Tuesday, July 29, 2008

Who Has the Tissues and the Time?

The GSE haters are all over themselves with passage of the new legislation and probable Bush signature into law this week. But they are confused. As my favorite hockey announcer Mike Lange says about the opposition, when the Pittsburgh Penguins score, “They don’t know whether to cry or wind their watches.”

The bad guys are not sure if they won or lost.

Fannie and Freddie still are standing and doing high quality business, too. The Bush Administration unfailingly says the GSEs are needed/necessary to pull the nation out of its real estate doldrums, adding “in their current form.” A possible Obama Administration looms large. (“Omigod, you don’t think he’ll name……”)

The GSE press has been uniformly bad, with the standard dollop of incomplete and erroneous facts. (In my mind, there is no federal bailout until someone asks for or gets one, but that didn’t stop a legion of reporters and headline writers suggesting the opposite.)

The “Right Wing” knows Paulson pulled off something, but they are not sure what. They have been screaming for a new regulator, various limitations, GSE punishment, compensation caps, bans on political giving and lobbying, etc. etc, but they don’t see all their demands in law.

The Washington Post today gave “FM Watch” and its progeny credit for beating the GSEs (“true dat!”) and notes that group of lobbyists may be taking a victory lap and closing its doors?

And the commercial banking system—which most of these conservatives think is ready to replace Fannie and Freddie--still stays on the sidelines or merely dips their big toes in the mortgage waters, preferring instead, once again, to let the GSEs do the hard work.

Bill Poole

In my humble opinion, there is no greater purveyor of anti-GSE foolishness—and tool of the crazies--than former St. Louis Fed President William Poole, now ensconced at the Cato Institute (where, reportedly, he brought his own togas).

Writing an op-ed in last Sunday’s New York Times, Poole called for the government to manage the post-legislation Fannie and Freddie out of existence over 5-10 years with other elements of the market picking up the business.

Poole buttresses his point by pointing out how little the market really needs F/F and cites 2005 when the two companies—operating under regulatory portfolio growth restraints—made up just under 15% of the total new mortgage volume that year.

Now, for all of you who believe that Poole is a genius, a guru, a thoughtful and reasonable observer, I suggest that you pause (and gag?) and please realize that the year Poole heralds as proof that the American mortgage buying public doesn’t need the GSEs was possibly the high point of those very same banks and Wall Street firms flooding the market with “private label” (meaning non-Fannie Mae and Freddie Mac) disastrously underwritten, subprime mortgage loans packed in hugely flawed high yield mortgage backed securities.

Now, most observers think that Poole’s proffered GSE nadir and zenith of non-GSE participation is the single largest reason why the country is reeling today in that ocean of red mortgage risk ink.

Is that really what our nation deserves, even if the advocate is wearing a slinky bed sheet?

It wasn’t the Fannie and Freddie securities that have been going bad, Mr. P, it was those issued by the righteous financial elements that you think will protect the US mortgage markets from the GSEs.

Using 2005 to represent the best of the non-GSE times is like saying "Stalin was good at controlling the Soviet Union's population growth," but at what cost?

Disagreeing as I do with Mr. Poole, I would argue that a more accurate example of GSE systemic value was what happened in the "jumbo mortgage market," AFTER the subprime mess hit an unhappy condition which persisted until Congress stepped in and changed the applicable law.

Two years ago, there was a major slug of mortgage activity which—by law—couldn’t be touched by the GSEs. Those were “jumbo loans,” i.e. loans about the GSE maximum mortgage purchase of $427,000, which by statute only could be originated by non-GSE clients.

As soon as their subprime losses started to bite, large commercial banks and Wall Street firms sprinted to the sidelines away from their exclusive rights to the jumbo market, leaving borrowers with few if any options.

Buyers in Los Angeles, Boston and elsewhere, where high prices forced them into jumbo loans, couldn’t get a jumbo or “non-conforming mortgage” (to GSE size limits) without paying a huge premium—and often, not even then.

That “abandonment” is not the desired behavior of any entity or group of businesses on which Congress should rely for maintaining a national secondary mortgage market (which buys, securitizes, and sells the balance of all primary market loans made to consumers) primary market) and which keeps that market open and liquid no matter what the prevailing cross currents. But it is by interests who do not have the wherewithal to stay in mortgage markets at all time and in all communities.

