Monday, May 25, 2009

Why President Obama Let the Bankruptcy Cramdown Legislation Die of Neglect

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

After the bankruptcy cramdown legislation was voted down on the Senate floor at the end of April, one of the reasons cited for its defeat has continued to confound both its supporters and its opponents: why did President Obama not push hard for the legislation that he had consistently supported, just when his help was most needed?

This is no mere academic question. The foreclosure crisis continues to show little sign of abating. The Administration's true attitude towards the legislation is a key factor for those supporters in deciding whether and when they should renew their efforts in Congress.

The Neglect
The White House put virtually no effort into the bankruptcy legislation after the House passed its version in early March.

Contrast what happened on credit card reform, which the President just signed into law on Friday, May 22. He met with credit card lenders at the White House about the legislation in late April right before the House passed its bill. On the morning of that vote, Treasury Secretary Timothy Geithner convened a meeting with the House bill's sponsor and consumer groups, at which he trumpeted the Administration's strong support. The White House publicly got involved in the negotiations, pushing certain provisions, broadcasting again that the Administration was deeply invested in the law's passage. Obama promoted it personally in a prime-time news conference and then again in one of his weekly weekend radio addresses, and then even traveled to Albuquerque, New Mexico for a highly publicized town hall meeting specifically on this issue, putting the full weight of his office behind the bill a few days before the Senate vote. Finally, the President pronounced weeks ago that he wanted to sign a credit card reform bill by the Memorial Day weekend, with the result that the Senate passed its version this last Tuesday, the House passed the compromise version on Wednesday, and, lo and behold, the bill was ready for the Rose Garden signing ceremony just in time for this "deadline."

This White House clearly knows how to go on the offensive. In stark contrast, everybody could tell, especially the Senators on the fence, that there was no offensive push whatsoever on the bankruptcy bill. Not a single word of public support from the President between the time of House passage and the Senate vote. Why not?

Two possible theories.

1) Genuine Ambivalence

Is it sensible that, notwithstanding the Presidential campaign rhetoric and Obama's inclusion of bankruptcy cramdown in his Administration's economic battle plan, he or his economic team actually did not believe in it? Or at least not enough?

Barack Obama had consistently supported the concept of bankruptcy mortgage cramdown. He promoted it explicitly during his Presidential campaign, devoting an entire (albeit short) speech to bankruptcy reform, a rather unusual elevation of bankruptcy law to the national stage. His campaign website listed "Reform of Bankruptcy Laws," including mortgage cramdown, as one of his 10 key bullet-points on the Economy (see my Bulletin of August 28, 2008). His support did not end with the election. A month after his inauguration, after he and his staff had had a few months since Election Day to consider the appropriate role of mortgage cramdown in addressing the foreclosure crisis, the President included the following paragraph in a major speech on his plan to address the foreclosure crisis:
My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That's the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.
That sounds like genuine support. Two weeks later the House passed its cramdown bill.

But at that point, it's as if the lights went out. Only muted or ambiguous public support followed. The most visible comment from the Administration thereafter came from Treasury Secretary Timothy Geithner on April 21 during questioning before the congressional oversight panel overseeing the financial bailout. The panel's otherwise very able chair, Elizabeth Warren, who had championed bankruptcy cramdown, made the most basic litigator's error: she asked the witness, Geithner, a question she did not know how he would answer. Or perhaps more accurately, Geithner just did not follow the lead of her leading question. Obama had said that cramdown was a vital incentive, the "stick," to encourage mortgage holders to enter into mortgage modifications. With that undoubtedly in mind, Warren asked Geithner if the cramdown bill was essential, to which he replied: “We are supportive of carefully designed changes” to bankruptcy law. "It’s a difficult balance to get right, as you know,” he continued, lamely adding, “But the president is supportive of this.”

This response was universally seen as unenthusiastic and ambivalent just when Senate negotiators desperately needed a hearty endorsement. Indeed, it gave any wavering Democratic Senators a clear signal that this legislation was not an Administration priority and that there would not be significant consequences if they strayed from the fold on this one.

The following week, the Senate voted down the measure.

Did the Obama economic brain trust, after a few months of grappling with so many angles of the broader economic picture, believe at least on some level the main talking point of the Mortgage Bankers Association, that the mortgage credit markets are in a such a delicate state that inserting a major unknown such as the cramdown law, with its inevitable immediate significant uptick in Chapter 13 bankruptcy filings, was too risky? Or did the Administration determine at some point that their beefed up non-bankruptcy mortgage modification programs should be first given an opportunity to work without the incentive of a possible Chapter 13 cramdown? More specifically, did these decision-makers fear that cramdown would force the nation's financial institutions at all levels to more quickly acknowledge the true value of their mortgage assets, overstressing the financial system just when it seemed to be starting to regain some traction?

Rahm Emanuel, Obama's chief of staff and de facto legislative strategist, knows, but he's not talking.

