Sunday, September 26, 2010

Congress: Put It Back, Because It Works!

(Excerpt from recent email I sent to friends planning a golf outing: ”Sorry can’t join you, but since so many of you paid for your kids’ college education earning money fighting Fannie and Freddie, I hope to give you a chance to do the same for your grand kids!”)

Why do Fannie and Freddie reform issues galvanize the Congress and some issues don’t? All together now class, “Politics.”

No surprise there. Being “being for or against something”--with a lot of buzz, glitz, and emotion to it-- drives legislative bodies. But so what? That’s a major component of our democracy and few would have it any other way.

Despite the politics, I hope I can generate some self interest/logic in this blog and appeal to congressional D’s and R’s--so deeply mired in their respective anti-GSE worlds--to reconsider their positions based on their own political self interest as well as practicality.

If it chooses, in a few months, Congress can fix the nation’s mortgage finance system by resurrecting Fannie and Freddie, with some substantive regulatory changes to ward off future excesses. It’s a working model—almost two years after “conservatorship”--with which American consumers, lenders, Realtors, Homebuilders are familiar and which works.

It’s a model that is needed right now given the reluctance of traditional commercial bank lenders to lend or certainly invest (keep on their balance sheets) in mortgage securities which aren’t Fannie or Freddie guaranteed.

Get Real and Get Practical

In testimony to its resiliency and appeal, it’s the system currently financing @ 90% of all conventional home lending, despite the fact that the two companies are operating with Treasury Department chains on them.

I suggest that congressional anger and bloodlust is phony. It mostly is externally generated and misdirected. It has been totally manufactured and falsely aimed at two institutions which—if reasonably regulated—provide the nation with a far greater bang for your legislative buck than starting de novo and grinding through what will be months of fighting with friends and foes alike over the shape the national mortgage market.

Naturally, most in Congress eat it up with both hands and would have trouble explaining their position with pages of talking points.

Both political parties, rhetorically, are pretty high on getting rid of the GSEs or dramatically restructuring them. But there is little agreement on how and general consensus that replacing them with nothing—save what’s in the market or works overseas--invites financial and broader economic disaster, no matter what American Enterprise Institute’s Peter Wallison claims. (In a recent Bloomberg article, Wallison calls for more private label securitization, “covered bonds”, and the “Danish Plan” as GSE successors. Watch for my response, Peter.)

But this won’t stop either party from trying and wasting much time on windmill tilting and political theater.

Unless someone follows my suggestion, expect a 2011 filled with political fighting, fatuous hyperbolic statements, perpetuating ideological myths, pandering to this or that interest group and generally doing a lousy legislative job with an inevitable untried Rube Goldberg “fix.”

Pre & PostSubprime GSEs

As I’ve argued (at the end of the blog, see a link to my interview with Fox News business reporter, Gerri Willis on this issue), I believe that policy makers should draw a distinction between F&F post-2006 (BAD!), when they began to acquire billions of dollars in Wall Street created private label subprime loan securities, and the pre-2006 companies (GOOD!), which performed very well, even when they had to finance 55% of all of their business for low, moderate and middle income families, as a result of excretive fiat first from the Clinton team and later the Bush administration?

The unrealism of the new GOP “Pledge” with Newt, the Tea Party, or whomever it is aimed, contains more tax cuts for the wealthy, homilies about balancing the budget and cutting federal expenditures, but little substance about how they would do anything about deficit spending.

What era as these folks living in and why do they think the American public will swallow the Bush/Gingrich recipe, a second time, when it failed miserably the last time the GOP tried pulling it off?

Can’t Republicans remember back just 10 years ago when George W. Bush did this dance and helped put Americans in a multi trillion dollar budget hole? Sadly for the nation, it came on the heels of Bill Clinton, with then OMB Director Frank Raines (applause!) and his then deputy Jack Lew, gave the nation two straight balanced budgets with surpluses?

The “Pledge” is filled with simplistic proposals, i.e. “Reform Fannie and Freddie”, meaning do away with them, but very few specific. Even Bush former Treasury Secretary Hank Paulson--who led the GSE takeover--would maintain F&F but in a different structure.

I’ll make a bipartisan case why, at least regarding the former GSEs-- now captive--of the US Treasury, the correct policy should be to allow them to move forward, repaying the federal government the money invested in them since 2008, and remain the foundation of the nation’s mortgage finance system. In it, the two exclusively inhabit the secondary mortgage market, buying and securitizing loans made to consumers by thousands of lenders across the country.

