Vikram Pandit, chief executive of embattled Citigroup, stopped by The Times this morning to answer questions posed by the editorial board and editors from the news pages. He dropped no bombshells -- alas, that rarely happens in these sessions. Instead, he gave a cautiously optimistic view of the economy, the housing market and even Citi's mortgage portfolio, saying that low interest rates are helping even borrowers in risky interest-only loans. He also said that Citi has the capability to buy out the federal government's $20-billion stake in its preferred shares (the feds also own 34% of Citi's common stock, which Pandit said the Treasury Department could sell whenever it wished), but that the company was still talking to regulators about the timing of any exit from the Troubled Asset Relief Program. He said the credit crunch felt by small and mid-size businesses stemmed from the problems at regional banks and the shrunken "shadow banking" system. And he offered a few thoughts on what the government should do about financial institutions that are too big to fail.

Here are excerpts of the session:

How is Citi doing?

How is the economy?

The government's stake in Citi

Citi and Treasury Secretary Geithner

Paying back TARP funds

The housing market's outlook

The ongoing credit crunch

The too-big-to-fail problem

Insuring against huge failures

Bring back Glass-Steagall?

Photo: Citigroup CEO Vikram Pandit testifies on Capitol Hill in February. Credit: Saul Loeb / AFP/Getty Images

-- Jon Healey

I don't usually consider Facebook posts to be worthy of transplanting to a (cough cough) professional blog like this one, but I'm making an exception for an FB thread about a Washington Post story.

The article focused on Georgetown University sophomore who has advertised for a personal assistant who would handle tasks "such as organizing his closet, dropping him off and picking him up from work, scheduling haircuts, putting gas in the car and taking it in for service, managing his electronic accounts and doing laundry (although the assistant will be paid only for the time spent loading, unloading and folding clothes, not the entire laundry cycle)." The pay: $10-$12 an hour.

One response was whimsical: "Just this morning I told my mom I needed a PA. She laughed at me. Then [she] saw this article on Facebook and told me about it." (Oh, oh, Parent On Social Media Alert!) But the Facebooker who introduced the subject considered the student's quest  "the most egregious of all insults."

 I weighed in ...

The article in today's Los Angeles Times about a Wells Fargo executive apparently living it up at a multi-million-dollar beachfront home repossessed from one of Bernie Madoff's victims seems to be fueling resentment on a Howard Beale-scale. My first instinct is to try to defend Cheronda Guyton, the banker in question, because there has to be more to this story than we've heard so far. Times reporters Scott Reckard and David Sarno couldn't reach Guyton, a senior vice president at Wells who leads a team of foreclosed-property managers, or the home's previous owners, and Wells has offered little on the subject.

So let me offer this admittedly lame defense for Wells not accepting offers on the Malibu Colony property or even allowing prospective buyers to visit the home: the housing market is so depressed, it will cost Wells less to hold onto the thing and wait for prices to go up than it would to unload it now at a (relatively speaking) fire-sale price. It's also conceivable that Wells can keep the cost of maintaining the property low by having someone live in the home part-time, picking up the beach litter and tending to the pool. Having the occasional soiree on a yacht moored out back boosts the property's mystique (although having the yacht visible during the day would be better for the curb appeal). And when Wells finally does decide to show the place, it will still have that "lived in" feel that so many buyers crave. I don't know about you, but when I look at a house on the market that's been vacant for a while, it makes me wonder what happened to the previous owners. And if you're trying to sell a $12 million house, do you really want to remind prospective buyers about (shudder) Bernie Madoff?

OK, enough with the sarcasm. Here's what I'm really curious about: there's something about Wells' repossess-and-hold strategy that doesn't add up. Reckard and Sarno's story said the previous owners -- Lawrence and Linda Elins -- refinanced the property with Wells for $3 million in late 2007. If it's a $12 million home, why not sell now and recover the $3 million and a tidy gain? Any real-estate whizzes out there want to hazard a guess as to the strategy here? Assuming there is one, of course.

