This week, Rep. Barney Frank (D-Mass.), the House Financial Services chairman whose systemic-risk legislation includes the after-the-fact fees urged by Geithner, says he’s now leaning toward the Bair plan. Indeed, The Wall Street Journal reports today that “a Frank aide on Friday said he now favors amending the measure to create a prepaid fund.”

There will be plenty of time to make the changes. Frank’s committee will meet tomorrow to begin marking up the bill, with debate on amendments not expected until Thursday, the Journal reports. No doubt some lawmakers are drooling at the chance to tweak the bill.

A timely, orderly resolution process that could be applied to both banks and non-bank financial institutions, and their holding companies, would prevent instability and contagion and promote fairness.

But Bair, echoing a common message from House lawmakers, is opposing a provision to reimburse taxpayers for bailouts by taxing the solvent competitors of the bailed-out firm — a tax the White House wants to apply only after the government steps in to euthanize the troubled company. Treasury Secretary Tim Geithner said yesterday that collecting the tax beforehand — effectively creating an insurance fund to pay for industry bailouts — would only encourage large institutions to make the risky bets that were largely responsible for the recent global collapse.

People will live the expectation where the government will come in and protect them. We don’t want to create that expectation. That’s why we think it’s better to do it after the fact.

Bair disagrees. “To be credible, a resolution process for systemically significant institutions must have the funds necessary to accomplish the resolution,” she told lawmakers.

It is important that funding for this resolution process be provided by the set of potentially systemically significant financial firms, rather than by the taxpayer.  To that end, Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms — those with assets of at least $10 billion.

The reason to pre-fund?

It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.

There’s still a long ways to go to iron out these differences. The “too-big-to-fail” bill unveiled this week by House Financial Services Chairman Barney Frank (D-Mass.) is just a discussion draft. The actual language isn’t expected until next week, when a markup is also likely. Expect a lot of amendments.

JumpStart Executive Director Laura Levine and Southeast Regional Director William Cheeks (jumpstartcoalition.org)

The JumpStart Coalition for Personal Financial Literacy, a national nonprofit advocacy group that aims to improve the financial management skills of America’s youth, draws lots of attention for its surveys measuring how much kids really understand money. Last spring, Federal Reserve Chairman Ben Bernanke even led a joint news conference to announce JumpStart’s most recent findings, calling it “a leader among organizations seeking to improve the personal financial literacy of students from kindergarten to the university level.”

The 180 corporations, government agencies and nonprofits that are partners and provide financial support to the coalition get prominent billing on JumpStart’s Website, and share in the prestige of a group that promotes national standards for financial literacy education in the country’s classrooms.

But also included in the coalition is CompuCredit, an Atlanta subprime lender that specializes in high-rate credit cards, payday loans, auto financing and debt collection, focusing on customers with poor credit scores. In December of last year, CompuCredit reached a $114 million settlement with the Federal Deposit Insurance Corporation and the Federal Trade Commission, which had charged CompuCredit and two partner banks with deceiving hundreds of thousands of customers by failing to properly disclose upfront fees and credit limits on their cards, thereby sinking borrowers further in debt. In addition, JumpStart’s Southeast regional director, a paid consultant who serves as a liaison to the group’s state affiliates, also counts CompuCredit as a client of his private consulting firm.

JumpStart executive director Laura Levine said that she was aware that CompuCredit belongs to JumpStart’s coalition, and that the coalition’s Southeast Regional Director William Cheeks also works for CompuCredit as a consultant. But, she said, no questions had been raised about the situation until an inquiry from TWI. Levine said JumpStart staff would explore the matter.

“No one’s called it to our attention as a problem,” Levine said. “Now that we’ve talked about it we will look into it further.”

JumpStart is not taxpayer-funded, although government agencies like the FDIC and Freddie Mac are partners. Corporate partners pay $5,000 annual dues to the coalition, with lesser fees for government groups and nonprofits. Membership has to be accepted by the board of directors, Levine said. Businesses that only do payday loans would never be approved for membership, she said, but the situation “gets into a real grey area” when a company, like CompuCredit, offers a range of financial products.

