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Banks and hedge funds turn their dark armies of lobbyists against each other.
Noam Scheiber, The New Republic Published: Friday, May 1, 2009
http://www.tnr.com/story_print.html?...f-2c881ddf5870
via opensecrets.org: $37 million in campaign contributions from hedge funds since 1990 ($17 million in 2008) pales in comparison to the $214 million from commercial banks...
Noam Scheiber, The New Republic Published: Friday, May 1, 2009
http://www.tnr.com/story_print.html?...f-2c881ddf5870
a funny thing happened while the big banks and investors were uniting against the cram-down push: The banks cut their own deal. Top executives at four large banks--Citigroup, Bank of America, J.P. Morgan, and Wells Fargo--descended on Congress to proclaim they'd love nothing more than to modify mortgages, just like the president wants. It's just that, with all those greedy investors out there, you never know who's going to sue. The solution, they argued, was a "safe harbor" provision: Give us legal immunity, and we'll modify all the loans you send us. "They said it's necessary to protect them from lawsuits," recalls one House Democratic aide. "Our position was, to the extent there are barriers to modifications, let's erase those barriers." (Spokesmen for J.P. Morgan and Wells Fargo declined to comment; the other banks did not return calls.)
From the banks' perspective, the beauty of legal immunity was that it would give them a free hand to modify mortgages owned by investors while collecting cash incentives from the government and protecting their second liens--a proposition potentially worth billions. From the investors' perspective, it meant the cost of modifications would come entirely out of their pockets. If the fight in Congress was essentially over who would eat hundreds of billions of dollars in housing market losses, the genius of the banks was to realize early on that, given the political environment, it wasn't going to be homeowners. That left them duking it out with investors, even if the latter weren't aware of it.
And so, while the investors droned on to glassy-eyed congressmen about the sanctity of their contracts, the banks waxed expansive about all they wanted to do for the man on the street. "The investors don't make a sympathetic case. The banks positioned themselves as happy to help modify the loans," says one neutral finance industry lobbyist. "By essentially throwing investors under the bus, they created a glide path for loan modifications."
When the House passed its bill in early March, the investors were stunned to see that it contained the safe harbor provision they feared and loathed. They'd hardly realized it was even on the table and had made no attempt to fight it. Their only consolation was the belief that safe harbor was joined at the hip to the cram-down measure, so the banks would work with them to defeat the entire package in the Senate. But it soon became clear that Senator Dick Durbin, who was spearheading the cram-down legislation, had no intention of letting it torpedo the overall bill--which, in addition to safe harbor, also included a larger credit line for the FDIC. (Durbin eventually decided to slice off cram-down for a separate vote.)
The investors realized they'd been had. They quickly pulled out of the broader lobbying effort and formed their own group--called the Mortgage Investors Coalition--which spent most of April frantically pleading their case. They argued that, even without safe harbor, the lenders had all the legal protection they needed. They insisted the only thing safe harbor would accomplish is to protect banks who made fraudulent loans, which they'd essentially be able to launder through modification.
[..]
Pressed by the big banks, the Senate defeated cram-down yesterday and is on the verge of passing safe harbor as early as Monday. (J.P. Morgan CEO Jamie Dimon was spotted in the chamber on Wednesday.) "We're trying to cram six-to-eight months of education into three-to-four week period," bleats one beleaguered investor lobbyist.
In the end, the problem for investors was largely sociological. Banking is a heavily regulated industry; in order to succeed, a bank's top executives must be as deft at navigating Washington as they are at lending money. But, with a few important exceptions, most hedge funds live by a meritocratic credo: You make money by having the more sophisticated computer model or arbitrage strategy. "Traditionally, investors aren't lobbyists, they don't have an eye toward Washington," says the finance industry lobbyist. "They have an eye on deal-making." That helps explain the irony that, even though Obama himself is closer to more hedge fund managers than bank executives, the banks look to have won this fight. (The administration did finally work out a compromise between investors and banks on the second-lien issue, though.)
From the banks' perspective, the beauty of legal immunity was that it would give them a free hand to modify mortgages owned by investors while collecting cash incentives from the government and protecting their second liens--a proposition potentially worth billions. From the investors' perspective, it meant the cost of modifications would come entirely out of their pockets. If the fight in Congress was essentially over who would eat hundreds of billions of dollars in housing market losses, the genius of the banks was to realize early on that, given the political environment, it wasn't going to be homeowners. That left them duking it out with investors, even if the latter weren't aware of it.
And so, while the investors droned on to glassy-eyed congressmen about the sanctity of their contracts, the banks waxed expansive about all they wanted to do for the man on the street. "The investors don't make a sympathetic case. The banks positioned themselves as happy to help modify the loans," says one neutral finance industry lobbyist. "By essentially throwing investors under the bus, they created a glide path for loan modifications."
When the House passed its bill in early March, the investors were stunned to see that it contained the safe harbor provision they feared and loathed. They'd hardly realized it was even on the table and had made no attempt to fight it. Their only consolation was the belief that safe harbor was joined at the hip to the cram-down measure, so the banks would work with them to defeat the entire package in the Senate. But it soon became clear that Senator Dick Durbin, who was spearheading the cram-down legislation, had no intention of letting it torpedo the overall bill--which, in addition to safe harbor, also included a larger credit line for the FDIC. (Durbin eventually decided to slice off cram-down for a separate vote.)
The investors realized they'd been had. They quickly pulled out of the broader lobbying effort and formed their own group--called the Mortgage Investors Coalition--which spent most of April frantically pleading their case. They argued that, even without safe harbor, the lenders had all the legal protection they needed. They insisted the only thing safe harbor would accomplish is to protect banks who made fraudulent loans, which they'd essentially be able to launder through modification.
[..]
Pressed by the big banks, the Senate defeated cram-down yesterday and is on the verge of passing safe harbor as early as Monday. (J.P. Morgan CEO Jamie Dimon was spotted in the chamber on Wednesday.) "We're trying to cram six-to-eight months of education into three-to-four week period," bleats one beleaguered investor lobbyist.
In the end, the problem for investors was largely sociological. Banking is a heavily regulated industry; in order to succeed, a bank's top executives must be as deft at navigating Washington as they are at lending money. But, with a few important exceptions, most hedge funds live by a meritocratic credo: You make money by having the more sophisticated computer model or arbitrage strategy. "Traditionally, investors aren't lobbyists, they don't have an eye toward Washington," says the finance industry lobbyist. "They have an eye on deal-making." That helps explain the irony that, even though Obama himself is closer to more hedge fund managers than bank executives, the banks look to have won this fight. (The administration did finally work out a compromise between investors and banks on the second-lien issue, though.)
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