2) Utilitarian Political Calculation

At some point, perhaps even before the House vote in favor of the measure, the White House made a decision that the cost of expending political capital on the cramdown legislation was not worth the anticipated benefit. An educated guess was made that Senator Durbin would not be willing to gut the bill by restricting it to subprime or a similarly restricted set of loans, that the mortgage industry would not bend to accept a broadly applicable bill, with the reliably predictable result that the bill would thus fail to garner every one of the essential Democratic Senate votes much less the necessary few Republican ones to get to the filibuster-proof 60 votes. Knowing the power of the financial services lobby, particularly on many of the crucial swing Senators, and knowing the relative discipline of the Republican Senators, the Administration determined that the legislation would almost certainly not pass in the Senate.

The only unknown in that utilitarian calculus was the difference that a full Presidential offensive could make on the outcome. The decision by the White House against mounting this offensive had the following Congressional and public components.

The Congressional Calculus
On the Congressional side, the Administration saw that the issue was starkly partisan, exemplified by the House Judiciary Committee vote just one week after the inauguration, in which the bill carried 21-15 but on strictly party lines. Given the other monumental legislative battles ahead--such as health care and climate change--this particular one was determined to be not worth enough to allow its partisan collateral damage to affect those future battles. Indeed, although there were a few Republican Representatives had voted to help pass the House bill, not a single Republican Senator voted for in favor of the Senate bill. Splitting off some of these disciplined Republican votes would only have been possible with a great deal of bruising arm-twisting.

By way of great contrast, the battle the Administration instead chose to pick against the financial industry, the credit card reform which became law this last week, was much less partisan. The bipartisan votes reflect this: it passed the House 357-70, the Senate 90-5, and then the House again 361-64. These votes were relatively one-sided partly because of the Administration's multi-faceted aggressive push, but more so because credit card reform, at least at this political moment, was much less divisive than bankruptcy cramdown. The Administration needed this infinitely less bloody and less risky victory.

Assessing the Public Mood
On the public side as well, the White House made an assessment of the public mood and concluded that, given the tenor of the moment, it was battling against the tide, and should cut its losses. Had the Administration pushed hard and lost, it would have taken a significant hit to its reputation.

The Administration perceived that, first, the pool of people personally affected by credit card interest rates and fees is many times larger than those personally affected by foreclosures.

Second, a large percentage of the public is frustrated by their credit card lenders and their seemingly unlimited arbitrary power, this frustration greatly accentuated these last few months as these lenders have tried to reduce their losses by much more aggressively using the discretion that their one-sided contracts have given them. As Senator Charles Schumer, one of the cramdown legislation's chief supporters, expressed:

"Bankruptcy reform, important as it was, was sort of esoteric. If you went into O'Halloran's Pub, the fellas aren't saying to you, 'What's going on with bankruptcy reform?' But they might say, 'What are you doing about my credit cards?' The average person feels the second much more than the first . . . ."
And third, although there are plenty of credit card abusers, somehow in the general public's eye credit card borrowers were helpless victims while homeowners being foreclosed on were much less so. The picture of millions of innocent homeowners who had been merely counted on what had largely been consistently occurring for two generations--increases in home values--was indelibly sullied with and overwhelmed by images of greedy house-flipping speculators and refinance-addicted spendthrifts. Perversely, and in no small part because of the persistent efforts of the mortgage lobby spanning at least two legislative cycles, a substantial portion of taxpayers transferred their outrage about having to shoulder the costs of the financial industry's collapse into an indignant moral superiority: "I've been responsible in buying a house within my means and paying on my mortgage so why should I pay for someone else's irresponsibility and failure to understand their mortgage terms?"

The White House realized the limits of its bully pulpit against such visceral attitudes.


The Obama Administration is cautious, rational and realistic. It determined at some point that, in the totality of the present circumstances, bankruptcy mortgage cramdown was not going to make it through the Senate. So, after that point the Administration did not invest hardly any of its political capital on that fight. The result: with almost no money on this race, it did not lose much. Although the Mortgage Bankers Association and its allies crowed about its success, and news reports labeled this as a defeat for the Administration, that part of the story faded quickly. The swiftness of the subsequent passage of the credit card reform bill, with its relatively strong bipartisan support, was in part orchestrated by the White House to mute the loss on the bankruptcy bill, to demonstrate its ability to prevail against at least one sector of the financial services industry.

Would the Administration's full support, akin to its effort with the credit card reform, have made a difference in the outcome? Take it from one of the chief legistlative opponents, Camden Fine, President and CEO of the Independent Community Bankers of America: "This would have been a much different deal if Obama had pressed it." "The fact that Obama effectively sat it out helped us a great deal."

Whether this bankruptcy legislation will return depends on two primary unknowns:
1) the evolution of the economy in the coming year or so, particularly how much the Obama Administration's enhanced loan modification programs reduce the millions of anticipated foreclosures and their tremendous strain on the economy; and
2) the true attitudes among the President's economic team about the benefits and risks of bankruptcy mortgage cramdown, and how those attitudes evolve over the coming months.

This Administration has only been in power for one quarter of a year, has had to deal with a tsunami of economic issues, and understandably has had to pick its battles. By all indications, the home foreclosure scene will still be one crying out for further attention for many months to come. We may well still have the opportunity to see what would happen to bankruptcy cramdown if this Administration gave it its full-throated support.

New Bulletins on this website will provide articles of interest related to any future bankruptcy mortgage cramdown legislation, non-bankruptcy mortgage modifications, foreclosures and similar subjects. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED WITH LINKS TO SUCH FUTURE BULLETINS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys