The NYT has an interesting article today on PennyMac, a company comprised of a number of former Countrywide execs (including former president Stanford Kurland). PennyMac makes its money by buying delinquent home mortgages from the government (such as its purchase from the FDIC of $560M worth of delinquent residential loans for a price tag of $43.2M) and either foreclosing or refinancing, keeping a piece of what they can collect.
The involvement of former Countrywide execs and their ability to profit from the crisis some claim they had a hand in causing has provoked heated criticism from some, while others, such as individuals who were able to stay in their homes as a result of PennyMac's refinancing option, are just plain grateful.
How fascinating. Its even more interesting than Meriwether's subsequent hedge fund. This reminds me of the movie "The Rock" or the "Dirty Dozen" where the government, in a time of war or crisis, turns to criminals to save the day. They may have broken the rules, but they're still the best of the best. The difference is that in those fictional narratives, the convicts are working for their freedom. Here, we have not been able to punish the people who created the bubble, if in fact we can say confidently that any particular person did something worthy of punishment. The comment from one plaintiff's attorney that "greed is a growth industry" nicely sums up the attitude that I think undergirds a lot of the situations that we have discussed in class. Our national market-philosophy has favored greed for its ability to generate returns, and until proven otherwise, these ex-Countrywide executives have done nothing other than play by the rules of the game. Maybe they were bad rules, but an ex post facto day of reckoning doesn't sit well with me. (Unlike President Obama who has justified his tax increases as a just reaction to the regulatory decisions of the past decade that distributed wealth in a way that he opposes.) If they are criminals, then punish them for their crimes; if they can create value of the government and recoup my tax dollars, then pay them as little as possible to get them to do it. PennyMac only makes 20 cents on the dollar for what value it can salvage from the mortgages, although that is apparently set to rise to 40 cents eventually. If they paid 38 cents on the dollar for the mortgages that they bought, I am not sure I understand how they are expecting 50% profits.
Is PennyMac a bailout? How is it different from building a bridge or modifying Chapter 13 bankruptcies? From funding Chrysler's reorganization? From buying equity in banks? From subsidizing the borrowing of F&F? PennyMac looks a lot like the LTCM bailout: the government has facilitated an opportunity for private capital to make a profit because there are potential positive externalities. The major difference being that sold the mortgages to PennyMac for less than it "paid" for them. If PennyMac's arrangement is getting better returns than Fred and the bureaucrats could do on their own, however, it strikes me as a less offensive use of tax funds than bridge loans to GM.
Posted by: Drew Navikas | 03/04/2009 at 04:21 PM