Tim Geithner’s principal hypocrisy

By Neil Barofsky
August 6, 2012

Last week the acting director of the Federal Housing Finance Agency, Ed DeMarco, made a familiar argument. He announced that he would not approve the Obama administration’s request that struggling borrowers whose mortgages are backed by Fannie Mae and Freddie Mac receive debt relief through principal reductions subsidized by the Troubled Asset Relief Program (TARP). DeMarco’s refusal was based on his concern that granting such relief would encourage other borrowers to “strategically default” by not making payments on their loan to take advantage of the promise of a reduction in their debt. This is a version of the moral hazard argument we heard about so often in the early days of the financial crisis. Secretary Geithner, in response, argued in a public letter that notwithstanding such concerns, and for the greater good of the overall economy, such relief should be granted whenever it would result in a better economic outcome than foreclosure.

This is not the first time this debate is happening – but last time around, Geithner was the one arguing DeMarco’s points. Although one can argue whether principal reductions are the right way to address the ongoing housing slump – I have championed principal reductions for years but acknowledge that there are passionate arguments on both sides of the issue – no one should be fooled that the administration’s entreaties to DeMarco are anything but political posturing. As I recount in my recently released book, Bailout, during my time as the special inspector general in charge of oversight of the TARP bailouts, Treasury Secretary Timothy Geithner, using the same justifications now offered by DeMarco, consistently blocked efforts to use TARP funds already designated for homeowner relief through a principal reduction program that could have a meaningful impact on the overall economy.

For example, in 2009, $50 billion in TARP funds had been committed to help homeowners through the Home Affordable Modification Program (HAMP), a program that the president announced was intended to help up to 4 million struggling families stay in their homes through sustainable mortgage modifications. Hundreds of billions more were still available and could have been used by the White House and the Treasury Department to help support a massive reduction in mortgage debt. But Geithner avoided this path to a housing recovery, explaining that he believed it would be “dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness.” Treasury amplified that argument in 2010, after it reluctantly instituted a weak principal reduction program in response to overwhelming congressional pressure. That program incongruously left it to the largely bank-owned mortgage servicers (and to Fannie and Freddie) to determine if such relief would be implemented. In response to our criticism that the conflicts of interest baked into the program would render it ineffective unless principal reduction was made mandatory (when in the best interests of the holder of the loan), Treasury reinforced Geithner’s early statements, refusing to do so primarily because of fears of a lurking danger: the ”moral hazard of strategic default.” The message was clear: No way, no how would Treasury require principal reduction, even when Treasury’s analysis indicated it would be in the best interest of the owner, investor or guarantor of the mortgage.

Indeed, at every critical juncture at which Treasury could have unilaterally implemented meaningful principal reduction, the same argument now presented by DeMarco was hauled out as an excuse for inaction.

Which is why it should not be surprising that rather than engage in bold action, such as replacing DeMarco with a recess appointment, the administration has responded with only a letter that seems primarily intended to distract attention from its own failed policies. The truth is that the administration – whether through principal reduction or otherwise – has never prioritized coming up with an effective approach to helping homeowners and reviving the housing market, even when it had a multi-hundred-billion-dollar TARP war chest at its disposal.

By late 2009, it was becoming apparent that HAMP would never come close to its stated goals. The program was designed poorly, and Treasury refused to hold the banks accountable for the abuses to which they subjected homeowners in the program. In one meeting I attended, after Secretary Geithner was pressed about the flaws in the HAMP program, he justified Treasury’s actions by explaining that the program would “foam the runway” for the banks by extending out the foreclosure crisis over time. In other words, Treasury was far more concerned with using HAMP to soften the blow of the housing crisis for the banks – just as the FAA once recommended spreading protective foam over a landing strip to prevent a disastrous crash of a malfunctioning airplane – than with helping millions of struggling homeowners. Now, three years later, with a tightening presidential election and a Democratic base disillusioned by the government’s abandonment of its promise to help homeowners (less than 8 percent of the funds originally allocated in TARP for foreclosure relief has actually been spent), Geithner and the administration would like to present themselves as having undergone a conversion.

Let’s be very clear about what is going on here. This is not a conversion – it is a political convenience. Geithner may well be correct when he wrote in a letter to DeMarco that an effective principal reduction program would “help repair the nation’s housing market” and that the refusal to do so is not “in the best interest of the nation,” but it is his own policies that are primarily to blame for where we are today.

