Friday, April 20, 2007



Ok, I admit it, Mulder.

I believe that “there is something out there.” There have been too many sightings of unidentified flying objects for every one of them to be bogus.

I also believe that many of those, who claim to have seen the Loch Ness monster, really have seen some major sea mammal and not just shadows, boat wakes, etc. Too many families on vacation, Protestants ministers, boatmen, etc., have reported seeing “something,” in that deep, dark coldwater Loch, for every one of them to be “bonkers.”

Yep, and I think that Lee Harvey Oswald did not act alone, nor could a single bullet do all of that entry, crashing, bouncing, damage to President Kennedy and Governor Connolly, and then be discovered on a hospital gurney, virtually unmarred. (And this is stated with all due respect to you, Senator Specter.)

OK, now I’ve established that I am a conspiracy theorist, a cynic, and myth believer. If that helps this “medicine go down,” then use it as a coating for my thesis.

GSEs Not Financially Weak?

What if Fannie Mae and Freddie Mac are not the weak financial sisters that many, in official Washington, have made them out to be? (Cue the “Twilight Zone” theme.)

What if lots of Fannie/Freddie enemies—for their own selfish reasons and with some choreography—decided to unload on the two GSEs? What if a trickle of complaints became a symphony of rejection and a bewildered Congress and compliant media, with no real capacity to investigate below the surface, began accepting at face value all of the claims and charges about Fannie Mae and Freddie Mac?

What if, back in August 2004, a very PO’d Andrew Card, concerned about the then waning second term presidential prospects of his boss, George W. Bush, got sick and tired reading too many headlines like: “ex-Fannie Mae Chair Jim Johnson vets John Edwards for Kerry;” “Ex-Fannie Mae Vice Chair, Jamie Gorelick, uses her seat on the 9-11 Commission to pummel Bush Administration;” “Fannie Mae Chairman, Frank Raines, possible Treasury candidate, if Kerry wins?”

Card, then. Might be doubly torked off, when that same Frank Raines--in the context of some political sally against his company--sends a snippy letter, complaining to Card about the GOP Lilliputian assaults?

Do you think it’s possible that Card or even Karl Rove, who saw all of the same events and was more sensitive to the politics, could have called some senior SEC official and suggested, “Nail those Fannie bastards and I don’t want to know how you did it?

Administration Chorgeography

Around that time, the Bush SEC dutifully proclaims that Fannie has not abided by FAS-133. HUD, then, weighs in against the GSEs, uttering something about missing housing goals; and OFHEO, after doing a 10 year Rip Van Winkle, stumbles awake and shrieks at the GSEs. The large bank dominated old FM Watch crowd, still filling their coffers with billions, acts as an Amen “Chorus.” The Wall Street Journal vomits anti-Fannie/Freddie editorials numbers 44, 45, 46, 47 and beyond. A weak kneed Congress doesn’t know what to do, except avoid defending anything that may even look politically injurious. Heads roll at both companies. New management apologizes to multitudes, seemingly one at a time, and agrees to various “12 step” prevention programs, including paying large fines, in return for Administration hints/promises to leave them alone. And, the rest becomes history, as we know it.

Pretty implausible, huh, even for a Bush Administration which violently bulldozed any law standing in the way of its political march through Washington?

Maybe so, but not for this conspiracy theorist/cynic, especially one who just read that Rove, or somebody in the White House, called Attorney general Gonzales and told him to dump a bunch of US Attorneys who weren’t towing the Admin’s line. The Bush White House did that with the same flawed Attorney General, who had been reeling from bipartisan criticism, because the AG had blessed torture, illegal confinements, and wiretapping, in written legal opinions, providing the basis for some extreme Admin conduct, post 9-11.

Pearlstein Column, AG and the Fed

For a few weeks now, in this miasma, I have been pondering the implications of a column written by the thoughtful Washington Post financial columnist, Steven Pearlstein, on May 25, 2005. In it, Pearlstein claims—“using the Queen’s English,” as opposed to Fed’s the complex verbosity, that Alan Greenspan—in a teleconference speech to bankers—ignored and even reversed the Fed’s benign GSE risk findings, in the central bank study, “Concentration and Risk in the OTC Markets for U.S. Dollar Interest Rate Options.”

Pearlstein’s review of the report found that Fannie Mae and Freddie Mac did not represent threats to the financial system. He said, the GSEs heavy use of derivative securities, which “hedge” mortgage portfolio interest rate risks, helped keep mortgage costs down and insured against future portfolio troubles.

The Post columnist went on to suggest that Greenspan deliberately ignored the work of his own staff, freelanced, laid out some of his own anti-GSE vitriol, which I believe encouraged the angry lynch mob mentality and rush to GSE judgment, that soured lots of people, policy makers, and politicians on the successful GSEs.

