by Tom aka Rusty Rustbelt Real Estate Insanity So my son and me are thinking about buying a duplex in Ohio and fixing it up this summer. He would live in half and we would rent the other side. Given the number of foreclosures this should be an easy deal, right? Wrong. The realtors tell me no one will finance the properties, not even the banks that own them. Why? It seems many of the banks did not get around to assigning “asset managers” for a year or two, which means the water pipes froze in the winter, burst in the spring and destroyed the interior of the properties. Even when asset managers were promptly assigned, many were incompetent and/or corrupt. So there are many thousands of properties with reasonable looking exteriors but with ruined interiors. Even with sweat equity labor the fix up costs will be very high. This will eventually be fixed with bulldozers.
Yves Smith provides a snapshot of her perception of at least public thoughts from mortgage industry conference participants. It is worth a read.
I just came back from the AmeriCatalyst conference in Austin, which was a packed two days focused on the state of the housing and securitization market. The panels were very informative, and it was also good to see some of the people I’ve read or heard about, in particular the leading analyst, Laurie Goodman of Amherst Securities. She gave a talk that where she went through a very persuasive (and conservative) analysis that there are 8.3 to 10.3 million more foreclosures baked give how underwater borrowers are. And she had some striking bits of information. One is if you take out the homes where no one has made a mortgage payment in a year or more, homeownership in the US is 61%. In addition, Judge Annette Rizzo discussed a successful program she had developed in Philadelphia to do remediation. The success rate on modifications that come out of her court is 85% after 18 months.
I had quite a few people come and commend me on my comments. I think the main reason was that the viewpoint presented on this blog, that there are deep seated problems resulting from chain of title issues, and that servicers have engaged in a lot of abuses, was sorely underrepresented. I don’t blame the organizer,
by Linda Beale
As our banking giants engaged more and more in speculation, and as the shadow banking system saw a way to make money off of people’s bad financial decisions by betting against subprime loans, the financial crisis took off. So redressing the problems that caused the crisis shouldn’t overlook mortgages.
The Treasury has now come out with a “plan” for addressing the government sponsored enterprises Fannie and Freddie, which played a role in the crisis though were not the drivers of the subprime origination mess. The plan, Reforming America’s Housing Finance Market: A Report to Congress (Treasury and Housing and Urban Development, Feb. 2011), claims that it will “reform America’s housing finance market to better serve families and function more safely in a world that has changed dramatically.” It also claims that it is intended to limit the government’s primary role to “robust oversight and consumer protection, targeted assistance for low-and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response.”
Both of those claims are worrisome. First, the alternatives proposed seem better designed to serve the financial services industry than famililes. Not only is there still no provision for mortgage modification in bankruptcy, but securitization is intended to “continue to play a major role in housing finance”, even though the securitization process has brought a nightmare of foreclosure mills and uncertainties about who owns debt and has the right to foreclose. While the Administration walks the GOP-favored walk of decreasing government/increasing private markets, it nonetheless leaves government as the one that backstops the private mortgage market, retaining the possibility of private gains and social losses.
Second, the statement that government will be limited to “carefully designed support for market stability and crisis response” means that the government will continue to backstop the securitization losses, as Yves Smith at Naked Capitalism puts it in The 7 Things Really Wrong with the Treasury’s GSE Proposal:
Of the Treasury three proposals, the last is the same as one advanced by the big guns, from the Mortgage Bankers Association, the Fed (both the New York Fed and the Board of Governors), the Financial Services Roundtable and Mark Zandi of Moodys. This alternative preserves too many bad elements of status quo ante, in particular significant and largely hidden subsidies for banks, for anyone to hail it as reform. Although each proposal has some distinctive wrinkles, all call for the creation of “private” entities that would provide insurance to mortgage backed securities that would then be reinsured by the government, with a full faith and credit guarantee.