As we enter the final phase of the election campaign, we need to end the meaningless political posturing and recognize that as a country we have severely mishandled the housing crisis. It may be a fair debate whether we should have gone with the “all in” approach that I and others have advocated or the “do nothing and let the market find its natural bottom” approach advocated by many conservatives. There should, though, be little question that the chosen policy – a “foam the runway” approach that assisted the banks and only a fraction of the homeowners that could have benefited – has been a failure and has left us stuck in economic mediocrity. Geithner wrote this week to Demarco: “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.” If only he had heeded his own advice.

PHOTO: U.S. Treasury Secretary Timothy Geithner speaks during a panel discussion hosted by the Los Angeles World Affairs Council titled “The U.S. and World Economies: An Overview” in Los Angeles, California July 31, 2012.  REUTERS/Mario Anzuoni

20 comments

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Either Geithner is clueless or he simply assumes we’re stupid–i fail to see how to justify his position. even, for a blue blood democrat as myself, i am appalled to the brink of vomit by this political gamesmanship–this is not abstract to me; it is real, and i hope Geithner can simply hang around with his mouth shut till November and pack the rest of his belonging from the Treasury, should Obama be re-elected.

Posted by 0okm9ijn | Report as abusive

Obama will simply select another representative of Wall Street after Geithner leaves.

The government has been captured by banking and finance. That includes Democrats. Stop fooling yourself.

Posted by TheUSofA | Report as abusive

There is no political will in this country to take on the casino banks. Washington is their protector.

Glass-Steagall came down under Bill Clinton with the support of Democrats and Republicans.

It is unbelievably naive to think Democrats will do anything about it. Criminal prosecutions are at an all time low under Obama. It’s business as usual.

Settlements and slaps on the wrist but ultimately the corruption and the crooks are protected. The influence and control of policy that the banks have over Washington leave them above the law.

Criminal Prosecutions for Financial Institution Fraud Continue to Fall

http://trac.syr.edu/tracreports/crim/267

Posted by paddletoe | Report as abusive

Let’s admit there have been arguments on either side of this one and stop trying to chop off people’s heads. The fact is a lot of good was done by the current administration in saving us from a harder crash than would have happened otherwise. Going forward the challenge will be to set up criteria to keep the “moral hazard” of strategic default from happening, and yet finding a way to help those underwater homeowners who need it the most.

Posted by skimish | Report as abusive

hahaha look at this picture of Geithner.. what a goon.

Posted by timshel | Report as abusive

The new populist stance may not be all political posturing. If Obama is re-elected, it will be largely without the help of Wall Street this time. He tried treating them with kid gloves, and they turned on him. We will certainly get nothing better, and likely will see far worse, from a Romney presidency.

Posted by Sanity-Monger | Report as abusive

@skimish

How can you move forward when you declare banks to be too big to fail? Will you hail the joke that is the Volcker rule as some sort of triumph? Dodd-Frank? Democrat Chris Dodd is now the CEO of the MPAA by the way.

You cannot move forward (unless by move forward you mean again leave accountability behind, especially because this administration happens to be wearing the right team colors) in any meaningful way without first understanding the causes, who the criminals are and who enabled them. Without that, ‘moving forward’ is just some wishy-washy nonsense.

As the poster above stated, criminal prosecutions for financial crimes are at an all time low.

If you want to move forward in a meaningful way, real change, not with rhetoric and posturing, then you should be calling for the break up the big banks and for the reinstatement of Glass-Steagall.

Posted by TheUSofA | Report as abusive

We need a full report card on Tim Geithner. What did he actually succeed at? What did he fail at? Did he steer the Obama administration away from Obama’s original direction, and more in favor of Wall Street?

In the coming election, to what extent will Obama be judged by Geithner’s performance?

Posted by DifferentOne | Report as abusive

Democratic supporters today have convinced themselves that pragmatism is not in fact just a euphemism for acquiescence and cowardice. That their party is not part of the status quo, it’s only the other guy that’s the problem.

As a poster above declares that at least this time, if re-elected, Obama will do so “largely without the help of Wall Street this time.”

See the rationalization here? The continual lowering of the moral bar. The picking and choosing of accountability. The acquiescence.

Posted by TheUSofA | Report as abusive

Does anyone have any good info or research on mortgage ownership? For instance, if Bank of America owns a particular mortgage, it’s pretty obvious why they wouldn’t want to take a writedown on it. If these mortgages are owned by Fannie Mae, then it seems like there’d be less concern about a writedown. I have to assume that since there is so much obstruction from the financial industry about mortgage writedowns, private banks/hedge funds are mostly on the other side of this deal and don’t want to take any losses.

