Wednesday, December 10, 2008

“Quit Moaning, Start Loaning”

Many thanks to old friend the Alex Pollock at the AEI for reminding me of that old bromide, which was real advice once, given to a prominent financial institution in New England, that was complaining about market conditions and competition.

It’s the kind of advice one would hope that our Treasury Secretary, Comptroller of the Currency, and Fed Chairman would give some of those big banks, feasting at Uncle Sam’s table, while forcing force the banks to do their part and thaw our national credit freeze.

The Fed and GSE “Receivership?”

Why would the leadership at the Fed be pushing for GSE receivership, as has been rumored “around town” this week?

I realize that is the large commercial banks “wet dream,” but doesn’t BB have enough on his plate and isn’t the ultimate Fannie/Freddie fate—two largely dead entities in the Treasury’s garage—the responsibility of the Congress, so given by itself in this year’s GSE regulatory restructuring legislation?

Of course forcing Fannie and Freddie into receivership would do away with any evidence that the companies were prematurely put into “conservatorship,” but that thinking takes us into fantasy land, right?

A better reason to delay final interment of the now non-GSEs is that nobody has come up with a viable mortgage market replacement, which presumably is what the congressional charge, to themselves for calendar year 2009, is all about.


Memo to Obama Transition Team

Speaking of rumors, while the Obama has been spending plenty of time with the Treasury Department (as they should!), insiders are saying that not as much time has been spent at the "new" Federal Housing Finance Agency (FHFA), the old "OFHEO." Big mistake. Unless the “Obamas” know they are going to recommend dumping the new agency because there won’t be any “Fannie and Freddie” left to regulate, someone needs to remind the incoming Administration that this “Keystone Cops” gang has presided over a whole range of regulatory disasters.

As recently as yesterday at the Waxman oversight hearings, it was noted that the OFHEO/FHFA troops have occupied the GSE offices and been onsight observers of about four years of management decisions.

If, as some claim, that management decisions were disastrous, what’s that say about the OFHEO/FHFA people who watched and blessed them?

Also, personal note to John Podesta, many of the senior FHFA managers have been GSE-haters from day one. Those aren’t good credentials for federal overseers.


Thank You, Barrons and “Nat from Pittsburgh”

Now maybe we can get some thoughtful action from Hank Paulson and his troops. They’ve stiff armed Susan Bair and the FDIC over mortgagor relief. They stiff armed the Congress over the same and then---with their wall-to-wall discretion-- decided to give money to banks which seem intent on using it to buy other banks, increase dividends, pay bank officials more, or just arbitrage it in their Fed accounts.

God forbid those banks should decide to lend it to individuals, business, or even other banks!

But, now, now Barrons has come out in its current issue—via an article by Jonathan Laing (certainly no great fan of Fannie Mae and Freddie Mac)—and called on the Treasury to initiative a massive mortgage refinance effort, utilizing the aforementioned “late” GSEs, to buy the loans.

High fives to Barrons, which now seems to agree with other great minds (me!) who claim that Treasury refuses to use Fannie and Freddie over some ideological hang-ups, totally ignoring the capacity and ability which those two “things” possess and their underutilized ability to help balance some of the mortgage market ills.

But, now we have a major New York financial publication--owned by the parents of the Wall Street Journal--calling for that result.

Barrons would have the Fed create a special lending facility, allowing Fannie and Freddie to borrow at near Treasury rates, which—after a small margin for overhead—would allow local lenders selling those loans or securitizing them with the entities, to offer a 4.5% or less loan rate to millions of American families.

(Ironically, the Barrons plan looks much like one that has been circulating in Washington for weeks, created by Nat Cohen, a Pittsburgh closing attorney. It’s not identical, but “close enough for grenades” and I know Cohen has been shopping his proposal to any number of mortgage market policy players in DC. I am sure that Barron’s didn’t “borrow” Cohen’s ideas. Instead, it must have been a case of bright people coming to the same conclusions about the same time, although “Nat from Pittsburgh” clearly was first!)

Go Barrons. I hope some of those deaf ears on the Hill might open themselves to you and your ideas. They make sense for the American people and the mortgage finance system, which is why Paulson et al might chose to ignore them. Solely, because it “wasn’t invented at Treasury or by this (outgoing) Administration.