Photo: The repossessed house is the one in the middle, between the pine tree and the palm. Credit: Kenneth & Gabrielle Adelman / California Coastal Records Project

-- Jon Healey

Remember when the administration was mulling whether to create a "bad bank" to help solve the financial industry's problem with toxic mortgage-related assets? It eventually abandoned that idea in favor of creating public-private funds to buy the assets, a plan that's gone pretty much nowhere. But there's no keeping a bad bank down! Washington Post reporters Zachary A. Goldfarb And David Cho reported today that the administration may restructure Fannie Mae and Freddie Mac, pulling their (considerable) distressed investments into government-managed bad banks, with the feds gradually disposing of those assets for as much (or little) as they might be worth. The companies would be left with the mortgages and mortgage-related securities that are likely to perform. But what to do with these revitalized entities? The government controls majority stakes in the two companies now, although there are still some shareholders (whose holdings are worth less than 80 cents per share). According to Goldfarb and Cho,

Options for the "good banks" include consolidating the firms into a single government agency, leaving mortgage finance purely to private banks or maintaining a hybrid model.

If policymakers have learned anything from the subprime meltdown, it's that the hybrid model doesn't work. As the saying goes, it privatizes the upside and socializes the downside. There's no such thing as an "implicit" government guarantee -- if Wall Street pins its investing on the likelihood of a federal bailout, there will be a bailout. So let's not do that again, shall we?

To me, the more important lesson of the housing bubble is that the massive government-chartered investment in mortgage finance hasn't just been unnecessary, it's been harmful. The GSE's chased Wall Street banks into the market for risky loans, throwing gasoline onto a fire that was already burning out of control. In ordinary economic times, private investors provide a secondary market for home loans with no help from Fannie and Freddie (in fact, they're competitors). And when credit gets tight and the secondary market dries up, the government has other mechanisms to spur mortgage lending. If the goal is to promote affordable housing, Washington can do that through tax subsidies, appropriations, guarantees for state bond programs and a variety of other measures that don't reach the scale or risk of a Freddie or a Fannie. By the way, the latter announced today that it's seeking $10.7 billion more from the taxpayers to cover a $15.2 billion quarterly loss. Here's hoping the administration charts a path out of the housing-finance industry by cutting the government off completely from the "good" versions of Fannie and Freddie.

Photo credit: File photos / AFP/Getty Images

-- Jon Healey

Today's Times editorial page tells FINA to get a grip. Or, rather, loosen its grip. FINA -- that's Fédération Internationale de Natation Amateur to you -- is the body that governs competitive swimming, and it recently said non to the high-tech, full-body polyurethane suits that have helped swimmers set new world records. Don't fear the modern world and its innovations, the editorial says:

But short of a swimsuit fitted with motorized propellers, or high-jump shoes soled with rocket boosters, there's little reason to reject improved design and materials based on skittishness about the records set and broken in seemingly less time than the 20 minutes it takes to don one of the new swimsuits. Fans like to compare performances of the past with those of the present. Who's the greater golfer, Tiger Woods or Arnold Palmer? Sporting events should be a contest among athletes, not between current athletes and the ghosts of athletes past.

The editorial page also says it's high time for Los Angeles to weed out the medical marijuana joints ... sorry ... dispensaries ... that can't or won't abide by reasonable restrictions. Like not being next door to a school. Or a bong supplier: "If the city doesn't regulate its dispensaries, there's a chance the Drug Enforcement Administration will, with results many Californians would rather avoid."

The page also raises a glass to President Obama, Harvard professor Henry Louis Gates Jr. and the guy who arrested him, Cambridge police Sgt. James Crowley. See, they're having a beer in the White House today to talk over old times ("Dude, remember that time you came to my house, and I yelled at you, and you arrested me, and the president took my side, and then he backed down? That was cool."). We don't deal with the fact that the president's beer of choice, Bud Light, is now foreign-owned.

OK, turn the page. Op-Ed leads off with Israeli blogger Yisrael Medad and his observation of a Jewish day of lamentation -- and his assertion that the U.S. stance toward the status of Jerusalem has created "another lamentable situation between the two nations."

UCLA law professor Gary Blasi, a persistent thorn in the side of cities trying to "clean up" homelessness rather than help the homeless, takes on Santa Monica for its aggressive enforcement:

The city's budget documents praise "the rigid enforcement of laws and ordinances to discourage" what it calls "encampments." The budget included $250,000 for "homeless intervention" but also $240,000 for a panhandling education campaign, presumably to reduce giving to people perceived to be homeless. And last winter, Santa Monica closed pickup locations from which homeless people could get to cold-weather shelters in adjacent cities.

Read previous Blasi Op-Ed articles in the Times here.

And Jersey girl Meghan Daum compares her state of birth with her new home. Is L.A. New Jersey West?