JumpStart describes its mission as promoting financial literacy through advocacy, research, standards for financial literacy education, and educational resources.

It also maintains an online clearinghouse of approved personal finance materials for educational use. Its partners provide financial support, and JumpStart in turn offers guidance and resources to help member organizations with their own financial literacy efforts. It does not allow any coalition members to sell or distribute their own products through JumpStart.

Regarding Cheeks, Levine noted that he is a consultant, not an employee, and that JumpStart can’t dictate what clients his private firm might accept. “We’re a coalition of organizations and entities that share a commitment to financial literacy education,” Levine said. “We have a lot of financial services firms that may be competitors, or may have different positions from each other. They aren’t working for us. They came to JumpStart to share in our support of financial education and financial literacy efforts.”

But Irene Leech, president of the Virginia Citizens Consumer Council, said she found CompuCredit’s involvement with JumpStart troubling.

“I’m disappointed,” said Leech, who also specializes in consumer issues as a Virginia Tech professor. “It’s distasteful, and it doesn’t improve its efforts. I would have absolutely said no to both these situations, at a bare minimum. I have a pretty high expectation for a group like this. There are many professional and academic organizations that I belong to that are members, along with the consumer groups. They’re the entity that everyone is looking to when it comes to measuring financial literacy with a high degree of accuracy.”

Leech added that “I just wouldn’t have thought that their leadership would have wanted to go this way. I’m really sad they’ve gone this route.”

In Virginia, JumpStart’s state coalition was credited with helping require financial literacy education in school curriculums, and also is active in other states to promote financial literacy at a local level, Leech said. Next month, JumpStart will sponsor its first national educator conference for K-12 teachers, devoted specifically to personal finance education. FDIC Chair Sheila Bair is scheduled as the keynote speaker.

At last spring’s joint news conference, Bernanke said the regional Federal Reserve banks work closely with JumpStart state coalitions on financial literacy issues. And JumpStart is probably most well-known for its biennial financial literacy surveys, which usually receive wide press attention. The April 2008 survey found that graduating high school seniors still were struggling with financial literacy basics.

Regarding the coalition partners, Levine said that “Many of our partners conduct financial education or support financial education activities–JumpStart’s role is to support, in some ways, what the partners do. For example, if a partner has a financial education product, we list it in our clearinghouse to try to help users find it. So, we don’t specifically ask them to do things for us.  We ask them to base their materials on the national standards, to help advance the
mission of the coalition.”

“We generally recommend their participation in financial literacy activities and efforts,” Levine continued, “but we don’t specifically ask them to do things.  Partners support us financially for the effort that we do, generally, on behalf of all, such as publication of the standards, operation of the clearinghouse, (and) promoting Financial Literacy Month.”

Leech said JumpStart has been very successful, particularly at the state level, in getting more businesses to join the coalition. But while partners from Merrill Lynch to Experian sponsor JumpStart surveys, conferences and other activities, CompuCredit should be treated as a different case, she said. Subprime lenders often seek to align themselves with more mainstream organizations to deflect controversy over their practices, Leech noted. CompuCredit’s membership in the JumpStart coalition reminds her of businesses that create fake consumer groups with benign-sounding names as cover, she said, and there should be no grey area in determining whether the firm belongs in JumpStart.

“I’m not buying any of it. We all know that folks are being taken advantage of” by subprime firms and payday lenders, Leech said.

For his part, Cheeks, president of a Georgia fiscal management consulting firm, described himself as a retired Equifax executive whose main goal is consumer education. As to whether any conflict of interest exists by consulting for both JumpStart and CompuCredit, Cheeks said that “I consult with a lot of companies” and added, “I’m not going to get into that discussion.”

