A bitter and obscure feud has raged for years between the Obama administration and a coterie of populist critics who believe the president has messed up housing policy and weakened the recovery. The publication of Timothy Geithner's memoir Stress Test in the same month that Amir Sufi and Atif Mian came out with their book House of Debt has reignited the debate. The Sufi and Mian book doesn't actually say very much about Geithner, but in their book-related publicity the authors have highlighted the contrasts between their view and the Obama administration's. One important focal point is the controversy over what's called cramdown.
In essence, the critics say that Obama failed to champion (or actively stymied) cramdown legislation that, had it passed, would have given the US economy a huge boost.
What is cramdown?
Back in 1979, the US Bankruptcy Code was written to prevent judges from forcibly writing down mortgage debt on primary homes as part of the bankruptcy process.
There was a logic to this move at the time: the then-prevailing high rate of inflation had made interest rates on mortgages very high. The public wanted measures that would make borrowing easier, and banks persuaded Congress that limiting their risk by adopting this provision would allow for freer lending.
The provision stood until the Great Housing Price Crash of 2006-2009, when activists and analysts began suggesting that giving judges the power to write down mortgage debt would be a useful economic-recovery measure. This was known as "cramdown."
Specifically, the idea was to provide assistance to so-called underwater homeowners — homeowners whose houses had fallen so much in value that the house itself was less valuable than mortgage owed on the house. A bankruptcy judge empowered with cramdown authority could order the bank to reduce the principle owed on the loan to the value of the underlying asset.
Why didn't cramdown pass?
The legislative record is fairly clear. Cramdown didn't pass for the usual reason that Obama-era legislation didn't pass — Republicans were against it and so were a handful of Democrats and you need 60 votes to get a bill passed in the US Senate.
All the reporting from March of 2009 — before the outbreak of the wars over the administration record — points to this conclusion and specifically fingers then-Senators Evan Bayh and Arlen Specter as the key actors.
Sen. Richard Durbin (D-Ill.) has been championing the bill, along with New York's influential Sen. Chuck Schumer, and they seemed to make headway early in the session. A bill nearly mirroring his sailed through the House.
Then, as their staffs combed through the Senate to find the handful of Republican votes needed to prevent a filibuster, something strange happened: A couple other senators - Evan Bayh (D-Ind.), who supported Durbin's measure last year, and Arlen Specter (R-Pa.), who last year offered a more industry-friendly alternative, were doing more or less the same - looking for ways to ease the features most objectionable to business.
The result? Confusion, according to the supporters of the Durbin-Schumer camp. As moderate Republicans and a few vacillating Democrats were approached by Bayh and Specter's staffers, they seemed to grow less interested in hammering out a deal with Durbin and Schumer. "That threw what was productive negotiations into a bit of a tailspin," says one Democratic Senate aide familiar with the talks.
At this time, Specter was still trying to prevent himself from losing the Republican Party nomination. Bayh bucked the Democratic Party leadership on dozens of issues during his time in the Senate. And without their support — and the support of every single other member of the Democratic Party caucus — cramdown could not pass. So it did not pass.
What did the Obama administration do on cramdown?
Not much one way or the other. The president himself was consistently supportive of cramdown in public. "I will change our bankruptcy laws to make it easier for families to stay in their homes," he said on the campaign trail. Obama also endorsed Durbin's legislative efforts to pass a cramdown bill.
At the same time, Obama opposed efforts to attach the cramdown issue to other economic legislation. As a presidential candidate, he urged congressional Democrats not to insist on cramdown as a condition for voting for TARP. And when opposition to cramdown among Senate moderates became clear, Obama ended talk of including cramdown in the fiscal stimulus bill.
Obama's political advisers always thought that the odds of cramdown passing the Senate were extremely slim, and his economic advisers were skeptical of its merits. They thought that both TARP and the Recovery Act were measures that would have dramatic positive impacts on the economy, and that it would be a mistake to jeopardize them or other major priorities for the sake of a measure that they thought wouldn't do much good.
What is everyone so angry about?
America's economic performance since 2009 has, clearly, not been as good as one would like. At the same time, there continues to be considerable public anger about the financial crisis and the banking industry's role in society. Unfortunately for people who like their policy analysis to line up in a neat moralistic storyline, it is relatively difficult to construct scenarios in which a single measure would have been both bad for banks and good for the labor market.
But cramdown fits the bill. Bank shareholders would have lost money had cramdown passed, and credit-constrained homeowners would have had more money. The former would have stuck it to the bad guys, and the latter would have boosted the economy.
Add in the fact that Obama clearly did not go to the mattresses over the issue and that his advisers clearly had mixed feelings about it, and you have the perfect populist bone of contention — a time the administration sided with the banks against the middle class and hurt the economy in the process.
Are Obama's critics correct?
Not really. The fact of the matter is that this bill wasn't going to pass. As Paul Kiel and Olga Pierce note in an article that's generally quite critical of Obama's team, this was a subject where big banks and small banks were absolutely united. They quote Steve Verdier of the Independent Community Bankers Association: "When you're dealing with something like the bankruptcy issue, where all lenders stand pretty much in the same shoes, it shouldn't be a surprise when the smaller and larger banks find common cause."
Elizabeth Warren has had a fair amount of success on Capitol Hill taking on the big banks' interests by forging an alliance with smaller banks. On the cramdown issue, no such divide-and-conquer strategy was possible.
Nor were there any magic tricks available to coerce Specter or Bayh (now a big money corporate lobbyist) into supporting the bill. It is true that Obama's support for cramdown was halfhearted and that many of his advisers were unenthusiastic about it, but there's no reason to believe that a greater level of presidential enthusiasm would have changed the fundamentals.
Was the entire Geithner/Summers/Obama approach to the crisis hopelessly misguided?
At the end of the day, this is what the bulk of the administration's critics argue: Not only should the White House have tried harder on cramdown, but the administration's whole presumption that it was useful and important to save the major incumbent financial services firms was mistaken.
In 2008, Obama urged Congressional Democrats to separate the cramdown issue from TARP in the interests of getting TARP passed. In a 2009 letter seeking congressional approval for release of a second tranche of TARP funds, Obama's National Economic Council director Larry Summers promised a vigorous effort at "reforming our bankruptcy laws."
The correct conclusion to draw from this record isn't that Obama killed cramdown, it's that Obama saved TARP. He treated the cramdown issue as a purely secondary matter to be handled in whatever way was necessary to secure support for the big bank bailout. If you think that bailout was necessary to avoiding a Depression-level economic cataclysm, then this is all to the good. If you think the bailout was an unnecessary or counterproductive sop to corrupt banking interests, then you'll draw a different conclusion.
- Lawrence Summers' review of Atif & Mian
- Brad DeLong's review of Atif & Mian
- Yves Smith on cramdown in April 2009
- David Dayen on cramdown and HAMP
- James Kwak on cramdown in April 2009