Recent Problems Caused by GSE Greed and Poor Regulation

Despite the very successful PR campaign against the companies, shaped and driven by their business, ideological, and political opponents, the GSEs major mistake was acquiring all of that subprime mortgage crap in 2007-2007 and then losing billions when it spoiled and died. Few errors--save in the view of ideologues--were made when they operated traditionally and carried out their congressional low-income missions.

But they hardly were alone. They were joined in the grievous error by every large American investment bank, commercial bank and international mortgage investor. The GSE failures weren’t unique to GSEs.

Not a financial regulator in Washington, not the Fed, Comptroller, FDIC, OTS, SEC or certainly OFHEO (the GSE regulator now called FHFA) saw it coming or did anything in time to stop the excesses.

But sellers need buyers and the buyers all around the world were blind to the threat, also, ergo the failures of investment banks Merrill Lynch, Bear Stearns, Lehman Brothers, and commercial banks Wachovia and Washington Mutual, as well as many other smaller institutions.

AIG, the massive insurer and re-insurer, was another huge failure, but the government has given it a lifeline and kept it functioning.

Don’t Conflate The Issues

It is the pre-2006 Fannie Mae/Freddie Mac which Congress should examine and decide if what the nation was offered then is good enough to perpetuate it, with appropriate regulatory changes to make sure “sub prime” or its equivalent never happens again and corporate earning are reasonable given the “new GSE” tasks.

I am not suggesting that Fannie and Freddie be absolved. But, they did what everyone else did, but more importantly they violated the rule most of our mothers warned us against, “Just because every other kid in the neighborhood wants to jump off the bridge, that doesn’t mean you need to follow them!”

I believe that pre-subprime, Fannie Mae and Freddie Mac were the foundations of our efficient modern mortgage finance system. Better regulation—insuring no more subprime purchases or their equivalent—and some control of earnings,prices, and size of affordable housing mission, would be a far better public policy answer than what I see emerging in the next two years with political warring in Congress, partisan positioning and angry vitriol to set up the 2012 presidential elections.

Also, at the end of this blog, I’ll post a piece by Karl Smith a faculty member of the University of North Carolina’s School of economics, titled “Fannie and Freddie Acquitted.”)

GSE Business Realty

The irony right now is that housing markets—filled with reluctant commercial bankers and still ravenous Wall Street—still rely on Fannie and Freddie, because none of the commercial banks want to get into a game where booking mortgage loans means taking on interest rate and credit risk, absent a Fannie or Freddie guarantee.

So, as my “mortgage fantasy” ends, let me describe my dream, with a congressional assemblage of Speaker Pelosi, Minority Leader Boehner, Barney Frank, Paul Kanjorski ,Spencer Bachus, Peter King, Scott Garrett, Jed Hensearling, Tim Johnson, Jack Reed, Chuck Schumer, Dick Shelby, Mike Crapo, and Barack Obama—suborning politics for smart policy making—cluck clucking, while they point to the current GSE leaders and declaring in unison (with only Shelby and Hensearling moving their lips but not uttering any words). Shh, cue the ethereal music.

"You really screwed up with those subprime purchases and we insist that you pay back the federal government.

"But, you also brought huge systemic value to the nation’s homebuyers, Realtors, lenders, and homebuilder, with sureness, cash availability, standardization, market efficiency, automation, creative products, the 30 year fixed rate mortgage's certainty, applicant equality, and all the jobs which flowed from that attendant economic activity.

"Although some of us still &^%$#* dislike you for reasons we can't intelligently articulate, our new plan is to “free you,” regulate you more tightly and limit some of your prices and profits.

"We agree to this out of pragmatism and because we know the unreliability of commercial bank interest in undertaking large scale mortgage lending, let alone insuring that some (percentage to be decided) lower income families need additional mortgage help. We also know that the only other source of the necessary financing to carry our nation’s mortgage finance system is Uncle Sam and nobody wants that.

"Ergo, reluctantly we swallow all of those horrible things we said and give Fannie and Freddie a real second chance to work more like they did before senior managements, made the disastrous 2006-2007 private label subprime and Alt A purchases.