Have You Seen?

The “jumbo mortgage market,” important to California and many large eastern cities, all but dried up and came to screeching halt because the only permissible lenders—Mr. Poole’s banks—forsook them. That caused Congress, separately, to approve an emergency measure—as part of the economic stimulus package--letting the GSEs buy higher balance loans (up to $725,000) just to jump start the market. The bill which the President will sign this week lowers the mortgage ceiling to some $625,000 for 2009, but makes it permanent in hopes the banks won’t repeat their jumbo real estate perfidy.

The GSEs started buy those larger loans a few months ago and mortgage money instantly became available—from the banks and thrifts that wanted to make but not hold what had been non-GSE” eligible loans--and the prices to consumers fell.

But, until that moment, I remember being told that it got so bad in many of those non-conforming mortgage markets that grocery stores began carrying milk cartons with the names and headquarter pictures of those missing banks, with key demographic facts listed under “last seen.”

Maloni 7-29-2008

Monday, July 21, 2008

Thoughtful Policymaking or “Tonkin Gulf?”

Good on them!

Neither Fannie Mae nor Freddie Mac wants the Treasury’s financial help. Both CEOs have stated that as well as their belief—which I share—that they don’t need any emergency capital to ride out the current losses, beyond what they have and what they can raise in the markets.

Freddie’s recent action to become SEC compliant also speaks well of that GSE’s viability.

Now maybe some of this hot air and pontificating on “federal bailouts” will cease.

Amid all of the bizarre rhetoric about “GSE nationalization” and “the government assuming $5 billion of new debt, heard often on the Fox News outlets and in the Wall Street Journal (couldn’t Mr. Murdoch get editorially excited again over the “Red Terror,” Al Queda, or the equivalent?), there is a need to remind the world that the companies haven’t asked for any assistance--beyond some common sense from Congress as it finishes writing GSE legislation--and have capital and the means to raise more.

I want to give Hank Paulson the benefit of the doubt, trying to do what he thinks is right and proper while fending off some White House crazies who still think a dead Fannie and Freddie is preferable to two functioning GSEs.

In my “benefit of the doubt” mode, Paulson saw the rumor driven campaign to push down the GSE stock prices--facilitated by a ton of Wall Street “shorts” and their anti-GSE collaborators, who played old Bill Poole like a fiddle--and decided that Treasury needed to put in place some type of contingency plan, should the stampede on the companies not abate. So a weekend ago he discussed the need to add to the GSE regulatory bill additional Treasury authority to lend money to the GSEs or buy their stock, since both require legislative approval.

I’ll stick with that more constructive view of Paulson, but there is a “Gulf of Tonkin” analysis, too, as pointed out by a well know financial services personage in town (who shall remain anonymous), whom I will call “Mr. Z.”

(For you Gen X-ers and younger, see Congress' reaction to "reports" of North Vietnamese gunboats firing on US ships in the Gulf of Tonkin.)

Z’s perspective is that the Treasury Secretary and the Fed have all the tools they need to act in a “real emergency,” but the canny Paulson was trying to manipulate the circumstances to get a GSE-fevered Congress (isn’t Congress always “fevered” about something?) to expand his and Ben Bernanke’s authority over the GSEs, with an amendment to--and at the expense of--the new regulatory agency the underlying legislation creates?

Until shown more proof, I don’t wholly buy Mr. Z’s view, but Z is a very smart and wizened man.

It doesn’t look like Congress—which seems skeptical for lots of reasons—is unquestionably going to go along with Secretary Paulson’s request without some limitations or additional conditions on its use.

Once again, the Treasury and Fed likely have the residual power they need, so why give them more “on the come?”

The thought has occurred to me that almost anything Paulson’s Treasury might implement by regulation could be trumped by a new “Obama Administration,” if the latter was so inclined and if the GSEs survived Paulson’s “medicine.”

The same principle might apply to any “scare legislation” hastily passed by Congress—because of Administration importuning--which a new “Obama team” didn’t think made financial sense in January 2009.

