Tuesday, November 11, 2008

Big Bad Paul

Kinda narrow at the shoulders and broader at the hips, but everyone knew that you give no lip to Big Paul, Big Paul, Big Bad Paul……!

I apologize to songwriter and successful sausage maker Jimmy Dean for ripping off a line from his famous “Big Bad John” lyrics, but Paul Volcker deserves the accolades and more.

If President-elect Obama just will name Paul Volcker to Treasury—even for a year, keeping Larry Summers at the NEC in waiting—I’ll feel vindicated and like a seer for suggesting on November 5 that Obama choose Rahm Emanuel and Paul Volcker for WH CoS and Treasury Secretary, respectively. As competent as Larry Summers and Tim Geithner are, neither has the domestic and international heft of Paul A. Volcker.

His insight and steely resolve to keep interest rates high in the early 1980’s, which successfully squeezed the remaining life out of Post-Vietnam inflation—and ushered in years of U.S. economic expansion and positive growth-- is considered Herculean and heroic by most economists and students of public policy. I worked for the Fed and Volcker in those days and watched as he was excoriated by the nation’s housers and vilified by Congress because he kept interest rates in the high teens.

Volcker would be an exceptional choice for Treasury Secretary.


Just as Paul Volcker gives gravitas and strength to how President Obama will go about achieving the Obama financial priorities, so too does Rahm Emanuel provide the same as the President’s conductor keeping the trains running on time.

I have to laugh at all of these pundits (mostly Republican) who reacted in mock horror to Obama choosing Rahm Emanuel as his White House Chef of Staff.

So what if Emanuel’s buddy, Paul Begala, respectfully describes the new CoS as a “pain, somewhere between a hemorrhoid and a toothache.” Rahm Emanuel has a reputation for hard ball, success and achieving his objectives. A new President facing the mountainous challenges staring Obama in the face needs someone just like that at his side and watching his back. So, he’s the iron fist inside of Obama’s velvet glove. Obama knows warmth and charm, alone, can’t drive policy changes, and major ones at that, in Washington. They call those interests “vested” for a reason.

If you are going to make legislative and policy “omelets,” I can think of few Democrats I’d rather have breaking those eggs than Rahm Emanuel, which was why I touted him last week.


Is anyone besides me upset at the behavior of the Administration and the big banks? The whole drill about giving the banks federal cash infusions was for them to use the cash to “unclog the credit markets,” by making commercial and personal loans, not to pay/boost dividends and take over weaker institutions.

It’s a simple model to implement, if the bank regulators showed some guts.

The banks get additional cash, if the banks agree to make loans--not to “everyone” or the “less credit worthy,” as the bank flacks try and imply--to those individuals who can repay the loans and those businesses seeking to expand and hire more employees.

And, yes, that criteria and performance can be measured by serious financial regulators and, yes, the banks can be held accountable.

Must the nation suffer even more before the large banks—which caused some of the mess—decide to get off their butts and do what they do best and that’s lend money?

When Fannie and Freddie both were given the significant housing goal challenges in the early nineties and some company officials asked if that large a percentage of credit worthy “low, moderate and middle income families, existed out there,” their regulators bluntly told the GSEs to “find them.” The banks should be given the same direction.

Election 2008

Many people are asking some variation of the question, “What does the GOP have to do to make itself relevant and competitive, again?” First the GOP has to stop blaming the media, fate, Palin’s wardrobe or her geographic educational gaps for Obama’s win

The dogs didn’t like your dog food. You lost the election. Your numbers dropped in both the House and Senate and there are still a handful of Senate and House races yet to be decided. The best thing the GOP could do is look critically at the election night tapes from Grant Park in Chicago and the same crowd scenes from John McCain’s Phoenix campaign hotel. There was a lot of happy diversity in Chicago and a bunch of Caucasians in Arizona. I know you R diehards hate to hear this, but the United States no longer is a white nation, politically. At some point the GOP will awake to that fact and truly open its policy doors and invite in blacks and Latinos.

