Unstructured Finance

Mr. Geithner and the politics of condemnation

Matthew Goldstein and Jennifer Ablan

The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn’t necessarily a new one.

Two years ago, a group of congressional leaders led by Rep. Brad Miller of North Carolina wrote to Treasury Secretary Tim Geithner recommending that the federal government consider buying underwater mortgages to stem the flood of home foreclosures. The Democratic congressman got two dozen of his colleagues to sign onto the proposal, which Geithner gave a pretty cool response to.

In a May 7, 2010 letter to the U.S. lawmakers, Geithner said the proposal had too many hurdles to be seriously considered. The Treasury secretary said eminent domain is a “complex and lengthy” proceeding. And he worried about the difficulty of  buying “mortgages out of the trusts and other securitization vehicles that own and control a substantial share of mortgage debt.”

But the biggest obstacle raised by Geithner was determining what would be fair value for taxpayers to pay for an underwater mortgage.

“If Treasury were to pay a a price higher than fair market value, taxpayers would be exposed to a high risk of loss and banks and investors would receive a windfall.”

Goldman sells China

Goldman Sachs, putting together the pieces of its TARP repayment, is taking a page from Bank of America’s book and selling off at least some of its China exposure. The stake of Industrial and Commercial Bank of China is being sold at a discount and should raise $1.9 billion – or about a fifth of what it owes in TARP.

Goldman, along with Morgan Stanley and others applied last week to repay the government. This may have more to do with Chinese bank assets being big and, presumably, more liquid than others Goldman has in its vast pool of assets. A more alarming analysis could be that asset quality at Chinese banks is as bad as it ever was.

Interesting that news of the sale should come from a bank that launched so many careers at the U.S. Treasury just as Treasury Secretary Tim Geithner touches down in China.

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