Wednesday, June 20, 2007

Politics, Good Moves, Busts, and Research

This is how one Washington Post op ed writer phrased it last week.

“The Bush White House has generally entrusted government agencies to officials devoted either to running those agencies into the ground or negating those agencies’ purposes….”

I wonder where “Two Gun” and his entourage fit in that model?


More good news for Fannie and bad news for its cabal of business opponents as the company conduct an aggressive effort to control administrative expenses and overall headcount. With a few exceptions, Fannie is offering “early retirement” to all of its employees, who are over the age of 50, from VP level on down. (Fannie’s minimum retirement age is 55, with five years of service.) The company hopes that a few hundred employees take the deal.

I believe that this won’t be the last workforce reduction, as the company seeks to get back to numbers more consistent with its technology based business and the actual needs of its secondary mortgage market focus.

It’s also a signal that the company feels good enough about its major business operations and back office overhaul, as per its accounting problems, to work on an issue it could not address while it was in the middle of the political and specious “systemic risk” fights.

Fannie’s board and senior management deserve kudos for taking thoughtful steps which should strengthen the company.

However, in the next round, they might focus their effort a little higher on the corporate food chain. Look left and look right, there is a lot of money and oxygen to be saved at the SVP level and among those who report to the junior brass.


One possible 2008 scenario. Senator Hillary Clinton will beat Senator Barack Obama, in the D primary, and go onto win the presidency, no matter the GOP nominee.

I have been slow to come to this thought, since—even as a life long Democrat—I had my doubts about Hillary’s chances of success in a general election, for many of the reasons that most other D’s have.

But, at the end of the day, she seems to be the most capable of the D candidates, with brains, organization, ideas, and money, which generally is a winning combination.

Obama is smart and charismatic, but may be running too soon, since he lacks some experience and seasoning.

For salient reasons, today’s Republican front runners risk getting abandoned by important GOP voting blocs, even if they run against Hillary.

Rudy Giuliani is thrice married, supports gays and abortion; Mitt Romney has to defend his Mormon religion against the right wing crazies, who fear the LDS “mysticism”; and Fred Thompson really isn’t “Ronnie,” plus he has a record--as a lobbyist--which may not sit well with the GOP traditionalists.

GOP stalwarts are a tough bunch and, yes, I think some stubborn GOP voters will sit it out in 2008 or “write in” a favorite, because their party didn’t dish up the conservative candidate they wanted, even if that gives the job to Senator Clinton.

In November 2008, when voters are faced with Hillary versus Giuliani/Romney/Thompson choice, I think a bi-partisan majority of Americans will deduce something like the following, “I may not love her or even like her a lot, but she is smart, tough, and determined. And, maybe a woman is what we need to straighten out the domestic and international mess George W. Bush harvested. What the hell, here is my vote, Senator Clinton.”

But, it’s almost 18 months until November 2008 and there is plenty of time for Michael Bloomberg to scramble everything, by doing whatever a $100 million can do, politically.


When Does a Housing Slump Become a Bust?”

This intellectually pregnant question was the headline over a New York Times Business section article, last weekend, which sought to define what measurable results would allow most knowledgeable people to agree that housing had moved form its current “slump” to an uglier “bust” scenario.

I won’t quibble with the article or its findings. But, as is my want, I am going to apply some of the article’s draconian possibilities to Fannie Mae and Freddie Mac and turn it on those who have been trying to sell the Congress on the bogus claim that the two secondary mortgage market giants represent “systemic risks.”

Anna Bernasek, who wrote the Times story, suggests if the United States suddenly encountered historically high levels of housing price declines that would be an excellent indicator of a “bust.” She then turns to the best recorded data for national housing price declines, which was during the “Great Depression,” from 1929 to 1933, when home prices across the nation lost 24% of their values.

She then goes onto to cite more extreme regional downturns, pointing to the “oil patch states” of the southwest, during the 1970’s, when oil prices fell around the world and the real estate impact in parts Texas, Louisiana, Oklahoma, Wyoming, etc, was a significant home price drop of 30% and 40%.

After quoting several “experts,” Bernasek seems to suggest that something like a 15% price decline would be a clear indication of a “housing bust.”

Here’s where I depart from Bernasek’s article.

The point for me is the risk based capital formula (RBC), set in law and which both Fannie Mae and Freddie Mac must exceed--with capital on hand-- uses as its default history, the undiluted oil patch states experience in the early 1980’s and it assumes that those horrible conditions exist in all 50 states, simultaneously, for a prolonged period of time. It is against that hypothetical scenario, plus extreme interest rates movements (6% increase and a 6% decrease), which the two companies portfolios currently are “stressed,” to insure their survivability.

Fannie Mae and Freddie Mac have sufficient capital on hand to survive for a decade, Ms. Bernasek’s definition of a “housing bust” and an added interest rate horror story, which she doesn’t even include in her downturn postulation.

When people claim that Fannie and Freddie are undercapitalized or are “systemic risks,” it helps to have some perspective on how much capital each company has and how their portfolios would behave in extreme conditions.


Another reason to view OFHEO, with a jaundiced eye.

Bernasek's article gives credit to the GSEs current regulator, the Office of Financial Housing Enterprises Oversight (OFHEO), as source for some of the writer’s statistics.

What OFHEO bull pucky!

Some years ago, OFHEO decided it needed a “research” capacity (nobody is or was quite sure why), so it just began taking information that Fannie Mae and Freddie Mac provided to it and republishing the data, as if it had created it.

There’s lots of “cutting and pasting” going on at OFHEO and very little original research. All of the data comes from the two companies, with little fresh manipulation at the regulatory agency. But, it gets republished with OFHEO’s name on it.

History suggests that OFHEO’s time, funding, and human resources would have been better put into its primary job, oversight and examination.

But, gee, that would have robbed the agency and its director of the phony PR!

Why not let the two companies publish the information themselves, as they had/have done for years?

Not that I feel any need to be overly fair to OFHEO Director Jim Lockhart, but this research lark started before “Two Gun” was named Sheriff, probably by one of those long time bureaucrats who never should find his/her way into the new agency, when Congress recreates OFHEO.

Maloni 6-20-2007


John said...

Bloomberg and $100 million? My man, that's his rounding error. Try $1 billion, at least.

Bill Maloni said...

Frightening that anyone could/would put $100 million or $1 billion, personal, into a political campaign!