I mention this because I still think Paulson is waging war inside the Administration with those who see one last chance to scuttle the GSEs and will try anything to succeed. I hope Paulson can outmuscle those thugs.

I realize that OFHEO still will be around until its successor takes shape, but the agency will need to tread carefully, absent a major new GSE real estate conflagration.

Media and GSE Knowledge

The GSE hysteria of the past few weeks (and the Wall Street Journal editorial page for the past five years!) has produced tons of flawed Fannie/Freddie stories, many of them with incorrect information about the companies and how they operate.

However, from my perspective one positive of all of the recent attention is eventually the media will get the story right and the public and the Congress will get better informed, at least on how the companies are structured what they were set up to do and how successful they’ve been with that federal mission.

I did something this weekend I seldom do and that was compliment a few writers for the quality of their work and less how they presented a new GSE development to their readers but more about the contest of the two companies..

In Saturday’s Wash Post Business section, Jeffrey H. Birnbaum and Lori Montgomery authored a news story on Freddie Mac becoming SEC compliant and their coming stock sale.

Again, pretty straight story, but what made this one different—and unique in my reading—were two early descriptive paragraphs Birnbaum and Montgomery included which spelled out the fact that both Fannie and Freddie by charter pursue public and private goals and their unique relationship to the federal government.

I thought this small addition was positive treatment because so much misinformation about the companies flows from the public’s failure (not to mention many in Congress) to understand the GSEs unique structure. It’s my experience that those in the media don’t often make those facts clear to readers.


Something must be right with the world; this morning’s WSJ’s daily GSE rant is sputtering and frothing with anger. Good for those who discomfited the Journal’s editorial writers.

Also in the Journal’s crosshairs was Randy Neugebauer (R-Tex), a House Financial Services Committee member who, along with committee colleague Rebecca Bean (D-Ill), co-authored a floor amendment which took out language which would have given the new GSE regulator the ability to use “system risk” as a condition for wreaking regulatory havoc on the two companies.

I’ve been giving Bean and Neugebauer credit for winning 366 bipartisan votes for their amendment, but the WSJ says that number actually was 383. That’s a correction I’ll willingly accept from Murdoch’s marauders.

Maloni 7-21-2008

Wednesday, July 16, 2008

Don't Do the Treasury Rhumba or the Samba

Attention Fannie Mae and Freddie Mac leadership, hear this, hear this! No dancing!!

One of the “Seven Great Truths*” is, “When you dance with a bear, it’s the bear who leads and the bear who decides when he’s danced enough…not you.”

Other “Truths” which the GSEs should internalize are, “You don’t get to be Archbishop by sitting around on your butt” and “It’s better to be healthy and rich than poor and sick.”

Nobody but the GSE hierarchy, their boards, and the Administration and Fed officials knows if the GSEs are at all interested or can be induced/seduced to sign up for any part of the government’s dance offer.

The companies should never agree to gavotte with the Feds because the price will be outrageously expensive. And, if the Treasury and Fed claims it isn’t, don’t believe them. There are lots of credibility-weakened people in this town, especially after 8 years of George Bush. So the GSEs must display great caution in dealing with any federal “saviors.”

Your company stocks already have been ravaged, so IF sufficient GSE capital is a question, start unloading as much of your portfolios as you can—balancing the macro mbs market impact on the rest of your portfolio--and grow your capital base, without Uncle Sam’s help or direction? Hopefully, it won’t come to that.

As a former Fannie lobbyist, I remember how urgently we would ask the Congress in any piece of legislation dealing with the GSE matters of the need to remind the Administration (no matter which party controlled it) that it was important “not interfere with the day to day operations of the company.” That phrase exists in a number reports accompanying GSE legislation.

Some of that caution already has been lost, irretrievably. OFHEO’s been dictating to the companies ever since they agreed to OFHEO “temporary” capital increases and portfolio limits.

A pact with the Treasury and Fed could steal the rest of the GSEs corporate discretion and send them to “regulated utility” status, quicker than the Bear might want to stop doing the polka.

If it isn’t too late, avoid boogying with this Bear.