"We want to reprise a time—before the subprime financial orgy—when you were a positive force steering innovation and efficiencies and keeping consumer prices down."

OK, so I laid it on thick, but I also strongly believe that beyond eating some crow--and understanding the political and market realities--little needs to be done to restore real estate market sanity and equilibrium. Many of the GSEs former business opponents would agree, especially given their cloudy fate in an unknown successor.

New market regimes take years to evolve.

Almost everyone who cares knows how to relate to the current national mortgage investor's presence. In the current rotten economic and political environments, the chances of doing solid policy change are unlikely. The likelihood of wasting two years is manifold.

I believe the Congress—if it objectively examines the issues—looks at the increasing supply of reports and data, which show how the 2007 financial debacle occurred and who started and perpetuated it, will reach the conclusion that the current mortgage finance system--with his 7000 or more local lenders and two giant competing secondary mortgage market investors--provides benefits that consumers, builders, Realtors, and lenders seek and like.

Fannie Mae and Freddie Mac. They Worked!

Maloni, 9-27-10


--Maloni Fox Business News interview.

Link to video:
© 2010 FOX News Network, LLC. All rights reserved.

--Karl Smith paper.

Monday, September 20, 2010

I Want the “SH”

The Tea Party, The Best of Times and…

The Tea Party is the best thing—near term—that could happen to Democrats. It’s the worst thing—near term—for the Republican Party.

But, the Democratic Party ignores the Tea Party at its own peril, since the TP is not going away and--with better leaders and the experience of the 2010 elections--it will form a better conservative base to challenge Democrats in the 2012 elections.

The likely effect this November, where TP candidates run, is some TP victories. But, I suspect that its agenda will keep many Republican and independent voters home and bring out fervent D voters, who are not happy with congressional Democrats and actions of the Obama Administration, but cannot abide by the TP’s agenda.

The net will be to allow the Democrats to continue to control the Congress—with smaller numbers--giving both the Congress and the White House a chance to rehabilitate themselves before the fast approaching 2012 elections.

The extreme and not very mainstream positions taken by some Tea Party candidates may not be a consumable cup of tea for many old line GOP members. This is the group which just stays home.

Have all seen Delaware’s Christine O’Donnell—who beat former Governor and current Congressman Mike Castle--discuss her partying on a cemetery alter with a male witch and O’Donnell’s views on sex? How does a "country club Republican" get comfortable with O’Donnell’s belief, captured on television, that most Americans are sinners?

Or, how does it weigh in the GOP suburbs that Ms. O’Donnell—at various times—welshed on loans to her college, didn’t pay her mortgage or landlord, owed or owes the IRS back taxes, and has generated massive confusion over her townhouse which she also claims is her campaign office. You can’t use campaign funds to pay for personal shelter?

She has not declared any income sources and the conservative group which once had retained her for representational work--at very small dollars--recently disavowed O’Donnell.

You Snooze, You Lose

But, there are too many creative, angry and cunning GOP operatives, who angst for political power, to not figure out a way—over time--to align themselves with the TP or just try and marry it.

If the Democrats don’t strategize, fortify, and align their presidential and congressional agendas—with their voters’ interests--then the TP assault, augmented by the remnants of the GOP, will be geometrically higher in 2012 than the one they face this November.

The TP’s core issues have a surface appeal, which could blind voters to the lack of policy substance behind them.

“Cut federal spending” sounds good, but where and who gets whacked when more than 50% of the nation relies on some form of direct federal assistance? And, once again, nobody should think that the “private sector” is somehow immune from nursing at Uncle’s breast. I won’t bore you with the list of industries which do, but the large commercial banks and their investment banks subsidiaries are very prominent on that list.

Democrats and the GOP—if it wants to survive tthrough the 2012 races--require tactical actions, now, to head off wholesale voter entrancement by a simplistic Tea Party manifesto.

How serious is the Tea Party threat?

Delawareans knew about O’Donnell’s foibles and outrageous public comments for years, because had run before for the Senate GOP nod.

Ms. O’Donnell—despite all of her “flaws” and the knowing smiles she generates--whipped a wonderfully able and smart Republican public official in their Senate primary.

Since her last week’s primary win, the Washington Post reports that O’Donnell has raised $1.8 million in campaign contributions and most of it is not from Delaware.

That’s a lot of “serious.”