Obama Leadership

This week over lunch a freind told me how moved/impressed he was with something Barack Obama told an interviewer, regarding energy conservation. Obama confessed to turning off certain lights in his home to save electricity and discussed other fairly easy to do things by which most families could conserve as well as cut down on their personal energy use and expenses.

My friend went onto describe all of the wonderful things that could happen if we truly got serious about saving energy, instead of just employing the rhetoric of same which has been the case for 20 years, and follow the President-elect's lead, here and elsewhere.

This caused me to go back to something I had hoped would evolve with an Obama win, the next President having the capacity, character, and vision to lead.

This may just be one of the times in history when the right man, with the right message,takes the right office at the right time, to lead this nation on a variety of successful efforts that sow the seeds for a much brighter future for all of us and our children and their children.

I think Obama has that wherewithal to achieve major environmental, tax, healthcare, education, financial and economic changes, in part because the American people—as they have shown time and again—will follow a thoughtful leader who lays out effective policy.

After eight years of disaster and “village idiocy,” I believe that the American people will insist that the Congress and the new President defang the special interests, who have found homes in one or both political parties io the detriment of all but a few, and bust phony barriers inhibiting future national greatness.

It's there for Obama to do and his early incilinations seem right on point.

Legal Times and Fannie/Freddie Books


The Legal Times had an article/interview this week with Beth Wilkinson, former Fannie Mae General Counsel.

Ms. Wilkinson, who the article notes is married to David Gregory, the new host of Meet the Press, discussed her time at Fannie and the specifically the Treasury and Fed meeting when both Fannie and Freddie were told that they were going to be put into conservatorship.

People who had read me know that I believe that decision was based far more on ideological and political grounds than market facts. *See earlier reference to fed and receivership.) But, what was done was done.

I think it’s fair to say that Ms. Wilkinson and I share a belief that when Fannie was taken down, in what I call Paulson’s “Sunday Smashdown,” the company had sufficient capital and market access to survive. I asked then why the Fannie board didn’t fight against this Bush Administration-led effort. Something Ms. Wilkinson was inclined to do.

I still haven’t found an answer to that question.

Maybe the writers currently working on Fannie Mae books--four at last count--can decide what really went down and why.

Maloni 12-10-2008

21 comments:

Bill Maloni said...

First post was "typo-rich," so excuse me.

Hope this one is cleaner, but you never know with me.

Bill Maloni said...

Yes, it is "Sheila" Bair, not "Susan."

Apologies Ms Bair. You are doing a fabulous job at FDIC.

Anonymous said...

Dear Mr. Maloni, I was impressed yesterday with Edward Pinto's presentation to Congress and his prediction of 8 million foreclosures for 2009. I think this figure could increase if Detroit automakers end up with filing for chapter 11. I was also surprised by Thomas Staton's testimony which invoked congress to use the GSEs expertise and resources to bring stability to the mortgage market and halt foreclosures. But couldn't understand why he propose to put them into receivership to do the above. They already are in conservatorship and the GSEs stockholders don't have much influence to oppose a government plan that could help the economy. (Blue Agent)

Bill Maloni said...

Tom--Who was a Fannie Mae attorney, when I joined the company in 1983, just has been hell bent on shutting down the company and has stated so and written that for over 20 years.

He's a zealot and I say that in the most positive definition of the term.

Unless I am mistaken, Pinto, another Fannie alum--in the face of a submission to the Waxman Committee, after his appearance--withdrew some of the numbers he originally had supplied and suggested they were in error.

Until we all know just what Ed retracted, I wouldn't give credence to much that he said.

Amicus said...

Bill, what do you think of Paul Volker to spearhead a "Commission" inquiry into how to restructure regulation in general, starting with recommendations for the GSEs?

Do you know anywhere on the internet that Pinto's testimony has been fact-checked or where any corrections might be posted? I read all of his lengthy presentation last night ...

Bill Maloni said...

Barry Zigas, himself a former Fannie official--who worked on most of the company's affordable housing initiatives--provided the Committee with data which caused Pinto to acknowledge the need make corrections.

I don't know what was provided. But, I'll ask Barry and see if I can post it. It also may be on Barry's blog, the name of which I don't have, but if you "Google" Barry, you find his blog and it might be there.

I am a big Paul Volcker fan, having worked for him at the Fed. He's no "GSE fan," so left to his own devices he might bury what's left of the GSEs.

Although I think Volcker would serve a President Obama well in any financial/economic post, including "Car Czar."

Amicus said...

Thank you very much, indeed.

