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.