Tuesday, March 9, 2010


What is Barney Frank (D-Mass) thinking?

I’m sure I’m not the first person to wonder what, beyond his legendary intelligence and quick wittedness, causes the cerebral and sometimes volatile Chairman of the House Banking Committee to stake out the policy positions he takes.

Recently, as the world now knows, Frank called for “abolishing” Fannie Mae and Freddie Mac. He soon will initiate congressional hearings to produce that desired legislative result.

The fact that the Obama Administration hasn’t reached the same fever pitched conclusion as Barney likely means that this atomization will not occur in an already volatile political year. Since moving forward in this regard—with no idea what to employ as a mortgage finance system replacement--is fraught with huge political and systemic mortgage business risk for the Democrats and the mortgage industry.

Last week, Barney’s took it upon himself to lob another grenade at the former GSEs and reminded investors that Fannie/Freddie debt and MBS securities were not the equal to Treasuries and that those who bought company securities could end up getting a financial “haircut,” or less money than they expected when they bought the bonds.

While legally and technically correct, what Barney said flies in the face of what the Treasury sales campaign to assure markets, i.e. that the former GSEs debt and securities are safe and the Treasury does stand with them, since the United States mortgage market—which right now is standing on Fannie’s and Freddie’s shoulders—relies on the two companies largely unfettered access to credit market.

Fannie and Freddie Still “It”

Like it or not, Fannie and Freddie alone are carrying out the secondary mortgage market policies that the Treasury wants performed and which the nation demands. The fact is, without Fannie and Freddie, the US would have no “conventional” secondary mortgage market where non-government guaranteed mortgage loans are securitized and sold throughout the world.

I can’t explain what was on Chairman Frank’s mind, but I don’t think that he was just “rattling the market’s cage, because he knows he can,” as some have suggested.

Barney—whom I suspect hasn’t changed much in the years—always was tough and ornery to lobby, the most difficult official to meet with and nail down on matters. His mind was always three steps ahead you. He was impatient and he didn’t suffer fools “gladly,” even when he agreed with you.

Tough and now likely GSE-hostile, I do not believe that Barney Frank is irresponsible and wanton.

He’s mad at Fannie and Freddie and that’s clear. His anger and “abolish” statements support that, but he understands that whatever system he designs it’s going to have to look a lot like what F&F looked like and produce much of what F&F produced.

He’s not going to throw the nation’s mortgage lending to the large commercial banks and their subsidiaries and have his name on that enabling legislation which would erode everything he has championed.

Can’t Just be The Feds

I don’t think Chairman Frank wants only the federal government lending for home ownership. I am sure that he wants private entrepreneurs and private money—not federal appropriations—doing most of the work to give Americans their share of the “American Dream.”

I imagine that he would like a new system which continues to take advantage of US financial products. i.e., bonds and securities backed by mortgages, which appeal to investors across the world and thus bring in dollars from overseas to meet US domestic mortgage needs.

Certainly he is joined in that by the nation’s homebuilders, Realtors, their employees and equipment suppliers, furniture, rug, window and appliance makers do and every other industry which supplies households with goods and services. That’s why the “homebuilding” segment of our economy has produced 20% or more of our gross national product.

Does he want to abolish the efficient secondary mortgage market system the US enjoyed pre Paulson’s “Bush whacking” of Fannie and Freddie? I hope not.

Can he really have problems with dedicated national mortgage investors, which standardized mortgage products so that families in every community in the nation could enjoy the same mortgages and pricing? Does he want to endorse a mortgage market that regresses and shifts the supply and availability of mortgage money from international investors to domestic savers?

I suspect not.

Is he upset at the millions and millions of low-moderate and middle income homebuyers, with increasingly in black and Hispanic communities, which benefited from a mortgage system that D’s and R’s in Congress supported year after year? I doubt it, since Barney would consider them his “people.”

Can’t Rely on the Banks

He and his staff must realize that those loans never would have been made by a primary mortgage market system which had no mandatory fair lending goals. They were made when Fannie and Freddie used market pressures to incent the banks and mortagge companies to originate those loans and in the process share the benefits of our nation with those traditionally ignored or left out.

