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.


John M said...

It's fascinating to get the knowledgeable insight into the politics involved in the GSE story.

Readers of this blog may also be interested in the detailed treatment of the technicalities of the MBS market that Tanta has undertaken at the Calculated Risk blog. She started off with the "easy" stuff in her MBS for UberNerds, Part I & Part II. Don't miss the discussions, they're awesome. Further installments will get into the complex structured finance stuff at the heart of the Private Labels' adventures in subprime during the bubble era when non-conforming loans exploded in popularity.

The present post opens up lots of issues. I'll be looking forward to future elaborations into specifics like the Roger Barnes testimony.

Bill Maloni said...

Typo Alert!

My apologies to Attorney General Alberto Gonzales, for misspelling his last name.

I spelled it with a "z," at the end, not an "s."

Matthew said...

The GSE's have been under attack by the Republidroids forever.

Why? Are they suddenly interested in long term fiscal virtue?

Snort! Behold their committment to that in the Federal budget.

What do they care about? The GSEs got in the way of their own constituency's lucre, i.e. entirely private greed-oriented banks from making even more profits.

All the true subprime crap? Private greed. Private mortgage lenders pushing non-conforming (i.e. not GSE-kosher) junk bought by private banks and private hedgefunds.

The GSEs have their problems, but thanks to that quaint endangered thing known as "prudent public-service oriented government regulation" (i.e. a throwback as obsolete as original aircooled VW bugs and nehru jackets), they are far more sound than 90% of the private lenders.

I'm sure the Fannie CEOs would have loved to be as irresponsibly greedy as the private banks to fatten (temporarily) their own enormous bonuses in a fit of Goldman-envy, but institutional factors of actually being a GSE for public-service purposes held them back. Thank God----or more accurately, thank liberals.

Freddie seems more honest to me---and Freddie's CEO just testified AGAINST mortgage bailouts! Wow!

Greenspan was clearly a political hack.

How to solve this conundrum? Just follow the greed.

Bill Maloni said...

Wait, I still wear one of those Nehru jackets. Primarily because Nehru was a big supporter of the GSEs. (Look it up!!).

I agree with much of what you wrote and I think that's reflected in the previous two articles, produced before this week's.

Freddie's Dick Syron is a super guy, whom I worked with in the 80's at the Fed, when he was Paul Volcker's top assistant.

As a former central banker himself, Syron is superbly positioned to poke holes in the bogus "systemic risk" label that Greenspan stuck on the GSEs.

For what it is worth, in the 20 years I was at Fannie, David Maxwell, Jim Johnson, and Frank Raines (the Ceo's for whom I worked) all took very seriously, the company's "public mission" obligation.