Monday, June 28, 2010

One Man’s Opinion

“They have labored long and produced a mouse…”

This phrase has been used often in commentary and very often when describing deliberative exercises.

It is most appropriate when describing the financial regulatory reform conference report, which emerged last week from the House/Senate conferees.

That’s unfortunate because a lot of people put in a lot of time and effort trying to improve the financial regulatory terrain and rules in the wake of the 2008 financial institutions implosion. The initial product of various House and Senate congressional committees had Wall Street and the big banks running scared and for good reason.

But when members of the two Banking Committees met “in conference” and produced an amalgam “conference report”-- which still must still pass both the House and Senate—a lot of the toughness came out.

The large financial firms did their job and lobbied, cajoled, and bought their way out of a lot pain which earlier had passed either the House or Senate, but never made it in the final conference report, which represented a House-Senate “compromise.”

Of course President Obama welcomed the result and made clear he will sign it, if enough Senate Democrats don’t toss their cookies when asked to vote for it. Just like the health care bill, the President will declare the product a major victory for the American people and his administration and display that coup.

But, he’ll be wrong about its substance (just like he was with healthcare).

On every major issue—which the new consumer protection agency wasn’t—the giant financial institutions begged and threatened and got a lot of the bite taken out from the proposals before the conferees voted. Whether it was the Volcker rule, the Lincoln language on derivatives divestitures, or the too big to fail capital protections, the big guys squealed and lied about their “international competitiveness” or the hoariest explanation that the new proposals would hinder the banks’ ability to finance necessary domestic lending.

The last argument in particular is enraging.

The banks now are sitting on $1.8 trillion which they have chosen to arbitrage with the Treasury and fed rather than lend to business customers, large and small alike, and individuals. The big financial guys seem only to want to be part of national economic recovery if the federal government gives them total protection.

The major financial service arguments against the congressional proposals always were “all about the money” and nothing more. The Congress talked big and drafted proposals that would have reduced major financial risk, taken some bank revenue and moved it around to other financial institutions, jhedge funds, and maybe even a few foreign banks.

The US companies draped themselves in red, white, and blue and conjured all sorts of negative impacts in the communities where branches have and claim they lend (but certainly do draw deposits).

Phoney Deadline

What people saw unfold was a very old story. Both D’s and R’s huffed and puffed, accused the other of obstructionism, and then someone creates an artificial deadline. In this instance it was, “Let’s pass this before the July 4 congressional recess” or “Let’s give the President a tool for the G-20 meeting” and a majority employs the bogus justification to cut corners, sand away the edges of tough legislation, and then 50% plus one vote for it, end of story.

Why does the President need a bill before July 4 or the G-20 meetings? Is it really better to have a piece of soggy statute, early, rather than solid legislation with teeth, which takes a while?

Might those Senators and Members have gone home for the Fourth and heard how much the voters revile the big banks and Wall Street and how much they want them stuck with the toughest Lincoln and Volcker language along with even more resistance.

Don’t bet your last dollar that it was anything but that.

Remember that some of the biggest opponents to the tough proposals were Obama Administration officials worried about hurting the banks and investment banks.

(This blog was written on Sunday, before the death of Sen. Robert Byrd (D-W. Va.) raised questions about the Senate’s schedule this week, as well as its ability to override a possible GOP filibuster of the reg reform bill.)

In my opinion, the best thing that could happen is for the congressional leadership schedule to fall through and the House and Senate not get bills to the President before they skip town this week. Maybe they’ll come back with some spine on these matters and reject what they did in conference for more effective ideas.

Does anyone listen to car ads on radio or TV (as I did during the week the conferees exempted the automobile sellers from the new consumer agency oversight)?

“Best price in town; only available for a limited time; these prices won’t last; see us for one of a kind pricing, blah, blah.” Hyperbole after hyperbole after hyperbole, which is a nice way of saying, lie after lie after lie. The behavior of new and used car dealers have been the stuff of social commentary and comedic grist for decades, but suddenly Congress sanctifies them absolving them from coverage by the new federal consumer watchdog.

What was most surprising was the car folks get a pass from the new consumer “eyes,” even after the Pentagon criticized the industry for consistently fleecing servicemen and women???

Fannie Mae and Freddie Mac

As I look ahead to what, undoubtedly, will be more hearings on Fannie Mae and Freddie Mac (certainly in the House) and efforts to develop legislation to “abolish them” or do whatever the congressional solons feel needs to be done, this recent legislative reg reform exercise should be most instructive.

Will the Congress really abolish the two GSEs which now finance 75% of all of the nation’s mortgages and almost all of the “conventional mortgages” (non-government)? Or will the chambers talk a big game but when you get to the details--and Congress realizes that it can’t replace something very workable with nothing--F&F themselves may survive—albeit more heavily regulated--or will a federal secondary mortgage market for conventional loans be created but in other institutional identities??

