Friday, August 10, 2007

Mr President, Get on the Bus!!

What’s a President to do when the markets are reeling from “credit concerns?”

Well, the first thing is not to say and do dumb things and the next is to get out of the Fed’s way!

Can his mind even encompass what the Fed and Treasury might have to do if Wells, Citi, or one of the investment banks couldn’t meet their commitments because of real estate losses?? (May it never happen!!!)

Shouldn’t Paulson be “schooling” W?

The action you will see in the next few days from the Fed is a reflection of the line that we used to throw around to each other when I worked there in the early 1980’s, to the effect that the central bank is “more powerful than the White House, except we don’t have the nukes!”

Expect the Fed to move into the market, providing reserves, and pushing levers here and there to assuage frightened market participants, who now appear to be in every nation and selling on every exchange.

President Bush doesn’t seem to have the political currency (pun intended), confidence or even warmth to give comfort to the markets, nor the understanding to assure the world that he will do “whatever it takes” to keep domestic U.S. financial ills from adding to his current foreign policy shortcomings.

Wouldn’t a combination of the Fed ”priming” and Fannie and Freddie providing billions in liquidity look pretty good right now?

A good politician and leader would have jumped all over the Fannie Mae request for portfolio investment relief and turned it into a gain for his agenda, not repeat some tired old right wing rhetoric. Someone please tell him, “In helping them, George, they are helping you!”

(The following was written about 10 PM on Thursday evening and still is relevant, but is far less acerbic than it should be, given the Administration’s behavior this week.

I like Washington DC in August, despite the brutal heat and humidity, because a whole slug of DC area residents leave, making it easier to get around, shop, bike ride, go to restaurants, etc.

With the Congress “home” for summer recess in August--and Congress is the straw that stirs the Capital of the nation’s drink --you often don’t get any political “action,” in the year’s eighth month, but that hasn’t been the case this past August week!!

With the great uncertainty in the credit markets, problems popping up all over the mortgage market, huge jumps and drops in the stock market, the GSEs find themselves in the middle of some very compelling political and industry drama. Unfortunately, the Bush Administration once again is showing its hind parts to the world and making bad matters worse with very questionable decisions.

To wit, on Monday, August 8, I blogged that the White House and Congress collaborate and remove the portfolio investment caps, which had been placed on Fannie Mae and Freddie Mac over a year ago, by their safety and soundness regulator, OFHEO, and its Director James Lockhart.

I argued that if the WH took that easy regulatory step now, it could have a major calming benefit; show leadership and market savvy; was a low risk move in a high stakes game; and be welcomed by the lenders and investors who’s bad case of nerves were making the mortgage markets unstable and potentially super risky.

At the time I made the suggestion (the blog was completed on Saturday, but I waited until Monday to do a fact check and then publish), I did not know that Fannie Mae was preparing--indeed that very day--to formally ask OFHEO for the relief I was suggesting.

On Tuesday, Senators Chris Dodd (D-Ct), Chairman of the Senate Banking Committee and Chuck Schumer (D-NY), Chairman of its Housing Subcommittee, endorsed removing the GSE investment caps. Later, Senator Hillary Clinton, in a housing position paper released that day, also called on the Administration to creatively employ Fannie and Freddie to work on subprime mortgage and credit problems (a truly ailing segment of the market, which I have noted, ad naseum, can be blamed on Wall Street and a hired corps of mortgage brokers, fueling the hedge fund high return investment mania).

The next day, House Financial Services Committee Chairman Barney Frank (D-Ct) added his voice to the Senate legion, giving the Administration the perfect political cover initiate this simple action, which never was sold as a total panacea, but as a smart substantive gesture that would be viewed quite favorably by all concerned, especially the very nervous lending, banker, investor contingent.

But the problem that many of us noted at the time (none more accurately than Steve Pearlstein, the Washington Post’s fine financial services columnist, in his Tuesday column) was that the Bush Administration had so demonized the GSEs that it might not be able to back away from its campaign and bring itself to realize the benefits that “removing the handcuffs from Fannie and Freddie” (my blog description) could bring to the markets and to the Administration’s own credibility.