And yet it's also the way both places are blessed with a commendable lack of smugness about themselves. Just as New Jersey lives in the shadow of New York and Philly, Southern California is forever contending with the sanctimonious posturing of Northern California. We are perpetually being told our coastline isn't as dramatic and our populace not as literate. San Franciscans refer to their town as The City and do a lot of chest-thumping about how the taxi drivers quote Rilke and the sourdough starter dates back to the Gold Rush.

You know, Meghan, the West Coast has the sunshine.

But, I guess, down on the shore everything's all right.

Photo: Martin Bureau / AFP / Getty Images

The Rehabilitating Healthcare series continues on the editorial page; this week's installment focuses on rationing. The current system rations care based on income, which leaves the poorer folks out to dry while properly insured Americans fare well. The Times' editorial notes that most people have no qualms with the system, though, because it prevents the government from determining what care you get. Critics of Obama's healthcare proposal are hostile to such government rationing. Here is the board's response:

On the Op-Ed page, ccontributing editor Sara Catania offers an up close and personal look at home foreclosures in Los Angeles. Catania talks to five people who have sought legal help after hitting rock bottom in recent days.

Also in Op-Ed land, NPR senior news analyst Daniel Schorr reflects on legendary news anchor Walter Cronkite and what made him as successful as he was in turning any story into national news. His conclusion? Everyone trusted Uncle Walter:

The simple answer, but maybe too simple, is that Cronkite inspired trust. In a couple of polls he was designated the most trusted man in America. His baritone voice with its Midwest cadence, the impression he gave of being unawed by all the big shots he had to deal with, his never losing touch with his audience -- all these factors placed him in a unique role. And he felt its weight. Asked to run for public office, Cronkite reportedly said he could not step down from his anchor post.

Photo: For-sale signs line a residential street in Adelanto, Calif., in the Mojave Desert (Robyn Beck / AFP/Getty Images).

Whenever the Times editorial board has opined in favor of helping troubled homeowners, most of the responses have been along the lines of, "Why should those of us who've been responsible bail out the ones who haven't?" This is the so-called moral hazard issue, and it came to mind again this week as the Los Angeles City Council and the federal government launched or expanded initiatives to aid borrowers who were struggling to pay their mortgages.

The City Council approved a plan Wednesday to offer payment-free loans of up to $75,000 to homeowners in foreclosure. The effort will be tested first in Pacoima, with $1 million available -- enough to help a couple dozen borrowers. The money will go to lenders who agree to write down the loan to the current, depressed value of the home. To participate, lenders may have to write off significantly more debt than the city will pay for, but they would still come away with more than they could collect by repossessing and selling the home.

Because the impact of foreclosures are felt most strongly by the surrounding community, it makes sense on some level for Los Angeles to try to attack the problem instead of waiting for the feds to fix their version of the loan-writedown program. But it's an expensive undertaking, and the city isn't exactly swimming in cash. The borrowers wouldn't have to make payments on the city's loans until they sold their homes. The hope is that property values would bounce back, enabling the city to be repaid with interest. But the risk is that the borrower sells or defaults before that, wiping out the city's investment. The only party sure to benefit from the transaction would be the lender, whose losses would be reduced, if not eliminated, by the money the city contributes. You could argue that there's no moral hazard in helping borrowers who are struggling because of unanticipated personal crises or unscrupulous lenders, but it's hard to find a similar way around the moral hazard problem posed by rescuing lenders. The only rationale there is that it's a necessary evil -- the stakes for communities and the economy in general are great enough for us to look the other way.

Meanwhile, the Treasury Department announced a few new wrinkles Thursday in its main program to help troubled borrowers. These were aimed mainly at those who couldn't be saved from foreclosure -- in other words, the ones who piled up so much debt, they can't afford their mortgage even if it were written down to the property's current value. The program provides financial incentives for lenders to repossess properties without foreclosing on the borrower's loan, either by allowing "short sales" or simply taking back the deeds. The main motive seems to be sparing those borrowers from having their credit scores ruined by a foreclosure. Hmmmm. No moral hazard problem there, no sirree.

I know, I know -- driving down the borrowers' credit ratings would only exacerbate their debt problems. And it's certainly true that many borrowers' troubles don't stem from fiscal recklessness or ignorance. They may have lost their jobs or endured a financially crippling illness. But those who took on gargantuan debt on a wing and a prayer, or who kept accumulating debt by living well beyond their means, should see their credit dry up. It's part of the dynamic equilibrium that the system provides, albeit not in a precise, Swiss watch sort of way. That's why I cringe at the thought of subsidizing this group of borrowers and their lenders, who really should bear the full cost of the decisions they made.

