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The Influence Game: Banks Shift Bankruptcy Tactics

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  • The Influence Game: Banks Shift Bankruptcy Tactics

    Interesting article!

    THE INFLUENCE GAME: Banks shift bankruptcy tactics
    By JULIE HIRSCHFELD DAVIS – 11 minutes ago

    WASHINGTON (AP) — Big banks, scrambling to prevent the government from forcing them to rewrite mortgages for struggling homeowners, are using their lobbying clout to press the Obama administration and Congress to scale back a key measure to rescue borrowers from foreclosures.

    The legislation, expected to pass the House on Thursday, would let bankruptcy judges reduce the principal and interest rate on a home loan. That essentially would require mortgage companies to let debt-strapped homeowners reduce their monthly payments rather than lose their main residences.

    Obama called for it last week as part of his housing rescue plan. Democrats and consumer advocates regard it as crucial to slowing the rapid rate of foreclosures.

    But the mortgage industry contends the measure will impose steep and unpredictable costs on its companies, which will be forced to pass them along to borrowers in the form of higher fees and interest rates. The industry spent millions last year on a successful lobbying effort to kill the bill, which almost all Republicans oppose. Opponents call it the "cram-down."

    This year, with Obama in the White House and Democrats enjoying a broader majority, a rift has emerged in the industry. One major player, Citigroup Inc., has bowed to the new political reality and moved to grab a seat at the negotiating table.

    It cut a deal last month with Democrats to back the plan, as long as it applied only to existing loans made before enactment and was limited to homeowners who try working with their lender to adjust their loans before seeking relief in bankruptcy.

    Other banks have changed their strategy, but not their position. They are continuing efforts to squash the legislation, but also have stepped up their bid to gut key provisions. Among their goals: restrict the measure to certain kinds or sizes of home loans, certain borrowers, or situations where the mortgage holder — known as the loan servicer — agrees to the changes.

    "I don't see a scenario where we can ever support this, but we're trying to make it the least-worst way to do the wrong thing," said Scott Talbott, a lobbyist for the Financial Services Roundtable, a trade group representing large banks. The group spent $7.8 million last year lobbying on this and other issues. "There are efforts being made to change the bill right now," Talbott said Wednesday, as Democratic leaders were putting the last touches on the measure to be voted on Thursday.

    That legislation, sponsored by Rep. John Conyers, D-Mich., the Judiciary Committee chairman, is part of a broader housing plan. It includes a boost in the Federal Deposit Insurance Corporation's borrowing authority and other steps to prevent foreclosures. In the Senate, Sen. Dick Durbin of Illinois, the No. 2 Democrat, has teamed with the Banking Committee chairman, Chris Dodd, D-Conn., and Sen. Charles E. Schumer, D-N.Y., on the bankruptcy measure. A vote could come in a few weeks.

    The change in tactics has paid off for the banks, now actively bargaining with top Democrats on the details of the legislation.

    "We continue to be opposed to the bill and that hasn't changed, but we do live in the real world, and we do understand that this is very likely to happen, and we owe it to our members to recognize that reality and to limit the damage as much as possible," said Francis Creighton, a lobbyist for the Mortgage Bankers Association, which spent $4.2 million on lobbying last year. "We're encouraged by the fact that the bill is moving to limit the damage of cram-down rather than make it worse."

    Aside from Citigroup, two other large banks, JPMorgan Chase & Co. and Bank of America Corp., have been in discussions with top Democrats. Neither has signed onto the bill, however.

    Industry players are pushing to limit the measure to home loans originated in the last several years and to strengthen the requirement that borrowers prove they tried other ways of modifying their mortgages before resorting to bankruptcy.

    "The bank opposition has had a profound impact on the bill as it stands today. They're very powerful special interests. They're a force in Washington," said Michael Calhoun of the Center for Responsible Lending, a consumer group. "Look at the concessions they extracted from the bill and are still extracting."

    Lobbyists and congressional aides close to the negotiations say the banking industry has recognized that some sort of action on the bankruptcy measure is virtually certain, and is actively seeking a deal on the issue that will limit its cost.

    In an internal research report last month, Credit Suisse said it expected the legislation to be enacted and projected it could lead to a 20 percent reduction in foreclosures.