Through two presidential news conferences this week, that position seemed to prevail as President Bush was twice asked about removing the GSE investment caps. (HUD Secretary Alphonso Jackson, separately, was asked at his own press event the same question.) Bush was adamant in his rejection of the suggestion, throwing out some puff answer about the need to “reform the companies first” and then look at other ideas, as if he had any congressional clout or leverage to get that done.

Great observation “Nero,” but isn’t that smoke over there?

Secretary Jackson, obviously not yet on the White House song sheet, seemed more open to the proposition, but since his response was sandwiched, in time, between the Prez’ answers, don’t look for anything but AJ getting quickly into line.

In a brief contemplative mood this morning, I observed to a friend that Fannie and Freddie were like fine, super efficient interstate buses, which have been carrying families back and forth across the nation’s highways for years, providing great service at low cost and earning user satisfaction. The problem is that ideologically, the Bushies have been criticizing, maligning, and degrading these “buses” for years.

Facing shaky credit and mortgage markets and with no abundance of flexible solutions it controls, the Bush Administration needs, figuratively, to get, quickly, from “Bad Nervousland” to “Good Promisedland” and its transit choices are to walk or use the GSEs.

Be smart, Mr. President. Get on that bus, now!

The world does not want to hear another Katrina-like boast, “Great job, Lockie! Um, Lockie? Lockie?”

(Speaking of OFHEO’s Jim Lockhart, please see Jim Cramer’s latest video “take” on “Two Gun” at and then think about the game “Whack-a-Mole.)

Maloni 8-10-2007


Bill Maloni said...

Yes, I'll assume the "reserved" first comment spot to alert readers to my now regular "typo."

No, Barney Frank hasn't moved!

Rep. Frank is a proud Democrat from Massachusetts, not Connecticut!

I misidentified the Financial Services Committee Chairman's state in the latest blog.

John M said...

Well, you sure nailed the Fed intervening today -- wow!

Housing Wire has a post with links to the two OFHEO responses (and this post). The regulator seems adamant that the big GSEs won't touch paper that doesn't conform to the new subprime guidance. They're also invoking the danger because F&F aren't timely filers, but since Fannie is supposed to be submitting it's '06 10-K in only a week, that situation might change.

All that being said, there certainly is pressure on the administration to do something. I was freaked out by the stories surfacing today (they started Wednesday) about really serious losses in Quant hedge funds just this month. Since presumably one of the issues there is support for subprime MBS and the like that the Quants own, all this is connected.

Should be an interesting week next week, and even the weekend should see lots of pizza & Chinese orders in your neck of the woods.


Bill Maloni said...

I truly believe that Ben Stein, in today's New York Times, has a good grasp on the issue and the fact that nothing in subprime is so bad that it should be seeping upwards the way it appears to be, save the panic generated by uncertainty.

One can't argue about stock market gyrations, because they are plain to see, but one can question the perpetrators and the lemmings who follow.

I heard and read a dozens stories over this weekend about illiquidity in the jumbo markets, with a 150 to 250 basis point "premiums" being demanded by investors.
Some will pay it, because they have no choice, most shouldn't.

This action alone, let alone whatever ongoing need there is for F/F in the subprime arena, challenges the GSE opponents' arguments that Fannie and Freddie easily are replaceable by the big banks, individually, or in a consortium.

Keith Gregory said...

Bill - good take on the political inability to realize what is going on-

I posted something very similar over on my blog

Essentially- all the cash from all the central banks isn't going to improve liquidity in the mortgage market.

And for everyone talking about bail outs- all the mortgage banks that wrote bad loans are gone- or about to be gone. If anyone is getting bailed out, its borrowers that don't fit neatly into fannie/freddie.

Bill Maloni said...

Keith--I have a simple answer for part of the "jumbo" illiquidity, which I'll touch on in my next blog, probably tomorrow or Wednesday.