Free-marketeers and banking industry allies cheered yesterday when the Senate buried a proposal to let bankruptcy judges "cram down" home mortgage debt. Under current law, when homeowners file for personal bankruptcy, the court cannot alter the terms of the loans they hold on the homes they live in. Loans for vacation homes, investment properties, farms, commercial bulidings are all fair game for bankruptcy judges, but principle-residence mortgages are not. As a result, mortgage holders who file for bankruptcy are pretty much compelled to sell their homes to pay off whatever they owe. On Thursday, Sen. Dick Durbin (D-Ill.) sponsored an amendment to S 895, a bill to avert some foreclosures that would have put home mortgages on the same bankruptcy footing as other types of loans, but the amendment was defeated, 51-45.

Score another one for bank-industry lobbyists, who persuasively argued that exposing home mortgages to cramdowns would raise future interest rates. Of course it would. But so what?

One of the Big Important Lessons of the most recent housing bubble is that the U.S. has gone too far in its efforts to encourage home ownership. Guarding against cramdowns is one of several ways the feds and states work to make home ownership more affordable; others include the tax deduction for mortgage interest, measures that cap property tax increases (such as California's Proposition 13), and federal mortgage guarantee and insurance programs. These mechanisms have not just reduced the price of borrowing enough to allow some renters to buy houses; they've also encouraged speculators to try to create wealth out of thin air by betting the banks' money on rising property values. Many banks were happy to go along for the ride even if it meant lending sums that couldn't possibly be repaid. They just wanted the fees from the loan, not the long-term revenue stream, which they sold (along with the risk of default) to investors -- among them Fannie Mae and Freddie Mac, which Congress created and maintained ostensibly to protect would-be borrowers against a shortage of loans.

Traditionally, lenders assumed the repayment or credit risk, which was offset by their ability to repossess and resell the properties in question. Borrowers, meanwhile, assumed the investment risk -- that is, the risk that the property wouldn't prove to be as valuable as they'd hoped. Allowing bankruptcy courts to cram down home mortgage debt would make lenders share some of the investment risk with borrower, and they would almost certainly respond by charging higher interest rates (although the experience with farm and commercial loans suggests the increase would be small). More important, though, they'd also pay a lot more attention to the borrower's ability to repay. And after the debacle we're still mired in, who doesn't want that?

I understand the moral hazard argument. Responsible folks would suffer in the future if we intervened on behalf of the binge borrowers. Setting aside for a moment the number of borrowers who aren't to blame for their current troubles (e.g., those who lost their jobs, or who were fraudulently steered into subprime loans), consider what the aid here would be. Judges would have the power to write down mortgage debt only to the point that it matches the current, presumably depressed value of the house. If borrowers couldn't afford the payments at that level, there would be no cramdown. In other words, write-downs would happen only if they were better for the lenders in the long run than foreclosing and reselling the home.

Rational lenders would be doing those modifications anyway, regardless of the indignation felt by "responsible" homeowners. But a large percentage of the loans in trouble are owned by investors (through complex securities) and managed by loan servicing companies, which have been deterred from writing down debt by opposition from investors. The mere prospect of cramdowns may help servicers overcome investors' reluctance to making significant but economically rational modifications before borrowers go into bankruptcy. Of course, the banking industry might have prefered the alternative offered by S 895: it would provide servicers that modify loans immunity against investors' lawsuits. But that's more of an assault on the sanctity of contracts than allowing cramdowns would be -- the bankruptcy process, after all, is designed to tear up contracts in an effort to mitigate all parties' losses.

Credit: AP Photo / Nick Ut

The Obama administration added two more elements today to its homeowner-assistance program, offering help to more borrowers -- and encouraging investors to offload more of their riskiest mortgages onto the taxpayers.

The original Making Home Affordable program, which the Treasury Department announced earlier this year, enabled more troubled borrowers to refinance their Freddie Mac- or Fannie Mae-backed mortgages. It also provided subsidies to encourage lenders, loan servicing companies and borrowers to agree to temporary loan modifications that reduced monthly payments to 31% of the borrower's income. But the program didn't do anything about second mortgages, nor did it address many troubled borrowers with loans that were deeply underwater (that is, their homes were worth 95% or less of the amount they owed).

One of the new features announced today would enable borrowers with second mortgages -- a situation that describes about 50% of those in danger of foreclosure -- to get a temporary cut in interest rates on both their loans. This initiative addresses two problems with the loan modification program: the need to pay off a second loan made it impossible for some borrowers to afford their homes, even with a steep reduction in the primary mortgage, and the refusal by some lenders holding onto first mortgages to accept lower monthly payments as long as the second mortgage holder kept collecting the full amount.