Sell everything you can sell, shrink yourself, but don’t give away any more of your management discretion. This is the one fight where you want to dig in your heels and—if it comes to it—go to court to stop them, if they insist that you need help which you don’t want.
If you accept the Bear’s paw, you’ll be fast underway to becoming some bastardized version of Ginnie Mae or the FHA and that would be horrible for the mortgage finance system, the mortgage consumer, and the companies.

The residential real estate market will come back. All cycles change. Fannie and Freddie should want to be there --when that time come--fully functioning with all of the GSE market tools, weapons, and techniques firmly in their possession.

Maloni 7-16-2008

*Totally mythical and made up.

Monday, July 14, 2008

Who’s Your Daddy

There goes the neighborhood! The Treasury and Fed decided last night to ride to the rescue of Fannie and Freddie (cue the “William Tell Overture”) and now the “Guvvies” will play a bigger role in the business activities of the GSEs and put their grubby little paws all over the operations.

Who knows exactly how that will play out in the mortgage market and what price the Feds ultimately will extract for their help, but there will be a price. (And I assume that Freddie’s borrowing costs today—Monday—will drop smartly when they go to market.)

Rather than write grandly about something on which I have few details, save the Paulson statement (the “Devil” always is in the details), I am going to go with a blog that I completed at 1 PM on Sunday afternoon, July 13, long before Treasury Secretary Paulson made his monumental announcement, to which Chairman Ben Bernanke added his “me, too.”

I still believe that the actions called for in my early blog—see below—are correct and I would be surprised if the GSE leadership doesn’t agree.

A No Good, Horrible, Very Bad Week…

In many ways, it was a horrendous week for the GSEs.

Their stocks precipitously tanked. The Senate approved mammoth legislation which seemed only to add to their burdens. Some possible stock market hanky panky (short sellers, boosting their position by feeding salacious rumors into the boiling kettle) forced prominent Senators, Congressmen, Cabinet officials, financial regulators, and even the President to try and calm the roiled waters, while the leadership of both Fannie and Freddie appeared somewhat AWOL or tongue tied!

Not that Dan Mudd or Dick Syron physically left town amid all of the sturm and drang, but their voices and visages were absent? Where was the leadership which should have had them standing nose to nose with the threats and detractors, hurling rhetorical lightning bolts at their critics or sending messages of calm amid the outrageous rumor-driven run on their companies’ market values?

It sure wasn’t “beanbag” last week that was being played both politically and with their stock prices. It was an all out attack with the companies continuously getting worked over and punched around with very little defense let alone counter attack coming from the highest echelons of either GSE. If pummeled and losing billions in market cap was what it took to get all of these new friends to talk supportively about your business virtues and national importance, who needed it?

Freddie, to its credit, had its folks—but not its Chairman—dealing with the media. Fannie decided finally to put away its overused public spokesman,” Mr./Ms. No Comment” and replace him/her--not with it’s CEO--but with a senior official in the CEO’s office, who basically said “no comment” by mouthing what the government types had already been saying!

It hardly was “GSE Profiles in Courage” material.

The GSEs Will Survive

Despite all of the extremist rhetoric, I believe that Fannie Mae and Freddie Mac will be in place when the sun rises tomorrow and likely for many days to come. What’s not clear is who should be leading them and what those people might do.

Sorry, Dan and Dick—don’t take it personally-- but it’s time for some fresh new GSE managers and it’s up to Fannie’s and Freddie’s board to produce them or check out of the scene themselves.

It has been rumored for weeks that both Mudd and Syron want to leave and get on with their lives, which is totally understandable given the battering they’ve absorbed. They served admirably and did their time in corporate purgatory. With the regulatory reform legislation all but complete, each could signal a graceful departure and make succession and inevitable change a lot easier for themselves and their boards and investors.

Failing that, short of mass hari Kari of course, the GSE boards could fire every senior officer for his or her active/passive contribution to the mess. And, I am not limiting that to just what occurred last week. (To insure some continuity, they boards could go after every other senior official responsible and decide in six months if the initial survivors require cashiering and replace them with new folks.)

If the boards refuse to act, then Congress should demand the board members resign and a fresh group of prominent non-conflicted “housers,” with zero self interest in their own financial well being--caring only about the companies and the mortgage market--should be given those board jobs to do the restructuring work necessary.

