What Has Changed?
by Richard K. Brawn, CCGA, MPA | February 10, 2009
PrintBe careful of cheerleading pundits that proclaim positive outcomes from the government programs based only on their undying faith in America. Working in underwriting brings with it a different perspective than mere faith provides. Underwriting is done on a semi-formula basis. It results in a cover sheet on a pile of documents called a docket file. The pile of documents can range from ½ inch thick to many feet of stacked cardboard boxes. The cover sheet provides an extremely dense summary of the docket contents and it is very judgmental. Once complete, the file is reduced to an electronic blip or the paper equivalent. At this point a financial instrument is created with a cash flow and can be capitalized to have a monetary value. With regard to the cash flow and value, nothing contained in that docket file matters until non-performance or default appears to become a possibility. When the loan enters into some sort of consideration of default, the documents in the docket provide the legal basis for proceeding. The coversheet reverts to being a data file.
I state this because many pundits appear to use only data in the cover sheet. A distressed loan is distressed for a reason not stated in the cover sheet. If the docket file contains errors that prevent recovery of the loan, that cover document becomes meaningless. The docket file may contain contracts that have “iron clad” legal opinion and the loan documentation may still not be worth the recycling value of the paper in the file. Why? Because the only contracts that matter are those that a court will enforce. Enforcement is not a right of any person or entity. It is the exclusive right of the government. None of the slicing and dicing, justified by opinions on the absolute legality, has any meaning if the appropriate court will not issue an enforcement order. Finally, there is a little provision in the Constitution that does not permit post facto (law cannot be written to justify a prior action). If the law was screwed up, it cannot be rewritten and applied after the fact. Many laws and regulations were written expressly to create circumstances that are now being regretted. New Federal law cannot undo the damage the old law created and it cannot undo State law.
The government proposes to acquire the financial instrument junk that private holders cannot sell. The only thing acquisition will accomplish will be to move “stuff” from the private hands to the government hands (taxpayer). As has been pointed out by Mr. Harry Markopolos testimony on the Madoff scheme, government (both Executive and Legislative Branches) simply does not understand the math or the concepts involved in the complex financial instruments. Since the Madoff debacle, Government has not gained any more understanding. So the net result is that the “stuff” is being moved from a location where brainpower resided and it could be managed to one where it cannot be managed. Of course, the concept is hyped as nirvana by the political pros in Washington and the financial mechanics in New York because it gives final burial to their fraud and fiduciary deceit. Cover will be further deepened by the current political rush to approve a fiscal stimulus. This is a political maneuver to join stimulus with the proposed purchase of junk and thus obfuscate both. Doing both simultaneously makes it impossible to judge the effectiveness of either while making it easy for politicians to switch back and forth between stimulus package and junk buying in order to avoid answering any substantive questions. Transparency and effectiveness in this mix are smoke and mirrors to create illusions.
Rather than treat them as Siamese twins, I will deal only with the program to purchase financial junk program. Once in government hands, the “stuff” will become virtually off limits from further investigation. The government will become the guardian and therefore responsible for “preserving” such self-interested barriers as privacy issues, “ongoing” investigation issues, etc., etc. Privately funded law suits will be needed to surmount these barriers. No doubt many files rely on state law that can conflict with law elsewhere. So, jurisdiction can also be used to obfuscate. Political appointees will have the power to make overt management/political decisions not to refer cases for prosecution. Congress can add to the mess by inadequately funding prosecutorial authorities. And, finally, the prosecutorial authority can reject the referral. These are just some of the excuses that will snuff any real enquiry. It could be possible that the private-public partnership proposed by Secretary of the Treasury Geithner, intends to use 100% ownership of the MBS and ABS’s to rework the internal relationships within the docket files, but who knows.
