Today Professional Risk Managers International Association is holding its first full day event of 2010, Issues in Securitization Symposium, at the FDIC Seidman Center in Washington, DC. This very timely event sold out. We are looking forward to an interesting discussion with some of the leading figures in the public and private sectors of the securitization field. Special thanks to all of the members of the event committee for a job well done.

The housing industry is always a hot topic in Washington but now doubly so. Readers of The IRA may have noticed that Treasury Secretary Tim Geithner has been growling menacingly at the loan servicers, chastising them for not meeting the expectations of the White House regarding modifications of delinquent loans.

"I want to be clear that we do not believe servicers are doing enough to help homeowners, not doing enough to help them navigate the difficult and often frightening process of avoiding foreclosure," Geithner said in prepared remarks. We wonder, are Secretary Geithner's remarks ever unprepared?

There's now something like three quarters of a million delinquent loans festering at the Federal Housing Administration, which for months now has been entertaining proposals for ways to deal with this backlog of NPLs. As with the FDIC's loan modification program, participants must promise to modify any loans purchased from FHA. Other than pricing, our question is logistical, namely who is going to populate such efforts? Every unsecured accountant, notary and loan origination professional in the lower 48 is pretty much engaged at present.

Now you might be tempted to think that the anxiety inside the Obama Administration has to do with a heartfelt desire to help Americans facing foreclosure or at least placate voters, but no. The priority of dealing with the FHA backlog is to prevent this credit cesspool from impacting the banks which originally wrote the loans. If the FHA should determine, for example, that the bank did not adequately document or diligence the loan, then the defaulted loan can be put back to the bank for repurchase.

We hear from our friend Paul Muolo at National Mortgage News that there is a brisk business going on in imperfectly documented loans, which are cleaned up and resold to FHA or the GSEs, kind of like used cars. Sadly there is no Carfax for previously owned mortgage securitizations.

Sometimes a defaulted loan is modified and sold again, proof again of the power of the resurrection. This situation kind of reminds us of when Fannie Mae and Freddie Mac did the same thing, modifying a defaulted loan and then repackaging it into a securitization for sale to investors. Poor underwriting standards for new and modified loans is one reason why default rates at the GSEs are running so far above "normal" expectations for credit loss experience. Notice that Senator Carl Levin (D-MI) is not grilling members of Fannie and Freddie management for selling hundreds of billions worth of "shit" to the taxpayer.

As 2010 continues, we expect to see the volume level of political invective directed against banks, servicers and anybody else in the residential home foreclosure food chain to increase. Just as the White House has found it expedient to throw Goldman Sachs (GS) under the political bus in April to start the political season, the rest of the banking industry will present a convenient target come September -- especially if we're are in the midst of a double-dip in home valuations by Labor Day.

Speaking of treats, in this issue of The IRA, we speak to an old friend, former Senator Ernest Hollings, the Democrat from South Carolina. Hollings was elected to the Senate in 1966 after a special election to fill the remaining term of Olin D. Johnston and served through 2004. He is a graduate of The Citadel, served in the US Army and then as governor of South Carolina before winning a seat in the state general assembly in 1948. Hollings is a social liberal and a fiscal hawk who regularly put his Senate colleagues to shame on issues such as Social Security and the budget. We spoke to Senator Hollings from his home in Charleston.

The IRA: Senator, thank you for taking time to speak with us. Our readers really appreciate your comments.

Hollings: I apologize for not getting back to you quicker but I've been out of pocket here.

The IRA: We'll get right to it. How do you assess the situation with the US economy?

Hollings: I got elected in 1948. In those days you had to do a good job to get reelected. I pushed a sales tax to help fund improvements in education, especially for black students. We had no black education in South Carolina in those days. But my point is that you had to do a good job, to be effective in those days. Not anymore. I can tell you for that crowd coming into Washington today reelection is the first order of business and that means money. In my last race, I raised $8.5 million which is $30,000 per week, every week for six years. It means that you can't get it all in your state and especially for me in a Republican state like South Carolina. You have to travel the country looking for money. You got to rely on the Senate campaign finance committee. Chuck Schumer put $15 million in at the end of Jim Webb's campaign and elected him to the Senate in Virginia. Schumer shocked 'em in Virginia. Same thing in Massachusetts with this fellow Scott Brown. He was nine points down and $14 million came in the last ten days of the campaign. He is now the Senator from Massachusetts.

The IRA: Nothing has changed then. They used to call it Tammany Hall, now its just Chuck Schumer. So we hear that members of Congress work three days a week and fund raise Friday through Monday?

Hollings: Yes. I used to travel for all of the members of the Senate to raise money, not just the members on my committee. I even went to a fund raiser for a fellow named Barrack Obama before he was elected to the Senate. Dick Durban asked me to go. Money, money, money, money. There is a cabal comprised of the big banks, Wall Street, corporate America and the Congress -- members of both parties -- and what they decide is about money. Corporate American is off shoring as fast as they can -- the jobs and the money and investment, the research and the development, really the whole economy. In the past three months, GM produced more cars in China than in the US. We own a Chinese company. You and I and the taxpayers own an interest in a Chinese company.

