Tuesday, March 10, 2009

Mrs. Bush (This One Unrelated to the Presidential Family)!

The Water at the New York Fed?

Maybe it’s the New York Fed’s drinking water which makes their presidents say and do weird things (even when they move on and become Secretary of the Treasury)?

In his very first official speech as NY Federal Reserve Bank President, William Dudley--who succeeded Tim Geithner--groaned about “banks and government sponsored enterprises, for the past 18 months, telling regulators that it wasn’t a good time to raise capital,” because—he analyzed—that they didn’t want to dilute shareholders values.

Um, uh, Mr. Dudley, Fannie Mae raised over $7 Billion in fresh capital in May of 2008—which was less than 12 months ago--and still got trucked by Henry Paulson and the Bush Administration.

At least get your facts straight, Mr. Dudley, if you are going to pontificate and lead the Fed’s paramount bank. Or are you auditioning for a bigger Washington job?

Disparate Memories

I remember my homeroom teacher in high school, Mrs. Elizabeth Bush. She was about 92 (honest!) and taught girls’ sewing, which was appropriate when I graduated in the 1960’s, since the Pittsburgh public school curriculum was designed in the 1930’s/1940’s.

I arrived in her class room only in the morning, to kibitz with friends, and then went through my seven daily academic classes. That limited intercation didn’t stop Mrs. Bush from writing on this indifferent student’s final 12th grade report card “1966?” Meaning what will happen to you in four years, you poor uneducated dolt, when all of your friends are graduating from college?

If she only knew, that little wig she wore would be spinning on her head. I definitely am going to look Mrs. Bush up, when I get to heaven!

What happened to me (very nice things) isn’t important, but I thought about this dire question/forecast when I was thinking about Fannie Mae and Freddie Mac last week, just after David Moffett walked away from Freddie Mac’s top job, for which the outgoing Bush Administration chose him late last year.

Moffett offered the predictable complaints about ineffective federal government bureaucracy and decisions, which took weeks and months when the business needed answers in minutes or hours. But many observers still were forced to ask if Moffett was up to the job?

If some home room teacher wrote on Fannie’s and Freddie’s current report card, “2013?” What might that answer look like?

Fannie and Freddie

Too many people say “Fannie and Freddie,” as if the two were identical twins. They are not, never were run that way, had different corporate strategies, almost contrasting cultures, operating systems, and differing volumes and qualities of crummy assets.

Freddie seems to produce continued negative surprises, making me wonder just how bad things are in McLean. Not that Fannie’s red ink is a day at Rehoboth, either.

However, there still is some form of twisted “parity” at work inside the Beltway, which could cause Congress or the Obama Administration treat them alike.

(So, who is spreading all of those Fannie/Freddie “merger” rumors out there?)

Last week, I offered to wager a friend that, “In the next three years, Fannie Mae will be engaged in a variety of business activities which are market sensitive.” That’s as far as I would go.

For a couple of reasons, I believe that Fannie could enjoy a revival which could return it into some semblance of its former self, i.e. shareholder owned, albeit not with the full range of investment powers they once enjoyed.

I believe this because the Obama Administration slowly seems to be awakening to the reality that it owns two companies with copious talent and resources, which can be employed to help the federal government get through it’s latest “new assignment,” i.e. to acquire, manage, and then sell hundred of billions of dollars of whole mortgage loans and mortgage backed securities of varying qualities and values.

Use Them and Use them Hard!

Creative and heavy use of Fannie and Freddie to help the Treasury and other federal agencies carry out that responsibility will save our government billions and also keep more families in their homes and paying down affordable mortgages. Some borrowers still might default, but that won’t happen as rapidly as it might have, once their mortgages are restructured by Fannie and Freddie and the government.

And if Fannie and Freddie are not overburdened by the Feds, their employees know how to do the job efficiently and effectively. Chalk one up for the Obama folks and for minimal interference.

Another reason to hope for Fannie (and Freddie), to get resurrected as “regulated utilities,” is because their function is missing from the residential mortgage market and hasn't been replaced. It’s needed and it’s vital.

The nation’s mortgage finance system has become reliant on the long term fixed rate mortgage loans and commercial banks just can’t hold them on their books. We need a private dedicated mortgage market investor, with the capacity to fund and manage those longer maturity mortgages.

The alternative is a commercial bank based system with only will offer adjustable rate mortgage loans or fixed rate loans with huge pricing premiums.

Nothing has yet stepped up to replace Fannie and Freddie and if the government chooses to create something, why ignore and waste that which you have?

Holman Jenkins and The Wall Street Journal

Now—and this is just me—another reason to think optimistically about Fannie and Freddie burst from a most unusual source last week.

Holman Jenkins, long time columnist and editorial writer for the Wall Street Journal--the most ideologically nasty of the anti-Fannie/Freddie publications--wrote that it was a mistake for the government to nationalize the GSEs. He said that it sent a horrible signal to the market and took the life out of lots of financial institutions companies, including the WSJ’s darling big banks. (My thanks to my friend/colleague Gwenn Hibbs, for alerting me to the Jenkins column.)

Where were you last year, Mr. Jenkins, besides cheering on Mr. Paulson??

Not that Jenkins’ piece, suddenly, will cause the world to say “mea culpa” to Fannie and Freddie. It won't, nor are they due it.

Both companies put hundreds of billions in Alt A and PLA subprime crap on their books in 2008 and 2007 (like those other companies which have been plowed under or are being kept alive on Treasury/Fed life support) and that, not their structure or affordable housing mission brought them down.

However, the candid comments from Jenkins will breed similar reviews, and reconsideration from others, which could soften the terrain for federal policy makers and make it easier to identify the national market role that Fannie (and Freddie) still can play.

So, Mrs. Bush, my old homeroom teacher and likely celestial resident, that’s why I think the future is looking up for Fannie (and maybe even Freddie).

Maloni 3-10-2009


John M said...

Hi Bill,

I've reposted this article here. Your readers might be interested in links I found to Dudley's speech and Jenkins' article.

Bill Maloni said...

Thanks, John.

(John is a senior part of the "Housing Doom" blog and, occasionally, picks up my stuff.)

ed said...

Bill, love your blog. Can you recommend any other sites that cover GSE's well. Keep up the good work.

Bill Maloni said...

Thanks, Ed.

The answer is that there are not many. More of the coverage is in the weeklies, like Guy Cecala's Inside Mortagge Finance publciations. Occasionally there will be a story in the American Banker.

Bob Hagerty covers the GSEs for the WSJ and Dawn Kopecki for Bloomberg and they'll write when there is something to cover.

But Fannie and Freddie don't generate much traditional news coverage, since they were taken over by the Treasury, save when they issue their quarterlies and notice is taken of their red ink.

Until the Obama Administration announces some new role for the GSEs (or at least Fannie, the healthier of the two), it likely will continue that way.

There are books being written about Fannie and Freddie and the financial meltdown. The two which I know about are being done by the WSJ's Bob Hagerty co-writing one with former Fannie lawyer--and longtime GSE opponent--Tom Stanton and Vanity Fair's Bethany McLean.

There also are reports of two other books being written by working reporters.

Jeffrey said...

Are there any other high school recollections you'd like to share?

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