My guess is that Ed may have double-counted some of the loans, by adding what is held in the portfolio. Some portion of the portfolio holdings may not be private label securities. It pays to clear this up, because there is already so much mis-information and dis-information mucking about on the GSEs.

I have to say that, based on my informal - very informal - reading, it appears that the answer to your question as to why there was not more of a fight to forestall "conservatorship" may have been weak leadership in the name of Daniel Mudd.

What's more, digging through the proxy statements, I find that Mudd was never on the firm's old Asset-Liability Committee. He does not appear to have been on the newer risk policy committee, which seems to have arisen sometime late in Raines tenure (the company didn't file a proxy every year, at least that I can find).

From the internal e-mails, it looks like the culture of the firm is that the CEO alone calls the shots, at the end of the day, with respect to credit policy choices and with respect to the risk in the portfolio (and new products?).

I'd be curious what Barry Zigas has to say about Raines never mentioning Fannie's experimental project in sub-prime (from the records, it appears that Fannie experimented with a "new" program starting sometime in 1998-1999 timeframe). How did the "lessons" of that experiment get interpreted?

I'd also be interested in Barry's take on Ed's formula for success in the subprime lending, which emphasizes, among other things (like capital for the lenders), low LTVs for the borrowers. To the outside observer, it's not intuitive why high LTVs default with such high rates, even if income is present at underwriting.

I enjoy reading your notes. Keep on blogging!

Bill Maloni said...

OK. This is the week for mini-mea culpas.

I relied on a colleague's report about Panel 2 and the "retraction," which indeed was accurate.
But my source confused Ed Pinto with Charles Calomiris, who also was a witness.

Barry Zigas' letter to the Committee sought to correct numbers that were in a Charles Calomiris/Peter Wallison
op-ed piece in the Washington Post.

Not surprisingly, Barry believed--and I think porved--that the pair had inflated/distorted some Fannie/Freddie loan data to present the worst possible case regarding the companies support of affordable housing.

Once I get Barry's OK, I'll
provide a link to his communictaion to the Oversight Committee.

Amicus said...

Hey, what's a blog wtihout a mea-culpea? I'm always surprised by the number of people who think of blogs as more than think-pads, anyway.

Calomiris' testimony was so ... loosely argued, that it was hard to find any nuggets in it.

His conclusion that, because of a period of poor credit underwriting, that the GSEs should be fully privatized isn't even argued. It's almost a non-sequitur.

For myself, I think the prescription is pretty simple.

The basic charter goals are sound and worthy, still. While other probably want to argue about the "role of GSEs" ad naseum, what needs to change, perhaps, is just the risk-taking culture and processes (based on what we know of what went wrong).

I suspect that the liquidity mission might be inflected to account for recent experience, so that it is possible to manage the firm somewhat counter-cyclically. This means no market share goals and that, at some points, the firm can deliberately fail to meet "affordability" goals (to the extent they remain stated the same way), based on market conditions, etc.

There are people who do organizational design for a living, but my first pass is that what might be best to get the companies back to a culture of conservatism is to put two serious risk managers and one "product guy" in charge. All three have to agree to the major things, like how much of what to buy and underwrite. In this way, no one person can dominate the decision process.

A firm, unequivocal end to *all* bonuses. Pay everyone a decent salary and really very good profit sharing. That's it. Re-commit to a culture of excellence, so that risk-managers also feel the pressure to seriously consider new projects/proposals, rather than sit still (and product guys don't feel like they are talking to clients only to come back and whistle past the risk-management ideas graveyard..).

The companies should be forbidden from paying anything more than 5% in dividends, of any kind (preservation/growth of capital).

I'd take a good audit or beefed up audit function over "new and improved" regulatory body any day.

I'd even be willing to try these things for five years and see how they work out, before recommending an expensive commission to study everything.

Bill Maloni said...

You are describing a "regulated utility" model, which many of us think, mainly because of all of the recent negativity and cynicism, is all that can be re-created either using the "old" F&F or at least two new entities.

The key will be how the "thing" raises money,

It can't be government, perse, but will anyone believe that it is "not full faith and credit," given our most recent national financial/economic history.

But, as I've written and said, ad naseum, I believe our mortagge markets require a dedicated conventional mortagge investor to free up the primary market to be as condition and rate responsive (translation: competitive) as it can be.

But, when the only ones providing mortgage credit are the large banks and their mortgage company subs, I begin to worry, systemically.