In previous efforts, I have tried to establish why the Fed would target the GSEs and their huge home mortgage generating/Congress pleasing business operations.

So much of what the GSEs encountered was based on the Fed argument of GSE risk, amplified by OFHEO (with it’s new “friend of W’s,” large and in charge), Fannie/Freddie business opponents--those big banks whose “private label” and subprime business grew, as the GSEs fought their political challenges--and various GOP politicos, all interpreting and ascribing selfish motives to those GSE (read Fannie) officials, who they claimed produced “accounting scandals.”

What If?

The media, reflecting most of the aforementioned cabal, lapped it up and did its own piling on.

It is important to remember that long before the Financial Accounting Standards Board promulgated FAS-133, which the SEC claimed Fannie violated, the regulation was strongly challenged—as unfeasible--by the GSEs, large banks, and other financial service companies. Since its implementation, hundreds of companies have had to admit to accounting or financial records problems and restate earnings, redoing past financial records. (Fannie, alone, has spent over a billion dollars doing so.)

Could any of the previous political speculations occur, here in DC, with the Fed and Bush Administration in charge? Would they create a snowball of safety and soundness doubt, wrapped in claims of malfeasance, and then roll it downhill and cheer the momentum?

Nah, not in this day and age, not with those GOP paragons of virtue, controlling the levers of government. Certainly not when Alan Greenspan was Fed Chairman and he saluted red ink producing tax cuts, advocated shrinking social security, and was myopically indifferent to fixing the subprime lending fiasco, fifteen or more months ago, when a fix could have saved thousands of families and the teeth gnashing going on now.

Yes, my tale probably is just another UFO or “Nessie” claim. That is, unless Steve Pearlstein was right. In which case, Mulder, lots of other people weren’t and, today, they still aren’t.

Friday, April 13, 2007

The Fed, Mortgage Credit, and the GSEs

Where does all of the conflict come from, between the Fed, Fannie Mae, Freddie Mac, and the incredibly efficient secondary mortgage market system?

Simply, the Fed has little respect for financial institutions created by Congress for specialty lending, i.e. thrifts for housing, Fannie and Freddie for the same, formerly Sallie Mae for college loans, and Farmer Mac for agriculture lending. The Fed believes that these institutions are “artificial” and create credit demand far larger than what would be, if they didn’t exist. Lastly, the Fed believes that a commercial banking system, with the Fed in the lead, is all that the nation needs for credit to go to the most rational needs, based on market demands, not because Congress “tilts” the playing field and creates credit incentives for housing, student loans, agriculture loans, et al.

The Board of Governors of the Federal Reserve System has a priority list. It is fanatic about its role and independence in setting monetary policy and its control over the payments system. It wants no interference, from any source. It wants no financial rivals, either inside or outside the Beltway, generating positive influence or national attention.

The Fed may have a seven member board, but—traditionally--the Chairman controls the Board of Governors. His priorities and his dictates becomes the Board’s. The Board’s Vice Chairman and other Governors, as they are known, and the Fed’s senior staff always fall in line with the Chairman’s thinking, even though there might be some disagreement behind the scenes.

So, why is the Fed viewed as “anti-housing” and why is it said by many that the “Fed dislikes the GSEs?”

When I first joined the Fed, in 1981, as a congressional liaison officer, coming from a senior post at the Federal Home Loan Bank Board, I found myself explaining the thrift industry and their lending habits and practices to a the Fed professionals. The central bankers didn’t really know and didn’t care to know about the “housers.”

They viewed the savings and loan institutions and their executives, almost as jokes, their officers like kids playing financial games. Housing lenders, because of their generally small size and specific housing lending, weren’t viewed as real lending institutions, with the Fed disdaining for years to include their business activities in national lending data.

While everyone professed to love housing and the thrift institutions which exclusively lent for home mortgages, the Fed thought the industry and their work was unnecessary and propped up solely by an adoring Congress, which viewed thrifts as serving the “little guy,”

The Fed’s credo was/is that commercial banks could do everything that these “creatures of Congress” could do and more efficiently.

The “thrift crisis,” which ended up costing the nation over $250 billion, seemed to buttress the Fed’s predilection about excessive mortgage credit and dedicated housing lenders.

Fannie Mae and Freddie Mac just naturally got into the Fed’s crosshairs, for policy reasons and some ego driven.

First and foremost, as Fannie and Freddie grew out of the thrift debacle, the Fed just viewed them as part and parcel of the same problem and gritted its institutional teeth, as the GSEs create large and seamless international mortgage markets, with huge access to international money benefiting homebuyers.

The GSEs were great for consumers and for many lenders, including big banks, but the Fed didn’t want to acknowledge the plus, for many of the old reasons, i.e. too much money going into housing and the fact that the Fed did not directly control the GSEs.