Just adding some more white faces and fair hair, as I saw at the convention in Minneapolis and on the ball room floor in Phoenix, isn’t going to cut it or win future elections. That’s not a cheap shot, just demographic reality.

By actively opening your tent flaps and welcoming in others, your party platform should change and also reflect the needs of those not so well off and headed to the Ivy League, either scholastically or socially.

Your crew on Wall Street ended—for the near term—your “less regulation and more tax cuts for business” political mantra. Plan for that change.

“W” murdered your “less government, less federal spending” party platform planks. Paulson and Treasury, with its nationalization and forced bank equity investment, put “socialism” in a whole new light, especially as it was carried out by a Republican administration,

Oh and although she won her election, drop Rep. Michele Bachman (R-Minn.) as a party spokesperson. Calling for media exposure of “anti-Americanism” in the Congress is wing nutty and loopy enough to resurrect J. Edgar’s cross-dressing ghost.

Fannie, Again

The Washington Post had a front page story, today, discussing the problems of Fannie (and Freddie) especially since the government/Treasury seems to have reneged on parts of its deal with the former GSEs.

Note: Treasury still hasn’t put a dime into Fannie Mae, but that hasn’t stopped the Paulson mob from demanding that it to do more mortgage finance.

Yet, with rising debt costs due in large measure to Treasury’s policy of not making clear the status of those debt securities (are they backed by the government or not?), Fannie can’t borrow cheaply enough to keep the conventional mortgage market liquid. So, that market will stay turgid.

Congress may want to begin asking questions about the real motives in the GSE “Sunday Smashdown” takeovers, since making the companies more effective clearly hasn’t come to pass and likely wasn’t on the GOP’s real agenda.

The conventional mortgage market just won’t function smoothly without a dedicated mortgage investor, buying product 24-7. from lenders in all communities in the nation.

The Government National Mortgage Association or “Ginnie Mae” does that for FHA and VA government loans. But, until the Treasury takes its boot off the necks of the former GSEs, you won’t have a similar operation in the conventional markets. And, most mortgage observers understand that.

So, I’ll keep saying it to the Congress, “Get ready to create a new “Fannie and Freddie” or take a smart shortcut and figure out how to breathe a little life into the ones you have, before Treasury sucks all of the life form them and you have no options and a rapidly deteriorating conventional mortgage market.


Temporaily, I am putting away my political six guns back, since I assume it wasn’t lost on anyone that two major GSE antagonists (John Sununu and Chris Shays) were defeated last Tuesday and a third “wannabe” (Elizabeth Dole)--who frankly didn’t have the smarts to do anything original on GSEs--also went down. Just call it “mortgage frontier justice.”

Add the retiring Chuck Hagel *R-Neb,) to that list and a lot of GSE animus will leave the Congress this year. When the next Fannie/Freddie issue arises, Senator Shelby (R-Ala,) may have to caucus in a phone booth.

Maloni 11-11-2008


mr. green said...

Bill, great insights. Looking forward to future posts.

Anonymous said...

This is the first time I read your blog, and I find it very objective and informed. Why is it that the financial media (CCfn, FT, etc.) does not point out that both GSEs have not borrowed money yet? Moreover, they are been asked to prevent foreclosures and modify loans to help borrowers. That is a superb role that they play for the US tax payers, providing strict underwriting rules and yet helping borrowers to avoid loosing their homes.

Bill Maloni said...

Thank you "mr. green." You, sir, are one of my eight favorite colors and always will be!

To anonymous:

The fairest answer I can give you is that some have pointed those things out, but not many.

My friend Gwenn Hibbs, who added some of her wisdom a few blogs ago, has produced an "index" of articles and reports, in which the authors have fairly descrtibed the Fannie Mae and Freddie Mac role and activities.

With her help, I will update that list and post it.

One further answer to your Q and this is where it gets a little disappointing is that clearly the "blame the GSEs" effort was a major part of the Bush/McCain effort for obvious--but different--reasons.