I hope the Congress is watching this development.
Mortgage provider diversity is good!!

Amicus said...

To be honest, I'm not sure how much equity money they need on a periodic basis, if that is what you mean. Can they get by on internal earnings growth?

I cannot see why they could not continue to issue debt (although that view is ... contentious).

I haven't talked about deleveraging the companies. To the extent they continue to operate on a thin layer of equity, that could still make them an attractive investment, providing a decent ROE (Buffets of the world might like - afterall, he said that not investing in FNMA was one of the big misses of his lifetime).

I'm not sure I intended a utility model. What I intended was to change organizational structure and 'incentives', so that the companies are comfortable leaving business on the table, if it is prudent, or even _withdrawing_ liquidity in the face of a bubble, as indicated by the company's prudent metrics. Put another way, I'm looking for ways to subordinate, but not eliminate, the pressures for innovation (chasing the market) and for increased risk-taking (showing exciting earnings growth every quarter), to broader, longer-term goals. Call it "the tyranny of the balance sheet", if you will, explaining why HUD "goals" weren't met that quarter ... I suspect even Congress could be made to understand that there are constraints on how much "affordability" can be achieved - the companies are not Rumpelstiltskin, afterall.

On these points, the people who know the culture inside the firm really can say more - they would be the people that anyone truly skilled in the task I laid out would talk to, foremost.

Perhaps I have too big a faith that the companies could _never_ be rendered irrelevant to the market by the private sector, if they got "too conservative". I confess I really don't think they ever would. There is nothing quite like wielding the scepter of the full faith and credit of the USG, even if it is implied...

I'm not even sure I'm tied to "conventional", in the sense of tried-and-true, 30-yr fixed, etc. I'm not "against subprime" (even at this point). It's not clear that other types of mortgage bonds that indicate a greater price-risk sharing of the asset aren't a good idea. Some people don't like to own things (they want the use of a car, say, but not to own it). It's not clear that those people aren't served by an I/O market.

Perhaps an express company model for innovation is in order, to provide guidance. Even if the companies are late adopters, as in five and seven years late, even, I'm not sure that is "a problem".

Anyway, enough from me for a while. I just believe in the mission and don't want to see it erased because the implementation went badly awry ...

Bill Maloni said...

Many of us agree with you!

Amicus said...

That's good to know, that this is at least on the right track.

Now, on to "rescuing" the 'full faith and credit' of the US Government, before private sector spreads trade through government debt ... say a prayer for the U.S. Economy. It's looking grim, grim, grim.

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Anonymous said...

I love your blogs Mr. Bill Maloni.

Most of the smart bloggers on Yahoo! finance message boards thinks that Fannie Mae and Freddie Mac will become a public utility.

What is your opinion on this?

Lastly, will FNM and FRE ever trade above 5.00 in the near future? If not, what is your best guess?

Harry Tong said...

I love your blogs Mr. Bill Maloni.

Most of the smart bloggers on Yahoo! finance message boards thinks that Fannie Mae and Freddie Mac will become a public utility.

What is your opinion on this?

Lastly, will FNM and FRE ever trade above 5.00 in the near future? If not, what is your best guess?

(Sorry I accidentally posted anonymous)

Harry Tong said...

Here is a very good analysis written from tvmetguy on Yahoo! finance message boards:

The Great FNM/FRE Mistake

Paulson should never have put FRE/FNM into conservatorship, but instead should have had the FED give 600B like it currently plans to do. When FRE/FNM went into conservatorship, the stock price plummeted, banks around the world who owned stock lost a buttload of money, and this is the reason why he needed the TARP. When Paulson got the TARP, he said it was to buy MBS's, but of course it wasn't. He knew he screwed up by putting FRE/FNM into conservatorship, so he had to recapitalize all of the banks who got screwed when he did this. He made a mistake, and he's only human, so we can blame him, but I don't think he meant harm.

At any rate, the 600B now being used to help FRE/FNM is a complete addmittance by Paulson that he should not have placed the GSE's into conservatorship, although he will not say he made a mistake. It makes no sense for a public official to say he screwed up, we don't need any less confidence in the markets.

The bottom line is, everyone knows the GSE's are vital to the secondary mortgage market and having them in conservatorship is bad. Now that the FED is spending 600B on them, they will become very healthy, very quickly. This process starts this Friday.