“I work to help consumers understand credit – how credit works, how to improve their credit,” said Cheeks, a former Vice President for Consumer Education at Equifax. “I do that for all of my clients. I am a consumer educator. That is exactly what I do. With JumpStart, my focus is kids. I want to get to students as early in life as a possible, so they can build a good credit history.”

He declined further comment regarding CompuCredit.

Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime industry, said subprime lenders like CompuCredit usually have a problem when it comes to supporting financial literacy, since some basic lessons would be not to take out payday loans or to pile up debt on high-rate credit cards.

The FDIC, for example, said its charges against CompuCredit stemmed from a fee-based credit card marketed to consumers with low credit. The FDIC said the solicitations “failed to adequately disclose significant upfront fees and misrepresented the consumer’s initial available credit. The solicitations appeared to offer credit cards with a $300 credit limit; however, consumers were immediately charged as much as $185 in inadequately disclosed fees, leaving them with as little as $115 in available credit.”

CompuCredit did not admit or deny liability in the settlement of the charges. A company spokesman did not respond for comment.

Subprime lenders have been reinventing themselves since the mortgage crisis hit, turning to conducting mortgage loan modifications or offering foreclosure counseling, Cecala said. CompuCredit’s affiliation with JumpStart fits that mold, he said.

On its Website, CompuCredit says it provides a “much needed second chance” to consumers overlooked by traditional financial institutions. It also lists financial literacy among its philanthropic activities. The company also features a “financial wellness” section, which includes a financial literacy guide for consumers.

Levine said Cheeks has been a consultant for Jumpstart for about five years. CompuCredit has been a coalition partner since at least 2007, she said.

CompuCredit has been involved in controversy over its financial literacy efforts before. The Southern Christian Leadership Conference drew criticism for entering into a 2007 partnership with CompuCredit, with plans for joint “economic empowerment” workshops aimed at educating minorities borrowers about credit, and a co-branded credit card.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Bloomberg, today:

House Financial Services Committee Chairman Barney Frank ruled out creating a single U.S. bank watchdog similar to the U.K.’s Financial Services Authority as part of an overhaul of regulations.

Failure to communicate? Not necessarily. Both the administration and Frank seem interested in combining the responsibilities of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation into a single banking regulator, and both seem to favor a separate regulator, likely the Federal Reserve, to focus on systemic risk. The difficult question, as I see it, is whether this division makes sense.

On the one hand, two separate regulators overseeing the health of the banking system provides an opportunity for redundancy. Should the Federal Reserve fall into the hands of a laissez-faire ideologue (difficult to imagine, but play along) then a separate regulatory agency overseeing banks could take steps to shore up capital buffers and limit risky activities at systemically important institutions. The system might have functioned this way before the current crisis, were banks not in a position to shop among multiple regulators (OCC, OTS, FDIC), which created an incentive for the regulatory bodies to compete for banks.

On the other hand, having dual regulatory agencies creates the potential for a lot of buck-passing. Pulling away the punch-bowl is not popular. Bubbles make a lot of people very (though temporarily) rich, and those people will command a lot of political influence, which will be marshaled to fight any attempt to enforce sobriety. The systemic regulator could be tempted to declare problematic issues the purview of the banking regulator, and vice versa.

It’s important to have a place where the buck definitively stops, and a few carcasses which can be nailed to the wall in the event of a major regulatory failure. That’s currently difficult to do, because so many potential overseers fell down on the job. Deny the regulator any scapegoat, and the regulator is more likely to do his job effectively.

As a reality check, let’s review something that happened recently — a reminder of how we got into this crisis and who bears most of the responsibility for it. On Thursday, the Federal Deposit Insurance Corporation announced it had completed the sale of IndyMac, a once high-flying subprime lender that failed last summer. The total loss to the federal insurance fund? Some $10.7 billion, according to the FDIC.