    Citigroup had an interest in showing a willingness to cooperate with the new administration in getting the foreclosure crisis under control. It has taken $45 billion from the government's financial bailout program already and is in discussions about getting even more federal assistance. The government is guaranteeing billions in risky Citigroup assets, meaning taxpayers are essentially on the hook for losses it could incur through the bankruptcy change.

  • #2
    Banks to Get Nearly Unlimited Federal Funds

    Wednesday, Feb. 25, 2009
    Banks to get nearly unlimited federal funds
    By KEVIN G. HALL - McClatchy Newspapers

    WASHINGTON -- Taking the wraps off its much-anticipated bank rescue plan, the Obama administration on Wednesday announced that it will provide a virtually unlimited solvency guarantee to the nation's 19 largest banks.

    Shortly after Treasury unveiled details of its plan, President Barack Obama appeared before TV cameras with congressional leaders to launch what he hopes will be a quick move to replace what he called a 20th century financial regulatory system.

    "This financial crisis was not inevitable," Obama said, noting that his goal wasn't to inhibit the free market but to regulate it better to prevent a repeat of the global meltdown now occurring.

    Treasury Secretary Timothy Geithner unveiled the administration's bank rescue plan on Feb. 10, and financial markets tanked as investors fretted over a lack of detail.

    Markets got those details Wednesday and the Dow Jones industrial average initially recovered from a loss of 200 points in mid-afternoon trading. However, that rally faded, and the Dow closed the day down 80.05 points to 7270.89. Other market indexes were off by similar margins.

    While investors appeared to cheer the confidence-boosting design of the Capital Assistance Program, it may prove less popular with taxpayers because it amounts to a blank check to ensure that the top banks - those with assets over $100 billion - remain solvent.

    The plan works like this: Through the end of April, federal regulators will pore over the books of the 19 largest banks - such as Citigroup, Bank of America, Wells Fargo and others. They'll be looking at conventional measures such as the composition of a bank's cash on hand, and at unconventional ones, such as how financial firms are valuing complex and opaque investments that are often shorthanded as toxic assets.

    The idea behind the so-called stress tests is to gauge if the banks have enough capital to cope with a more severe downturn than even today's - one in which the economy contracts by 3.3 percent and the unemployment rate tops 10 percent. That's far from the worst-case scenarios that some of the gloomier forecasters predict.

    "Supervisors will work with institutions to estimate the range of possible future losses and the resources to absorb such losses over a two-year period," said a joint statement from four federal bank regulators - the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Office of Thrift Supervision.

    At the end of the exercise, if it's determined that banks lack enough capital to weather such a storm, they'll be given six months to raise more capital from private investors or to ask for a capital buffer from the government.

    "The more specificity, the less uncertainty, the more it does provide banks an opportunity to raise private capital ... is frankly the right way to go. It clearly is a time frame that I think is reasonable," said Stuart Hoffman, chief economist for PNC Financial Services, one of the 19 firms that will be put through the stress test.

    If a bank is unable to raise private capital and needs to get capital from the federal government, it would do it in exchange for "convertible mandatory preferred shares." They could be converted into common stock on an as-needed basis, which would inject new capital into the bank. The government would become a shareholder in the company through its ownership of common stock.

    Banks don't have to complete the stress test to apply for this capital buffer. Citigroup is expected to get a fresh injection of capital through the program in coming days. In exchange, the government is expected to take a stake as high as 40 percent.

    The administration's plan has two goals. One is to ensure that banks have adequate capital cushions to withstand any downturn. The other goal is to restore investor confidence by showing that these big financial firms have access to as much money as they need, because the government is willing to invest as needed.

    How much will it cost? No one is saying.

    There's no price tag on the CAP, at least until the stress tests are over in April. If most of the 19 banks were determined to need additional capital, the Obama administration would have to seek much more Wall Street bailout money from Congress.

    "The fact is there is no explicit cap on the assistance that can be provided under this program," said one senior government official, speaking on the condition of anonymity.

    Whether the plan will work depends in part on whether other components of the administration's rescue effort prove effective. Those include the public works spending envisioned in the $787 billion stimulus plan and an effort coming next week from the Federal Reserve to serve as the buyer of last resort for pools of securities backed by loans for new cars, students, small businesses and credit card debt.

    Few analysts are willing to guess whether Obama's plan ultimately will work.

    "I don't know what it's going to take to calm the markets at this point, because everyone is just so paranoid that it's hard to know," said David Wyss, chief economist for the rating firm Standard & Poor's in New York.