Storm Coming

Avast me hearties, there she blows!

Storm warnings for Senators and their staffs; get on your hip boots and your rain slickers.

No, I’m not talking about Captain Jack Sparrow and his swashbuckling cohorts from the stormy Caribbean. I’m warning of a different kind of disturbance, from which you still will need real protection. This one features flying poop or more precisely, poop from bulls, or even more explicitly, bullpoop—which sometimes is called bull----! Oh, you get the point.

I am forecasting a coming maelstrom—complete with tossed excrement—when Administration types and their think tank, media, and business allies assail you with their re-cast claims that Fannie Mae and Freddie Mac are “systemic risks.”

What else can they do?

Just before the Memorial Day recess, when the House approved a new GSE regulatory bill, it refused to buy the Administration’s over hyped rhetoric and squeeze the life out of the two “target” GSEs. The only way the White House and its cronies now can capture the Senate’s legislative attention is to convince the chamber that the House was wrong and Fannie Mae and Freddie Mac need enhanced regulatory chemotherapy.

The House gave the new regulator interdiction authority, equal to that of other federal financial regulators, which makes sense, but the Bush Administration claimed that was not sufficient and the new regulator should have even more expansive power. The “other body” wasn’t buying it.

So, the old campaign--aimed at the Senate--will begin anew, casting the companies as unstable financial wobblies, requiring a heavy legislative dose of Bush regulatory medication.

Arguments Against the Systemic Risk Claim

Here’s a suggestion for Senators, their staff, and the media. Demand your visitors prove their charges.

The next time an Administration official, a rep from one of the conservative think tanks, someone from the old “FM Watch” cabal, or anyone else claims that the housing GSEs represent a “systemic risk,” make them describe exactly what they mean and answer a few of your questions.

Start by asking, “If Fannie and Freddie aren’t risks to themselves (see positive reports of Fannie’s and Freddie’s financial health, compiled quarterly by their current regulator), how can they be risks to the entire financial system?”

Ask them to tell you, in plain English, “not Fed speak,” exactly how the GSEs could upset the national apple cart and bring most of financial America crashing down with them?

Force them to be specific, give you details, and in layman’s terms, so that the average Senate staffer and his /her boss easily can grasp what “systemic risk” means. Make them explain how and why thousands upon thousands of American families, suddenly, will stop making their monthly mortgage payments and default on their loans, starving Fannie and Freddie for income, and ultimately cause a domino collapse among a whole skein of federally insured depository institutions?

Senate folks should get mad and question critically these “snake oil” hucksters. It’s your constituents and their mortgages--along with low and moderate income families and their mortgage loans in the other 50 states—for whom the Bush Administration is predicting doom.

No Matter How Often Greenspan Gets Mentioned in the Washington Post, the Fed Is Not a “Reliable Source”

Don’t let them get by with buzz words or say, “That’s what the Fed believes.” Remember, the Fed’s housing opinions sometimes are worth squat. The Fed didn’t believe that subprime was a big enough problem to do anything about it, except to mumble and later point fingers. The central bank’s housing analytic capacity is suspect, especially given its history of anti-GSE activity. That fact was made very clear by Alan Greenspan’s role discrediting the GSEs, as point person for this Administration.

(BTW. What was Chairman Greenspan thinking about when he urged borrowers to take out variable rate mortgages, at the very time the Fed dramatically was raising rates? Does the Fed believe that its 17 step federal funds rate climb, from 1 percent to 5.25 percent, had anything to do with today's subprime problem? )

When the “systemic risk salespeople” come to your door, ask them, “Aren’t Fannie Mae and Freddie Mac, both, capitalized under a stringent statutory risk based capital rule—more demanding that the capital regimes of all other financial institutions in America—which requires the GSEs to have sufficient capital on hand to survive a 10 year financial “nuclear winter,” that never has occurred in our nation’s history?” Aren’t both, currently, holding more than those required capital sums? Doesn’t that RBC rule also assume that—during that 10 year period--both will keep their doors open to lenders and buy loans, providing liquidity during this “economic Armageddon?”

Didn’t the Fed do a study in 2005--all but squelched by Alan Greenspan but reported by Steven Pearlstein, in the Washington Post--which suggested that Fannie Mae and Freddie Mac were not as risky as some Fed officials had suggested publicly and, in fact, the GSE “hedging activities,” employing derivatives, both facilitated safety and soundness and kept mortgage rates down?

