’t have a bank account. But the opt-in system that California has setup seems designed to minimize the number of people who will use direct debit. As does the distinct lack of any documentation from California saying that direct deposit is a really good idea. The money arrives automatically in your bank account, a good two or three days earlier than it would in the bad old days of paper checks. You don’t need to keep close track of how much money may or may not be on your debit card at any given time. And you can keep all your money in one place, give it to someone else by writing a check, and enjoy all the other conveniences of having a bank account. Prepaid debit cards are all well and good, but bank accounts are always better.

In fact, if California really wanted to do right by its claimants, it would force BofA to give them a bare-bones, no-fee bank account rather than just a debit card. The bank account would come with a debit card, of course. But you could add money to it whenever you wanted, without incurring any fees — something which apparently is illegal with benefits cards. California has more than 2 million claimants receiving some $100 million per day: that gives the state a lot of negotiating power to get what it wants. And it’s a little sad, I think, that what California turned out to want was a way of maximizing interchange fees for BofA and for itself.

COMMENT

A government bureaucracy in bed with a bank that got massive bail outs from taxpayers??? Who’d a thunk it. LOL!

Posted by 1AngryAmerican | Report as abusive

Parking datapoints of the day

Felix Salmon
Nov 17, 2011 18:55 UTC

largest.jpg

Emily Badger has found a fantastic paper (not online, sadly) from the University of Connecticut. Authors Chris McCahill and Norman Garrick took aerial photographs of New Haven, Hartford, and Cambridge, and started counting up the number of off-street parking spaces over time.

There’s a general tendency, in American cities, for the number of parking spots to rise inexorably — and that’s exactly what happened in New Haven and Hartford. As McCahill and Garrick write:

If places were to grow, it was assumed that most of the growth would be served by automobile, so new development would require supplemental parking facilities. In the city of Hartford, Connecticut, city officials stated in 1972 that, “the most critical improvement to [neighborhood shopping districts] which could be made at this time is the provision of off-street parking facilities”. In 1982, responding to the claim that his city had more parking than any other Connecticut city, New Haven Mayor Biagio DiLieto stated that he was “strongly committed to maintaining and improving parking facilities for workers, shoppers, and visitors in the downtown area”.

The authors add, waspishly:

Applying this thinking to U.S. cities, without knowing any other information, one would expect that the cities with the greatest increases in parking over the past fifty years have also experienced the greatest growth of development and activities. And conversely, the cities in which parking has not increased substantially might be struggling to achieve growth.

Of course, that’s not what happened at all. New Haven had 21,690 parking spots in 1951, and 106,410 in 2009; Hartford went from 47,000 to 141,000 in the same time period. But both were shrinking, rather than growing, in population.

Meanwhile, Cambridge took a different tack, and decided in 1985 to essentially ban the creation of any new parking spots. That decision marked the beginning of a reversal in its population trend: it started growing quite impressively. Here’s the chart:

parking.tiff

Parking lots are — with only a handful of exceptions — the best possible way of destroying a city’s soul. They’re gruesome, lifeless places, and I’m constantly astonished by the way in which governments and developers are convinced that they’re a great idea. Instead, local government should act as a brake on private developers’ desires to build out new parking: while that might (or might not) be good for an individual commercial operation, it can at the same time be bad for the city as a whole. Cambridge is living proof that this can be done: other cities, including New Haven and Hartford, should follow its lead.

COMMENT

I live in Baltimore. Significant parts of the downtown have been turned into high-rise parking garages by developers. Where once there were drug stores, local restaurants, dry cleaners, candy shops, etc., there are now brick facades housing cars. The friendliness of the streets has warped into a sense of threat. One can drive down Lombard St and feel they are in a brick corridor. Where people used to shop, walk and converse, there are just cars and brick walls of garages. One of the things that parking lots and garages do to a poorly planned or developer, profit-oriented city is visually destroy it. The quality of visual life, alone, matters. The garages of Baltimore are a clear example of how something needed for city development, rather than promoting it, results in alienation for visitors and citizens alike.

Posted by IsabellaBinney | Report as abusive

Charts of the day, corporate income-tax edition

Felix Salmon
Nov 17, 2011 15:22 UTC

fredgraph2.png

This is a chart of corporate income tax as a percentage of total corporate profits, and it’s the main thing you should bear in mind when people start saying that the US corporate income tax is too high. And while you’re at it, you should remember this chart, too, showing corporate income tax as a percentage of GDP.

fredgraph.png

Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%. But US companies are extremely good at not paying that.

But at least we know the aggregate amount that corporations pay in taxes. What we don’t know — because they won’t say, and no one’s forcing them to say — is how much any given public company pays.

