Elizabeth Warren: Pointing Out Problems, Offering No Solutions

Elizabeth Warren weighed in today with her assessment of the reason for the slow pace of loan modifications as well as the banks’ purported reluctance to lend. In her opinion it’s a problem caused by accounting rules.

Business Week reports that Warren is of the opinion that accounting changes that permit banks to value their whole loans at historical cost as opposed to current market value causes them to adopt a strategy of holding the loans and hoping that they recover their value over time or that during the holding period they are able to earn their way out of their problems.

Accordingly, they are reluctant to modify loans as that would mean they would have to recognize losses and they are reluctant to lend because they know they are worse off than their books imply and, therefore turn to hoarding capital in anticipation of the day of reckoning. Warren implies that this problem is most acute among the smaller banks and that continues to place the system at risk and prolongs or at least stymies the recovery.

Warren proposed no solutions, saying that it was the job of her commission to point out problems not make policy. Sweet Job, that.

Permit me to offer a few observations that will more than border on dissent.

First, banks can’t just let loans sit on their books and pretend that they have no problems. Though they may not have to value them at a current market price, they do have to provide for reasonable loan loss provisions. That does have an impact on earnings and it’s a matter of conjecture as to whether that would be more or less than valuations based on market.

Second, so long as loans are being serviced their is a very plausible case to be made for minimal markdowns. On any given day the ultimate fate of a loan may look bleak or rosy but the actual outcome is going to be determined by economic events that are best seem through a blurred lens. Many a company or individual given the chance to work out their debts have done just that. Neither Warren nor any other government employee has the wherewithal to predict with any certainty whatsoever, the ultimate performance of a loan portfolio.

As to earning their way out of their problems, we should be so lucky. Even if the loans are poorly valued or reserved for, if the banks are not rushed to write them off (remember, many are performing) and do accumulate capital via retained earnings with which to eventually absorb the losses, what’s so bad about that?

Warren is using some peculiar logic to trumpet the need for modifications. As I have said numerous times, we are operating with incomplete information about the behavioral aspects of the mortgage market as it pertains to borrowers and lenders. The call is for loan modifications but those making the call don’t have a clue as to whether it will actually help with the problem, make it worse or perhaps turn it into a chronic condition that just sucks the blood out of the housing market for years to come.

Warren’s job is easy if you have no responsibility for proposing real policies to deal with the issues. You just paint the problem in black and white and are absolved of the nasty consequences that real solutions carry. Unfortunately, in the real world you not only have to identify the problem but devise a solution that won’t result in outcomes that unacceptable.

Warren is lobbing grenades without joining the battle.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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3 Comments on Elizabeth Warren: Pointing Out Problems, Offering No Solutions

  1. Phil Grande and Peter Schiff school you Tom…..

    They have been pointing this stuff out for a long time. You jokers are on spin control for the people writing your paychecks.

  2. YOu are not paying attention …
    she did not define the world/economy as Paulson did … he set up a straw man to defend …..as an oligarch his task was to save the system in place … oligarchical rule……
    Warren states, look it up it is out there …
    the big banks yes were at risk and could not survive with out capital infusion from the taxpayers … however the big banks were not in her opinion the World … the world as she defines it is the 150 million US house holds …
    and not as Paulson had defined it … the big banks.
    if the big banks would have not been saved and instead the real world saved .. the house holds of the USA ~ we as a country would be stronger and the world as defined by the oligarchs ~ Paulsons puppeteers would have ended …
    We had a shot to get our country back ….
    she knows this …as does anyone with half a brain ….

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