“The Boys Are Back in Town"

Washington got a major jolt of good news last week (no, not Mayor Adrian Fenty’s defeat, which DC will rue), but the info that Tom Nides is coming back and will work at the State Department for Secretary Hillary Clinton, succeeding the incomparable Jack Lew. Mr. Lew reportedly is going over to head the Office of Management and Budget (OMB).

Both are good appointments.

Tom is a super likeable young guy, barely 50, who worked admirably for years in Democratic political circles. Five years ago, he went off to work on Wall Street, marched smartly up the corporate ladder and ended up as Morgan Stanley’s Chief Operating Officer, plus owned a gaggle of other titles and responsibilities.

His early resume is filled with Democratic political action, including as an aide to former House Speaker Tom Foley (D-Wash); chief of staff to US Trade Representative Mickey Cantor; and chief of staff to VP candidate Joe Lieberman during the 2000 presidential campaign.

But Nides re-emergence on the Capitol scene confirms for me a rumor that I’ve been hearing for weeks about “it,” a piece of space age trickery that assaults the simple minds of common old folks like me.

(Reader warning: Maloni’s barbed and twisted humor to follow.)

The “it’ is the “Sani-history” or “SH.” Its creators claim that,” the "SH" can turn “chicken s*** into chicken salad!”

It is super practical for any job seeker, since the “SH” apparently can wipe from a candidate’s career history any heinous or embarrassing experiences, like being an active cannibal, a member of the Nazi party, an experienced commercial pilot with Al Queda tendencies, or having a top post Fannie Mae or Freddie Mac.

This is where Nides comes in. You see, he was my colleague and friend at Fannie Mae for a few years, before he left for New York.

I noted last week two other Fannie veterans, one a former senior employee and a the other a valued company consultant, are being considered for a major White House vacancy soon to open.

I couldn’t figure out how those guys had managed to breach the “Maginot Line” employment obstacles, erected early by the Obama Administration, reportedly to fence out candidates who worked at/for Fannie or Freddie.

The historical absence of any Democrats at Freddie Mac, except for the legendary “Harvey”—Leland Brendsel’s former one armed driver, who only could make right turns---eased these concerns at the Virginia company.

Nides and the others must be proof positive that the “SH” exists and works!

Maloni, 9-20-10

Sunday, September 12, 2010

“Gimme Shelter!”

Rahm is Going, Going, G….?

Reports are that White House Chief of Staff (COS), Rahm Emmanuel will return to his beloved Chicago and run for Mayor, now that the current Hizzoner Richie Daley has decided to retire and not seek re-election. More power to Mr. Emmanuel, whose hardnosed approach to politics and his Democratic colleagues is bracing and—in my view—totally necessary and desirable.

According to carefully designed White House media leaks, the early successor candidates are Valerie Jarrett, long time Obama Chicago ally, Democratic operative, close family friend, and a White House senior advisor to President Obama. The other two candidates are Tom Donilon, a White House senior national security adviser, and Ron Klain, Joe Biden’s Chief of Staff and Al Gore’s former Chief of Staff..

Klain has performed many things well in his long career as a Democrat operative, but wrongly—in my view-- allowed Kevin Spacey to play him in the HBO movie “Recount,” the story of Al Gore’s 2000 presidential campaign, when the Supreme Court elected, I mean ruled in favor of George W. Bush in the controversial Florida ballots case.

Both Donilon and Klain—as Jarrett is—are very capable officials with the skill set to be “COS for POTUS.”

Yet each guy also worked for Fannie Mae, Tom for several years as General Counsel and Ron as a consultant.

Unless Jarrett worked for the Chicago candy company, the other “Fannie May,” she doesn’t have a “Fannie Mae problem.”

I thought GSE service all but ruled out Democrats wanting to toil for President Obama in high profile positions? Maybe I am missing something, unless Donilon’s and Klain’s names were thrown out there to be lightning rods for Jarrett, who some insiders believe is a lock for that tough job.

BTW. Ron Klain’s “Spacey mistake” was letting Spacey portray him.

While Spacey is a superb actor and did a fabulous job in the movie, Ron is “Hollywood photogenic” and so much better looking than Spacey. I don’t know why Klain didn’t insist on playing himself!

I’ve often counseled Ron, “Never permit a less handsome individual to play you in the movies!”