Ask why so many why, foreign central banks—counterparts to our Fed—buy regularly and still own $720 billion in GSE debt, issued by the very US companies that our central bank claims are systemically risky? Those German, English, Chinese, Japanese, Swiss, Belgium, et al central bankers must be whacky risk takers and not very smart, or maybe their politically non-rabid view is that the GSEs are quality borrowers!

Ask your visitors, “Haven’t Fannie Mae and Freddie Mac just undergone dramatic cultural and structural changes, with many old officials fired or retired, and new men and women running the companies? Haven’t both companies streamlined their operations and instituted new underwriting technology and reporting requirements, since their accounting setbacks? Don’t both companies have OFHEO regulatory officials on site, every day?”

Hasn’t Fannie Mae just spent over $1 billion dollars to clean up its books and soon will be up to date in its financial reporting? Hasn’t Freddie Mac done the same, although not spending as much, and soon, too, will be on a regular financial reporting schedule?

Overcapitalized and Still Market Responsive

Fannie has more than $43 billion in capital and Freddie some $36 billion (4^th quarter, 2006 totals). Those numbers include a 30% capital “add on,” which OFHEO Director, Jim “Two Gun” Lockhart deemed necessary because he perceived that the GSEs had “management and operations risk.”

Lockhart knows that there is a business and financial cost to excess capital and he well understands that overloading the companies with his capital mandates--or any other individual costs--helps their competitors. Is that the game plan?

Despite the corporate cleanup, in both companies, of matters cited in the Lockhart’s “add on” demand, he hasn’t rescinded his finding and some people think he’s holding the companies financially hostage, to insure they don’t get out of line.

Extortion, hostages? Maybe Lockhart does think that he’s Captain Jack Sparrow?

Fannie Mae and Freddie Mac have more than $80 billion in capital protection, just to deal with any future problems. Additionally, they have loan loss reserves and mortgage insurance, protecting their low down payment mortgage assets. That mortgage insurance provides both companies cash if borrowers default on their loans?

Both companies just stepped up recently and pledged over $40 billion in private financing to try and fix subprime problems, which Wall Street, greedy brokers and lenders, and others—but not the GSEs-- foisted on low income America? (See the Fed’s subprime role, noted previously.) That’s $40 billion of their shareholders money, not federal government funds.

Look Who Is GSE Trash Talking

Don’t you think it is ironic that two of the entities, which historically took up the mantra of “the GSEs are too risky and need more oversight” are GE and AIG, two huge financial service companies, each with more assets than either Fannie Mae or Freddie Mac, but which have no effective federal financial regulatory oversight, whatsoever?

Don’t forget the Wells Fargo role in those campaigns? Oh, and weren’t all three of those companies charter members in “FM Watch,” a group of mortgage business entities which formed when Fannie and Freddie pro-consumer market efficiencies began costing those fat cats revenue?

Hmm? Business foes demand intrusive oversight for Fannie and Freddie and more GSE capital; anyone sees a cause and benefit here?

Force those proselytizers of GSE financial doom to explain exactly how they would applying their same “systemic risk” concerns to every large financial services company in the nation (several of which have far more assets and far less oversight than Fannie Mae and Freddie Mac)? Tip: Three of those commercial entities, needing tighter federal review, were mentioned in the previous paragraph.

“It’s Just The Same Old Song, With a Different Beat And A ..…”

Lastly, ask them, “Isn’t this whole GSE systemic risk charade the same old GOP campaign against Fannie Mae and Freddie Mac, started first by Ronald Reagan and designed to help the large commercial banks displace the GSEs in the secondary mortgage market, at higher costs and less mortgage variety for your constituents?”

Several years ago, some smart people carefully examined the variety of anti-GSE proposals and arguments, brought into congressional offices, since David Stockman first headed the OMB in 1993, and reduced them to one never changing, but still truthful, plaintive congressional plea:

“Senator/Congressman: Will you help me whack Fannie Mae and Freddie Mac so that my company/industry/other investors can charge your constituents higher prices for similar mortgage products, but not be as fair or efficient as the GSEs in their delivery?”

Always was--and still sounds like--a whining loser’s lament to me, just like the much flogged claim that the GSEs represent unique systemic risk.

Maloni, 6-1-07

(Bill's note: Let me reiterate what I stated, when I began this blog a few months ago. I am retired. I do not work for Fannie Mae, Freddie Mac, any of their law, PR, and firms, or other interests in the financial services world. I have strong views on these GSE business and political issues, from working on them--for 20 years--for Fannie Mae. In an earlier 15 year period, prior to joining Fannie, I worked on similar and related matters, on Capitol Hill and in the federal financial regulatory world.)