Your stock doesn’t drop as quickly as Fannie’s and Freddie’s did, your political credibility doesn’t evaporate, and your corporate word doesn’t become valueless, unless you work very hard to achieve those things. To produce this kind of massive screw up, someone spent a lot of time making serious misjudgments and implementing mistaken policies, which should produce not multi-million dollar contract extensions but directions to the front (or back) door, complete with instructions not to let it hit you on your way out!

More Was Needed But Not Given

I understand the business fallout from the subprime mortgage issues and how that infected the better quality loans the GSEs purchase and securitize. Fannie and Freddie were created and are structured to survive these scenarios, still lead the market, and keep their purchase windows open providing copious liquidity to lenders. The companies were designed to handle these kinds of financial setbacks, while simultaneously managing political and communications assaults.

I would argue that someone in GSE-land seemed to ignore the external side of their responsibilities, as well as some business necessities.

Prematurely beating your political swords into plowshares and almost refusing to engage the media—which were conscious Fannie Mae decisions—helped produce much of the predicate for last week’s turmoil. But these resolutions were made months ago not just in the past seven days.

With all due respect for my friends in McLean, it always has been easier for Fannie to operate when Freddie sat back than it was for the reverse. And Fannie seemed to demure heavily.

Because Fannie scaled way back, when the GSEs needed political friends and allies, they had none. Nobody at Fannie Mae stated this, but they acted as if they believed, “When you are a multi billion corporation with a sandpaper lobbying history, trying to maintain political clout is overrated. You just need to show you’re contrite,”

Except, the real reason your business butt is on the line is because certain important Members and Senators—in both parties—not to mention the Bush Administration, have shut you out and you lack the ways and means to turn them around. All you can do is watch as they devour parts of your business charter.

All of the big time Fannie Democrats—who used to draw GOP fire—are long gone. So little of the current political failure can be blamed on Jim Johnson, Jamie Gorelick, and Frank Raines drawing conservative ire (although I am sure there still is some of that out there).

Being contrite didn’t go very far with the Republicans.

The nation’s home buying public and the mortgage finance system deserves more courageous and better GSE leadership, as do the company’s shareholders and the Congress.

If the federal government has to infuse any capital into the GSEs, that support should come with an insistence that some names and faces at the top of the companies change.

My preference would be for the Treasury and/or Fed to buy $20 billion of preferred stock in each company and get a financial return for its/their help.

Just as private buyers get concessions for their investment, so will the government.

Maloni 7-14-2008

Monday, July 7, 2008

Up to The GSEs or Beat Up the GSEs?

“Do no harm” is the first principle of the Hippocratic Oath. It should also guide legislators, too.

I hope that the Congress is watching the stock markets, especially the GSEs share price,

For whatever reason, the markets are choosing to accelerate the pain for Fannie and Freddie, including today, when both lost over 20% of their market values.

This pummeling should worry some responsible people on Capitol Hill.

I would argue that the Congress had better be darned sure that the markets perceive their GSE legislative efforts as part of the solution, not part of the problem. This is legislation which first started out as one thing and now has morphed into another as the Republicans sought greater sanctions and the Senate decided that the GSEs aren’t really businesses but cash cows whose revenues were needed to bailout FHA losses.

It’s not beyond the ken to believe that investors may just run away from Fannie and Freddie (has it started?), sparking the very financial dissolution Congress claims it doesn’t want and also all but destroy the institutions Congress says it DOES want to solve problems in the nation’s ailing mortgage markets.

What may have looked only like mildly objectionable GSE policy development--over the course of the first half of this year--could now look downright ugly and super punitive to market players.

I’ve claimed all along that nobody on the Hill seems to be toting up and balancing the new missions and obligations balanced against the new impediments, capital, and intrusive regulations that they are proposing. Maybe the markets are doing that and expressing their opinion with their feet.

Few people on Capitol Hill ever understood the GSEs as businesses or the role the shareholders play and the value of same. To many Senators, Members, and staffers, the GSEs always have been just “federal agencies” like HUD or some other entities to be pushed and pulled.

Congress often yawned, “Investors? Huh? What do they do and why should we care?”

Far sooner than Congress can act, those “investors” could wipe away all of the pickings leaving Congress little with which to play.

