A sack of sugar wouldn’t help the bailout go down

February 2nd, 2009 at 10:57am Annette LaCross

Published Jan. 18:

Call 2008 the Year of the Great Flameout.

As in your investment bank. Or, more to the point, your retirement account. Record bankruptcies. Record foreclosures. The auto industry. Real estate. Wall Street. Iceland, for crying out loud.

You get the point.

But (theatrical sigh of relief here) we’ve moved on. It’s 2009. We’ve gratefully shed the uncertainty of the past for the … uncertainty of the future.

But at least it isn’t 2008 uncertainty.

It’s 2009 — or, as I’ve come to think of it, the Year of the Great Cramdown.

And trust me. There’s going to be a lot of it this year. Enough to choke on.

A cramdown is lingo for a bankruptcy action, when a creditor is forced to accept less than he is owed. In other words, instead of collecting the $100 you’re owed when your neighbor declares bankruptcy, the judge forces you to close the account after you’ve collected just $25.

At that point, consider the deal “crammed down” your throat.

As you might imagine, mortgage bankers and credit card companies tend to oppose the idea. They want all of their money back, bankruptcy or not.

But allowing bankruptcy judges to modify mortgages, often reducing the principal so the homeowner can afford it, has been gaining steam on Capitol Hill.

Initially, it was a condition of the $700 billion Troubled Assets Relief Program that Congress passed in October. It was eventually removed because it was so bitterly opposed by banks, homebuilders and mortgage brokers.

Luckily for our elected officials, times have changed. Today, most of the big brokerage and financial institutions are owned by the federal government, at least partially.

This month, for example, a Senate bill to allow mortgage cramdowns cleared one roadblock after Citigroup Inc., one of the country’s biggest mortgage lenders, helpfully decided that it didn’t hate the idea after all.

At the time, the feds were into Citi for $45 billion, a loan made the month after TARP passed. Then Friday, Citi posted a loss of more than $8 billion for the fourth quarter of 2008. Anyone else think Citi might be open to a few billion more from the feds?

I suspect that fewer big banks (of those that are left, anyway) will be publicly airing their opposition to the idea. They might leave it to their various lobbying groups — the Mortgage Bankers Association comes to mind — but we probably won’t hear much from the companies.

So the banks stand to get crammed down twice — once by Capitol Hill, which really seems to like the idea of helping out struggling homeowners, and then by bankruptcy judges.

Not that I have a great deal of sympathy for the banks. They’re getting their bailouts despite their objections, despite their irresponsibility, which helped get us into this mess.

So the banks get their money. And it looks like homeowners on the verge of foreclosure will get a bailout of their own. Even the U.S. and European auto industries get bailouts.

Who, then, is left holding the bag for the still-collapsing $11 trillion subprime-mortgage market? After all, somebody has to pay for it.

In the past, losses from mortgage or credit card debt would have been spread throughout the financial sector. The institution holding the pink slip took the loss.

But these days, all that debt was long ago chopped into tiny little pieces and mixed into thousands of financial casseroles euphemistically called derivatives.

The people holding the derivatives? Financial institutions, which are busily hiding their government handouts.

So who will be forced to accept the biggest cramdown this year? That’s left, again, to you and me — those of us who don’t qualify for any kind of bailout because we didn’t overburden ourselves with too much debt, bought houses we could afford and continue to pay our bills.

Like I said, it’s enough to choke on.

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