IndyMac sustained huge losses selling Pay Option ARMs, which are loans that require little or no documentation. They allow the borrower to pay only the interest on the loan for several years, or to choose the amount of the monthly payment. These loans went south quickly, often because borrowers couldn’t afford the houses they bought or their loans reset to much higher payments as the loan balance grew.

Did any of this stop IndyMac from selling these loans, even at the end of its tenure, when it was clearly in trouble? No. Banking analyst Bert Ely told TWI that IndyMac used $10 billion in loans from the Federal Home Loan Bank of San Francisco to continue making Pay Option ARMs — even when investors figured out that the loans might not be such good bets and refused to buy them anymore.

IndyMac wasn’t alone. Other struggling banks also borrowed from the Federal Home Loan Bank system to keep themselves afloat, as TWI reported. The financial newsletter of the Institutional Risk Analyst wrote that Congress ought to be investigating the whole mess:

“Most of the failed banks resolved by the FDIC during 2008 have been excessive users of FHLB advances…Remember, it was the availability of the FHLB advances as funding source which allowed the management of IndyMac to grow the bank’s size beyond that supported by its natural deposit base… Like WaMu and Countrywide, but even to a larger degree, IndyMac leveraged government funding via the FHLBs with unsafe and unsound lending practices – and all with the full approval of federal regulators!

Obama and Geithner weren’t in charge when all that deregulation was going on, as I recall. It’s true the rescue effort hasn’t been perfect, and the populist anger against AIG often has gone too far. And it’s convenient for congressional Republicans — the biggest cheerleaders of the free market for financial services — to try to pin some of the resulting damage on the people in charge now.

But the huge cost of winding down IndyMac is an important reminder: Don’t forget how we got here — and who led the way.

–

Subprime loans were bad. TWI’s Twitter feed is good. Please follow it here.

Imagine how the Federal Deposit Insurance Corporation must feel these days. The same agency that now says it needs to borrow $500 billion in emergency funds to take over failed banks collected no insurance premiums from most banks for nearly an entire decade, The Boston Globe reports.

The practice lasted from 1996 to 2006, according to The Globe.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.

Now with 25 banks having failed last year, 17 so far this year, and many more expected in the coming months, the FDIC has proposed large new premiums for banks at the very time when many can least afford to pay. The agency collected $3 billion in the fees last year and has proposed collecting up to $27 billion this year, prompting an outcry from some banks that say it will force them to raise consumer fees and curtail lending.

This practice doesn’t look too smart these days, now does it? Here’s how FDIC Chairman Sheila Bair explains what happened:

Last week, Bair wrote to Senate Banking Committee chairman Christopher Dodd, a Connecticut Democrat, that her agency could need more money because the existing fund “provides a thin margin of error” given the government’s responsibility “to cover unforeseen losses.” The March 5 letter, provided to the Globe, said the additional borrowing authority is necessary to “leave no doubt” that the FDIC can “fulfill the government’s commitment to protect insured depositors against loss.”

Bair said yesterday that the agency’s failure to collect premiums from most banks “was surprising to me and of concern.” As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

“That is five years of very healthy good times in banking that could have been used to build up the reserve,” Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. “That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times.”

Yes, a very “important lesson.” Although, I think it’s a bit of an understatement, considering the FDIC — whose primary mission is to provide insurance for bank deposits — failed to, you know, collect insurance premiums from the banks it insures. Oh, well. Live and learn.

And we should probably hope that not too many more banks need to be taken over by the FDIC.

(Via Balloon Juice)

From Dodd’s opening statement during a panel hearing on Detroit:

In my view, if we’re going to insist on reforms by the auto industry as a condition of receiving federal funding, we ought to do the same for the financial companies. For that reason, I will do all I can to insist that any auto company bill also place tough conditions on any loans to financial firms, including provisions that require tax dollars to be used for responsible practices like lending that requires lenders to get much more aggressive about attacking the foreclosure crisis that is still at the root cause of the larger financial crisis and that prohibits executives from paying themselves obscene sums while they are essentially receiving a welfare check from the American taxpayer.

