Monday, June 22, 2009

Hockey and Financial Reform

Two things brought me out of my blog-a-lethargy, a hockey game and President Obama’s financial regulatory reform plan.

I am sure that only Henry Gonzalez, my late father, mother, and brother—plus the others hanging out in heaven—remember what I wrote in my final blog of last year.

In my “2009 wishes blog,” among other things, I asked for the Pittsburgh Steelers to win Super Bowl 43 and the Pittsburgh Penguins to win their third Stanley Cup hockey championship. I had hopes for the Steelers, but never thought the Pens could pull it off.

How wrong I was about the latter, as the boys in black and gold, responding to a late season coaching change, beat the defending National Hockey League champion Detroit Red Wings, in a dramatic series, with Pittsburgh’s clincher coming in Detroit in Game 7.

Pittsburgh, the city where I was born, which I still call home despite living for 40 years in the DC area, and which I love, truly is the “City of Champions,” with major sports wins this year in professional football and now hockey. (They also were the "CofC" in 1979, thanks to the Steelers and the baseball Pirates.)

(Current Pittsburgh T-Shirt, based on the foregoing, with depictions of the Super Bowl trophy and the Stanley Cup, it reads, “On ice or grass, we’ll kick your A--!”)

Since I try not to speak ill of the dead, athletically or otherwise, let me note that I haven’t written about the Pittsburgh Pirates baseball team—except in a brief 1979 historical fashion—because they have amassed a record of 16 consecutive losing seasons and, with much futility displayed in the current 2008 campaign, likely will set a major league record of 17 straight losing season.

Financial Regulatory Reform

It’s too much; it’s not enough; try discarding more than you enhance.

The Administration seems to have watered down its own financial regulatory plans and settled on a lot of form but little substance in a scheme which seems to have drawn fire from m many interests, except some of the major banking institutions.


We had a major financial mess, caused in part by lack of strong financial regulations and we still are in the middle of it—as President Obama knows, politically—so the traditional low risk political approach is to proposed something which looks dramatic but in fact isn’t.

Yet, in satisfying critics before the legislative process begins, the Administration—which predictably will make more concessions—may not have solved many of the financial problems we and the world face.

Suffice to say, if the Admin could produce a cadre of strong regulators, they wouldn’t have to change much of the current financial regulatory terrain. But, I guess they can’t, so they throw up some structural changes (not enough) and some rules changes, pray they work, and hope for the best.

Go ahead and codify it, but the Fed already has the authority to assist any company—of any sort—which it deems needs help. It’s “systemic risk tools,” are hardly marginal, either

I already laid out my scheme—which never would pass congressional muster—because it gives too much power to the Fed, which already has a bunch of D’s in the House clamoring to dilute its authority.

These complaining Members should look at the Paul Volcker Fed's history, see the lengths to which Congress and the interest groups went demanding his head, and then internalize why those critics were wrong in the 1980’s and just as wrong now with Ben Bernanke.

Here are some simple (for me to suggest) regulatory reduction suggestions for the Obama Administration and the Hill as they go about financial reform.

You don’t need a Comptroller of the Currency's office just to give the Treasury Secretary redundant say over national bank regulation; you don’t need the OTS, because all of those small banks can be handled by the Fed and the FDIC; you don’t need a Commodity Futures Trading Commission, when you have a Securities Exchange Commission, unless you believe all of those farm interest Members and Senators, who think that ag products securities trading will get lost at the SEC. You don’t need a Home Loan Bank System (apologies to my friends who work in them or represent them), since there is nothing they offer the industry that the Fed’s discount window can’t give those smaller institutions.

While you are at it, swap out state regulation of insurance companies for federal control and if you have any time, energy, and political will, do the same for state charted banks.

Political Advice for the President: People in the business want their pet regulators and people on the Hill want their pet agencies. This is Washington, be skeptical and cynical (at least privately). Any financial interest which likes your current financial re-regulation proposal probably hasn’t been discomfited by it. Break some eggs. That's the only way to make an omelet.

The GSEs

The Obama Administration signaled that it wasn’t going to change—this year--how Fannie Mae and Freddie Mac are being employed, i.e. in a very non-conservation mode, carrying out public policy, with little regard to what the real costs are of running a national secondary mortgage market.

When the two were "nationalized," they were supposed to be run as conservatorships, to allow for their eventual revival as public companies.

Both congressional chambers said last year that they would—in 2009—decide the future role and structure of Fannie and Freddie. They won’t have to now that the Administration suggested it will wait until the FY 2011 Budget (February 2010) to offer GSE policy recommendations.

Speaking of Fannie, there was a sad development involving a Fannie attorney alumni, who the Administration plucked from a law firm to be General Counsel of the Army.

Donald Remy worked at Fannie for about 7 years, between law firm gigs, and he was a well liked colleague, who labored on employment and corporate conduct issues for the com[any.

Somehow, Remy’s official Senate confirmation papers (bio, background, etc. etc.), did not specifically cite his Fannie Mae service. One report said his papers disclosed that he worked at (paraphrasing) “a major international financial services corporation in DC.”

Bottom line, that discrepancy killed his appointment and he withdrew his name.

Nobody who knows him thinks that Donald Remy did that on his own. Someone in the Administration had to bless this description and Remy’s documents.

The issue for me is why all of the subterfuge and camouflage? Why is Fannie Mae service a “scarlet letter,” in the eyes of this White House, which still has managed to find spaces for a few talented ex-Fannies?

Fannie’s real business problems occurred in 2006, under a Republican CEO, who chose to buy billions in destined-to-fail lousy mortgage products and who left the company under pressure, not unlike a lot of the Wall Street and big bank shamed and besmirched, who lost their jobs and shareholder money.

So, some no-nothing GOP Senators and maybe even a Democrat or two would have complained, “Remy worked at Fannie Mae.” So what? He didn’t do the mortgage deals and he didn’t rub shoulders with the private label securitizers or the lenders who sent billions in Alternative A mortgage crap to the Fannie portfolio. And, he didn’t compromise his principles on Fannie’s important housing mission.

This episode’s shame doesn’t rest with Donald Remy.

Note to White House

Forget how much we—as a nation—love President Obama’s persona and his family.

The public is getting anxious. Too much federal money is being committed with too little return. Promises don’t cut unemployment numbers.

Yes, I know it barely has been six months, but reading “chicken salad results” into so many chicken crap economic reports can’t fool the public.

They want jobs and some prospects that the monstrous deficits won’t grow continuously.

Bite the bullet and make hard choices, no matter what some in Congress claim they want.

If you will lead, they will follow, especially if the public agrees with you.

Less rhetoric, please, and more action.

Maloni, 6-22-2009


Derek Pilecki said...

Is the delay in deciding the GSEs fate beneficial? I think it is because it gives Congress more time to decide on what is the best for the secondary mortgage market. Cooler heads will see the GSEs as the only consistent source of capital for the mortgage market.

Bill Maloni said...

Thanks for your insightful question.

Yes, I can make that case, too, as long as this Administration and the Congress decides the companies fates before 2012.

What I edited from my blog was the fact that Fannie and Freddie still represent the only "conventional secondary mortgage market," despite the fact that they are being run by Treasury through FHFA.

The banks and Wall Street haven't stepped up to replace F&F's market function and they may never do so.

The American public's mortgage finance options become pretty slim, absent a viable secondary market where mortgage loans and securities can be traded and risk dispersed.

A rational person(your "cooler heads")easily could discern that letting Fannie and Freddie recapitalize and operate as they once did, albeit with some controls and limitations, would be the best policy choice.

But, as I hope was clear in my discussion of the Donald Remy matter, there is a fear of/anger toward Fannie that far surpasses
the company's shortcomings.

Perspective seems to have been lost when discussing what really happened at Fannie and Freddie.

And the politics of resurrecting the GSEs, or whatever they might be called, is what will decide the isssue.