The other initiative announced today would integrate a new version of the Hope for Homeowners program into the loan modification efforts. That program calls for lenders to write down a troubled borrower's debt until it's a bit less than the value of the house, then refinance the mortgage into a loan guaranteed by the Federal Housing Administration. The original version, which Congress approved last year, was a bust among lenders and borrowers alike -- in trying to screen out fraudulent borrowers and prevent unjust enrichment, Congress had made the program unwieldy and unattractive. Lawmakers are moving a bill to address the major shortcomings (it's been hotly disputed, but for other reasons); in the meantime, the Treasury Department said it would require mortgage servicing companies to evaluate troubled borrowers who were in line for loan modifications to see if they qualified for Hope for Homeowners. If they did qualify, the servicers would be required to ask the investors who owned the mortgage if they wanted to write it down and hand off the borrower off to another, FHA-backed lender. The thinking is that investors might settle for the lower payout offered by Hope for Homeowners rather than modifying the loan because a modification would still leave the borrower underwater -- and tempted to mail in his keys.

Here's the problem, though. The greater the risk of a borrower abandoning a home, the more likely an investor group is going to want to turn that loan over to Uncle Sam through Hope for Homeowners. The FHA's underwriters would provide some protection against the feds assuming the worst loans, but a more important risk factor is housing prices. If the worst of the decline is behind us, borrowers who walk out on loans written down through the Hope for Homeowners program would leave the FHA guaranteeing amounts below or near the current value of the repossessed home. But if property values slide much further, homeowners would have more reason to give up on their loans, and the FHA would be stuck with considerable losses.

The changes to Hope for Homeowners will take a few months to put into place, buying more time for the market to bottom out. The flip side is that the longer it takes to get the program going, the fewer homeowners who'll be helped. If you're concerned about the impact of foreclosures on neighborhoods, the banking system and the economy, that's problematic. But if you're disturbed by the thought of the government bailing out any homeowners, no delay is too long.

Credit: AP Photo / David Zalubowski, FILE

You know how they call newspapers the "first draft of history"? Our editorial this morning in defense of the HALO program -- a three-pronged effort to keep homeless, non-violent offenders out of the criminal justice system -- is a pretty good example. By the time it was published, it may already have been moot.

Here's a quick tick-tock. City Attorney Rocky Delgadillo's office was planning to hold a press conference Thursday about an expansion of HALO, which is part of the Safer Cities Initiative in skid row. The program was planning to step up efforts to help homeless people resolve their legal problems without going to court or jail -- in particular, enabling them to discharge citations by performing community service (which could include attending classes or getting counseling). Late Tuesday afternoon, one of the organizers of the event sent an e-mail to others in Delgadillo's camp, noting that the conference had to be canceled because Mayor Antonio Villaraigosa's new budget wiped out HALO's funding (along with the rest of the Safer Cities Initiative). She also asked for help alerting those who'd already been invited to attend, including city council members, top brass at the LAPD, business leaders and skid row service providers.

Opposition to the proposed cut built swiftly, and by early Wednesday afternoon we in the Opinion Manufacturing Division had gotten wind of it. By the time I started talking to service providers and business people who were familiar with the program, supporters of HALO were well along in their efforts to persuade the City Council to restore its funding. They planned to make their case to the council Monday, when the Budget and Finance Committee is scheduled to review the public safety portion of the budget, among others. Curious why Villaraigosa had singled out the Safer Cities Initiative, I put in a call to his press office. Press Secretary Matt Szabo said he wasn't aware of the cut, so he tried to round up someone who could respond to my questions. No answer came by deadline, so we went ahead and ran an editorial praising HALO and urging the city not to sacrifice such programs without good reason:

... [T]he budget gap is so wide that city leaders may have little choice but to cut some programs that confer real, cost-effective benefits. But they need not cut just to cut. They must do their best to keep intact the best models for delivering services, spending tax dollars wisely and laying a foundation for better times.

Later that evening, I got an urgent message from Szabo saying that the proposed cut had been "inadvertent," and that Villaraigosa had not intended to shrink the Safer Cities staff. The mayor will seek an amendment to restore the positions. It's still a mystery to me how HALO's money vanished -- Szabo says no one in the mayor's office approved the cut -- but I care less about that than seeing the funding reappear.

Credit: David McNew / Getty Images