Monday, January 25, 2010

Peanuts, Popcorn, Crackerjack…!

Lots of things worth blogging about

The Brown victory in Massachusetts; the President seeking to implement some of Paul Volcker’s financial regulatory proposals; Chairman Barney Frank (D-Mass) announcing that he plans hearings, hopes to abolish Fannie and Freddie and replace them with something else, and many others.

Senator Scott Brown (R-Mass)

If losing the Massachusetts Senate seat wakes up the arrogant Democrats (yes, you read that adjective correctly), then it was worth it. How many presidents have enjoyed 60 senate votes? What could LBJ or even Bill Clinton, pre-Lewinsky, have done with the 58 or so Senate votes President Obama now has or the Democrat majority in the House?

The Democrats are still in major control, if they only would act like it. They need to stop the dumb in-fighting and try legislating/governing. If they soon don’t, they deserve to lose this year’s congressional elections, which likely means losing the 2012 presidential set.

I don’t give the Administration much credit for what/how it has advocated and the same for the D’s in Congress. They both need to learn from this past year’s errors and get off their high horses and do some serious work.

Having said all of that, the Democrats still are trying to dig out from the 8 years years of the Bush trauma and humongous policy errors. Can any party do so in one year? That’s doubtful, but the harsh political reality is that Franklin Roosevelt’s party needs to do more and better.

The Democratic Party made too many promises to gain control of both ends of Washington in 2008; now they need to produce, if they want to maintain that grip.

I’ve always counseled public officials that you are known in this town either as a wolf or a sheep. If the political bell is going to toll for them, it’s better for the D’s to go out as wolves than lamb chops!!

Paul Volcker Rules!!

As someone who long has blogged that President Obama should listen more to Paul Volcker and less to Tim Geithner and Larry Summers, I hope last week’s flurry of statements about new Obama financial service policies—and Volcker’s role in shaping them--are correct.

Nobody should look for banks (or many other commercial interests) to do anything but what they were created to do...make money.

You keep them directed toward the public good and constrained by strong regulation, not through wimpy calls on them to be “good citizens.”

Volcker knows the big bank beast and understands better than many what banks should do as taxpayer insured depositories and what they must be denied as they seek other major revenue options.

Geithner might mouth those words, but I doubt if he “walks the walk,” since--when his time in Washington ends--he’ll almost naturally turn to the big financial institutions for his next portions of bread and butter.

Don’t underestimate Volcker’s wisdom and experience. It’s one of the benefits of age; a shame he isn’t 20 years younger and could then take on a fulltime job as Treasury secretary. He might turn it down, if offered, but—today--he still would be the best man for that job.

Barney Frank and GSE restructuring Hearings

I am constrained by blog space limitations to write everything I want on this subject. So consider this the first of many installments on the matter.

The political reality is that in an election year (yep, here it comes that old “saw”), the House is unlikely to restructure the former GSEs. Nor--with Senator Chris Dodd’s (D-Conn) pending departure --is the Senate ready to consider such far reaching legislation, despite the howls from certain GOP Senators about how badly Treasury is running Fannie and Freddie.

And, what might be surprising to many but not to all, is--if there was a serious move on Fannie and Freddie —one sound the Hill would hear loud and clear is the metallic “clank” of so many Wall Street and commercial bank anuses slamming shut!!.
Those bad boys, right now need F&F, more than ever, to take from their books the interest rate risk represented by the few (conventional) mortgage loans they do make.

THERE IS NO CONVENTIONAL SECONDARY MORTGAGE MARKET IN THE UNITED STATES, SAVE THAT WHICH IS BEING PROVIDED BY THE TREASURY--CLUMSILY-- EMPLOYING FANNIE AND FREDDIE.The challenge for Barney Frank and anyone else who delves here is producing a mortgage model that had all of the pluses of the Fannie/Freddie design and few of the problems and conflicts.

Any new structure must be able to deliver long term fixed rate financing to consumers, no matter the rate environment; do so in a way that every market in the nation can access the same mortgage products and prices as the others; and offer systemic standardization and efficiencies, which allow mortgage money to flow easily across the nation and attract overseas investors as funders.

If the new scheme doesn’t do those things—not to mention insure that lower income families and minorities get access to the mortgage goods and services—then it makes no sense to shuck what you have.

The “abolish them” mindset of Chairman Frank seems to suggest some unhappiness and I will bet that more than a majority of the Banking Committee feels the same way, without them quite knowing why.

Some of these critics are many of the same who actively helped legislate more than 50% of Fannie and Freddie’s business going to low income families and those not living in “underserved areas” and silently cheered when HUD officials drove that number to 55%. Many of them stood with the GSEs and cheered the new homeowners or those multi-family buildings, but now would they would vote to level the credit providers.

That is their option, as long as they responsibly create a replacement.

Up until 2005 when their managements failed F&F, the model worked well—with no federal dollars ever being spent on/for Fannie and Freddie-- but the subprime debacle caused self-inflicted mortal wounds at both former GSEs.

The task facing Mr. Frank is how to re-create the “implicit” federal relationship in some institution(s)—and keep alive long term fixed rate conventional mortgage funding-- or default and go to all private funding and risk the country only being offered adjustable rate loans (ARMs) and at premium prices because lenders will not keep even those assets long on their book (because they are no F&F’s to buy and hold them).

Anything in between will look much as F&F did before the “conservatorship” and beg the reasonable question, why abolish what we have unless it is to engage in some twisted form of continued outrage?

The substantive choices are pretty few for Congress or anyone else trying to come up with something “new” to avoid whatever are seen as Fannie’s and Freddie’s structural problems.

Just because Congress delays and stumbles doesn’t mean the market will or that people will stop seeking mortgage finance. So policy in this area needs to be deft, effective, and creative. Things which don’t come to mind when you think of Congress legislating.

What could be the hearings’ saving grace—as they explore alternative mortgage finance systems--is if they dispel some of the “BS” that surrounded what happened at Fannie and Freddie and if the Committee identified some of the strengths of the F&F mortgage system model. As dedicated mortgage investors, those companies help responsibly finance millions of new homeowners while creating new products for lenders to offer consumers, modernizing and making efficient the mortgage process.
Do away with Fannie and Freddie, without immediately providing a viable alternative, and the housing market, what’s left of it, would near crumble.

The House Banking Committee needs to approach this issue rationally, not like a torch carrying mob.

The F&F secondary mortgage market model worked and largely can still work, although there is no denying that the last three years have created a bunch of mortgage lender eunuchs, which won’t extend credit unless Uncle Same wraps his arms around every loan.

The hearings should be more about preserving the Fannie and Freddie function in the best manner possible.

Given what individual committee members know and don’t know--unless Chairman Frank and his staff take a whole new approach to the topic--these hearings could just become what many previous Banking hearings became, the blind leading the blind while kowtowing to every special interest group sending campaign contributions to the Members, i.e. “the best free circus in town.”

I wish I had the popcorn and peanuts concession!

Maloni 1-25-2010


Norsky said...

Bill, Friday's Bloomberg stories on FNM/GSEs had an udate, #4, just after 4PM. B. Frank was quoted as saying they would have to figure out what they could do for the existing shareholders. Can you offer any insight on what that was all about??

Bill Maloni said...

The short answer is that I don't know, right now, but the reality is that he can propose any changes in the law for which he believes he can get the votes.

Just as Mr. Frank reaffirming that the current model, with modest changes, is how to move forward. That could help current shareholders.

I didn't see the Bloomberg quote and I don't often remember Chairman Frank worrying about F&F shareholders.

I will try and find an answer to your question, but I would be stunned--when they begin their hearings--if the Committee will the benefit of a "Chairman's Mark," a draft that would have complete details restructuring the nation's mortgage finance system.

It's always possible, contrary to what has been written, that the Obama Administration will offer a major plan in its FY 2011 Budget, which will be sent to the Hill shortly.

Bill Maloni said...

With regard to the last comment, I think the writer incorrectly spelled "scumsucker!"

Bill Maloni said...

NORSKY--Banking Committee sources told me that the Chairman had nothing "specific" in mind when he made the comments you mentioned.

They said that he merely was identifying his desire to come up with a systemic plan which is "comprehensive" and would apply also to Ginnie Mae and the Federal Home Loan Bank System.

I wouldn't spend a lot of time looking for shareholder relief, but Congress is capable of doing most anything.

Also, remember, this will be a very long process, subject to the ebbs and flows of congressional year legislating.

Bill Maloni said...

Norsky--I dropped a word from that last answer.

It should have read "congressional election year legislating."

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