My continued advice to the Hill, pass the FHA bill and think about going slow on the GSE “reform.”

I suspect that the last thing most public officials want--save many in the White House and several GOP conservatives—is to be the guys responsible for six of their friends having to carry Fannie and/or Freddie by the handles in or out of National Cathedral or Boot Hill.

Jim Creamer

Cramer the showman is one of my favorite financial analysts.

He’s done a good job skewering the Administration on its GSE policies and on financial services broadly.

He offered a bit of advice at the end of June, which I hope was seen/read by a variety of congressional and Administration policy makers.

It was advice to financial regulators and said, essentially, exercise forbearance for all things save illegalities.

His advice was not just to OFHEO and any new GSE regulator Congress may create but to all financial regulators, including those overseeing the big banks.

I thought his recent sage advice to the GSE overseers was particularly on point.

“The regulators just have to say, look guys you (the GSEs) are our way out of this mess and we will simply stop examining your books. Or do so only for fraud, while we work our way out of this. They (the GSEs) particularly need forbearance right now, as it seems like there is a panic in the government sponsored enterprises market at the moment.”

Cramer’s perspective is all the more rational since the market seems to be pillaging the GSEs to a much greater extent while the Congress seeks to pile more obligations on both companies, as noted in my earlier rantings.

You can’t have it both ways, load them up with chores and then strangle them with oversight. Unless Congress makes its views on that score known to OFHEO, there’s no reason for those bent ideologues to back off their plans to hobble Fannie Mae and Freddie Mac.

I have no idea if the new legislation contemplates current OFHEO employees working at the new regualtory regime, but Congress would be wise to limit the number of current OFHEO officials, save some very low level technicians, who could work in the new agency.

Manna from Hell?

Lots can happen between when the Congress returns from its July 4 recess and the end of the legislative session—and likely will.

I already noted how the stock market could rain on the Congress’ parade, not to mention the GSEs themselves.

But, if the GSE bill being shaped in the Senate in large part becomes law, then I think the GSEs will have Sen. Richard Shelby (R-Ala.) and White House official Keith Hennessey to thank for a windfall “benefit,” which conservatives—wrongly--always claimed existed in huge quantities before but certainly would become manifest now, if the GSEs stay on the hook for FHA losses in the legislative fix to refinance unaffordable subprime loans into affordable FHA fixed rate financing.

By insisting that the GSEs provide funding for FHA losses, which most certainly will occur, Shelby and his White House collaborators likely will cut future GSE borrowing costs (if there is any!!).

The fine line between being privately owned companies, not on budget or tied to federal program obligations, now becomes very cloudy and international debt purchasers—already watching the Fed’s bailout of Bear Stearns—will become more confident that the Treasury and Fed wouldn’t dare let the GSEs fail, especially since that failure would impact the new FHA program.

Upon passage, if that “fix” stays in the bill which the President signs, then Fannie Mae and Freddie Mac soon should start paying less for their corporate debt than they have traditionally.

No amount of floor managers’ report language, statements by sponsors, or even official Treasury blathering will cause the sophisticated debt community to ignore the FHA linkage and fail to draw the obvious conclusion.

When I ponder the impact of this provision for the GSEs, I think about Uncle Remus’ B’rer Rabbit and the hare’s plaintive and exaggerated pleas to B’rer Fox and B’rer Bear not throw him in the briar patch.

To steal a line, “Please Senator Shelby, don’t make us pay for the FHA losses. You hear us Mr. Hennessey, please don’t make us do that!”

With apologies to B’rer Rabbit, just as the briar patch is a wonderful spot for rabbits to frolic and play, so is the debt market for the GSEs after they’ve been drafted to bail out HUD’s major single family assistaed housing program.

I am surprised that Messrs Mudd and Syron are not sending limos to the homes of Sen. Shelby and Mr. Hennessey to insure that each gets to work safely in the morning to champion this FHA fix.

(Happy birthday to Carl Arthur Maloni or “Cam,” who turned 21 today. The seventh day of the seventh month produced a handsome, creative, and wonderful youngest son for the Maloni family. Your Mom and Dad love you very much; ditto your three brothers, two sisters-in-law, two nieces and nephew!)

Maloni 7-7-2008