I have an ironclad understanding with two authors—writing books on a subject where I was a minor player—that if their books are made into movies and my actions make it into the script, I insist that Antonio Banderas play me. Of course, AB’s English is better than mine, but we are--or were--near look-alikes! I also expect Banderas to introduce me to Selma Hayak??

(For those who are slow on the uptake, the last four paragraphs are facetious and a spoof.)

Who Needs Federal Support for Home Ownership??

Fair weather sports fans always want to change their local heroes when the latter has a bad game or bad season.

“Trade the bum; get rid of him, who needs him, etc. etc.”

We’ve all heard variations of these cries or equivalent in sports, our businesses, our political lives and even our family squabbles.

But, for the first time in my lifetime and memory, we hear that now from doubters questioning desirability of the federal government helping those who need support to become home owners.

Home ownership suddenly is bad or undesirable??’

“Some people—hint, hint--shouldn’t own a home; as a nation we are over housed; federal support only goes to minorities; ‘Sweden’ (or pick your favorite foreign country) doesn’t have government support for homeownership and they do just fine; who needs the federal government, we have plenty of US banks that can do the job; the ‘American dream’ is just a sales pitch for Homebuilders!”

Really? Everyone one of those anti-housing rants is wrong or misapplied.

Yes, some people should rent and not own and others prefer to rent and not own, even those who can afford to buy a house.

But, there is so much more to owning a home then shortening some builder’s inventory.

Are we so faint hearted as a nation that the recent financial debacle and its dilution of housing values will cause us to jettison a rampart of our national character and economy for well over a century?

Home Ownership Isn’t Just About Houses

It’s an old story but requires re-telling. Home ownership and all of the goods and services which go with it, like furniture, appliances, electrical installations and technology, rugs, carpeting, painting, driveway and sidewalk contractions, asphalting roads, repairs of the sesame, etc. etc, etc produce around 25% of our nation’s gross domestic product.

Where else is there a $3 or $4 Trillion slug of domestic business activity and all the jobs that go with it, waiting to insert itself into our economic mix, if the “too much housing” crowds have its way?

Most houses are part of a neighborhood, which is part of a community, which is part of a town or city. Those demarcations in turn support vast municipal enterprises, libraries, hospitals, schools, teachers, police and firemen and others.

And while hoary, it is true that home owners impact the quality of life and traditionally have been more active in their communities and PTAs, as volunteers and voters, in all probability related to the stake they have where they chose to live.

Some moan about lower property values, but there still is a wealth effect in owning and slowly appreciating property, which is not going to disappear completely because houses today are less valuable than they were three years ago.

Yes, there certainly is a major role necessary for the federal government to support home ownership, especially when that “private money”—which the GOP loves to say will make up the difference—won’t or can’t.

Remember, Mr. Hensearling, Mr. Bachus, Senator Shelby, and others, you can’t beat something with nothing!

“Whores on Seventh Avenue”

When Simon and Garfunckel sang about the “whores on Seventh Avenue,” they weren’t thinking of the industry whores in Washington, like those who inhabit the headquarters of the Mortgage Bankers Association of America.

This special interest last week called for the federal government to get rid of Fannie Mae and Freddie Mac, reducing them to rubble and memories. Forget that the GSEs carried those companies for years, even as most of them were gobbled up by big banks.

Does this new position suddenly reflect altruism from a group known for its selflessness?

Hardly, even the association is misnamed, since not one of them is a real "commercial banker,” which takes deposits from savers and lends money to individuals and businesses.

The MBA is just a group of “mortgage companies,” which do nothing but originate mortgage loans and sell every one to some investor, traditionally Fannie Mae and Freddie Mac or the FHA and Ginnie Mae, the true government equivalents of Fannie and Freddie.

Et Tu Brute?

In the past, after thriving on GSE benefits, MBA companies turned against Fannie and Freddie because the latter--thank heavens for the consumer—made the mortgage application process more efficient and cheaper, squeezing fat out of it, meaning the MBA members couldn’t earn as much, slow walking consumers through the unnecessarily prolonged application period.

That worked for the nation’s borrowers because if the MBA member didn’t make a loan (largely on Fannie and Freddie’s underwriting terms and prices), the consumer would walk across the street to another lender which would.

Ok, so the MBA wants to do away with Fannie and Freddie. Oh and they also don’t want any successor institution to make loans to low income families. Hmm, sounds very elistist and right wing conservative to me.