Half of the $700 billion Wall Street bailout has already been allocated for Treasury to spend wherever it pleases. But in order to tap the second $350 billion, the administration must first get approval from Congress — creating a good deal of leverage for Congress to make some demands. Even Republicans are starting to question the effectiveness and integrity of the White House program as the money continues going out, but the banks still won’t lend.

As Bloomberg points out this morning, there’s a new twist on this saga: Sheila Bair, head of the FDIC, has long pushed for a program tapping bailout funds to help homeowners directly, putting her at odds with the officials responsible for managing the bailout spending. That, of course, includes Tim Geithner, the head of New York’s Federal Reserve Bank who President-elect Obama recently named to be his Treasury secretary next year.

If Bloomberg is right, and Geithner really wants to run her out of office because she “isn’t a team player,” the immediate question is: What will be the response of Dodd and other Democrats on Capitol Hill who support Bair in her help-for-homeowners’ stance — including House Financial Services Committee Chairman Barney Frank (D-Mass.)?

Could this be the start of the first rift between Democratic leaders in Congress and the incoming Obama administration? Or will Obama, who has supported greater help for those facing foreclosure, rein in his newly appointed financial guru?

Only time will tell.

President Franklin D. Roosevelt signs the Tennessee Valley Authority Act in 1933. (tva.gov)

President-elect Barack Obama is confronting a cascading economic crisis, which seems to worsen by the day, not the week. As venerable banking houses collapse, once-mighty industries teeter on the brink of oblivion and unemployment mounts, the air thickens with recollections of the Great Depression of the 1930s, and comparisons between Obama and President Franklin D. Roosevelt.

But let’s define our terms. So what exactly was the Great Depression, and what did FDR do about it?

Illustration by: Matt Mahurin

The short answer is: The Great Depression was a rare political opportunity, and Roosevelt made the most of it — to the nation’s lasting benefit.

A longer answer would acknowledge that the Great Depression was a catastrophic economic crisis that Roosevelt failed to resolve – at least not until World War II came along, some eight years after he took office.

A still longer answer would recognize the connection between FDR’s short-term economic policy failure and the New Deal’s long-term political success. Much misunderstanding surrounds this matter.

“At the heart of the New Deal,” the distinguished historian Richard Hofstadter once wrote, “there was not a philosophy but a temperament.” In a kind of caricature of Hofstadter’s view, a New York Times writer not long ago said that Roosevelt “threw a slew of policies at the wall, and whatever stuck became the New Deal.”

That accepted view of the New Deal — as a kind of harum-scarum frenzy of random, incoherent policies that failed to slay the Depression demon — has become deeply embedded in our national folklore. But it is woefully and mischievously mistaken.

The fact is that Roosevelt purposely forged in the crucible of the nation’s most harrowing economic crisis a set of reforms that cohered in a more systematic pattern than is dreamt of in most philosophies. The essential logic of that pattern fairly leaps from the pages of the historical record. It can be described in a single word: security.

A Great Depression bread line, as depicted at the FDR Memorial in Washington, DC (Flickr: Tony the Misfit)

It is altogether fitting and proper that the New Deal’s most durable and consequential reform bears that very word in its title: the Social Security Act of 1935. A even greater measure of security was the New Deal’s gift to millions of Americans — farmers and workers, immigrants and blue-bloods, children and the elderly, as well as countless industrialists, bankers, and merchants, not to mention enormous tracts of forest, prairie, and mountain.

Forget about the colorful creations of the decidedly frenzied and much ballyhooed Hundred Days — like the Civilian Conservation Corps and the National Industrial Recovery Act. Most of them were attended by much sound and fury, but signified little, and strutted the briefest of hours on history’s stage.