Allan Sloan has a very good column on this today. Companies already report 16 different tax metrics; they should simply be required to add a 17th — the amount they pay the IRS in taxes — which in many ways is most important. The companies already file tax returns; the number’s right there, on lines 31 and 32. They just refuse to say what it is.

Here’s Sloan:

During the past few months I’ve repeatedly asked three big companies in the tax-wars cross hairs — GE, Verizon, and Exxon Mobil — to voluntarily disclose information that would refute allegations that they incurred no U.S. federal income tax for 2010. All have refused, saying they won’t disclose anything not legally required. They still manage to complain about the allegations, however. I suspect that if I called the rest of the Fortune 500, I’d get 497 similar responses.

As a society, we need the “taxes incurred” information to inform our current tax debate. Investors, too, would benefit; knowing the tax that companies actually incur would be a useful analytical tool.

Once the taxes-paid number was public, we could start dividing it into the company’s GAAP profits, to get an idea of what kind of tax rate companies are really paying right now. And of course, companies would be more than welcome, if they were so inclined, to reveal how much tax they were paying in other jurisdictions as well. But for the time being, all we can do is look at the aggregate numbers. Which are showing, very clearly, that corporate income taxes in America are very low and falling.

Update: Kevin Drum creates the chart I should have led with: corporate taxes as a percentage of pretax profit.

COMMENT

> Kudos to Felix for his straight-up correction

Maybe I miss your sarcasm, but if so let me be the sucker and play it straight… BULLSHIT.

He doesn’t fix anything, the article and lead remain as they are; he adds an appendix: “oh by the way if you read this far I kind of screwed up and here’s what I should have said…”. Except that it isn’t even this transparent or apologetic. And anyway, the lead in to the article with the broken-for-its-purpose graphs remain as is (in the 50′s we taxed almost 95% of all profits???).

Kudos would be to him if he fixed the article, fixed the headline, and removed the search engine bait. But he won’t do this, he’s going to hide behind some convenient “ethics” which will preempavely paraphrase as “whatever I blog, however wrong it its, must stay there forever in its original form, and the best I can do is to publish SEPARATE corrections and apologies – yes I could get the source material corrected too but that is morally impossible for me to even contemplate because it’s a mortal sin to change what has been published however evil or wrong my initial drunk rantings were.”

Felix, can you revise the article to put WHAT YOU CONCEDE is the _right_ graph as the front of the article and rewrite the first paragraph to reference it instead?

To people other than Felix: please not that he’s not going to respond this this, and he’s certainly not going to do it (11′th commandment to Moses, though shouldnt no show weakness and admit errors other than by addendum, else thoust historical record be muddied).

Posted by bxg6 | Report as abusive

Counterparties

Nick Rizzo
Nov 17, 2011 00:07 UTC

Evans-Pritchard: EU leaders are bypassing democracy to save the Euro — Telegraph

Both parties are reaching for accounting gimmicks as Supercommittee nears failure — WSJ

Federal prosecutions are up, except for bank fraud — NYT Economix

Congress declares pizza a vegetable — AP

Congress is less popular than BP during the oil spill, or worse, Paris Hilton — Washington Post

Your middle class neighborhood is probably disappearing — NYT

“Blink” your small business worries away with Malcolm Gladwell and BofA — Market Watch

We shouldn’t have said Fannie Mae paid Gingrich $300K. It was actually $1.6M — Bloomberg

COMMENT

Re: Evans-Pritchard, The Great Euro Putsch

IMF dirty MF
Takes away everything it can get
Always making certain that there’s one thing left
Keep them on the hook with insupportable debt
– Bruce Cockburn, “They Call It Democracy” (25 years ago)

Posted by melior | Report as abusive

Ed DeMarco’s obstructionism

Felix Salmon
Nov 16, 2011 19:34 UTC

Representative John Tierney of Massachusetts is one of those politicians whose questions tend to be substantially longer than the answers they elicit. But that doesn’t mean the questions, pared to their essence, aren’t good ones. Here he is grilling FHFA head Ed DeMarco, asking why he’s refusing to consider principal reductions on mortgages.

DeMarco’s answers come at 2:15 and 4:50. He starts off quite explicitly:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

Later on, he agrees to furnish Congress with these analytics: I, for one, would love to see them. There are two ways that you can come to this conclusion, and I suspect that the analysis uses both. First, you can try to maximize the probability that underwater borrowers will continue to make payments after a loan modification, rather than simply strategically walking away; and secondly, you can maximize the probability that borrowers who are current on their mortgages will strategically default if they think they can get a principal reduction by doing so.