All of this means if Barney is going to scuttle F&F, he just may end up recreating their clones.

Chairman Frank could be angry and aggravated because he long has supported Fannie and Freddie—when others in Congress didn’t—and he feels personally chagrined and disrespected by the GSEs for their dubious PLS subprime mistakes and all that it produced.

That’s understandable.

But it hardly is grounds for destroying a system which worked fabulously, until the bad GSE judgments by a few in power, drove faulty business decisions. Those same kinds of decisions were made by commercial and investment bankers across the world, with the results that many of them and their firms and officials--just like Fannie and Freddie and many of their employees--were forced out of business, lost jobs, earnings, and reputations.

I keep repeating that the “bad guys” are gone from the GSEs. Those who remain did not have their hands all over the stupid business decisions which have angered so many.

Policy makers shouldn’t let their personal peak destroy institutions which have shown their capacity to work and successfully perform a variety of desirable chores and which well could be superior to something “whiz bang and new” which their current frustrations breed.

Baby and bath water, wheat and chafe.

If the upcoming GSE hearings are fair, then the world should be shown not only what went wrong, but also the many, many things that Fannie and Freddie did right.

The Black and Hispanic caucuses, which heavily populate the House Banking Committee, should be particularly attentive to those facts, since they have firsthand knowledge of how fairly their constituents were and have been treated by the large commercial banks which presumably aspire to succeed Fannie and Freddie.

Maloni, 3-9-2010


John M said...

As usual your political viewpoint is invaluable and I'm planning to put this up pretty well as is in a few minutes.

I think practical considerations having to do with the debt markets are going to turn much of this into custard, but that's neither here nor there. I believe your text deserves as wide an audience as possible.

Bill Maloni said...

Thanks, John. Use it as you will.
But, the

Anonymous said...

Oh! This is awesome! Thank you for putting to rest many
misconceptions I had read on this lately.

Bill Maloni said...

Tanks, but what did I do, what did I do?

Which misconceptions do you think I corrected, since I've heard from folks who still think I am rewriting history (although I don't believe that)?

John M said...

For what it's worth, I'd say this is one of your best (if not the best) articles you've posted to date. Your readers might like to compare it to this professional job on the same general subject (whlch is also quite good, by the way).

"Politics, shaky economy create no rush to restructure Fannie and Freddie", by Zachary A. Goldfarb, Washington Post, March 11, 2010.

Incidentally, our re-post of this article got a very large number of page hits on Doom -- more, indeed, than Debi's and my recent efforts ;-)

Bill Maloni said...

Thanks John.

I sent Zach Goldfarb a comemnt on his article (after congratulating him on getting the Post front page), noting that the GOP quote he used was generic and had nothing to do with Fannie and Freddie, which is typical House Republican rhetoric. Goldfarb could have done better with some of the other "substantice critics," say Peter Wallison.

I also felt that Post reporter missed by quoting Fannie's former regulator, Jim Lockhart, but not divulging that his current job is with a Texas billionaire, Wilbur Ross at W.L. Ross, which buys and sells tarnished mortgage assets.

While Goldfarb hit the major GSE issues, I think he missed the big one, which is, "Why--given the Administration's opposition to doing anything now--is Barney Frank moving forward with these hearimgs?

Anonymous said...

For a start on reform, how about combining Fannie and Freddie and turning them into the Federal equivalent of a state housing finance agency? That would cut executive compensation in half as a start. Then extinguish the common stock. Then capitalize the new agency and make it a quasi-public agency -- so its debt stays off the Federal balance sheet, but it doesn't have the incentive to chase market share that led its last unlamented leadership so far off track.

Bill Maloni said...

I am close to where you are.

In something I noted in a previous blog that I wrote but didn't print--when the Admin made clear it wasn't going to move on F&F issues--I said that you only needed one of the two companies to play the secondary market role, but you did have to preserve some profit incentive or you would have nothing but a "new HUD."

Frankly--unles it refuses to change F&F--when Congress finally proposes its statutory alterations, I would use the opportunity to put all of the existing F&F debt on budget.