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


Bill Maloni said...

The Post editorialized today (Wednesday, July 9) about the GSE legislation and--predictably-- complained that it wasn't tough enough, noting that the Senate bill didn't have language allowing a regulator to utilize "sytemic risk" as a reason to jack up GSE capital.

Interestingly, that language originally was in the House Committee bill that went to the floor but was taken out by a bipartisan floor amendment on a vote of 366-34 (or something close to that), meaning it was soundly rejected by a better than 10-1 ratio.

Given the reluctance of the GSEs (at least one of them) to actively lobby most issues, one is left with the thought that that amendment , offered by Reps, Bean (D-ll) and Neegebauer (R-Tex.) was approved on the strength of the arguments and the silliness of the initial Administration proposal which would allow a regulator to use any condition prevalent in the financial services system as justification for increasing GSE capital.

Anonymous said...

If GSE stock and debt continue to spiral downward, what will federal government do? How would they go about saving the GSEs? Would equity shareholders be saved?

Bill Maloni said...

Sorry for the delay in getting back to you, shame on me.

But, you now have part of the the answer to your question.

It's about 11 AM on Monday morning and "Mr. Market" is saying he is not sure about the meaning to shareholders, since neither stock is trading substantially higher than they closed on Friday.

Not surprisingly there are all sorts of opinions being expressed out there by investors, from praise to condemnation.

The greater the federal control the
worse it will be for shareholders