At heart, what any lender needs to do with regard to any given loan in default is make a choice. You can modify it in any number of different ways, some involving principal modification. Or, you can just foreclose. You know, pretty much, what the costs of foreclosure are — and they tend to be enormous. So there’s a good case for modifying the loan, if the present value of the modified loan payments is decent. But in order to calculate that present value, you need to have a handle on the probability of a redefault. The lower the redefault probability, the more attractive a modification is to the lender. The higher the probability of a redefault, the more likely it is that you’d be better off simply foreclosing now.

Now here’s Tierney’s point: redefault rates are significantly lower when you do a principal reduction than they are when you don’t. It stands to reason: if you have equity in your house, you’re going to want to keep that equity. If you have negative equity in your house, not so much. As a result, principal reductions reduce redefault rates, and are a good way of maximizing the value of a loan.

In order to demonstrate that Tierney is wrong, then, DeMarco is likely to attempt to show that redefault rates don’t drop very much if you do a principal reduction. I think that’s going to be hard, not least because we haven’t had much in the way of principal reductions, so the data on redefault rates is going to be pretty thin.

And then there’s the second leg of the argument DeMarco has to make, which is even harder to get good data on. It’s the moral hazard problem: if you start doing principal reductions, everybody’s going to want one — even people who are current on their mortgage right now. And you don’t want to do anything which will give people an incentive to default, just so that they can get their mortgage modified.

Again, however, the argument here is a relative one. Any kind of modification program, at the margin, is going to provide an incentive to default. So DeMarco is going to have to demonstrate that people are more likely to strategically default the minute a principal-reduction program gets implemented. And I can’t imagine where he could possibly find the data to support that conclusion.

It’s worth noting that DeMarco made neither of these arguments in his answers to Tierney. Instead, he started attacking straw men:

I do not believe that I’ve been appropriated taxpayer funds for the purpose of providing general support to the housing market…

I believe that the decisions that we’ve made with regard to principal forgiveness are consistent with our statutory mandate… I do not believe I’ve been authorized to use taxpayer money for a general program of principal forgiveness.

Tierney was not asking DeMarco to provide “general support to the housing market”. He was not saying that DeMarco’s actions to date were somehow illegal. And he certainly wasn’t suggesting that DeMarco use taxpayer money for a general program of principal forgiveness.

In fact, he wasn’t suggesting that DeMarco use taxpayer money for anything at all. He was suggesting, instead, that DeMarco would save taxpayer money if he did principal reductions on certain mortgages. And he rattled off a long list of private-sector lenders who are doing just that, which suggests that there’s definitely a profit motive in there somewhere.

Obviously, no one’s suggesting that the FHFA start doing principal reductions across the board for all mortgages: Tierney’s only suggesting that DeMarco allow such things where it makes financial sense to do so. That’s a no-brainer; what’s weird is DeMarco’s certainty that it never makes financial sense to do so. Fannie and Freddie own a lot of mortgages; surely a few of them, at least, are good candidates for principal reduction — especially ones where the home is worth half or less the amount of the mortgage.

DeMarco does have one other alternative — he could just come clean and be honest. In which case he’d say something like this:

“We’re keeping millions of underwater mortgages on our books at par. We know they’re not worth 100 cents on the dollar, and so do you. But our accounting conventions allow us to pretend that they are worth that much, and as a result we’re managing to kid ourselves that our assets are worth a lot more than they really are. If we modify the loans while keeping the principal amounts constant, we can continue to carry those loans on our books at par. But if we do principal reductions, the accounting conventions finally grow some teeth, and we’re forced to take a write-down. Since we don’t want to recognize reality and take that write-down, we’re simply going to avoid doing principal reductions instead.”

Since it seems to be impossible for anybody to remove DeMarco from his supposedly interim position, he might as well come out and say this. After all, no one seems to be capable of firing him, no matter what he says.

COMMENT

StephanieRenee, what you are proposing is much like a “short sale”. The borrowers are able to sell (if they wish) but any profit over the reduced principal goes to the lender. The difference is that your proposal would also reduce the loan payments *without* the borrower needing to move out.

Any government spending program would stimulate the economy, but they might not all do so equally. Your proposal involves a large immediate writedown (e.g. $100k) to provide reduced mortgage payments (e.g. $5k/year lower) over a 30-year period of time. The stimulus would be greater if that $100k were spent over a shorter period of time. This program would benefit a small number of households at a high cost with only a slight increase in expendable income. Simply not effective stimulus.

“The average American did not create the problem we face today.”

Nonsense. The average American happily joined in the game, believing that this was the easy path to wealth. (After all, real estate always rises, right?) The average American was clearly duped — but nonetheless played a critical role in creating the problem. Prices do not shoot through the roof without average American’s borrowing and buying at inflated prices!!!

P.S. Can’t really call them “homeowners” when they have no equity in the property.

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