What will be the condition of the docket files? My experience with The Department of Housing and Urban Development FHA records provides an example of what to expect. FHA dumps the docket files in cardboard boxes with no thought about potential future litigation. Many files contain no indexation, no documentation to support decisions and provide no trail of responsibility that would hold up in court. If an FHA insured loan ends up in court, the FHA legal team often finds that it has to do more praying than looking in the boxes to find their case. So we can assume that billions of dollars will be paid for cardboard boxes with no indexation; no record for a trail of responsibility and fraud. The perpetrators of fraud will be securely hidden from exposure by various corporate veils that the courts will uphold. The electronic accounting will tally what someone in “the system” thinks (or hopes) is in those boxes. The financial instruments will change hands as a SALE and subsequent physical transfer of the docket (all those boxes of paper) will happen with final possession by the government in an “as is” or perhaps more appropriately “as dumped” condition, which adds yet another layer of fingerprint wiping. The sales pitch right now is that government “plan” will reduce the ratio of assets at risk to equity impeding the private organizations, and thereby miraculously making money available for lending.
Is there really a government “plan”? A real plan consists of four parts. The parts are:
- an assessment of the current situation,
- the objective(s) to be achieved,
- statements of assumptions being used, and
- a layout of how available resources will be used to accomplish the objectives.
Washington DC lives on promises that buy votes and the New York financial mechanics want all fingerprints erased. The common ground that suits both parties is chaos and obfuscation rather than clean management decisions, accountability, and transparency. But, here are some of the assumptions the government has to make for this operation to succeed. (To be correct, I am assuming that government wants to succeed.) But first, by definition, an assumption is that which must be true if the result of the plan is to be correct. Here are some assumptions to think about.
1. The US Government assumes that both the private financial sector and government will change their ways, ethics, interests, and operations without the benefit of any investigations or punishment or change of top leadership/management.
2. It assumes that people, who have benefitted enormously from failing to maintain fiduciary relationships, will see the light and change their ethics, their ego, and their character. All that is needed is a second chance…. Or third chance if the second chance does not work.
3. It assumes the wisdom of the Congress to deliver on the promise to fix what is broken once the economy gets a lift from the stimulus.
4. It assumes that all of the buying and selling of financial organizations like Countrywide somehow does not wipe clean the slate of wrongdoing. It assumes that such sales will still allow investigators to go back and examine the books and catch the crooks… up and down the totem pole.
5. It assumes that government ownership of the financial instruments, that are purportedly asset-backed, can produce the miracle (and judicial rulings) needed to actually join the bits and pieces of various “rights” back together again in order to make these Humpty Dumpty instruments whole.
6. It assumes that the means to pay for the legal and all other administrative costs will come from… you guessed it…. the taxpayer pockets.
Of course, once laid out, it is easy to see that only the last assumption could possibly be true. Of course there are political assumptions I have not included, but those change by the hour.
What of the resources to be used? Despite Secretary Geithner’s statement today (Feb 10, 2009) that the government will provide capital, the government has no treasure. That means government will have to borrow the funds or create additional currency. To avoid inflation, this new money will have to be withdrawn from the money supply after the operation is over. (Of course that requires some sort of definition of what the end game will be… ha, ha, ha!) Money to make this happen can come from only one ultimate source: future earnings of the taxpayer. Any repayment of the borrowing will be the tax shell game. People will pay taxes to government so the government can repay the people’s retirement funds for what the government borrowed. To actually withdraw excess money from the economy would necessitate higher interest rates, the cost of which would fall, once again, on the back of the taxpayer. If the excess money is not withdrawn, the taxpayer will lose both the purchasing power of his/her money and end up in higher tax brackets.
This returns us to the stimulus program. It will be interesting to see if the appropriation will provide any measure or accountability for its effectiveness and to justify the huge future burden to be placed on the American people. The government is engaged in an enormous transfer of wealth from the private citizen to the government and doing so with a near infinite lack of concern for the burden it is creating. Government seems unable to muster any concern for the people who must earn each and every dollar government wastes. I do not see how this situation can end well politically or economically.
Copyright © 2009 Richard K. Brawn
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Richard K. Brawn, CCGA, MPA | Petaluma, CA USA |
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California Certified General Appraiser (CCGA) | Master Public Administration (MPA)
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