New Orleans Citi, Citicorp, Citibank, a division of the US Government, or whatever you might want to call the name of the financial services operation on Park Avenue did a smart, political thing and cut a deal with its major owner and lender to allow clawbacks. Finally, maybe we are getting something for our investment!
A clawback is the Holy Grail to the beleaguered homeowner facing losing their home, bankruptcy, and the current economic hounds of hell as property values have sunk their home in the sand around them. A clawback allows a reduction of principle, and in this recession that means realignment with something probably closer to the real current value of the property. To really impact on foreclosure relief and loan modifications, there simply must be some significant write downs of loan principal, unless we want to simply abandon whole segments of the urban and suburban landscape to for sale signs and empty lots and tumbleweed.
And, why not, you might ask given the billions and billions that financial institutions are writing down against the value of the mortgages in their portfolio and offsetting with federal bailout investments? The “why not” is partly based on some very shrewd lobbying by the financial services industry a couple of years ago which managed to get personal homes exempt from clawbacks by bankruptcy judges. The principle could be written down on 2nd homes or rental properties so that the poor soul would have a chance of staying afloat and making the payments, but not on their primary residence. Insane!
But, of course the magic was in the political power of high priced Congressional lobbying which was able to get this done in the Age of Bush when the Republicans ruled the roost and parroted the fiction of free enterprise while subsidizing big business and the financial services combines. Now, many of the Democrats in Congress want to amend the bankruptcy laws to allow these clawbacks in such situations.
Citi, holding 10% of the country’s mortgages, was the first domino to fall, and they were smart to jump to the front of the pack. Congressman Barney Frank’s will should be done here as head of the House Financial Services Committee, and Citi has always kept their finger on the political pulse and sees the inevitable coming only weeks away.
If you are going to take government money, best you learn to sing the Star Spangled Banner loudly and often, and jump to the front of the line in welcoming change that makes sense and is inevitable. That may not sound like high moral leadership, but that’s not what we can expect from bankers, so let’s take this as a first dividend on our public investment, and look to the others to fall into file.