Monday, July 23, 2007

Did Bernanke Mess Up, Fail to Fess Up?

A few weeks ago, I wrote that the Senate (and the public) will hear all sorts of negative things about the GSEs, as the White House and its allies try and get the Senate to pass a very restrictive GSE regulatory bill. I cautioned people to listen carefully to who says what and to critically question the messengers.

Last Thursday’s Senate Banking Committee hearing, with Fed Chairman Ben Bernanke, was a perfect example of a misstatement making headlines, while the “truth” slowly trailed.

At one point in his appearance, Chairman Bernanke was asked to comment on the Bean-Neugebauer amendment to the House Financial Services Committee’s GSE regulatory bill, which had been added on the House floor, overwhelmingly, by a bi-partisan 383-36 vote.

Chairman Ben was thrown this “softball” anti-GSE question so he could slug it out of the park and he did. But, in his answer, “BB” chose to ignore some salient facts and, hopefully, ended up undercutting his own position.

The problem for pro-housers is that desired boomerang may not occur, unless the Senators and their staff understand what happened.

Assault on Bean-Neugebauer and Bernanke’s Role

The floor amendment in question, offered by two Banking Committee members, struck out some Administration regulatory overreach—which was part of an early deal between the House Banking Committee leadership and the White House-- and instead gave the new GSE regulator interdiction authority similar to that of other federal financial regulators.

Reps. Melissa Bean (D-Ill.) and Randy Neugebauer (R-Ky.) successfully convinced the House that only matters pertaining to Fannie Mae and Freddie Mac should be considered in making decisions about the two companies and not exogenous economic issues, as the Bush Administration so desperately wanted.

The Bushies and the old FM Watch crowd still hope to get more restrictive language passed Congress, believing that a new regulator will punish the GSEs and force them to actively shrink their mortgage portfolios. The successful Bean-Negebauer mooted some of that.

As part of the anti-GSE campaign for the more restrictive portfolio language, Fed Chairman Bernanke dutifully played his part and opined about the House bill, with the new--and in his view--undesirable B-N limitations. With his answer, he tried to start the “GSEs portfolios are risky” snowball rolling down the “Hill.” (Pun intended!)

He trumpeted the same-o Fed “systemic risk” concerns and suggested that growing

GSE portfolios might be good for the companies, but not good for the financial system (“haff, kaff, harrumph, risky, trust me, I’m the Chairman, um Fed speak”).

So, with no clarification about the likelihood of that horrendous development occurring, listeners in the hearing room, viewers watching on television, or folks reading the news reports, saw Bernanke--in the wake of the House passed bill with the Bean-Neugebauer--express great concern about excess GSE portfolio growth causing “systemic risk.”

Bernanke’s answer was akin to talking about Germany, as if there still was a functioning “Berlin Wall.”


Over a year ago, Fannie Mae and Freddie Mac, separately, entered into consent agreements with the Office Federal Housing Enterprise Oversight (OFHEO), their safety and soundness regulator that limit their portfolio growth.

Those GSE portfolio limits have been and currently are in place and unless OFHEO backs off, changes its mind, or decides that portfolio growth is healthy and desirable, the UNBRIDLED GSE PORTFOLIO GROWTH STRAW MAN, which Bernanke created for the Senate Banking Committee, doesn’t exist. (Boldface emphasis, all mine!)

Tut. Tut. Some officials just will say anything to get the Senate to adopt stricter limits on the GSEs.

One enterprising wire service did catch Bernanke’s error, referenced it, almost apologetically, and suggested that his was more of a historical than a contemporary comment!

But, where was OFHEO in promptly pointing out the error by the Maestro’s successor? Why hasn’t OFHEO defended its “safety and soundness” initiative, capping what the companies can do in their portfolios? Why hasn’t Director Lockhart pointed out his “good deeds” and explained how Bernanke’s fears are unfounded? Where is the Fed, correcting the record--once they saw the news report--pointing out how the Chairman’s view were “macro” and not necessarily reflective of the GSEs current regulatory arrangements?

Ben and or “Two Gun” Should Correct the Record

Senate sources should ask themselves, who benefits from leaving this mistake uncorrected?

The Senate needs to understand Bernanke’s misstatement, so that nobody foolishly acts on it, as in “But, the Fed said…..”

Until the Fed or OFHEO steps up and clears the record or Chairman Dodd or ranking Republican Shelby asks them for a clarification, most people will think--based on Chairman Bernanke’s response--that Fannie and Freddie are poised to run amok and fecklessly grow their portfolios to generate huge profits.

As long as the Senate is subjected to the “siren songs” of the anti-GSE crowd, they need to keep in mind the very positive “mortgage market cop” role, which Fannie and Freddie play, and why hamstringing them--as the Admin and their allies propose--would merely open the mortgage lending playing field to domination by the worst elements in the lending community. (Thankfully, some of Sen. Dodd’s comments during this hearing suggested that he is very much aware of that fact.)

The Senate also should see clearly that what happened with subprime lending is exactly what could happen to large elements of the “A” mortgage market, if Fannie and Freddie are successfully stifled and the “slimy slug lending network” is permitted to fill the vacuum, confuse and dupe borrowers and charge what the traffic will bear.

I’ll give Chairman Bernanke the benefit of the doubt and say—with all of the other things on his mind—he just forgot that Fannie Mae and Freddie Mac ARE operating under regulatory portfolio growth limits. But, I would respect him more and OFHEO, too, if one, the other, or both, made that point clear to the Senate Banking Committee.

Maloni 7-23-2007

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