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


Anonymous said...

Thanks, Bill. As a "retired" 20-year vet at FNM, and a shareholder, I find it quite sad to see how low FNM has fallen. The GSEs were whipsawed by unreasonable housing goals, the constant pounding of free-market wing-nuts, and a criminally incompetent regulator more concerned with getting respect by punishing the GSEs than by ensuring their safety and soundness. I wonder if the SEC has any second thoughts on its harsh treatment of GSE accounting, even though so many other financial institutions got a pass or at least were given corrective advice in private meetings with their regulators. FNM could sure use the money it was forced to spend on a silly $400 million penalty and billions on pointlessly re-doing its accounting etc. Not to mention all the lost gfees in subsidies to meet goals and compete with an out-of-control Wall St. I wonder if some of the onerous provisions in the current proposed legislation will now be removed.

Bill Maloni said...

As you know, there was a strong suggestion--since Frank Raines legal filings--that the SEC action also was politically motivated and aimed--in part--by the activities of ex-Fannie officials garnering natioonal attention at the expense of the Bushies.

Jim Johnson, who in August 2004 was vetting John Kerry's VP candidates and being mentioned as a possible Kerry White Hosue CoS, and Jamie Gorelick, who at the same time was beating up the Admin as a member of the 9-11 Commission.

Raines, leading Fannie, found himself in an antagonistic situation with the SEC.

Given this Administration's willingness to go after perceived poltical enemies, to me it is not outside the realm, of possibility that the SEC just became the attack vehicle and ruled that Fannie wasn't apply FAS 133 properly.

The subsequently fines paid, "violations" acknowleged, "outside reviews," and billion dollar re-write of the company's financial books were viewed by the current management--especially since they mostly pointed fingers at officials no longer employed by the company-- as small prices to pay to relieve some of the hostility, which never abated.

Anonymous said...

How did Mudd survive? Was he viewed as the clueless and nominally Republican piano player at the whorehouse? Or by agreeing to wear a "Kick Me" sign on his back in perpetuity? You can't appease folks who are philosophically opposed to your mere existence. Do you know how many meetings I attended where Dan kept exhorting the troops that FNM was being rendered irrelevant by Wall Street, that we needed to take more risk, and that our default rates were too low?

Bill Maloni said...

I can't answer the Mudd question.

He clearly was the natural successor to Frank, but he also participated in some/many/all (?) of the decisions which the Board felt were mishandled enough to ask Raines to resign.

From 30,000 feet I think he felt if he was sufficiently different from his predecessors (including Frank, Jim Johnson and David Maxwell)in tone and deed, the White House might cut him some slack.

That doesn't appear to have happened.

The "onerous" provisions of the legislation likely won't be removed, but--if there is a new Administration and a new regulatory Director--only time will tell if he/she uses all of that authority to hamstring the companies or merely as a club in the closet.

Ironically, not attending the meetings you've described, I would give Dan high marks for his goals if beating Wall Street etc, was all about more and better mission work, maintaining quality underwriting.

But somebody didn't do their job when about a tenth of the portfolio (Alt A) or less is driving 50% or so of the Fannie losses.

Anonymous said...

In a bubble market, it was impossible for the GSEs to achieve their onerous HUD goals without taking on gobs of mispriced risk. The credit folks at FNM tried to do their job, but were repeatedly marginalized and shot down by ascendant Marketeers who thought Wall St knew what it was doing. (FNM's credit folks were kinda like the State Department's Middle East experts when Bush/Cheney wanted to invade Iraq.) Senior management didn't fully appreciate the cyclicality of real estate and appeared powerless to challenge unrealistic housing goals. They gave into the bullies--not surprisingly, appeasement didn't work! I also think the high salaries and "performance-oriented" bonus structure can be corrosive--it certainly earned a lot of enmity inside the beltway. By the way, what did you think of Mr. Raine's OpEd in the WaPo?

Bill Maloni said...

I thought it was "spot on."

I'm not a media expert but it seemed unusual to get an op-ed on the same day that the Post did a very upbeat feature story on FDR, too.

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