What is to prevent huge public losses? The proposal relies on a guarantee fee and higher bank capital requirements. This isn’t good enough because it builds too much on the status quo ante. Yves Smith provides her list of the Treasury proposal’s problems:
- The most pressing problems related to the crisis of abuses in the housing securitization markets outside of Fannie and Freddie are still not addressed
- The plan continues to use a poor tool to address housing goals, by focusing on mortgage financing.
- Reliance on the old 30-year fixed rate prepayable mortgage is outdated and fails to address today’s markets.
- Continued use of the private (owners of the entities)/public (backers of the entities debts) structure is fated to suffer the same problems with increasing risk and lobbying as Fannie and Freddie
- This just props up the housing market; it isn’t really a help to consumers.
- The new entities will continue the conflicting roles of the pre-crash Fannie and Freddie of propping up liquidity and making credit decisions.
- There’s nothing to keep these new entities from being too big to fail.
As the title indicates, this will be a more than usually confused post.
The stimulus was the now famous grief over elementary fairness which errupted when “[Judge] Scott Fairgrieve of Nassau County District Court, wrote that ‘swearing to false statements reflects poorly on the profession [of law] as a whole” and fined lawyer Steven J Baum $20,000 for false statements in support of a foreclosure. Baum also suffered a Schack attack when Judge Arthur M. Schack referred to one filing as “incredible, outrageous, ludicrous and disingenuous.”
Baum wrote “Pay no attention to the man behind the curtain.”
In Toto not a good time to be a sleazy lawyer in New York (when was the last time that was true?).
The part which stunned me was
Anne Reynolds Copps, the chairwoman of the real property law section of the New York State bar, said, “We had a lot of concerns, because it seemed to paint attorneys as being the problem.” Lawyers feared they would be responsible for a bank’s mistakes. “They are relying on a client, or the client’s employees, to provide the information on which they are basing the documents,” she said.
So her view is that lawyers do not have the responsibility to check the claims of fact they make to judges, to look at the evidence. So what exactly do they do? Is the claim that their job is to look good in a suit and speak proper English with a confident tone?
Lawyers have discovered that they can make a whole lot more money by not doing their jobs and claiming they have done their jobs. Big surprise. Now the idea that they might have to give up that income, because they don’t have time to do what they have been claiming they have been doing is shocking.
I think that this is a very general phenomenon.
I don’t know how much money Baum made, but it is clear that one lawyer with a huge income must have been mainly taking money for doing what he didn’t bother to do
“David J. Stern, a lawyer whose Florida firm has been part of an estimated 20 percent of the foreclosure actions in the state, has been accused of filing sloppy and even fraudulent mortgage paperwork.” One firm [working on] 20% of the foreclosures, how many partners? How many associates with law degrees? How many robo signers?
Bankers and lawyers used to earn good money for, among other things, due diligence, keeping records, keeping proof if the records were contested, and complying with burdensome laws and regulations.
Relatively recently, they have earned immense incomes claiming they had done those things without bothering to do them. I guess that the fee charged by the lawyers who didn’t glance at the evidence is the same as the fees charged by lawyers who check if something is true before telling it to a judge. Clearly, one can make a lot of money claiming to have done something difficult and time consuming without bothering to do it.
Banks charge fees for handling transactions, but clearly stopped bothering to, say, handle transfer of a mortgage in a way that the entity which paid them could foreclose when the time came.
Banks charge to exchange currencies. If they are trading pieces of paper for pieces of paper, then they have to hold money to do that and they have to keep people from stealing it. If I am taking money out of an ATM in a country with a different currency from my bank account, I am forcing some computer somewhere to multiply two numbers. Ouch. But they charge as if they were doing it with pen and paper (or maybe an abacus).
I’d guess that most of the huge profits of the financial services sector are based on separating gamblers from their money, but a large part come from charging for services not rendered and another large part come from charging a lot for services which cost very little to provide now that they have computers.
The terror at the idea that judges won’t accept “because I say so” as proof shows how much the system depends on no one checking what was actually done in exchange for the huge flow of fees.