Because the Congress talked big but acted small on regulatory financial reform, Congress may feel a need to come down heavy and make major changes with the housing finance entities. After all who would defend Fannie and Freddie?

But, once you get passed the Wall Street Journal and others on the fanatical Right and listen to folks who understand mortgage markets, you’ll find residual strength for federal support of the mortgage finance system, even Fannie and Freddie themselves, which could twist next year’s Congress just as much as the bank and Wall Street guys did this year.

The debate will not and should not be to extend the life of F&F but it should be about the role of the federal government in mortgage finance,

It’s not just the Homebuilders, Realtors, small bankers, and others—all of whom vote and all of whom have lots of employees who vote, and all of whom willing to put their money where their mouths are—who might challenge the Congress if the politicians get radical when it comes to the nation’s mortgage infrastructure.

In the wake of the 2008 debacle caused by lousy Wall Street underwriting on subprime mortgages, I’ve seen a certain amount of, “Does the US need all of this homeownership?” commentary.

Let me rephrase the question with, “Does our nation need the neighborhoods, stability, citizenship, community and civic activism, and multitude of jobs, which go with all of that homeownership?” Those lost jobs are much more than just builders and laborers. They are appliance sales and repair people, national warehouse stores (Wal-Mart, Home Depot, Lowe’s etc) independent paint and hardware stores, glaziers, rug manufacturers, roofers, carpenters, etc. etc, and the myriad industries which rely on an active housing industry and contribute to it representing about 25% of our gross national product.

You get the picture. Cutting back on support for US homeownership involves a lot more than a few home builders going out of business and Fannie and Freddie finally being sidelined.

What do you think Congress? It will be argued that you just are “getting Fannie and Freddie.” But if you legislate on mortgage finance matters as poorly as you did on financial regulatory reform, turning your legislative shotgun on the “American Dream,” you’ll be punishing a lot more than just that.


On June 25, 2010, a son, Rocco Patrick Maloni, 7 pounds, 5 ounces and 20 inches tall, to Andi Hedberg and Jason Maloni, with an Italian first name, Irish middle name, and a last name that swings both ways!!!

Best wishes for good health and a long life Rocco and thank you from Grandma Heidi and Grandpa Cheerios and God bless Rocco, his sister Daryn, and cousins Rex and Tiegan Maloni.

Maloni, 6-28-2010


Derek Pilecki said...


Would love to hear your thoughts about how DeMarco handled the delisting of Fannie and Freddie's stock?

In a similar vein, if Freddie is able report a profit in Q2 because delinquencies are declining, do you think DeMarco will allow them to actually report the profit or will he continue to force them to over-reserve for loan losses? I mean the GSEs have 3 years worth of charge-offs in their loan loss reserve compared to Wells and Chase at 1 year in theirs. How much is too much? Does somebody at the FHFA want the GSEs to look weaker than they actually are?

Thanks in advance,

Derek Pilecki

Bill Maloni said...

i don't think that Demarco is calling the shots for Fannie and Freddie, Treasury is.

But, that doesn't mean Demarco is any sort of GSE ally, quite the contrary as his GOP work experience suggests. (I still am surprised he keeps his job, unless the Obama Admin--in their myopia--doesn't want a D "staining" his/her resume.

I have no idea how FHFA handled the delisting, but I am not surprised that it happen as soon as the letter of the law re "trading below a buck for __ days" was hit, further eroding the values of F&F. The same thing happened when Hank Paulson decided both had insufficient capital, although a decent contrarian case case could have been there, too.

Right now, the former GSEs have no powerful friends, in high congressional or Admin places." And, if there are any, they are keeping their mouths and eyes shut.

The rules for F&F always will be different, from higher TARP repayemnts rates to the Treasury than banks (10% versus 5%) and in the disdain that they seem to be held because of their affordable housing missions, which were not the causes of the financial and economic meltdown in 2008. No matter how heavily that is imbedded in GOP talking points. (Hint to those still in doubt, it was the billions in subprime mbs created, originated, guaranteed, and sold by Wall Street that was the cause. F&F stupidly bought the stuff.)

Yes, a lot of "somebodies" at FHFA and maybe a few at Treasury and the Fed, hope the the former GSEs will look bad. I suspect that Freddie will start showing positive numbers before Fannie but when that inevitably happens, Congress will be thoroughly "kurflufilled" (old family term), because in their "weakened form and non-creative government management" F&F alone are holding up the nation's conventional secondary mortgage market.

Maybe "abolishing" the two won't seem so attractive or make sense, when the enterprises start producing black ink.

Anonymous said...


Do you view the FHFA proposed rules that we announced on July 6th as a zero for preferred shareholders. It seems to point to a move to put these entities into receivership.