Monday, June 2, 2008

The Sounds of Silence. Are the GSEs Beaten or Triumphant?

Hello darkness, my old friend,
I’ve come to talk with you again,
Because a vision softly creeping,
Left its seeds while I was sleeping,
And the vision that was planted in my brain
Still remains
Within the sound of silence.

I’m of two minds regarding the deafening GSE silence following approval in the Senate Banking Committee of its version of the House-passed legislation to create a new Fannie Mae and Freddie Mac regulator.

It appears that the bill is tough, illogical, burdensome, and punitive and begs the question of what sins have the companies committed to earn this treatment as they dutifully carried out their national housing missions.

The Committee legislation instructs the regulator to dial up dramatically the oversight of the GSEs, applies heavier capital requirements, intrudes more into business operations, and adds statutory mission obligations (nice phrase for “giveaways”) which do not/cannot earn money for the companies. It also brings back “systemic risk” as a totally subjective regulatory justification to bludgeon the companies.

(Look at all of the Fed-generated “GSE systemic risk noise” for the past five years and it was the Wall Street guys who needed bailed out and who were allowed to grow risky because of Greenspan indifference and lax regulation elsewhere.)

The Banking Committee proposes a new GSE-financed dual purpose “housing fund” first paying for FHA losses and then, in later years, offers entitlements to state housing agencies and non-profits for rentals units. Based on a percentage of their annual business, the Fund could cost the GSEs upwards of a half billion dollars annually. As a further poke in the eye, the Senate tells the regulator to make sure that the GSEs do not raise their prices to pay for the fund. (I guess “market forces” and “profit and loss” don’t matter when you are in charge of fashioning a bipartisan legislative deal.)

Both House and Senate bills represent the first serious structural changes in the company’s oversight since 1992, when their current regulatory regime was created.

I am not close to the GSEs or know exactly what either company is thinking, so I have to deduce the reason for their failure to scream their outrage and go head hunting.

My guesses: It’s either the action of wily foxes-- unwilling to show their glee at developments—or the strangled noise of trapped desperate men, resigned to no help or hope and just wanting the pain to go away.

Which is it, since there is evidence for both interpretations?

Hurt or Faking Pain?

First, the “Maloni dark side interpretation,” the doom and gloom answer.

I see little value and many bad things in the Senate Banking Committee legislation. If it becomes the law and the GSEs face higher costs and more interference, I doubt whether the fettered companies simultaneously can carry out their housing missions, exert managerial discretion, be market responsive, and still generate profits for their shareholders and capital account.

Right now, it looks like a big fat crap sandwich that neither company has the ways or will to defeat.

The GSEs have no consistent Hill or congressional allies to overturn the results and have themselves to blame for letting their historic industry trade allies go hither and yon, occasionally even lobbying against them (see NAHB).

No longer is there a reliable “housing coalition” willing to combat bad GSE legislation. The various housing interests, which often acted in concert and covered each other’s back, now pursue their own agendas and seem to have forgotten that they had better “hang together or will hang separately,” as Ben Franklin eloquently warned Americans more than 200 years ago.

Minority housing aspirations, manifested through the Congressional Black Caucus and the Congressional Hispanic Caucus positions, do not appear paramount nor do the two caucuses seem concerned by the fact that hobbling the GSEs just will make it tougher for many of their constituents to achieve their homeownership needs.

The GSEs current regulator, Office Federal Housing Enterprise Oversight (OFHEO), has successfully limited the GSEs congressional relationship building and GSE docility and acquiescence have aided the agency’s ultimate objective, i.e. insuring there is no willing congressional support now that the GSEs’ fates are on the line.

No major newspaper, magazine, or network thinks Fannie and Freddie do anything of real value. The media are comfortable naively assuming that the GSEs can be replaced by commercial banks, since neither company has conducted an active campaign to change that misperception. Freddie tries, but Fannie seldom even talks to the media, preferring to hide behind the “no comment” approach, which must warm the cockles of OFHEO’s heart.

As hard as it is to accept the lack of congressional support for their statutory housing missions and the new Hill attitude of “let’s treat them as cash cows and take what we can, while we can,” it is the possible dissolution of GSE executive will to continue to fight back that should most concern the companies’ shareholders and their board members. (Read that line carefully.)

Harsh Speculation

There were ugly sub rosa allegations last week about the CEOs of both companies capitulating and having “short timer mentalities.” Critics claimed that Dick Syron and/or Dan Mudd (it’s tough for one to advocate successfully anything the other doesn’t want) no longer opposed the brazen invasions of their corporate treasuries and their management prerogatives. The two GSE officials were described as “tired of conflict” and wanting the legislative exercise just to end quickly. It was whispered that each was looking to leave his job and get on with their lives and careers. They’ve been made quite wealthy by their GSE service but it also had battered them emotionally. It was time to “end the eternal conflict.”