But all the New Deal reforms that endured – the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Federal Housing Administration, the National Labor Relations Board, the Fair Labor Standards Act and, above all, the Social Security Act — had a common cardinal purpose. Roosevelt’s goal was not simply to end the immediate crisis of the Great Depression, but to make life less risky, to temper for generations thereafter what FDR repeatedly called the “hazards and vicissitudes” of life.

The New Deal provided more assurance to bank depositors (FDIC), more reliable information to investors (SEC), more safety to lenders (FHA), more stability to relations between capital and labor (NLRB), more predictable wages to the most vulnerable workers (FLSA), and a safety net for both the unemployed and the elderly (Social Security).

Those innovations re-wove the very fabric of national life. They profoundly shaped the fates of Americans born long after the crisis of the Great Depression had passed. With the exception of the FDIC, none dates from 1933.

Had economic health been miraculously restored in the fabled Hundred Days, a swift return to business as usual might have meant politics as usual as well — and none of those landmark reforms would have come to pass. Indeed, there would have been no New Deal as we know it.

Roosevelt understood this. He was a deeply strategic political actor and an astute student of history. He keenly appreciated what the engines of history had wrought and what they might be made to yield in the uniquely enabling circumstance of the Depression.

FDR had sketched the broad outline of his grand design well before the Great Depression descended. Proposals for old-age pensions, for example, dated back to the platform of the Progressive Party in 1912, which nominated for president his beloved cousin and political role model, Theodore Roosevelt. FDR publicly endorsed the idea as early as 1930.

But FDR also told his fellow Democrats throughout the 1920s that his comprehensive reform agenda must wait “until the Republicans had led us into a serious period of depression and unemployment.” He eventually confronted a more dangerous depression than he could have anticipated — but he realized the opportunity that it afforded.

The Chinese character for “crisis,” we are told, is a melding of the characters for “danger” and “opportunity.” FDR did not read Chinese, but he appreciated the logic of that etymology.

In his extraordinary second Inaugural Address, delivered Jan. 20, 1937, Roosevelt crowed about the actually quite modest recovery since 1933. “Our progress out of the depression is obvious,” he said. Then he added something altogether novel in the annals of presidential addresses: “Such symptoms of prosperity may become portents of disaster!” Roosevelt went on to describe the “one-third of a nation ill-housed, ill-clad, ill-nourished,” whose plight made a mockery of the American dream.

The context made it clear that he was not then speaking about the victims of the transient depression crisis, which he saw as ending, but about the accumulated social and human deficits spawned by more than a century of let-‘er-rip, swashbuckling, unregulated American capitalism — deficits not yet fully redeemed.

Solving that problem was what he meant when he said that “this generation of Americans has a rendezvous with destiny.”

“We are going to make a country,” Roosevelt once remarked, “in which no one is left out.”

In that unadorned sentence, Roosevelt summed up his highest purposes and his lasting accomplishments. The New Deal’s legacy was to give countless Americans, who until then had never had much of it, a strong sense of security. And with it, Roosevelt gave them a deeper sense of having a stake in their country and a bond with their countrymen.

Obama’s chief of staff, Rahm Emanuel, seems to have taken this essential history lesson on board. “You don’t ever want a crisis to go to waste,” he said recently. “It’s an opportunity to do important things that you would otherwise avoid.”

Like Roosevelt, Obama faces an urgent economic crisis. Like Roosevelt, Obama must use the (now considerably greater) powers of government to restore economic health. But like Roosevelt, Obama will ultimately be judged not simply on whether or how he ended this crisis, but on how he used it.

We have our own accumulated social and human deficits. Some, like the lack of universal health care, have been begging for attention since Roosevelt’s time. Others, including a crumbling infrastructure, struggling public schools, climate change, energy dependence, environmental degradation, widening income disparity and illegal immigration, have been festering merely for the last several decades.

If this generation is to have its own rendezvous with destiny, and if Obama wants to stand in FDR’s company, those matters can no longer be avoided.