Posted by timshel | Report as abusive

[...] die with ‘virtually no financial assets’ (MIT News) • Tim Geithner’s principal hypocrisy (Reuters) • Bank Loans at Post-Recession Peak Support U.S. Growth (Bloomberg) • Hey America! We’re [...]

@ TheUSofA. So please tell us what Romney will do? Maybe we should not vote at all, or vote for a third party. Tell us what you intend us to do? Morally there is no one lower than a religious zealot intent on forcing everyone else to follow their dictates. Much like the right in the US. So even if I did find your argument convincing I’d have a hard time voting for the truly morally corrupt, the right. God or no God, it’s about the money really, and Romney is really really about the money.

Posted by brotherkenny4 | Report as abusive

[...] with housing, which range from the merely feeble to incompetent and downright disastrous. As Neil Barofsky points out, it’s Geithner himself who has stood in the way of principal reductions [...]

Geither is following the Orwell 1984 play book: say one thing and do the opposite. He’s been protecting his banking buddies from day one.

I have a simple solution. Set interest rates at true value (5-10%), and all the rest of this crap will take care of itself. Too bad the US is addicted to credit.

Posted by pdjisok | Report as abusive

Lost in this debate is what a spectacularly bad idea it is to use a failed private corporation currently in government receivership as a source of unlimited taxpayer funds to affect housing policy.

We don’t ask General Motors to sell the post office trucks below cost, do we? This is just as bad an idea.

Posted by jpmist | Report as abusive

yes the idea of helping some people with mortgage problems might allow some really “bad” people to get over the rest of us.

kind of like Too Big to Fail, wouldn’t want to keep a bad thing bad, would we? oh i forget these are banks and not people.

the people who could pay off their mortgages if helped aren’t worth saving, but TBTF banks are?

such wonderful logic that got us here in the first place. lol Corrupt Business, Corrupt Government.

and stupid people who want help so they can continue to pay off their mortgages?

America is truly exceptional, isn’t it?

Posted by Beleck | Report as abusive

And now you get why Bernanke is disgusted with both Congress and the White House. He has tried, albeit by some means that have long term negative consequences of their own, to get the interest on homeowner debt down to slow down the foreclosures and buy time for government and the banks to act, and they have completely failed to implement the obvious non-moral hazard decision…make a 3% or less 30 year mortgage available to anyone that wants to refi, underwater or not, at no cost to the homeowner, and split the losses between the investors and the TARP funds… Another option is to refi existing ARMs as 30 year fixed mortgages at the same rate as homeowners now pay, and make it mandatory that banks cannot raise the refi rate for any reason. Simple math tells you that if you borrow 100k at 5%, and that interest is all you can afford, then you can only afford a 2 1/2% rate if you have to borrow 200k to buy a home, which is what happened from 2000-2007. Get the real amount of interest in line with what people can actually afford, and you don’t have to reduce principal and the “moral hazard” element is eliminated. The loss is going to have to be taken, but it can be spread out over enough time for the housing market to recover. But don’t hold your breath that it will happen cause you are dealing wirh bedrock human greed…

Posted by Hatterasman | Report as abusive

This entire refinancing thing is a joke as there is not need for the principal reduction when the average rate is around 6.25% that will be reduced to 4% on the average $200,000 loan which is $277 per month saving such be the argument allowing the current mortgage balance of what owed on the Fannie & Freddie loan to be refinanced like a government streamline refinance without an appraisal because the amount is already owed to us the taxpayer who the two seized agencies are into us for over $190 billion.

In the long run we are saving to much money because we are not taking the close to 50% loses. Along with the new 30 year terms there is about $6,000 we make over the old interest on the average, and the $100,000 realized lost of the foreclosures. Even if we had to sweeten the pot and put some type of balloon payment of $25,000 at the end of the 30 years in order to give relief today.

For Geithner to write DeMarco who is an idiot but so to is Tim who has only used about $3 billion of $50 billion of TARP funds to correct this mess the industry caused.

I feel that what Barofsky is saying about foaming the runway is the mindset of the Obama administration in spreading out the foreclosures to get a feel for just how many foreclosures could be conducted where the economy could absorb an without no real outcry from the public the phony modification program been allowed to continue until the 50 State Attorney Gen came together and spoiled the plan collapse of 18 to 25 million foreclosures.