There was very little pushback to that campaign, although the facts were plentiful and available. I heard some of the "most popular TV news hosts" repeat the GOP line.

The false belief that Fannie's and Freddie's problems were primary causes of the economic meltdown unshakenly just seem to reside in the heads (and hearts) of too many of the nation's editors, reporters, and producers.

In part that is testimony to how well those falsehoods were spun and ladled out to the public.

Naturally, the two companies legitimate mistakes (massive Alt A and PLS subprime purchases for yield and market share reasons, in 2006-2007)
just made it easier to believe all of the other crap.

John M said...

Hi Bill,

I'm really looking forward to Gwen's next effort.

Meanwhile, we've just re-posted your final two sections (on the GSEs, lightly edited) as "Bill Maloni: Let’s Breath some New Life into the GSEs."

John M said...

oops! forgot to turn on e-mail notify

Bill Maloni said...

John--I suggested that Gwenn contact you and Twist today, since she has produced some very interesting things which I wanted her to attach to this blog, but she demurred.

She did an interesting analysis--for some of us-- of the Fannie 10 Q, which raises more questions about the company and its management than it answers.

She's a talent and I hope you can utilize her great skills.

(Speaking of 10 Q, kudos to Fannie's Allison for callign out the Admin of its lack of real support and failure to clarify
the status of Fannie's debt. He merely is asking Treasury to stop waffling and say definitively, the "full afith and credit of the US" is behind the former GSEs debt or it isn't!

Anyone who can see that the continual Treasury "diddling" is part of the, "Let's do all we can to screw them up but not so much we can't use them for our needs."

That's despicable and if there was a way for it to come back and burn the Admin,I hope it happens.

John M said...


You can see how this stuff is going to fry everyone by reading this astonishing story that Debi and I are both blogging on (me in the re-post): "Spreads on AAA commercial mortgage-backed securities today soared 71 basis points to a record 714.5 basis points more than the benchmark swap rate, according to Bank of America Corp. data. The bonds were trading at 582 basis points over the benchmark a week ago."

Be careful what you wish for, by the way. The way things are going the USD could start destabilizing, and that would be no good thing for the incoming Admin or America.

Bill Maloni said...

That's where my emergency supply of 700,000 "loonies" comes in!

The Progressive Pragmatist said...


During the election, the R's went after the GSEs w/ a vengeance. As I recall, they slammed the GSEs in their first response in all three of the Pres debates and in the VP debate.

What's behind that? It obviously was coordinated. Who initiated it and why? Why say the GSEs caused the bubble and never mention the bigger culprits (such as the rating agencies and Wall St issuers)?

Bill Maloni said...

My answer is a simple one. in a way just like the GOP's campaign.

The GOP needed an easy "villain" to deflect blame for the subprime problems and economic meltdown problems from them, which had--as I wrote--"too much GOP DNA and finger prints" all over them.

Also the McCain Campaign and the "Bush legacy" efforts needed the same camouflage, even distorting and putting on steroids McCain's pretty meager role as a "GSE whisteblower."

Fannie and Freddie already had been beaten up, by many on the "Right," for crimes real and imagined. So, when a "housing crisis" came along, it was easy to obfucscate and dsitort the mistakes the GSEs did make and heap on them all of the blame, ignoring the obviosu Wall Street role.

Fannie's previous managements had some high profile Democrats among them, so that was "red meat" for the "GOP base" and made it easy to villify them politically (even though Freddie has few if any).

And, very few people really understood much about the two billion dollar companies with the "cutsie names," so once they got into some trouble with the "Bushies," few people wanted to support them. Also, Fannie's most recent management--before the "conservatorship"--also decided to scale back their lobbying and
communications efforts, so when political friends and broader understanding was needed most, there were very few allies to be found.

The good news is that enough media and policy analysyst have since written more accurately about both subprime and the market implosion, fingering the correct culprits, so I think history will get it right. But, it likely is too late to save the GSEs, which is unfortunate because--unless recreated--their coventional mortagge finance roles will be missed sorely, systemic-
ally and by low income families.