But does the association want the government out of the market and all mortgage lending done by those cash filled big banks and Wall Street?

Um, not quite. The MBA wants the federal government to continue to provide guarantees on all federal insured mortgages—through the FHA and Ginnie Mae--and add to that support new federal guarantees on all conventional mortgages, which historically have been made with “private money” (and loans that Fannie and Freddie bought in the past without federal support).

In testimony before Congress this spring, the MBA witness had the brass to insist on only private funding for secondary market operations, but then—in his next sentence—he called for a brand new federal guarantee all for mortgage securities created there.

Can you hear those oinkers at the trough? Looks to me like a win-win for lenders, with Uncle still holding the bag.

And which lenders would originate the mortgage loans that the MBA wants Uncle Sam to fully insure, guarantee and ultimately pay off if they go bad? Surprise. It’s MBA’s members.

Save me from such hypocritical posturing.

As I’ve said, often, the MBA—which ran itself onto hard times with questionable internal business decisions--should just close its association doors and let the American Bankers Association (ABA) represent its members' interests. It would be a lot cheaper and more efficient for that “industry.”

Maloni, 9-13-2010

Note: I soon will be changing my email account from AOL( to Gmail (; look for a special message from me.

Monday, September 6, 2010

Happy September; Welcome Back to Work!!

Private Label Securities, Redux

In last week’s blog, I noted that Fannie’s and Freddie’s regulator, the Federal Housing Finance Agency (FHFA) took a surprising stand and wrote 64 issuers or guarantors of private label subprime securities (PLS) sold to Fannie and Freddie, and urged them to pay their GSE debts.

Because of haphazard and shoddy underwriting on most of the underlying loans, as well as the application of spurious ratings and useless self-guarantees, the PLS mortgage bonds quickly went sour costing the GSEs billions.

Fannie and Freddie, as well as their regulator, are trying to make those businesses pay their bills, allowing the GSEs--in turn—to repay billions to the federal government.

Current estimates are that the subprime mess and resulting financial debacle cost more that $1.5 Trillion. That numbers doesn’t take into consideration the ruined lives, fortunes, aspirations, and careers of millions of people around the world.

In retrospect, a fair question to ask is, “Who was regulating these institutions when they fabricated and sold these soon to be worthless securities to the GSEs and others?”

The questionable credit quality of subprime loans was enough of an industry concern that some at Fannie (noted in post facto New York Times and Washington Post news stories) argued—unsuccessfully--against the purchases.

Aren’t the federal financial regulators supposed to be as aware as or smarter than the institutions they regulate?

For some (many?) of these financial services miscreants, using brokers to originate loans, securitizing pools of mortgages with their own corporate guarantees, and hedging them with exotic credit default swap contracts was a new business.

Did any federal government official check to see if these companies were up to the task and approve their undertakings?

Youth May Be Wasted on the Young, But Not With This Kid!

John McLeod, Canadian poet and a most proficient writer for “Housing Doom” (people who think I’m a cynic should read John and the very excellent HD blog), alerted me to a superb and insightful collegiate thesis, written last year by an undergraduate student working on her Harvard Economics degree with honors.

Anna Katherine Barnett-Hart’s 2009 paper is trenchant (certainly the first 33 pages are, until she gets very technical with her mathematical support/analysis), especially if one is seeking insight into why and how the massive production of subprime securitization started, mushroomed, and yielded so much financial destruction.

There always had been some systemic “subprime” financing, usually mortgage lenders—working in poor neighborhoods--overcharging less credit worthy borrowers for mortgages and reaping gains on loans that didn’t fit basic standards. But the amounts were miniscule compared to what began coming from Wall Street beginning in 2004 in the form of Collateralized Debt Obligations (CDOs), a descriptive category into which all mortgage backed securities generically fit.

This young author nailed the history, the principals and the abuse of subprime financing and securitization. She notes when Wall Street pioneers set it up, how they did it, the absolute profit whirlwind of profits, and why the practioners got engulfed by the surging investor demand for high yielding but risky mortgage securities. Hint: greed!

As the revenues rolled in everywhere, the suddenly monstrous US and international PLS appetite seemed to blind everyone involved to quality control or prudent underwriting concerns.