As far as the future of FRE/FNM, the government has to be involved in some way. The way it will occur is to utilize them. This way the FED has direct oversight, mortgage rates stay as low as the FED wants, the debt is guaranteed, and shareholders remain, but you can expect a low stable return. It will be like supporting/buying a Treasury note. Current stockholders will get very rich, and those who buy in after they are utilized will get a stable low rate of return stock.

Do not expect PPS to go to 50, 60, or 70, but it will be many multiples of what it is now.

The more you think about it, privatization is way too complicated and messy. We need a simple, clean, and fast fix to this mess. The current FRE/FNM business model does not work, but a public utility is what is coming down the pipe, bet your bottom dollar on that.

Your strategy right now should be to hold a core 75% of your shares, and trade 25% to make a quick buck or accumulate more. To make a quick buck or accumulate more all you need to do is buy late in the afternoon while the market is open, 90% of the time we GAP up in AH/PM, then sell right at the beginning of market open the next day. I've made an average of 10% a day doing this and have doubled my shares since early October.

At this rate I'm doubling my net worth about every 2 months. Remember though, hold 75% and only trade 25%. We've got to keep most of our shares at bay so the supply/demand gets out of whack when big buys come in.

On a final note, do you realize that every week for the next 6 months at least, there will be news of the FED either buying toxic debt, or buying MBS's off of FNM/FRE. What do you think is going to happen each day that is reported?

Lastly, the Q4 report and Q1 and Q2 of next year will be far better than any analyst expects because of the accounting which will take place when the FED buys the debt. Analysts assume they know what is going to happen, but they have no idea, and I'm positive there will be more positive things debuted in the near future by the FED that I'm not including in this report. By the way, if you don't think the government is going to attack forclosures as hard as we hit Iraq, then you simply aren't American. This ain't the 1930's, and we have the knowledge and tools to correct even the biggest mistakes. Essentially everything is on the line, and I'd like to bet on America!

Anonymous said...

One thought going forward is to remove the mortgage insurance requirement. This would be helpful for 2 reasons. First, if F/F have to assume the full credit risk for what they guarantee, their underwriting will reflect that exposure. They were taking risks they maybe shouldn't have because they thought they had the shield that 20% MI offered and they didn't believe a 30% market correction would take place in home prices.
Second, this would give F/F a business line that makes sense for them to be in. They won't have to rely on the portfolio to make money.

Barry said...

The letter I sent to the Committee followed a request by majority staff to review a September 2008 paper published by AEI and authored by Peter Wallison and Charles Calomiris. Edward Pintois acknowledged in the paper as having contributed significantly in its development.

In the letter I specifically noted a serious mistake reading 2Q2008 investor reports from both Fannie Mae and Freddie Mac. The authors read tables prepared and published by the companies backwards. This led them to overstate by significant amounts the shares of GSE financing 2005-2007 that had various features the authors call "junk features," such as interest-only, neg am, low FICO scores, high LTVs, and Alt-A. I did not offer any analysis of their broader conclusions about the GSE share of the total subprime and Alt-A markets.

The Committee chair entered the letter into the record at the point in the hearing when Calomiris asked permission to include the 9/08 AEI paper in his written testimony. At that point, Calomiris asked to correct a "typo" in that report, and then totally changed one or two sentences to correct the mistake. He did not ask to change two tables in the AEI study that contained the erroneous numbers. The paper is still on their website, without the changes Calomiris offered at the hearing.

I have been unable to post things to my own website at www.zigasassociates.com because of problems arising from migrating to a new hosting service, but should be able to post the letter there next week.

Bill Maloni said...

I thought I posted this response last night, but don't see it. One of these days, I'll really learn how to type, use a pC and how to blog!

Obviously, Barry Zigas answered Calomiris, Wallison, and Ed Pinto in the critique he provided the Oversight Committee. (See Barry's "comment.")

On Fannie Mae and Freddie Mac stock futures, the companies were taken down by the "Right" for politiical reasons and it will take a similar wave of political support to right them--somewhat--and allow them, once again to function and earn money.

I don't know if that ever will happen.

It could, if the Obama Administration wants the the two former GSEs, now nationalized entities, to serve as the ramparts for the US conventional secondary mortgage market.

The two firms just were demonized by the Bush Administration and a Democratic Congress helped turn them upside down and put them into "consevratorship."

Reversing that--even though it easily could be justified by market conditions--will take a very determind effort by strong interests in the incoming Administration.

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