Financial Firms Eye Chance To Cash In On Bailout

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While Congress is hashing out details of the government's $700 billion bailout of financial institutions, Wall Street is eyeing an opportunity. The government will have to hire help to deal with the bad loans. So, some of the same firms that packaged up and signed off on those bad mortgage loans in the first place want to get hired to help with the cleanup.


Well, everybody is up there lobbying now, wanting to be able to get at this money. ARNOLD: Bill Seidman was the chair of the original Resolution Trust Corporation set up back in 1989 that disposed of all the troubled assets in the savings and loan debacle. Back then the RTC employed 10,000 people, and Seidman says this is a much bigger undertaking. Mr. SEIDMAN: You're going to have thousands of employees, thousands of contractors. They have to be honest, they have to be policed. And you are talking about millions of loans. ARNOLD: Seidman says the government will clearly have to hire some financial firms to help them deal with all those loans, many of which are delinquent or in foreclosure. But some of the same firms who packaged up and signed off on all those bad loans in the first place now want to get hired for the cleanup. Mr. SEIDMAN: Well, I think that's something that will have to be judged on a firm-by-firm basis. There certainly are some that probably should not be hired for incompetence, if nothing else. ARNOLD: Seidman says last time efforts to actually rip off the government were common. He says when the RTC was selling some assets that were hard to value, like these current mortgage assets are... Mr. SEIDMAN: Somebody would come in, and they would offer the examiner, who was handling for the government, money if they would sell it to him at a low price. Just a plain bribe. ARNOLD: So Seidman says the oversight here will be crucial. There is also concern about conflicts of interest if, say, a firm the government hires is also one of the firms selling its bad loans and related securities to the government. Steve Bartlett is president of the Financial Services Roundtable, a big industry lobbying group. He says that and other problems can easily be overcome. Mr. STEVE BARTLETT (President, Financial Services Roundtable): Well, you'd establish conflict of interest rules so that there's not a conflict of interest on that particular pool of assets. But the criteria for selecting a manager should be in the best interest of the taxpayers. ARNOLD: The government has already used Morgan Stanley and a firm called BlackRock to help with its interventions in Fannie Mae and Bear Stearns. Bartlett says it will be much cheaper and faster for the government to keep outsourcing work to experienced financial firms. Mr. BARTLETT: What you don't want to do is to set up a government agency to try to do it, because by the time they learn how to do it, the world would have gone way past us. ARNOLD: Bartlett says one of the biggest jobs the government will need help with will be reaching out to all those homeowners who are in trouble after the government buys their loans. Mr. BARTLETT: You take a pool of assets, and then you contact every single borrower and make certain that they are in a mortgage that they can afford, and they can afford to repay, and that they are repaying. And if not, then you identify, is there another mortgage that would, by modifying it, that would be more suitable? ARNOLD: It's called a loan workout, and this will be crucial for the government effort. And taxpayers can save money here if the government can cut deals with borrowers, say, by lowering their interest rates. If that avoids foreclosures, that keeps those loans performing, and the government can turn around and sell them later, maybe even for a profit. The problem is, critics say, the industry has been doing a terrible job with these loan workouts. Mr. BRUCE MARKS (CEO, Neighborhood Assistance Corporation of America): It's outrageous. They can't do the job today. We shouldn't let them do that job tomorrow. ARNOLD: Bruce Marks heads up the Neighborhood Assistance Corporation of America. He's cringing at the idea of the mortgage companies themselves being hired on to help manage this $700 billion bailout. Mark Pierce is North Carolina's deputy commissioner of banks. He says that the industry is doing meaningful loan workouts for far less than one in ten homeowners facing foreclosure. Mr. MARK PIERCE (Deputy Commissioner of Banks, North Carolina): Well, if business as usual continues in the mortgage industry, we'll still have millions of foreclosures happen. It won't matter whether the federal government owns the loans or someone else owns them. ARNOLD: But Pierce says... Mr. PIERCE: There is a great opportunity here if the government provides the leadership. ARNOLD: Pierce says the FDIC did just that when it took over IndyMac Bank. It gave firm marching orders for loan workouts. He says if the government took that kind of action now, it might result in lot fewer foreclosures, which would be good news for the housing market and the economy. Chris Arnold, NPR News.

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