Early success drove the Wall Street firms and large banks to quickly originate great volumes of questionable mortgage product; securitizing it and busting the mortgage backed securities (MBS) into more exotic marketable “tranches;” and selling those bonds with abandon, often taking the riskiest products in house on their own balance sheets (Merrill and Lehman).

The three major credit rating agencies—relying on outdated and flawed models and metrics—affixed superior ratings on the bonds, a key element for the desired world wide acceptance. (For more on the rating agency breakdown, see Gretchen Morgenstern’s column in the September 5, NYT Business section.)

Moody’s S&P, and Fitch got overwhelmed with the subprime volume but continued to throw AAA ratings (the minimum investment grade required by many international financial regulators) on the senior security pieces. The raters were making historic profits and were gulled by the guarantor’s promises that they could pay for any shortfall.

From 2005 to 2007, ignoring history and prudence, few in the business believed the bottom would/could fall out of the residential real estate market and all the Street players figuratively became residents of New Orleans, singing, “Laissez les bons temps rouler.”

Yes, I know that Fannie and Freddie joined the feeding frenzy and bought the stuff, like hundreds of other financial institutions around the world. But, the GSEs didn’t create it, they didn’t cultivate it, package it, fashion “synthetic” PLS geometric enhancements from it, or sell it to institutional naifs/d.f bz; on street corners.

Who Dropped the Ball?

Just because the Fed, the Comptroller, the OTS, FDIC, and the SEC missed it—or maybe because they did--the GSE regulator, the Office of Federal Housing Oversight (OFHEO now FHFA), permitted Fannie and Freddie to buy those questionable mortgage securities.

As noted by the media in after-the-fact stories, folks inside Fannie/Freddie opposed those investments and said so to their superiors. Did anyone at OFHEO/FHFA feel similarly and, if so, did they tell anyone at either company?

Or was this another giant incident of Bush era regulators asleep at the switch or just being generally indifferent. If so, that’s very damaging and expensive indifference.

Lessons for All

Lesson for Obama White House and Congress: You can create all of the new financial regulatory units you will, but make sure they are staffed by people up to the job.

(Is now the time to make the pitch for Elizabeth Warren to head the new Consumer Office?)

Lesson for the GOP and GSE haters: Read this paper and see if you still can sustain the myth, “It all was Fannie's and Freddie’s fault.”

I know it will be inconvenient for you on the Right to budge from your simplistic talking points because you feel you have “facts” backing you up and because the GSE names are so cute and lend themselves to hyperbole or sounding like an insider.

But any objective observer can see the devastation that subprime—brought to us by the big banks and the Street—wreaked on Fannie, Freddie and many others and should be able to draw fairly stark distinctions between that activity and the GSEs traditional affordable housing support.

Stated simply, the GSE’s affordable housing mission, even when jacked up by President Clinton and President George W. Bush to more than half of their business volumes, with the active support of both congressional parties, didn’t tank the companies. It was the deviance from mission and their subprime purchases which shattered them, at least in Fannie’s case.

The other thing which could disturb some conservatives—if they are honest--is that when they scratch the surface of the subprime phenomenon they are going to find a lot of traditional GOP business interests feeding at that trough.

Read Ms. Barnett-Hart’s paper and see if her details square with your understanding of what happened and which financial interests were the culprits?

If Congress plans to redesign the nation’s mortgage finance system, both parties need to understand what they are changing and the recent history of it.

Spencer Bachus (R-Ala.)

Poor Mr. B, if the GOP recaptures the House in November, the smart money in town doesn’t like his chances of winding up chairing the House Financial Services Committee in 2011, despite the fact that he’s the current ranking minority Member.

When I lobbied, I always liked Bachus, because he was approachable and seemed willing to learn issues with which he wasn’t the most familiar. But for too many R’s, he has somehow become “Gomer Stumblebum” in the job and they want someone sharper heading their Financial Services committee.

The two names one hears are New Jersey’s Scott Garrett and Texan Jed Hensearling, although Michigan “Tea Partier” Michelle Bachman might try and leverage her Caucus popularity into the post.

The smartest of the possibilities is Garrett—by a wide margin--but brains don’t count for much insider the House GOP Caucus (or in the D Caucus, either). Bachus could prevail, if he has successfully raised thousands of dollars for his Financial Services colleagues and used his clout to get them re-elected. Expect a showdown, if the R’s win in November.

Maloni, 9-6-2010