Naked Capitalism points us to a letter to ‘sign’ today in support of the FDIC and Congressman Brad Miller’s advocacy for servicer regulation:
This time, though, there is a way to stand up against the banks. And the reason is because in this case, Sheila Bair at the FDIC actually wants to do the right thing. There’s an open letter from Wall Street reformers to regulators advocating a wide range of new measures on the mortgage and securitization fronts. Congressman Brad Miller, who has been on predatory lending since 2004, penned a letter to the regulators. His effort is getting traction.
And now there’s a petition that you can sign, at StopServicerScams.com. If you missed it before the holidays, sign it now. We will be submitting the signatures today by the end of the day today. We up to 12,000, which is a large number for this sort of initiative, thanks to the efforts of Credo, FireDogLake, Mike Konczal, Chris Whalen, and Josh Rosner (the total on the site does not reflect the signatures obtained through some of these channels). We added a comment field, so your comments will be delivered to Geithner, Bair, Bernanke, and Walsh. Tweet it. Put it on Facebook. Send it to your friends and family.
This is meaningful action that every citizen can take.
Yes, there are three very similar (shades of blue) lines—but they are all household and non-profit data. (The growth in “credit market instruments” is, presumably, primarily driven by the non-profit sector.)
Note also—as Rusty would certainly tell you if I didn’t—that borrowing in the non-financial sector (the red line) has the flatest line of all (it’s at the top through the early 1990s and near the bottom as of last year.
Compare this with Mike Konczal’s graphic of corporate profit shares over the same period (h/t Brad DeLong) and there is a fairly clear case that accusations from bankers that consumers are suffering because of their foolish, excessive borrowing is a case of a very grimy pot talking to a copper kettle.
This whole post is after the jump as my accounting is not ready for prime time.
Scott Sumner thinks he is the first to note that the cost to the US government of bailing out the big banks is more likely to be a profit than a cost. Clearly he doesn’t read angry bear much, as I have been predicting that for months.
His accounting strikes me as very odd. Last I hear, the total cost of bailouts (including GSEs, AIG, GM and Chrysler) was predicted to be $87 billion. This does not include the cost of the FDIC honoring its contracts which was not discretionary and not a bailout by any normal use of the word.
Now Sumner reports the good news that the cost not including GM and Chrysler will be only 158 billion ?!?
Huh what happened ? First I think he forgot about roughly 125 billion when he wrote “Last time I wrote on this subject the eventual cost to the government from bailing out the big banks was estimated at a negative $7 billion–in other words a profit to Uncle Sam of $7 billion.” I believe that when he wrote “the government” and “uncle Sam” he meant “The Treasury”. Uncle Sam also has this little organization called the Federal Reserve Board. Last I heard it was predicted to make a profit of 125 billion out of its bailout efforts. Not all of that involved big banks, but I just don’t believe that the government made only 7 billion out of its direct interactions with big banks. In any case, the 125 billion (or probably more now) seems to have escaped Prof. Sumner’s notice entirely.
The news which he reports is that the current guess is that the cost of bailing out AIG is going to be about zero. That is, the amount AIG owes is roughly equal to the expected present value of future repayments.
Sumner gets his huge loss overall because he describes the cost of bailing out Fannie and Freddie as “$165 billion and rising.” I believe this is the amount they owe the Treasury minus zero. Sumner argues that big banks and AIG were OK investments and GSEs weren’t because in one case he includes expected discounted repayments and in the other he decides they are zero.
It is worth noting that the GSE rescue involved loans at 10% per year and the GSE debt is not equal to money transferred from the Treasury to GSEs plus the interest the Treasury paid on that extra debt. Oh no. It is the amount transfered plus penalty interest rates charged on that amount.
Basically, I beleive that Sumner did not stick to a consistent definition of “cost” and redefines the word so as to generate meaningless numbers which confirm his prejudices.
Also he doens’t understand the extent of the US government and thinks it is just the department of the Treasury.
One of us is profoundly confused.
The opening chapter of Jack Cashill’s Popes and Bankers relates his version of the tale of Melonie Griffith-Evans, a woman who in 2004 borrowed her way to losing her house. Ms. Griffith-Evans accepted loans in order to buy a house priced at $470,000 that resulted in her having to pay “roughly $3,500 a month.” Of course, she ends up not being able to pay those loans, and—since ex post is ex ante—the result must be All Her Fault. Mr. Cashill allows as to how a “traditionalist” might “if feeling churlish, talk of Griffith-Evans as a ‘predatory borrower.’ ”
Working solely from the information as provided by Mr. Cashill, let us test the validity of his hypothesis, assuming the “traditionalist” were sane.
Taking Mr. Cashill at his word on that “roughly $3,500 a month” and assuming that the ancillary loan is described correctly, Ms. Griffith-Evans would have to have taken out the following loans to buy the house for $470,000:
- A $ 94,000 (20% of the price of the house, an amount Ms. Griffith-Evans did not have in savings) loan. This loan—which I’m guessing was for 30 years was offered at the rate of 12.5%. (Mr. Cashill stipulates this.) Presumably, it was not secured by the property itself.
- This would produce a payment due of approximately $1,000 per month.
- A $376,000 (80% of the price of the house) 30-year fixed-rate mortgage, securitized by the property, at 7.00%
- This is the only way to total $3,500 per month if we assume Ms. Griffith-Evans borrowed the entire 20%, which seems to be Mr. Cashill’s contention. Otherwise, she only borrowed around $57,000 and made a down payment of around $35,000—certainly not the actions of a “predatory borrower.”
All of this excludes the closing costs or title searches or inspections or any of the other minutiae that is required before such loans are approved. But the process is transparent in Mr. Cashill’s tale, so we should assume that is the way he wants it to be.
Strangely, the details Mr. Cashill offers do not jibe with that. He claims that Ms. Griffith-Evans “took out a fairly standard 8.5% loan on 80% of the purchase price.” And—in a case of poor writing that betraying poor thought—he collaterally notes that the $3,500 payment due was “increasing as the loan was adjusted.” This would lead to an initial combined payment of approximately $3,900 a month—more than 10% higher than “about $3,500,” though still significantly below the rental costs of “about $5,000 to $6,000 per month” for apartments that, per Mr. Cashill, “suited her fancy.”
Mr. Cashill is determined to argue that the loan Ms. Griffith-Evans took out was not “predatory,” but was an 8.5% mortgage rate “fairly standard” in 2004?
It doesn’t seem to be. Even the highest rate for conventional mortgages in 2004—6.29%—is more than 220 basis points (2.20%) below the rate of Ms. Griffith-Evans’s loan, and that is excluding whether her rate was itself adjustable. (It is unclear from Mr. Cashill’s account whether the 8.50% mortgage, the 12.5% additional loan, or both were adjustable.) Or, to put it simply, the lender was charging Ms. Griffith-Evans more than a 35% premium for her loan. Quite a premium to accept if one wants to be a “predatory borrower,”
One might fairly wonder why she was not offered a loan for the entire amount at a fixed rate that would produce a loan payment due of about $3,500 a month, eliminate the risk to the second, unsecured lender, and leave the primary mortgage lender with a less encumbered “owner.” (That rate would be 8.10% for a $3,500 per month payment, or—given Mr. Cashill’s figures—a loan of 9.30% for the entire amount.) Certainly, if the primary lender honestly believed the property was worth $470,000, they would have been willing to offer a loan for such an amount, with the attendant Mortgage Insurance.
Mr. Cashill wonders about none of those actors, either, however. Tis Ms. Griffith-Evans who is wholly at fault, from the Very Christian perspective presented. Somehow, it was venal of her to elect to pay $3,500 a month for a house for her family, instead of half again more for an apartment.
I raise the possibility that the primary lender didn’t believe the house was worth $470,000—or even anything beyond $375,000—solely because the evidence runs that way. There is first the fact that the lender was not willing to loan Ms. Griffith-Evans the entire amount—or even within 20% of it—against the value of the property. (We can safely conclude this because the alternative is to believe that she, given the choice between paying 8.5% and paying 12.5%, honestly preferred the latter.) The second piece of evidence comes from Mr. Cashill, who declares that the lender was “embarrassed” into allowing Ms. Griffith-Evans and her children to stay in the house—“presumably free of charge” (quite the presumption, that)—“while she tried to find a buyer.” (Those of us who do not understand this behavior from a “predatory borrower” probably don’t understand Christianity either.)
Do I need to note that she failed to find a buyer? And that the lender clearly didn’t have one either, for—as Mr. Cashill continues—“When she failed to find one, the lender gave her still more time to find an apartment.” The benevolence of lenders is legendary, to be certain, but this one is clearly destined for sainthood.
The world in which I live—clearly one with a different color sun than that of Mr. Cashill in this chapter—is one in which businesses make decisions based on revenue and cash flows. So when the seller of the house accepted Ms. Griffith-Evans’s original bid, even with its dodgy financing, during the peak of the housing market, we must presume that they did so because they expected to receive more net money, easier, from that sale than from any other bid. And we must presume the lender was fully aware of what they were doing—and charged usurious interest rates (compared to the market) accordingly.
So we have a situation in which, ex ante, all parties got the best deal they could, given the information they had. Ms. Griffith-Evans paid around $1,000 a month less than she would have paid in rent, even before any tax benefits. The seller received a price to which they agreed, and which they represented as fair market at the time—with a lawyer doing a title search, a home inspector, and a home appraiser all corroborating that the property and the structure were as represented, and that the price was reasonably on the market (even if it wasn’t, or soon thereafter was not), all of whom were paid for their expertise and conclusion. The lender received a significantly higher interest rate than they would have from another buyer, which presumably compensated them for their additional risk—and they had the property in reserve.
In the world in which the sun is yellow and Ms. Griffith-Evans is a single mother—not General Zod—economic agreements were reached consensually among the parties and of whom except Ms. Griffith-Evans were compensated professionals. Strangely, in the “traditionalist” world of Mr. Cashill, the one person in the entire series of transactions who is most likely to have been deprived of information is the one who should be described as “predatory.”
After a start like this, I can’t wait to read the rest of the book.
I had an informal discussion with a manager in an MBS IT area last month. Just a general conversation about the field and the data people check. He mentioned FICO scores and I noted that I’m not fond of using them to evaluate a mortgage, especially for first-time homebuyers.
Part of this is simple: it’s relatively easier—even in the densely-populated metropolitan areas (e.g., NYC, SF), and certainly in sub- and exurban areas—to maintain a good credit rating if you don’t own a residence. No property taxes, no major repairs, no appliance replacement, no general maintenance, no landscaping, no snow shoveling. And it’s very easy, especially the first time, to underestimate just how much those expenses will be. Looking at just the cost of commuting, renting, storage, parking, etc. makes homeownership appear to be a better economic decision than it is.*
Well, the Federal Reserve Bank of New York recently released some data on mortgage payments by type. It’s not directly comparable—the subprime and Alt-A loans have a more granular level of data, most especially with respect to late and current payments—but there are some interesting relationships.
I looked at the data for States where the subprime loans are current for either (1) more than 55% of the borrowers or (2) less than 45% of the borrowers, which includes 24 states and the District of Columbia. The overall breakdown was 16 states in the first group and eight states and the District of Columbia in the second.
Of the six states that have more than 100,000 subprime loans outstanding, three—Illinois, Florida, and California—are in the More Delinquent category, while only one (Texas) is in the “so far, so good” realm.**
So I ran a regression on those states and the District, using as factors the percent of the subprime loans that were not Owner-Occupied, the Average FICO score for the state, the percent of subprime loans issued to borrowers with a FICO below 600, and the percent of subprime loans issued to borrowers with a FICO score above 660. The result was
PctwithCurrPymt = –1.18*(FICO>660) + .292*(FICO<600) + .266*(Average FICO Score) –0.9*(Pct Not Owner-Occupied) –93.66
R-squared = 0.4213 (Adjusted R-squared= .3056) F = 3.64 (Prob > F = 0.0220)
However, none of the coefficients passes the t-test.
If we assume that there is a solid distinction between a FICO score below 600 and one above 660, then we must note that the signs of this regression are precisely the opposite of what we should expect. The more loans with an initial FICO score above 660, the fewer the number of households that are expected to be current in their payment. Conversely, the more households with a FICO score below 600, the better the Current Payment Performance should be expected to be.
This would seem to be a Very Bad Regression—both methodologically, since it takes two separate sets of data and treats them as if they are part of the same set and intuitively, since it produces results that are not compatible with rational assumptions—but that may not be so.
California, for instance, has the third-highest percentage of Owner-Occupied Properties, the highest Average FICO Score, the lowest percentage of subprime loans to borrowers with FICO scores below 600 and the highest percentage of subprime loans to borrowers with a FICO score above 660. But it falls into the group where fewer than 45.0% of the borrowers are current.***
Which means that, were you to use FICO scores as an input to your model for buying Whole Loans to securitize, you would likely have bought more currently-dicey CA paper than not.
But, as noted, we may believe this to be a Very Bad Regression. The greatest likelihood is that there is/are (an) excluded variable(s) in the equation. If we consider the entire set of data, this becomes clearer. The regression equation for all of the states and the District of Columbia is:
PctwithCurrPymt = –1.019*(FICO>660) + .6118*(FICO<600) + .7685*(Average FICO Score) –0.38*(Pct Not Owner-Occupied) –422.80
R-squared = 0.1471 (Adjusted R-squared= .0730) F = 1.98 (Prob > F = 0.1128)
The signs remain consistent—and counterintuitive—but there is a much lower explanatory power and it is much more likely that the regression fails the F-test. And again, none of the coefficients passes a t-test.
Adding variables whose signs are more likely to produce indeterminate results—the Average Age and the Average Interest Rate of the Loans—corrects the two original signage issues, but produced a third (and possibly a fourth):
PctwithCurrPymt = 1.375546*(FICO>660) –1.639*(FICO<600) – 1.3423*(Average FICO Score) –0.223*(Pct Not Owner-Occupied) + 16.5340 AvgInterestRate + 0.2632 AvgLoanAge + 775.9700
R-squared = 0.4661 (Adjusted R-squared= .3991) F = 6.40 (Prob > F = 0.0001)
The additional variables have significantly raised the explanatory power of the model, and we now see that the FICO scores point in the intuitive directions. But the Average FICO score has ceased to be a positive contributor to the model, and the Average Interest Rate—the only variable that passes a t-test for significance—indicates that the higher the rate, the higher the likelihood of payment.
So we are left suspecting that the initial FICO score does not significantly affect the ability of the borrower to keep their loan payment(s) current. This also seems intuitive, since a FICO score is a stock variable, while mortgage payments are flow variables.
