South By North Strategies, Ltd.

Conflicted Out?

Marshall Auerback wonders if the members of the National Commission on Fiscal Responsibility suffer from too many of conflicts of interest to offer useful advice.

The issue of privatization is germane when one considers the members of the Commission approved by the President. There are questions of possible conflicts of interest. As James Galbraith has noted, the Commission has accepted support from Peter G. Peterson, a man who has been one of the leading campaigners to cut Social Security and Medicare. It is co-chaired by Erskine Bowles, a current Director at North Carolina Life Insurance Co (annuity products are a competitor to Social Security and would almost certainly be beneficiaries of the partial privatization). Mr. Bowles’ wife, Crandall Close Bowles, is on the Board of JP Morgan, and she is also on the “Business Council,” a 27 member group whose members include Dick Fuld, Jeff Immelt, Jamie Dimon and a plethora of other Wall Streeters.
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At the very least, these kinds of ties raise questions in regard to proposals for dealing with Social Security. Many members of the Commission stand to become clear direct and indirect beneficiaries of the privatization that the President is now warning against. It’s disappointing that these ties have not been fully explored by the press, and it is extraordinary that the President would exhibit such political tone deafness in making these kinds of appointments. It tends to undercut the message of his last radio address.

Around The Dial – August 16

Economic policy reports, blog postings, and media stories of interest:

• David Leonhardt explains why financial information matter.
• Calculated Risk expects the unemployment rate to rise.
• Naked Capitalism argues that economics isn’t “a hard science.”
• Economix asks “why girly jobs don’t pay well?”

Eliminating Conflicts of Interest

New York Times business columnist Gretchen Morgenson recently explained the efforts of U.S. Rep. Brad Miller of North Carolina to eliminate conflicts of interest involving mortgage servicers.

The problem:

So where does the conflict of interest lie? Often, the same bank that services a primary mortgage owned by another institution also owns a second mortgage or home equity line of credit on the same property. When that borrower has trouble meeting both payments, the servicer has an interest in making sure that amounts owed on the second lien, which it owns, continue to be paid even if the first loan, which it has no interest in, slides into delinquency. About two-thirds of primary mortgages are serviced by banks who do not own them but hold the accompanying seconds.
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This conflict is a crucial reason that the government’s loan modification program has been so woefully ineffective. The Treasury Department never forced the second-lien holders who service troubled primary mortgages to reduce the amount they are owed by borrowers, even though such a move would give them a better shot at keeping their homes.

Rep. Miller’s proposed solution:

“Unless we can make servicers modify mortgages through bankruptcy or eminent domain, the servicers are not going to reduce principle,” Mr. Miller, 57, said in a recent interview. “Their stance does seem largely driven by accounting concerns — they are trying to maintain the fiction that the mortgages are worth the value they are carrying them at on their books.”
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Enter Mr. Miller’s bill, the Mortgage Servicing Conflict of Interest Elimination Act. It bars servicers of first loans they do not own from holding any other mortgages on the same property.
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The bill would give these institutions a reasonable amount of time to divest either their servicing businesses or their interests in home mortgages, Mr. Miller said. A likely outcome is that the four biggest banks would spin off their mortgage servicing operations. This would not only resolve the conflict between loan servicers and investors, but it would also result in smaller, less complex banks, he said. That is surely a major benefit.

Social Security Facts and Figures

Last weekend marked the 75th anniversary of the signing of  the Social Security Act.

As a new fact sheet prepared by the Social Security Administration shows, the programs’s retirement piece remains vital to the well-being and economic security of older Americans. Some facts for consideration:

• 87% of elderly households received Social Security payments in 2008.
• 64% of elderly households received at least half of their incomes from Social Security; 34% received at least 90% of their incomes from Social Security.
• The average retiree received a monthly benefit of $1,164 in Dec. 2009.
• 33% of all beneficiaries are age 75 or older.
• Program revenues exceeded expenses in 2009.
• The Social Security Trust Funds are expected to last (by design) until 2037; absent changes, the funds then would be able to pay 78% of scheduled benefits indefinitely.

Around The Dial – August 13

Economic policy reports, blog postings, and media stories of interest:

• Paul Krugman sees paralysis at the Federal Reserve.
• Six questions about the deficit, answered.
• The Stash notes that markets can adapt well to regulations.
• Fed Watch reminds readers that the economy has seasonal patterns.