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.


Stephen Foley said...

Hey Bill. Just found your blog and really appreciating all the insights. I'm the Wall Street Correspondent for UK paper The Independent and would love to chat about what Fannie and Freddie might look like in a few years time. Big issues! Would love it if you could get in touch your number:


Bill Maloni said...

(For interested bloggers, Mr. Foley and I have exchanged emails.)

John M said...

Hi Bill,

Hope you're enjoying a great summer.

I know this is pretty irrelevant at this point, but is Bean-Neugebauer still in the GSE reform legislation? It would look pretty silly after all the recent sound and fury if the new regulator couldn't consider systemic risk.

Bill Maloni said...

Good question John (about B/N). The truth is I don't know. I haven't read the Senate bill--and liekly won't--but I was told the exact language of the House, permitting the new regualtor to use "systemic risk" as a jusification for higher capital and other business changes--which got taken out on the House floor- IS NOT in the Senate bill, but some vague authority still is, which means the subject is "conferenceable." The 366 Hosue Members who voted for Bean-Negeubauer, however, might balk if that language gets resurrected and that number certainly is a veto proof majority!!!

I might challenge your "SR" premise, since the "facts" are that neither company has asked for Treasury help, their regulator says they have sufficient capital and don't need it, and the GSEs say the same thing.
The "systemic risk" talk is all anti-GSE rhetoric and some of the fall off from "shorts" trying to improve their financial position.

I keep stressing the improatntce of facts.

The GSEs have lost money and may lose more (liekly will lose more).


Both GSEs put on quite healthy booKS of busiNESS in the past two quarters and the outlook for the same seems to cover the rest of this year and muchh of 2009.

Plus virtually everyone who has been quoted in the past 10 days, i.e. Paulson, Bernanke, President Bush, Lockhart, Dodd, Schumer, Barney Frank, etc, all say the GSEs are need to lead the residential real estate market back to health.

John M said...

First of all, congratulations on your part in Mr. Foley's article, where he reported your views coming out much as you responded to me in that last comment.

It is encouraging that there was still healthy demand for new agency debt on Thursday. Some days earlier Nouriel Roubini had predicted a "very modest" 5 percent haircut in the offing for these investors, but this has clearly not yet impacted the market.

In a recent Newsweek forum Peter Wallison, rather startlingly, calls for a turnaround in the US housing market right around the time of the election. If he is right, and everyone keeps calm for the rest of the year, we'll get out of this thing OK. Would it were so.

As far as shorts go, the table at the bottom of this WSJ article documents a massive turnaround at F&F since the rule change was announced. It's not clear yet whether the SEC has revealed the artificiality of the shorts' influence or if what we are seeing is a temporary effect of the PPT's present effort to repeal the Law of Gravity.

Anyway, lest we forget, the first domino in the present unpleasantness was Lehman's 7/7 analysis that SFAS 140 reform would force F&F to raise more capital. Your old friend Lockhart seemed to brush that aside, figuring a GSE exception was in the bag. However, I don't know if this issue was ever resolved.

Bill Maloni said...

Thanks. I haven't seen a Foley article so don't know what he wrote. But, I'm happy I am consistent.

Not only did Lockhart suggest there would be an "exception" for the GSEs--something he cannot know or guarantee--he did say (paraphrasing) that he "wouldn't be influenced by the accountants."

If Wallison predicted a housing turnaround by November or December, this will be the only time I say "From Peter's lips to God's ears!"

susan said...

Hello Bill,

How about a fun assignment for a short period?

We are holding $2.8 billion in bank debt (yes, that's a B).

Send me an email

John M said...

Hi again,

Debi found this story, wondering what you think ...

"New Regulator in Rescue Plan Spurs Debate", by Stephen Labaton, New York Times, July 21, 2008.

Bill Maloni said...

John--For what it's worth, I criticized one of Labatons' early stories (about he initial Paulson announcement) in an email to Clark Hoyt at the NYT, yesterday.

Nonetheless, as with most things in Washington, the design and impact of the new legislation, assuming it passes in the form the House will vote on this week (someone always will want to add something here ro take away something there) occurs at a time that just adds to the impact uncertainty.

Paulson thinks he's going to get his additional Treasury request, but you have some skeptics in the Senate.

While I welcome Paulson's "support," there is another view of the Treasury effort--which I mention in the blog I'll put out later today--which isn't so complimentary.

However, with an election looming that likely will bring Democrats back to the White House and given the incredible GSE hostility that among many "true believers" in the Bush Administration exists--absent a true capital emergency, which I don't think exists today--how the new legislation and current authority will be wielded in the next 6 months is anyone's guess.

My bet is on nothing outrageous as the current guys prepare to leave town and the "hopefuls" make sure they paid all of the taxes for their domestic help.

(Given the sputtering anger in today's WSJ editorial, it looks like there is no equivalent to the "systemic risk" language, which the Bean/Neugebauer amendment removed in the House. Murdoch's minions even beat up on poor Randy Neugebauer (R-Tex)over his sponsorship.)

Anonymous said...


Enjoy your blog, even tho I may not always agree with it.

Q: Have all the critics really missed the irony of bellowing about legislation providing a government bailout of the GSE's when in fact the legislation forces the two institutions to pay a half bil (that's with a "B") directed to salvaging the FHA? That's right: the GSE's are bailing out the government, not the other way around! And that at a time when according to Mr Poole they are supposedly insolvent? Oh, the hypocrisy...

Gainell said...

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