The IRA: American policy on trade today certainly represents a change from the years after WW I when tariffs were still in vogue with the Republicans.

Hollings: Oh, certainly does. Old Franklin Roosevelt he said look here, everybody's going to work 24/7, women are going to have jobs. Chrysler did the tanks, GM did the B-24s. And we had the wherewithal to manufacture. The War Production Act of 1950 required that we have the domestic manufacturing base for war materials. What's happened now, as long as they keep sending the contributions we'll keep sending jobs overseas. David Axelrod doesn't know anything about trade. And trade bills must originate in the Senate, so we don't do anything about trade.

The IRA: There is a lot of talk among Democrats about a value-added tax (VAT) to raise revenues. Do you think we should have a VAT or perhaps consider a tariff instead? Should America return to the era of Pax Republicana and high tariff protection for what is left of domestic industries?

Hollings: Both. And import quotas. Richard Nixon put in place a 10% tariff in 1971. The quotas are supposed to be when the production capacity is endangered, not bankrupt as it is today. And not just in the US. Down in Mexico you need a Marshall Plan to help that country. They don't just have an economic problem. They have a drug problem and a crime problem. The mayor of Juarez lives in El Paso. He only crosses the river when he has a large protective detail around him.

The IRA: Mexico is hurt badly by predatory trade practices from China. Fred Bergsten says China's currency policy represents a 25-40% subsidy for their exports. Why shouldn't the US, Mexico and Canada, through NAFTA, have a tariff to adjust? Why should we wait for China to adjust her currency?

Hollings: Unless and until we cut off the money politics and force Barrack Obama to lighten up on the campaigning and go to work on the economy, all of the economy, we are never going to pay the bill. I'm a governor. Every governor, every mayor, has got to pay next year's bill. He's figuring out how to keep his credit rating and pay the bills. But when we get to Washington, well, oh no, you become an economist and you've got a percent of the GNP. On Page 178 of the Obama budget he projects a fiscal deficit of no less than $1 trillion per year going out over a decade.

The IRA: That's quite a change from when you left the Senate in 2004.

Hollings: We handed George W. Bush surpluses as far as the eye can see in 2001. Obama's vision is deficits of $1 trillion per year. The Concord Coalition, Pete Peterson, all of the anti-deficit groups have got the lockjaw. They say nothing about this. The economists, Paul Krugman won't talk about trade war. He and the rest of them talk about "stimulate, stimulate" as though domestic adjustment is sufficient. Baloney. They all knew what was going on years ago. The recession started in December 2007 and Henry Paulson didn't move until 2008. Paulson put in $700 billion in stimulus. The Federal Reserve put in a $1 trillion. Obama put in his $800 billion. Now all the stimulus is spent and its 2010 and we are still losing jobs. Domestic stimulus is not working.

The IRA: As we discussed with Dick Alford last week, the Fed pretends that inflation is low while we import deflation via foreign imports. He pointed us to a 2005 speech by Fed Vice Chairman Don Kohn where he estimated that the decline in import prices since the mid-1990s has shaved between 1/2 and 1 percentage point off core inflation over the past ten years.

Hollings: That's exactly right. Microsoft wanted to bring in all of these engineers from India and China to do their grunt work up there in Redmond Washington. But it all comes back to the money thing. Senator Mike Mansfield used to have a vote on Monday morning to get a quorum for the Senate to do business and would keep us in session until Friday's at 5:00. Not anymore. Mondays and Fridays are gone. We fund raise. We love filibusters. We get a Republican and a Democrats to hold the floor and the rest go out and fund raise. We can go to California and New York and fund-raise, fund-raise.

The IRA: Do the members of the Senate take turns holding the floor?

Hollings: Yes. As soon as they threatened this week to bring out the cots for a filibuster on financial reform the Republicans said "no, you're playing dirty!" They said we'll agree, we'll agree. They never had a true filibuster and everything else on financial reform. We agree to have filibusters so that both sides can raise money.

The IRA: We often feel walking around Capitol Hill that it has become a soundstage. Real business does not seem to occur there any longer. It seems very corporate. All of the people have been out-sourced to lobbyists offices but somebody forgot to turn off the lights. Are we too critical?

Hollings: No. Look, you're elected and you come to Washington. You've got 30 plus staff and friends on the committee. You've got friends on the senatorial campaign committee. You got contacts with the lobbyists who are the direct source of money and you organize your staff to fund raise. In 2004, my last year in the Senate, I raised $600,000 for the Democratic campaign committee. Those girls in the committee worked me hard.

The IRA: Where do the people of the US obtain the leverage to change money politics? We've described the relationship between the Congress, the Fed and the Big Banks as "the alliance of convenience." How do you attack this problem and win? Money has been part of American politics for all long as we have been a nation.

