Ratigan and Spitzer: Mitt Romney’s State of the Union Challenge on the Mortgage Crisis
January 24, 2012By Dylan Ratigan and Eliot Spitzer
Finally, a presidential candidate came out and honestly addressed the biggest problem in our economy, the enormous debt overhang in our mortgage market. A few days ago, Mitt Romney was at a forum in Florida talking about foreclosures, and his comments were actually refreshingly honest about our housing and banking situation and the need for a debt write-down.
We’re just so overleveraged, so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake, they loaned too much, we’re overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it’s worth.
Mitt Romney was pointing out that the banks are carrying debt on their books at inflated values. When was the last serious politician to make that point, openly? There’s more.
In some cases, if the debt is not in something you can service, it’s like you have to move on and start over away from those debts. It’s helpful if you get an institution that’s willing to work with you, but if you don’t you have no other option.
Romney is now saying that if you can’t pay your debts and your lending institution won’t work with you, walk away. Perhaps this isn’t so surprising, though, as Romney is an expert in debt restructuring. This is actually just common business sense.
And finally, he offered a real solution to the mortgage debt crisis.
The banks are scared to death, of course, because they think they’re going to go out of business… They’re afraid that if they write all these loans off, they’re going to go broke. And so they’re feeling the same thing you’re feeling. They just want to pretend all of this is going to get paid someday so they don’t have to write it off and potentially go out of business themselves.”
This is cascading throughout our system and in some respects government is trying to just hold things in place, hoping things get better… My own view is you recognize the distress, you take the loss and let people reset. Let people start over again, let the banks start over again. Those that are prudent will be able to restart, those that aren’t will go out of business. This effort to try and exact the burden of their mistakes on homeowners and commercial property owners, I think, is a mistake.
This is the right approach to the problem. If you force the banks to recognize losses on the mortgage debt they are holding, then all of a sudden they will have an incentive to write down debt. Otherwise, a bank will do anything it can to maintain the fiction that the debt is worth 100 cents on the dollar, including lie, harass, and robo-sign.
There are ample reasons for cynicism, the cup overfloweth with them, perhaps. Still, what’s shocking about these comments is how casual they are, as if it’s common knowledge that the banking system is still insolvent and that our debt loan cannot be paid back. Among financial elites, it in fact is common knowledge. Tim Geithner noted this when he talked about Lehman Brothers and the “air in marks” on the debt it was holding on its books. And Martin Feldstein on the Republican side and Alan Blinder on the Democratic side are both arguing for debt write-downs. Everyone knows this has to happen, that the accounting manipulation needs to stop. But Mitt Romney actually said it.
We’re pretty sure that Romney will walk these comments back if necessary, since he holds positions only insofar as they are convenient. Since at that same forum he called out for praise one of the most bank-friendly state officials in the country, Florida Attorney General Pam Bondi, we can probably measure his adherence to this common-sense approach in micro-seconds.
But what this episode shows is that the solutions to our crisis are understood. In the book Greedy Bastards, the question of restructuring debt is considered in detail. We need a debt deal, as Romney inadvertently noted. More fundamentally, getting rid of the accounting gamesmanship will lead to a healthier economy because it will align financial assets with real economic assets. As another example, credit default swaps are linking American banks excessively to an unstable Eurozone. Credit default swaps are in fact yet another accounting game designed to further balance sheet fictions. Dick Grasso offered his solution to this obvious problem. We can, according to Grasso, simply declare these contracts online gaming, and void them.
What Americans should be taking from this episode is that finance, while complex, is not conceptually hard. If it’s a lie on the balance sheet, it’s going to be destructive to ordinary people. If you stop the balance sheet lying, the economy will do better. But while Mitt Romney might have said this out loud, they all know it behind closed doors. Our question is, who will be the first to make this a policy reality?
This originally appeared on The Huffington Post on January 24, 2012.
As if Romney would have the balls to do anything other than what Obama has done if he ever got in office, he's just trying to appeal to some of the Ron Paul supporters to rise about Gingrich again.
Thanks for the show! The other secret is still hidden. The banks probably have lost more money on their foreclosures so far than Fannie and Freddie. Just think, that means GSEs are more competent than Wall Street banks since they each had half the market until 2008. Instead of shrinking the GSEs, we should shrink Wall Street banks.
Hold your horses a minute. This is the same guy who a few months ago said Do Not Stop the foreclosures and let the marketplace take care of it. The lure of Florida delegates appear to have helped Romney find the right answer, for now!
How much debt did he forgive or write down at Bain Capital!
@ Andrew – I think his message is the same.
He's basically saying people should walk away from their underwater homes and, if they don't, then banks should push them away because those loans are bad for both borrower and lender. If the banks would write-down the debt the foreclosure issue would matter much less, because there would be far fewer foreclosures. Foreclosure is a symptom; dealing with it matters less if the underlying problem is fixed.
I'm not sure he was trying to be sneaky, though don't know him and haven't been tracking him closely. But I got the feeling he was speaking about an area he knows well: what to do about hopeless debt.
Dylan, THANK YOU for this incredibly important discussion Re mortgage write-downs. I've been posting/tweeting/blogging about this for three years, now. I used to work for one of the top five banks in the U.S. I experienced firsthand the incredible arrogance and stupidity of their mortgage practices, as well as their brazen disregard for risk in derivatives. As much as I admire and respect President Clinton, his rolling over for Sandy Weill (Travelers) on the repeal of Glass-Steagall was one of the worst moves he ever made. Banks *never* should have been allowed to get into the securities trading business.
The most obvious solution to the housing market woes in the U.S. and worldwide is to "push the reset button" and write down ALL mortgages to the current Fair Market Value of the homes to which they're attached. The resulting losses could then be added to the Net Operating Losses (NOLs) of the individual institutions and used as deductions against income over a period of, say, 3 – 5 years (like depreciation). Hell, that might even encourage the banks to keep a little more of their income in the U.S. rather than shipping it offshore to hide it from Uncle Sam.
A nationwide mortgage write-down also could be structured to benefit homeowners already *in* foreclosure, underwater homeowners who are still current with their payments, as well as homeowners that have positive equity in their homes — to benefit everyone. It's a relatively simple math formula; the problem is not the math … it's politics and greed. I don't mean to minimize the latter challenge; but if people like you, Spitzer, Krugman, Sachs, Romney, President Obama and others get behind it and we let the bankers know they HAVE to work it out, they CAN work it out. Let's put some of those big-brained quants to work actually *helping* their customers for a change.
In Nevada, where entire neighborhoods have more empty bank-owed homes than homeowners, Romney said "Let foreclosures run their course." And now in Florida, he is talking about principal write-downs, and we are supposed to believe him?