Thursday, April 29, 2010

The GOP and Fannie and Freddie

Did the Senate R’s Blow It, Again?

It appears as if the wobbly Senate Democrats—in negotiations over a broad financial reform bill--gave into their GOP counterparts and dropped the $50 billion Wall Street/big bank prepaid fund, which would cover initial costs of future bailouts.

The Washington Post editorialized last week that was an acceptable removal, especially if the fund’s existence caused Wall Street firms to think there was bailout money available for future exploitation and risk taking.

Excuse me if I disagree with the Washington Post editorialists one more time.

I think it is better to have the money paid in before any more financial crap hits the fan, since virtually any Administration when faced with a “Too Big To Fail” (TBTF) dilemma will turn on the money spigots because failing to do so could cause the “unthinkable.” If in 10 years we have no TBTF incidents, then the Congress in 2020 can decided if the fund still is needed or should be disassembled and used to pay for more fences in Arizona (to keep Arizonians in state or out of Mexico), or whatever the WH of that era is pushing.

Of course that option always is there for the Congress—as part of this bill—to say that the federal government never will bailout a large financial services company, just let it go through bankruptcy procedures. But, just as the Congress passed an explicit provision in the Fannie and Freddie charters that neither was the “full faith and credit of the United States government,” both the Bush Republicans and then the Obama Administration ignored that tiny legalism, because each decided, independently, that F&F were “TBTF.”

Speaking of the former GSEs and the Senate regulatory reform bill, I am writing this on Thursday, 4-29, with no idea if the GOP made good on its Senate demand to get language into the Senate bill on the two mortgage giants.

If the R’s were smart and really objected to how the Treasury--through the Federal Housing Finance Agency is managing F&F—GOP senators would insist that the Treasury begin to force F&F to market price accurately their services with an eye toward maximizing revenue, not for their lonely common stock investors--who only own 20% of the company, with Treasury owning 80%--but because it would bring integrity and discipline back to national mortgage pricing and also give the Fannie and Freddie staffs some incentive to run their operations like a businesses.

An added benefit to putting more “market sense” back into the mortgage business is that the two companies can begin earning revenue to pay back the Treasury what they’ve “borrowed” and mimic the auto companies and the big banks.

If the Senate Republicans really believed in the “market” working, since Fannie and Freddie right now are the only real secondary mortgage market participants, you would think the Republicans would encourage that development. If for no other reason than future F&F revenues largely would go back to Uncle Sam.

It’s probably asking too much of this mainly screwy group of conservatives, whom—I’ve argued—really could have made a major improvement in the healthcare bill--which they totally scorned procedurally--if they insisted on adding limits on healthcare legal damages as their price for going along and making it truly a bipartisan bill.

I believe that provision would have been approved, despite the fact that the trial lawyers heavily support the Democrats. It makes sense and it would have cut doctor’s malpractice insurance fees by huge amounts, as well as lower patient costs. But the GOP decided, instead, figuratively to hold their party’s breath and turn blue, rather than try to participate legislatively and add provisions that might have helped.

That was a one missed opportunity which won’t come around again soon.

Spencer Bachus

Once upon a time, Rep. Spencer Bachus (R-Ala) was a good guy, someone who supported housing and the then-GSEs. Now, he’s become the ranking minority member on the House Banking and Financial Services Committee and he has consumed the right wing kool aid and—in an anti-Democrat article in Politico newspaper-- is excoriating Democrats for all of Fannie and Freddie’s “shortcomings,” ignoring the role that the GOP played in that which he laments (most recently under President George W. Bush and when the Senate and House were controlled by the Republican party from 2000-2006).

I guess Mr. Bachus refuses to face those realities and instead wants to hide behind talking points which continue to blame Fannie and Freddie for the financial debacle. Yes, they had a hand, but the source of the problem really was massive subprime mortgage lending, started and stoked by Mr. Bachus’s Wall Street friends and the large commercial banks which supply him and his fellow R’s on the Committee with plenty of campaign cash.

I’ve written this ode before, but I’ll do it again for Spencer Bachus. Nothing that Fannie and Freddie did in carrying out its congressional housing mission, putting 55%of their business into mortgages which served low, moderate, and middle income Americans, significantly harmed the companies.

There were flawed decisions by CEOs at both companies, in 2006 and 2007, to purchase huge amounts of Wall Street underwritten subprime loans, put into Wall Street guaranteed subprime mortgage backed securities, and then sold throughout the world by, you guessed it, Wall Street, which overwhelmingly failed and shellacked Fannie and Freddie and dozens of other financial institutions worldwide.

Fannie and Freddie were guilty of buying that garbage for their portfolios, a fact for which former Fannie CEO Dan Mudd apologized and took personal responsibility for--with regard to Fannie Mae--when he appeared before the Angelides Commission recently. Those wretched Wall Street loans still in GSE portfolios continue to bleed red ink.

The House GOP Banking staff could do worse then compare those loans to the Fannie and Freddie MBS which contained their standard or “prime” mortgage loans and note the marked performance differences between the Wall Street “sub prime loans” and the F&F "prime" business.

That might kill a Republican talking point or two but it would make Mr. Bachus look a little more informed.

C’mon Spencer give up the cheap political rhetoric, show your independent thinking and look at the facts. A lot of your constituents got quality mortgage financing through Fannie Mae and Freddie Mac, a fact that you celebrated when the companies were riding high.

You had no problems then, with their affordable housing goals, neither did the Bush Administration, which certainly never lowered but celebrated them and then made the goal tougher to reach when it disallowed certain financed units from being counted toward the goals.

And, as I pointed out, it was you and the rest of the GOP which controlled this town politically from 2000 to 2006, but I don’t remember you leading the any charges against the former GSEs.

Mr. Bachus, who do you think is going to finance housing in this nation, if the federal government doesn’t participate somehow?

Will it be your friendly large commercial banks and Wall Street? Read the headlines about Goldman, my friend.

Read just how much lending your friendly banks are doing. When will they come back and lend mortgage money in Alabama or any other state? If I were you, I wouldn’t bet my political future on the banks doing the right thing.

You have a partisan role to play, I understand that, but when you get ready to seriously legislate and not blame the D’s, realize that the Congress—as I have been writing—has very few options. All of your ranting and hyperbole won’t change the fact that, for now, Fannie and Freddie are all that stand between plentiful mortgage finance, still dispensed rationally with national underwriting standards or—if F&F disappear or are “abolished” with nothing meaningful replacing them--very little mortgage money with your friends the banks calling every underwriting shot.

Do you really think the little people of Alabama will be well served with that arrangement and happily re-elect the Congressman who put them in that shaky and unstable mortgage lending environment, where all of the cards are held by the banks?

Maloni, 4-29-2010

1 comment:

Bill Maloni said...

I should have spelled out in greater detail my thoughts on TBTF and why I would prefer Wall Street to front the money for future bailouts.

In essence, it is because there will be future bailouts, no matter what party is in power when they occur and it will cost money.

TBTF is an "existential" conceipt, meaning it defies list making.

Like pornography, you'll know it when you see it and that's when a collapsing TBTF business fails. That's when you want to have money in hand to deal with it, not suddenly beggaring thy neighbor for the resources.

I suspect that it won't happen because of GOP protection of the major financial servcies companies, but I hope someone on the Senate floor or in a conference with the House puts back that $50 Billion fund. The banks and Wall Street can afford it.