Hollings: That's right. I am as frustrated as any. I speak and write but it has no effect on Larry Summers and Tim Geithner, who sank the trade policy. They want to keep Wall Street and the banks up and Goldman Sachs up. They don't give a damn about jobs or environmental safety of labor in Shanghai. As long as the market's up they think we have a good economy. The market's up my ass. We're broke. Everybody's broke. We have 12 % unemployment in South Carolina, where we have growing industries. Republicans and Democrats don't want to lead. All they talk about is "bipartisanship, bipartisanship." Hell, in 1993 we did not get a single Republican vote. We increased taxes on liquor, tobacco even Social Security. I couldn't get Sam Nunn's vote or Bennett Johnson's vote either, but old Al Gore broke the tie and we got it. We had eight years of the strongest economy and handed George Bush budget surpluses. Now both sides are saying "oh no, we're not going to raise the taxes." And then Obama comes in and gives tax breaks away in the stimulus package. It is ridiculous to manage our fiscal affairs in this way. The only way to fix it is to educate the public on what is going on. Rather than a "hue and cry" about Wall Street, we should be talking about how to fix our nation's finances.

The IRA: So how do you raise tax revenue with such a soft economy?

Hollings: I worked on this with the economists. A two percent VAT brings in more revenue than the corporate income tax.

The IRA: Do we get rid of the corporate tax? End the double taxation of corporate earnings?

Hollings: Yes. You could cancel the corporate tax. Put in a two percent VAT for general revenues and one percent for health care and perhaps a dedicated tax to reduce the debt. There is never a good time to raise taxes, but you could construct a VAT between three and five percent that decreases the deficit and pays for some of the things we need to do as a nation. You cut the corporate tax, just eliminate it.

The IRA: So is this the deal with the corporates: We reduce corporate taxes but also prohibit corporate action in politics? Get them out of politics entirely?

Hollings: Obama wants to promote exports. This gives corporations a huge lift in terms of profitability and competitiveness, and raises badly needed revenue. More than one hundred countries raise their revenue in this way. It is not a question of a tariff or quotas or a VAT, but all of the above. Freeze spending in Washington and make the government run itself back into a surplus with higher tax revenues. You cancel half of the political "earmarks" for spending projects. Remember that George Bush signed all of the spending bills from the Congress.

The IRA: That's how they do it in Texas. How do you see trade policy evolving in the US? Will there be a swing back to a more protectionist posture in Washington?

 

Hollings: There is not going to be a swing back, but a work back to protectionism. There is going to be a renewed focus on manufacturing and sourcing those product that are essential for our national security. But we need to focus on why we have a continued hole in the economy due to off-shoring jobs and spend less time and money on stimulus. We don't need a fiscal commission to tell us what to do next year. The White House is waiting on Erskine Bowles and Alan Simpson to report on the fiscal situation. The House and the third of the Senate who are up for reelection in 2012 won't vote for their recommendations.

The IRA: Attacking the banks has become very popular. The political fortunes of Blanche Lincoln (D-AR) were turned around by proposing limits on derivatives and her positions was relatively pro-industry at the end of the day. Democrats are certainly not getting much credit for health care reform.

Hollings: Well, by the time Obama got his deal they should have let it go and blamed the Republicans for blocking it for a year. We got Republican health care. Insurance companies are still in control.

The IRA: Barrack Obama really does come off as almost a liberal Republican politically. How do you feel about Obama as a life-long Democrat?

Hollings: Nobody wants to be seen disagreeing with him so we don't have much of an opposition. I like him and think he is smart. I think Obama is inexperienced and that he needs the right help and that's why I have been trying to help him. Larry Summers and [Treasury Secretary] Geithner ought to be fired immediately. And then let's stop competing in Washington and talking about the benefits of globalization. In fact, globalization is just nothing more than a trade war with production looking for a cheaper country to produce.

The IRA: Beggar thy citizen.

Hollings: They are going to China, they are going to India or Vietnam or wherever they can. Business is business. And we have come to a cul-de-sac in this country where we cannot produce many goods at a profit. If Christopher Whalen Manufacturing goes to the bank and says I can manufacturer this desk for x dollars, lend me $2 million to set up a factory. The banker will say well can you meet the price of the China place? Hollings Manufacturer has moved to China and can bring that desk into this country cheaper than you can manufacturer right here. The banker won't make the loan.

The IRA: In the neo-liberal world, we norte americanos are supposed to be stoic like our brothers and sisters in Mexico and say nothing as the Chinese and Indians take our jobs. So what happens in November to Obama and the Democrats?

Hollings: I am out of the loop now in terms of fund raising and the candidates, so I can't say generally. Looking at some of the incumbent governors like Charlie Crist, though, takes me back to what I was saying about doing a good job. Crist is doing a good job. He is personally popular. Whether or not Crist can get the money he needs in the state will be the deciding factor. The Republicans have gone crazy with the Tea Party and Sarah Palin, so they won't help him. The Democrats won't help him. So he has done the calculus and figures that he'll run as an independent and go against the party system.

The IRA: Maybe that the is pathway of change. Thanks for your time Senator.

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