David M. Kennedy is the Donald J. McLachlan Professor of History at Stanford University. He won the 2000 Pulitzer Prize for History for “Freedom From Fear: The American People in Depression and War, 1929-1945.”

That’s important, because Bair is the leading proponent of massive restructurings of mortgages. She wants Treasury to move forward with using $40 billion to $50 billion in financial bailout money to guarantee as many as 3 million restructured loans. So far, the Treasury Department and the White House are resisting that idea.

Bair didn’t attend Tuesday’s news conference to announce the loan-modification program by Fannie and Freddie. She issued a statement saying it would fall short of stemming home foreclosures.

Under the Fannie and Freddie modification plan, homeowners at least 90 days delinquent would be eligible to have their monthly payment reduced to 38 percent of their gross monthly income, under certain circumstances. That would be accomplished mainly through interest-rate reductions and by extending the length of the loans.

The government remains a bit vague on the details. The worry among housing advocates is that the plan is being pushed as an alternative to Bair’s more sweeping proposal.

I had a different reaction — but it may reflect my generally low expectations for mortgage-loan modifications. The plan calls for paying servicers to do modifications, which I think is a great idea. These people aren’t motivated by altruism, and they usually get paid for foreclosing a home, not for working out troubled loans.

I also recognize that the program wouldn’t help a large swath of borrowers. But unless the government steps in with a huge, Depression-era program to buy up delinquent mortgages, or unless it finds some way to order investors to sign off on loan modifications, there’s only a patchwork of solutions out there?

Helping some people in small ways isn’t the worst thing in the world. Housing advocates, lenders and mortgage servicers all are getting better at loan modifications than they were, say, a year ago. That’s progress, however modest.

Tuesday night, I checked in with Ellen Seidman of the New America Foundation, who specializes in the financial services industry, to find out her reaction. Seidman, who closely follows loan modifications, said that people don’t really understand that the Fannie and Freddie plan is aimed at heading off foreclosures among prime borrowers — the next segment of homeowners in danger of defaulting on their mortgages. In that sense, the program has some merit.

Seidman explains on her blog today some of the reasons for the consternation over the plan, despite its attributes. She believes the negative reaction has a lot to do with way it was presented. She described the news conference as a “really inept rollout.”

From Seidman:

The rollout was marred (that’s being kind) by the Treasury trying to sell this for far more than it is, intimating that it is a substitute for aggressive action on a broader range of loans, including sub-prime and Alt-A loans and loans not yet seriously delinquent, such as the guarantee program that FDIC Chairman Sheila Bair has been pressing the Treasury to implement. The fact that Bair wasn’t around for the announcement, and the Treasury spokesmen literally ran out of the briefing room to avoid answering questions, didn’t exactly help the picture.

Despite the PR debacle, Seidman said the plan has merits, including breaking the logjam that has kept Fannie Mae, in particular, from doing a lot of loan modifications. If the loan modifications work well, and the agencies keep good records on successes and repeat defaults, that would offer strong evidence to convince lenders it’s in their interest to modify their loans rather than foreclose, she said.

All sorts of competing loan-modification plans are out there. Citigroup, JPMorgan Chase and Bank of America have their own variations. They’re all voluntary, and they all haven’t broken through the problem of redoing loans that aren’t in a lender’s portfolio, but are sliced into pieces and scattered around the globe in mortgage-backed securities.

Until investors begin buying into the loan-modification idea, don’t get your expectations too high for any particular program. Just consider each new rollout, however ineptly handled, as one more attempt to chip away at a problem that still seems as insurmountable as ever.

The reality that banks are closing down — and the fear of more failures ahead — must be seeping into the popular culture. Today I told my 8-year-old daughter that we would set up a bank account this week for her allowance. She was quiet for a moment, and then asked, “But what if the bank fails?”

Apparently the talk of the third grade is that there’s another Great Depression on the way.

I guess an additional challenge for parents facing shrinking retirement and college savings accounts is finding a coherent way to explain the global financial crisis to children.