Mr. Freeze's b-u-r-e-a-u-c-r-a-t-i-c n-i-g-h-t-m-a-r-e

David Gaffen of the Wall Street Journal MarketBeat blog and Caroline Baum at Bloomberg have both weighed in on the "Hope (for a Bailout) Now Alliance".

Thanks to David, the image of Arnold Schwarzenegger, in his 1997 role as Mr. Freeze in the fourth Batman movie, is now indelibly etched into my brain and will forever be associated with the proposed plan to prevent introductory interest rates from adjusting upward on many subprime borrowers' home loans.

California's Gubernator was one of the "rate freeze" pioneers here just a few months ago, apparently recalling what must have been many long hours in the makeup chair and one or two of his three lines from his co-starring role in Batman and Robin along with George Clooney and Chris O'Donnell.

Or, maybe it was a fond recollection of Alicia Silverstone as Batgirl that got him thinking about reprising his role in an attempt to save the California housing market.

Anyway, Mr. Freeze orignally appeared at the MarketBeat blog last Friday:

If the still-in-formation “Entity” (the super-conduit for SIVs) was supposed to weigh in at around $80 billion, then what do we call a massive, monolithic structure designed to freeze interest rates for subprime borrowers for a good lot of time and essentially introduce a mortgage-rate-by-fiat system that short-circuits the market? Is it The Matrix? Either way, Hank “Mr. Freeze” Paulson, as he will now be known (in the footsteps of the real Mr. Freeze, Arnold Schwarzenegger), is taking an awful risk on something that hasn’t worked just yet on its smaller scale, especially considering that there are others who are going to presumably have to foot the bill for the bad loans taken by borrowers and originated by lenders.

More recently, following yesterday's group therapy session hosted by the Treasury Department, David wrote:

Talk up finding a solution for funding troubles once, and the equity market loves it. Chat about it a second time, and suddenly investors don’t care so much about potential solutions. The stock market caught up with the credit markets today with regard to its collective opinion of Treasury Secretary Hank “Mr. Freeze” Paulson’s plan to freeze certain teaser rates as a means to alleviate the pain experienced by homeowners, selling the brokerages, the GSEs and key mortgage lenders as Mr. Paulson continues to prattle on about his plan to save the world.

Not surprisingly, Caroline Baum had an opinion on the subject as well commenting in her Bloomberg column after studying the sketchy outlines of the proposal.

According to the broad outlines of the plan, the Treasury will divide subprime borrowers into four groups.

Group 1 includes those who can afford the higher mortgage reset rate. "These homeowners need no assistance," Paulson explained at a housing conference in Washington yesterday.

Check.

Group 2 consists of the folks who haven't been able to pay the teaser rate, not to mention the higher reset rate. Implicit in Group 2's specifications is the fact that these people couldn't afford their mortgage in the first place, lied or were encouraged to lie about their income, got a no-doc, no-questions- asked loan or were victims of fraud. They were counting on higher home prices and refinancing as a way out.

"Some of these homeowners will become renters again," Paulson said.

Check.

Group 3 consists of the homeowners who might "choose to refinance their mortgage," Paulson said. (See Group 1 above for Treasury's commitment.)

Misplaced Incentives

Group 4 includes those who can continue to make their mortgage payments if the teaser rate stays in effect or the maturity of the loan is extended. For this category, and this category alone, help is on the way.

How do you spell b-u-r-e-a-u-c-r-a-t-i-c n-i-g-h-t-m-a-r-e? If fraud was widespread during the housing bubble, the current plan has its own set of incentives.

"People will come up with eight ways of rearranging their finances to stay in Group 4," said Ram Bhagavatula, managing director at Combinatorics Capital LLC, a New York hedge fund.

More to the point, "this policy solution smells of the tenets of Marxism: from each according to his ability to each according to his need," he said.

A few years ago, when Alan Greenspan was being praised for engineering another economic rebound founded on rising real estate values and George Bush was marvelling at the dramatic increase in the rate of homeownership, could anyone in California or Washington have imagined where it would all lead?

Mr. Freeze's b-u-r-e-a-u-c-r-a-t-i-c n-i-g-h-t-m-a-r-e?