But, as with credit ratings, good FICO scores can only go downward. And it is very rare—especially in an environment in which there is downward pressure on wages—for a good FICO score to go upward. Indeed, dropping the positive FICO score and the Average FICO score as a variables makes for a better regression:
PctwithCurrPymt = –0.663*(FICO<600) –0.238*(Pct Not Owner-Occupied) + 15.4976 AvgInterestRate + 0.1469 AvgLoanAge – 47.325
R-squared = 0.4466 (Adjusted R-squared= .3985) F = 9.28 (Prob > F = 0.0000)
While the Average Interest Rate still has a counterintuitive sign, we should note that the Averages range from 6.69 to 8.66%—even the high end is neither an overwhelming burden for subprime borrowers nor a level from which it is likely to have been worth refinancing. Additionally, while AvgInterestRate remains the only coefficient that completely passes a t-test, both FICO<600 (-3.17) and the constant (-2.54) are negative for all values within a 95% confidence interval. Dropping Non-Owner-Occupied from the equation sharpens matters even more:
PctwithCurrPymt = –0.6747*(FICO<600) + 15.7738 AvgInterestRate + 0.1400 AvgLoanAge – 50.7117
R-squared = 0.4407 (Adjusted R-squared= .4050) F = 12.34 (Prob > F = 0.0000)
With the t-values for both FICO<600 (-3.25) and the constant (-2.83) now both more than 99% probable and, again, the values being negative for the entirety of a 95% confidence interval. In summary, the use of FICO scores as a predictor of mortgage repayments appears to be questionable at best, for the same reason that “junk” bonds tended to outperform high-grade securities on a risk-adjusted basis: it is much easier for a rating to decline than it is for it to improve. The value of a FICO score as a predictor of loan performance appears to be much more for lower scores than it is for higher ones. Whether there is greater value on a risk-adjusted basis, as there legendarily has been for corporate bonds, is left for further, more detailed research. *None of which is to suggest that the non-economic reasons aren’t valid. But credit scores deal with how you manage credit, and how you manage credit has to do with the options you have as much as the choices you make. Homeowners have fewer options on the allocation of funds to lodging than renters do. **New York State and Ohio are in the middle range.with 46.8% and 52.0% current, respectively. ***Only Hawaii had tighter FICO standards than California—and they have the second-highest (worst) level of non Owner-Occupied Subprime loans (and the worst of any area with more than 10,000 subprime loans outstanding), while California is fifth-best (lowest) in that metric.
Jeff Imment, CEO of General Electric, frightened Paulson in early September by calling to say GE, which Paulson describes as “an American business icon,” was having trouble borrowing money by selling IOUs known as commercial paper, and visited Paulson several days later in person. In mid-October, Paulson called Immelt to discuss imminent plans for a Federal Deposit Insurance Corp. guarantee of all new bank debt, but not GE’s. Immelt told him not to worry, GE would manage and would benefit indirectly by a more stable banking system. The next day, Immelt called back and said the bank guarantees were hurting GE’s finance unit because banks could borrow with U.S. government guarantees and GE couldn’t. And on Oct. 16, 2008, Immelt came in person to press the matter with Paulson. Over the following weeks, Paulson and Treasury official David Nason “worked hard to get Sheila [Bair] comfortable” with extending the guarantee to GE. In November, she did. GE’s finance unit…became one of the biggest users of the program.
The transition from “an American icon” to “a poorly-run finance company” had already been made by one “icon.” And its salvation is presented by Paulson as part of a “domino sequence.” Wessel:
The federal rescue of Citi led directly to the rescue of General Motors and Chrysler. “Nancy Pelosi [the speaker of the House]… told me point-blank that it was politically impossible to rescue Citi and not help the automakers. She had until recently opposed bailouts for the car companies, which she considered poorly managed.”
Top management of Citi, last two iterations: Vikram Pandit, Chuck Prince, Bob Rubin, and Richard Parsons.
Top management of GM, last two iterations: Rick Wagoner, Jack Smith, Ed Whitacre, Jr.
As Business Week (via Wikipedia) dryly noted of Smith and Wagoner:
After GM lost $30 billion during a single three-year stretch in the early 1990s, Wagoner and Chairman John F. “Jack” Smith Jr. forced GM “back to basics” to battle “30 years of management mistakes” that left him with little room to maneuver.
I don’t know about anyone else, but I’d take the latter set over the failed hedge fund manager, failed CEO, ineffective Chairman of the Board, and guiding force for TWX behind the AOL/TWX merger.
UPDATE: Jeff Gerth has more on GE’s condition.* American icon, indeed.
*Given Gerth’s track record, the article should be taken with a ten-pound bag of salt.