Reply #23: The Stealth Battle Between Bernanke and Paulson [View All]

The Wall Street Journal's “Treasury Plans to Press Lenders” and “Subtle Ben (Bernanke) Inches Closer to Barney (Frank)” describe the not so subtle, under the radar battle being waged between the Federal Reserve and the Treasury. Chairman Bernanke has made many speeches supporting an FHA program to trade mortgage guarantees for mortgage principal write downs. Both the Fed and the FDIC are calling for a systemic approach to process mortgage modifications quickly and efficiently, although they differ in methodology. Secretary Paulson has taken to obstructing a systemic approach at every turn. Paulson continues to say that mortgage principal write downs should only be done on a case by case basis.

Paulson has proved to be the more powerful influence, but he is losing the public relations fight. The Treasury has warned bankers and mortgage servicers that unless they adopt some set of rules for “voluntary” mortgage modifications, the “socialists” will overwhelm them (my words). The Treasury hosted a six hour meeting yesterday with ten major industry participants. Included were: Bank of America (BAC), Countrywide (CFC), Fannie Mae (FNM), Freddie Mac (FRE), and J.P. Morgan (JPM).

The message the Treasury purveyed was that through small concessions, the industry could avoid aggressive actions by the Democrats, and by consequence the wrath of tightening Fed regulation. The only concessions the Journal cited were a five day acknowledgment of a loan modification request and a possible answer in five days. The Journal also reported that the Treasury is trying to facilitate compromise between first and second mortgage holders.

The timid endorsement by Bernanke has given Congressman Barney Frank credibility. The House is preparing to vote on a $300B plus package of FHA loan guarantees. The clock is running out for Paulson.

Disclosures: Author is long CFC, FNM and FRE.

http://seekingalpha.com/article/76077-the-stealth-battle-between-bernanke-and-paulson

This explains a lot:think: