Tuesday, December 15, 2009

“The Zimmer Plan,” A Smart Step for the White House and Congress

A good friend of mine, Rob Zimmer, has come up with a capital idea—literally and figuratively—which I think needs the light of day or light of blog, depending on where you are sitting.

Simply stated, Zimmer would have Fannie and Freddie pay Treasury less than the 10% they now pay for their federal borrowings and channel some of the difference into dividend payments on their previously issued preferred stock.

The beauty of Zimmer’s idea is that it can be accomplished through a Treasury regulation. It corrects two historic wrongs committed against the country’s small community banks by the Bush/Paulson Treasury and would unleash powerful small bank efforts to generate much needed jobs within the small business community and elsewhere.

I’ve known the hard working Zimmer for 20 years. An ex-Cold War army Captain, he worked on the Hill for Representatives Steve Bartlett (R-Tex) and Tom Ridge (R-Pa.). Fannie then hired him to be the regional public affairs director in its Philadelphia office. He then “went techie” for a company in Philadelphia, before Freddie tabbed him to be one of their top Washington lobbyists. Zimmer operates financial services consulting firm, which he founded when Freddie cut back their congressional and public affairs outreach.

To appreciate the Zimmer plan, you need to go back to when Bush Treasury Secretary Hank Paulson told Fannie Mae and Freddie Mac to build their capital bases by issuing preferred stock, which they did, between 2000 and 2006.

Bush financial regulatory officials then pitched the nation’s small commercial banks to buy the high dividend paying preferred stock, with the banks carrying the stock as capital on their books. Industry sources say that it was suggested by regulators that such purchases would smooth the small banks’ examinations.

Paulson later engineered the federal takeover of Fannie Mae and Freddie Mac, mandating that the former GSEs pay Treasury a usurious 10% on any money borrowed from the Treasury.

This Bush Treasury action, complete with Treasury taking 80% of the two companies’ common stock ownership, ended all GSE stock dividends and caused the largely small-bank-held preferred stock’s value to drop to nearly nothing, wiping out a slug of community bank capital.

When the Treasury—under Paulson--started funneling TARP money to the large banks and others, the repayment tariff for the big bank “GOP darlings” was just 5%, half of what the GSEs had to pay. (In the minds of many, including my own, this was another Bush Treasury tactic to screw the former housing finance GSEs. Yet, that 10% rate still exists today.)

Here’s where Mr. Zimmer comes in and why his idea makes so much sense. He would have the Obama Treasury mandate via regulation that the former GSEs pay the same 5% (or 6%, if need be) to the Treasury for their borrowings, but require Fannie and Freddie to pay the difference as dividends on the now valueless preferred stock that that the Bush regulatory officials urged the small banks to buy.

The community banks still owning the preferred would agree to use that additional capital only to make loans to small businesses, for mortgages, or whatever other private activity the Obama Administration believes will generate the most jobs or public benefits.

In this way,the public gets a boost from the additional small bank lending and from the new jobs it generates; the Administration and the public get employment help where it is most needed and most productive; the community banks get needed capital back (original capital stolen from them, I would argue, by the Paulson Treasury); and the former GSEs get to repay their debt to Treasury at the same the large commercial banks pay, or slightly higher if you still are looking to punish the former GSEs.

This proposal has more promise than the Obama White House’s easily ignored begging the large banks to “do more” and asking them to quit sitting on the sidelines while unemployment dances around the 10% range.

It seems that kind of importuning has been going on for months and all that the big banks do is rub their TARP-filled coffers and give the President and his team and his team a cold shoulder.

Yes, there is slightly less going into the Treasury General Fund, because of the possible GSE interest rate cut, but it is a small amount since there is no proposed reduction of the Fannie/Freddie principal repayments.

Some small bank industry sources believe that redirecting some of the GSE interest payments into preferred stock dividends could leverage more than $250 billion of fresh lending. Even a piece of that would be more than the empty promises of a lot of the bigger financial services companies, many of which are rushing to repay their TARP debts so they can avoid Treasury compensation limits.

Others have nibbled at this same idea, but Zimmer has put the entire concept together, wrapping in the necessary political realities. He’s identified many positive components. I hope the Obama Administration or some Senate solon sees the virtue and strongly supports the plan, including it in the coming Senate regulatory reform legislation or just demanding that the Administration issue the necessary regulations.

Those small bank interests, who have been talking for years about the Paulson perfidy and their own financial hit from the Bush Administration’s GSE takeover, should welcome Zimmer’s creativity and industry. It could provide a major boost to their institutions and the nation.

Maloni, 12-15-2009

(Disclosure: I own Fannie Mae preferred stock, less than $8000 worth at yesterday’s close, which could appreciate in value, if the Zimmer idea was implemented.)


John M said...

Hi Bill, I've just now re-posted your work as "Zimmer Plan For GSE Recapitalization". Hopefully my title is still a fairly accurate description of the general thrust of the piece.

I've done a few, mostly cosmetic, edits. At one place I have ... and the former GSEs get to repay their debt to Treasury at the same rate the large commercial banks pay, ..., guessing that "rate" was indeed the missing word in your original version.

Bill Maloni said...

Thanks John and you found the now "predictable typo."

Bill Maloni said...

Leverage Explanation:

For some who might have questions about how the new dividend payments could produce $300 Billion in lending, the sdecnario goes this.

Community banks reportedly have about $35 Billion of F/F preferred stock on their books, which has a near zero value because no dividendsds are being paid.

If dividends are re-started by the Obama Treasury that stock "comes to life" as bank capital and the $35 Billion leverages about $300 Billion or more in new small bank lending.

Bill Maloni said...

I know "scenario" is not spelled thta way!!!!

Unknown said...

It's not a GSE recapitalization....GSE capital standards have been effectively suspended in conservatorship, so they won't lend more due to this. It IS a community bank recapitalization, as many of them have been materially harmed by the Paulson action.

But hey, it's only the US economy at stake here.

Bill Maloni said...

I rest my case!!

(And, John is a very, very intelligent guy!)

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