GSE financial power was being enhanced by their growing political growing influence in Washington. Starting in the late 1990’s, Congress and others wanted Fannie’s opinion on housing as well as a variety of other financial services matters. “If they could do so well with home financing, why not try them….”

To the Fed and Alan Greenspan, Fannie Mae was becoming a scary juggernaut, big business and big politics, neither of which the Fed could countenance.

The central bank got some added incentive to combat the GSEs, when the major regional and money center banks started to complain that Fannie and Freddie were getting too large, too efficient, and reducing profits for the banks, which by now had acquired control of the “primary mortgage market” from the thrifts and the mortgage bankers. The large banks facilitated this latter development by rapidly buying up the previously “independent” mortgage companies.

Targeting the GSEs gave the Fed a veritable bonanza: it could pontificate about excessive housing credit, blow hard about systemic risk, and help the banks, the institutions they really cared about the most.

Part of the Fed campaign involved saying/testifying that the GSEs were “undercapitalized,” despite the fact that the GSEs have statutory risk based capital tests—which no other financial institutions have—that, in part, were designed in collaboration with Paul Volcker, after he retired from the Federal Reserve.

Because the Fed is the nation’s “lender of last resort” and has explicit and implicit authority—working with the Treasury and others—to do whatever is necessary to make sure a commercial failure doesn’t bring down the entire payments system, it began to suggest that the GSEs “could/might/potentially” be a problem source of problem and needed more capital and control.

The “systemic risk” phrase, encouraged by the Fed and jumped on by the GSEs opponents, who included the aforementioned banks, larges elements of the GOP, the conservative thinks tanks and media, started to get used against Fannie Mae and Freddie Mac, in an effective—but not accurate—campaign.

The GES accounting fiascos, for which the companies themselves are exclusively to blame exclusively, should never have caused the blowback they did, if for no other reasons than the mammoth remedial efforts both Fannie Mae and Freddie Mac took, after acknowledging the errors.

But, if an allegation is repeated frequently enough, especially by those in a position of respect, the potential to accept it as “truth” grows. After all, who has enough swack to challenge the Fed?

My final observation about the Fed’s hostility to housing and the GSEs, and especially Fannie Mae, is one that I cannot prove. Yet, I strongly believe it to be fact.

I think the Fed’s anti-GSE vendetta got a steroid injection from Alan Greenspan, who took personal umbrage at senior Fannie Mae officials. He had all of the aforementioned institutional cover he needed to go after Fannie and Freddie, but the growing “cult of GSE personalities,” giving and receiving major awards and media attention, association with other prominent DC institutions, plus getting lots of positive reviews on the important “Georgetown cocktail train” etc. irritated Greenspan—no shrinking social violet, himself--and allowed him to give Fed staff the green light to torch the companies, using the Fed’s famous “on the one hand and on the other,” where much was negatively implied, but little substantiated.

Would the Fed ever carry out a destructive GSE campaign because of institutional pique or the Chairman’s anxieties?

The Washington Post’s excellent financial writer nailed the answer to both question, writing on May 25, 2005.

Pearlstein had gotten his hands on a Fed staff report which dramatically downplayed the risks the GSEs represented to the financial system (the Fed’s catchy “systemic risk” allegation), because the companies employed “derivative securities,” commonly used to hedge against interest rate movements.

The Fed staff concluded that the GSE risk was far less than “most of us thought” and that, “If either Fannie or Freddie were to fail, the(se) derivative markets would not melt down.”

According to Pearlstein, Greenspan—shortly after the report was produced—delivered a speech to a Chicago banking conference, via satellite, and summarized the report, “at times tracking the report line by line, while carefully skipping over other portions that might have given comfort to Fannie and Freddie and their supporters.”

“And then, at a crucial moment, he (Greenspan) departed from the staff’s conclusions to add one of his own, albeit, without attribution”

Pearlstein wrote that AG freelanced and declared, “Nonetheless, concerns about potential disruptions to swaps market liquidity will remain valid until the vast leveraged portfolios of mortgage assets held by Fannie and Freddie are reduced.”


Here’s hoping that Mr. Bernanke can rise above recent history—and his predecessor--and see the value to the nation’s mortgage finance system in strongly regulated GSEs, controlled by their own business managers.

(Writer’s note: This piece was boiled down, from one that was nearly 3000 words, but which I wanted people to read, not sleep through. The balance will lend itself to more blog stuff about the banks, their large DC associations, and why an industry that benefits from huge and explicit federal deposit insurance subsidies, is the proverbial “pot” calling the GSEs “kettles” black. Worrisome addendum: Pearlstein did a recent piece on Bernanke calling for more GSE controls and speaking to “subprime” problems, yet never mentioning that the GSEs had no role in creating that mess.)