Supposedly the GSEs rejected some offers of Senate political help because the GSEs corporate leadership said the “bill is fine” and/or “we’ll be fine.”

Are Syron, Mudd and the companies just resigned to defeat or are they just very skillful and superb poker players, since there is another possible explanation for their “silence?”

The Glass is Half Filled….

The “Maloni happy analysis” is that the reluctant GSE voices could be wise and sage like, not worn out husks, believing little white political lies to make their sleep come easier.

They see the Senate and House bills as rife with problems yet rich with opportunity, not hemlock cocktails.

While you can’t be happy about excessive regulation, bureaucratic interference, posting much higher capital, and having $500 million per year expropriated from your working funds, you can accept it if most of the following occurs.

First and foremost the legislative assaults end with passage.

The Sen. Dick Shelby (R-Al.) “use Fannie and Freddie to bail out the FHA losses” provision ties the GSEs ever closer to the federal government--moots the “not the full faith and credit of the federal government” charter provision”—and when the companies borrow in the international credit markets, their debt costs narrow and are closer to Treasury rates than they ever have been, which produces huge savings for the GSEs.

(The irony is that Shelby, promoted his FHA fix saying, “I don’t want the tax payers picking up the tab for FHA losses.” But his actions become precisely that, as the market players wink at one another, see the role the new congressional role the GSEs now will play, charge them less for their debt and pay them more for their mortgage securities, because the legislation ties them closer to “full faith and credit.” The markets also remember the Fed’s Bear Stearns mouth-to-mouth exercise.)

Because leaders in both chambers want a GSE mortgage ceiling increase, for back home consumption, they add necessary langauge in conference or on the Senate floor, the legislation ultimately gives both companies, as well as the FHA, permanent authority to finance previously “jumbo” mortgages, as large as $700,000 or more, opening a major expansion of the conventional market to the GSEs, adding to their dominance and income.

Markets being what they are, the US mortgage market comes back and the GSEs resume their old time magic, new rules, new regulator and all.

The superior attraction of Fannie’s and Freddie’s “red, white, and blue” securities—thanks to Sen. Shelby--keeps their growing market shares high and their prices gradually are boosted to pay for all of the new bells and whistles the legislation inflicts on them. Already major corporate federal taxpayers, the companies may pay the government higher “homeownership taxes,” but, at the end of the day, the companies are richer, fatter, and their shareholders better off than before.

It also will take some time—certainly if there is a new Democratic Administration--to settle the new overseer and get out all of the necessary implementation regulations. In the interim, that job could fall to OFHEO, which the Congress’ very actions scream never was up to the job. “Ptooey” on you, OFHEO!!

Maybe that’s why the Fannie and Freddie heads are quiet? They see some managerial grief in the Senate bill but also vibrant growth, not the rusting away of two former corporate housing behemoths.

I hope so. I hope that’s the correct view and that the housing execs have the last laugh, after the Congress has tried so hard to damage the companies.

It would be a shame if the corporate leaders had wanly abandoned their fiduciary and managerial responsibility and given into Administration and congressional thugs stealing the GSEs corporate legacies, their corporate futures, and the American public’s housing dreams.

Maloni 6-2-2008


Bill Maloni said...

Post your opinion of whether the Senate GSE bill--and what likely could get sent to the President--is good or bad for the GSEs?

Using a scale of 1 to 10, with 1 being "great" and 10 being a disaster, share your view.

Anonymous said...

This bill looks like a disaster for the GSEs--no way to sugar-coat this piece of dreck. The supine ineffectiveness of Fannie Mae, in particular, in the face of this slowly advancing catastrophe over the past couple of years has been astonishing--government relations malpractice of the highest order.

Anonymous said...

I suspect that Syron and Mudd are exiting the system. Only explanation that makes sense to me. They aren’t savvy enough to do a rope a dope.

Anonymous said...

I'd rate the Senate bill as a 6 or 7 for the GSEs, but not necessarily a total disaster. Yes, the GSEs will face tougher regulation and higher capital requirements. But they will also end up effectively owning the secondary mortgage market in terms of business for the next few years. And that's a very valuable commodity that can only benefit the GSEs - regardless of the regulatory environment. We've also seen with OFHEO over the years that it's not necessarily the legislation on the books but rather the political bent of the regulator that determines how much regulation is imposed on the GSEs.