The New York Times recently anecdotally explores just who is being foreclosed upon right now, and who is doing the foreclosing, when banks fail and the loans are auctioned off, noting that it’s mostly small-business owners being squeezed by debt-collectors, since most single-family homeowners are at least temporarily exempted by law from foreclosure.

http://www.nytimes.com/2009/04/17/business/smallbusiness/17debt.html

I hate to say I find myself siding more with the debt-collectors on this one, although if some of the tactics outlined are true, the debtors should be made aware of their rights and of their ability to report unethical or illegal tactics — they also should be aware that formal bankruptcy reorganization might be their best option to avoid these unethical practices. As the old r&b tune goes, “no pain, no gain”.

Most interesting part of this story however, is the chart in the sidebar:

http://www.nytimes.com/imagepages/2009/04/16/business/20090417_DEBT.html

If you do the math, essentially they are giving away the loans which have missed any payments at all. The “performing” loans represent 57% of the total book value, which is “57 cents on the dollar”, what they have received in toto.

So they are assuming that the only way to get rid of loans which have missed any payments at all is to essentially give them away. It’s kind of bullshit, and to call the guys buying these loans “risk takers” is nonsense. These are collateralized loans, so there is some value to them. In other words, we should be getting more than the “cash value” of the “good loans”, even if we’re packaging them with bad loans, which isn’t clear from the numbers. A very small percentage have been sold at a premium of 1% above book value, but most “good loans” are apparently being sold for the cash value, perhaps a factor of the “fire-sale” nature of these auctions.

This is the same crap that happened with the RTC, they sold the bad loans back to some of the same people who originated them in the first place (note that one of the “example” buyers is a former mortgage broker — they simply shifted business as that business tanked, and became ‘debt collectors’).

I would be interested in knowing if anyone has analyzed TALF in this light — is the government trying to recoup on their “investment” in toxic assets by partnering with hedge funds so that the taxpayers at least receive some portion of any upside to these assets? While it still would probably represent a loss, it does seem that it would be less of a loss than the bank-closure process is creating. (The FDIC still needs to cover through deposit insurance and transfer credits –T-bills — all the “assets” the failed banks were showing on their books, when the deposits are moved to another, healthier, FDIC-insured bank, so 57 cents on the dollar still means the taxpayers, at least temporarily, are covering something under 43 percent of the deposits in these failed banks).

Since the TALF program is being 90% financed by the government, and the assets under consideration would fall into the “not paying” or “some payments” categories, at worst the FDIC auctions are providing a market value of those at between 27 and 50 percent of book value, so are they trying to essentially squeeze another 25 to 45% of recoup out of the process, in aggregate?

In addition, you have to assume also that any profits made by hedge fund operators on these risks will eventually result in some increased tax revenues to the government, but the outright sale of bank assets would as well.

These numbers suggest that in the end, the taxpayers will be on the hook for an amount comparable percentage-wise (but much, much larger in raw numbers) to the Resolution Trust Corporation in the 90s — at least 33% of the funds issued via TARP and TALF will not be recouped by the process. (Unless the government decides to keep an equity stake in banks well beyond the time period when loans are paid back, a politically unpalatable notion).

An improvement on outright liquidation of the banks, I suppose, but isn’t there also an aggregate “opportunity cost” to the economy of dragging this out over 5 years or more, while the increased debt and money-supply cause rising inflation and the contracting GDP causes rising unemployment? In the end, we’re going the route of South America and the International Monetary Fund, a policy which mitigates pain for the wealthiest (investor) classes while severely punishing the poorest (working) classes.

Unless tax policy is adjusted to heavily tax the government-orchestrated windfalls for so-called “high-risk” investors in this scheme, this is basically a shell game which further redistributes wealth upward and further concentrates capital in the hands of the wealthiest segments of society. Is tax policy really likely to be adjusted in that way, or is this going to be another “trade-off” that never happens — like ‘welfare reform in return for universal health care’?