Citicorp had a big week last week. Robert Rubin, former Treasury Secretary and member of Obama’s Transition Economic Team, bowed out of his Director and Senior Advisor role at Citi. Also, Citi withdrew its opposition to restoring Bankruptcy Judges’ power to modify home mortgages – a power taken away from Bankruptcy Judges via recent Bankruptcy law amendments a few short years ago in a frothy economy a world away from the sorry, beached whale the Media agonizes over today.
Some wondered how long Robert Rubin could remain untouched by Citi’s debacle (me, anyway) which he, according to some, had a major hand in creating. It is always fascinating to watch the rise and fall of media stars having their proverbial ’15 minutes of fame.’ For years, the Wall St. Journal would feature some rising economic star in the center column portrait piece, promising the moon, the stars and the sky for whoever they profiled, only to re-visit the same character some years later, this time on the way down amid scandals and ruination. It is reminiscent of the old saying: “Be nice to those you meet on the way up because you may well meet them again on the way back down.”
Citi took like a duck to water to all the toxic insanity of every exotic financial instrument that the quants could dream up. Citi drank the Kool Aide over and over again, enjoying for a while the incredible earnings that came with the out-of-your-mind risk they undertook which nobody understood anyway. Money Talks, Nobody Walks! – blared the old, late-night New York area radio ad between every song. As I have written in several prior articles about Citi on F&HD, when the end came, it was brutal and, without an injection of many billions of your tax dollars, there would be no Citi today at all. Citi was trading at just under seven iTunes songs last Friday, Jan. 9, down some 73.66% from its 52-week high.
Shedding Rubin, Citi also had other big news last week. It announced that it would no longer oppose restoration of the Bankruptcy Judges’ power to modify home mortgages again, taken away as recently as 2005 by an amendment so unwise that some accuse it of decimating the housing market and assuring the free fall that home values are caught in to this day. Objections by Citi and other lenders that Bankruptcy Judges should not again have this power totally missed the fact that Bankruptcy Judges, who preside over most all economic disasters, big and small, are probably the single best and most qualified people in our society to perform this vital and delicate task with an appreciation for all the important interests involved. They will now have the power, so charmingly named by Bankruptcy lawyers, to “Cram Down” lenders again, including Citi, and force them to renegotiate terms of home mortgages as to length, interest rates and even principal amounts.
Consider that in the Go Go years of 2003-2006, homeowners got all those home loans with ridiculously low initial Teaser rates of like 1% and then watched interest rates tick upwards in some 16 or 17 upward adjustments over a couple of year period so that their mortgages might have gone from a $1000 per month payment to perhaps a $3000 payment – well above their ability to afford the payments. Then came in droves the foreclosures of the last couple of years and homeowners found that it was not so easy to even get somebody on the phone on behalf of their lender or even, in some cases, to figure out who their lender was as loans were wildly securitized and assigned and re-assigned, literally all over the world.
Forced “Cram Down” modifications of those mortgages might have stemmed the flood of foreclosures which destroyed real estate values across the country and now threaten whole neighborhoods and adjacent shopping centers, but, Congress, in its infinite Lack of Wisdom, pulled the rug out from under everything and took away that “Cram Down” power leaving Bankruptcy Judges to sit idly by while the Trainwreck ensued.
Citi was likely one of the giants who lobbied hard for the same Bankruptcy Law amendments that they are now withdrawing support for and it is fervently hoped that other lenders will join them now and that Congress will wake up and finally get this straightened out. The alternative is pure insanity. Lenders thus have literally proven the old adage that your mother or grandmother might have repeated: ‘Don’t cut off your nose to spite your face.’ Or, if you listened to too much of the Rolling Stones in your misspent youth then, “You can’t always get what you want, but sometimes, you just might find that you get what you need.”