The Fed has helped this con by printing $16 trillion to lend for zero to .5% loans which has allowed bank to foreclose at will or string along these modification until after the election. We have a foreclosure review program that been extended until Sep 30 before the clown pay a single claims. This is about running out the clock until Nov!

Posted by CharlesReed | Report as abusive

[...] Tim Geithner’s principal hypocrisy | The Great Debate. Share this:EmailFacebookTwitterLike this:LikeBe the first to like this. Comments (0) [...]

So, Geithner thinks a certain class of homeowner “should” get a break. Again, the Obama Administration chooses expediency, a short term fix, over principled, long term reform. Some win but most lose with this President. Perhaps it’s because Congress denies him meaningful legislation that he tinkers endlessly at the margins, favoring some and irritating everyone else. Well, that’s a measure of leadership. A certain class of taxpayer “should” pay more. Certain States are allowed exemptions from NCLB. Certain institutions are exempt from women’s health provisions of the Affordable Care Act. Certain classes of professionals are favored: “…so we can hire more policemen and teachers….” Certain industries bask in the sunshine of grants and loans. Well, divide and conquer. If suspicion continues to replace trust and cooperation, America will ressemble the former GDR where half the people were employed spying on the other half. No one was happy, by the way, and the standard of living kept on dropping. It that what we want?

Posted by billbradbrooke | Report as abusive

[...] link: Tim Geithner’s principal hypocrisy – Neil Barofsky via [...]

@brotherkenny4

What you (purposefully) fail to recognize is that lobbyist money and donations which buy influence also flows into Democratic pockets. This idea that one side is full of devils and the other side is full of angels is beyond naive, it’s irresponsible.

Where is the pressure On Obama from supporters to take on the banks? Where is the pressure to hold him accountable for the shredding of civil liberties? If you happen to be a Democratic supporter calling for accountability you are quickly rounded upon. Rationalizations are thrown at you and slogans and rhetoric. Everything but the issue at hand.

You can keep playing the game of the lesser of two evils, and continue to pick and choose accountability based on ‘team colors.’

Thereby ensuring both ends get continually played against the middle.

Posted by TheUSofA | Report as abusive

[...] Barofsky’s out with another criticism of Geithner. Barofsky uses the recent ruling of the Federal Housing Finance Agency to take another [...]

[...] Neil Barofsky describes “Tim Geithner’s principal hypocrisy.” [...]

Lower interest rates do not have exactly the same effect as a principal reduction.

Someone who has a mortgage balance of $170K whose home is now worth only 100k can not sell their home unless they give 70K of their own cash to the mortgage company in addition to the 100K provided by the purchaser at time of sale… the cost of a realtor would also be an out of pocket expense.

It doesn’t matter if the interest rate on that balance is 6.25% or 1%.

If the mortgage company gets all of the proceeds from the sale of a house and 70K cash from the seller, then the “homeowner” doesn’t really own the home. The homeowner has no financial stake in the property.

The underwater property is essentially owned by the bank, lock, stock and barrel and the “homeowner” won’t have any financial interest at all in the property until he has made enough payments to reduce the mortgage to what the property is actually worth. (Remember, only the principal portion of the payment reduces the loan balance. Payments on a home purchased within the past 10 years consist mostly of interest.)

In the case of a property that is 70K underwater that would require payments made over a very long period of time just to climb out of the red.

We’ll see where Obama really stands on this issue after the election (if he wins). Firing DeMarco now would hand Republicans an opportunity to leverage the situation to their advantage. If Obama wins, and DeMarco and his policy remains intact, the the author of this article was right and I’d expect to see at least a modest surge in defaults.

Posted by breezinthru | Report as abusive

A simple, elegant solution to this problem is available:

Invoke a call to the public to withdraw all their funds from the major banks on one day.

Think about it. If that were to happen, then the banks would come into line very quickly. You don’t need government intervention, which is overtly biased in the banks favour. What you need is simply to amass a public revolt to “educate” the banking system. Call it a systematic,anarchistic approach to market re-equilibrium.

The American taxpayer shouldn’t be looking to vote for a politician to make a change. Rather they should simply vote with their dollars, which is infinitely more effective at causing lasting change.

The only thing they respect is money. Take it away, and then… you’ll have their attention.

Posted by GKJ1 | Report as abusive