Monday, January 31, 2011

Heat and Light

Now that the Maloni’s have our heat and electricity back, after almost four days without either, I honestly can say to the Potomac Electric Power Company (PEPCO), “#%*&^%$#@ you!”

My four PC-less days screwed up plans to immediate blog about two articles which came out about a week ago, the first by Gretchen Morgenson in the New York Times and the other, coming a day later, by Zach Goldfarb in the Washington Post. The news stories covered a few issues but both mainly were lurid “tax payers pick up Fannie/Freddie legal costs” themes and then went on to discuss the amounts the companies were paying lawyers to defend the GSEs against law suits and the same for some former officials.

It seems to me the more that is written about the GSEs the less some people seem to know about the companies. Unfortunately, the deficits often are with those who write the articles and later their readers.

I am going to resort to a very lengthy blog, broken into two segments, one coming out today and the second on Wednesday evening, to try and establish my perspective. I hope you find both parts informative and provocative.

Every time something of a GSE corporate nature arises, we get the Washington and media equivalent of Claude Rains’ classic portrayal of Inspector Renault, in Casablanca, announcing that he is “shocked, shocked” to find out there is gambling at Bogart’s saloon, as Renault hurriedly pockets his own winnings.

GSE Foes=Ideology and Money

Now, let me clear some hot air out of this faux balloon.

The reasons that Fannie Mae and Freddie Mac have been attacked and vilified first were ideological but later became all about money!

The conflict started in 1983 when the Reagan Administration, led by David Stockman, opposed Fannie’s federal heritage and history and wanted to weaken the two GSEs by charging them —and no other financial or commercial businesses—a 25 basis point user fee or “homeownership tax”, as it became known, on every dollar the two borrowed.

That “chestnut” always was resurrected—although it never passed—and new issues got added to the assault in later years when several large financial institutions--GE, Wells Fargo, AIG and others--wrongly fearful the GSEs efficiency and cost cutting could induce Fannie and Freddie to enter the “Bigs” secure markets.

The big banks and their allies joined up because they thought then and still believe they can make more money from consumers if Fannie and Freddie were/are diminished or destroyed.

In my view a few major elements lay against the recent newspaper articles, but you didn’t see them covered.

Bitch All You Want, the GSEs are Private

Whether the town’s new conservatives like it or not, Fannie and Freddie were designed by the Congress 40 years ago to be unique private/public institutions. The reality is that they were far more private than public, which is why in 1970 after President Lyndon Johnson sold off Fannie Mae, a federal agency created in 1939, the newly privatized Fannie Mae because privately owned and managed and traded on the New York stock exchange, where it still trades, albeit lightly.

Government agencies don’t get traded on the stock exchange, private companies do. So that is 40 years worth of history that the one dimensional GSE critics just can’t explain away.

Before the Bush Administration nationalized Fannie and Freddie two years ago, neither company ever sought nor received one penny of taxpayer’s money. Nada. But once Hank Paulson made his questionable decision to take over the two GSEs, the federal government because responsible for every dime the companies spend, over and above what their corporate revenues generate annually.

So, why didn’t Ms. Morgenstern or Mr. Goldfarb mention Fannie and Freddie utility costs, wages, healthcare, lawn maintenance, travel costs, cafeteria food, housekeeping, pens, pencils and paper or hundreds of other things on which companions spend money?

I guess you don’t get front page, lead column in the NYT writing about the cost of 40 pound bond paper, Eagle #2’s and Sharpies.

But the two articles provide a wonderful opportunity to closely examine just what did happen in 2004—it’s another poorly understood era where simplistic answers don’t cut it --as the entire US financial services world had to implement a new Financial Accounting Standards Board (FASB) “mark to market” rule.

FASB 133

FASB 133 required businesses to establish real time values for all of the securities on their books—whether they were up for sale or not—and despite the fact that mortgage backed securities might see values change any number of times during a daily trading period or not at all, if there was no demand.

Fannie, Freddie and lots of large financial companies balked at the proposal. The same institutions submitted long public comments about why the proposal made no sense, if the goal was giving investors more accurate information on securities and how those markets actually worked, making accurate continuous valuations difficult and near meaningless.

OK, fans, friends and enemies, let’s look very carefully at this “Fannie accounting scandal” charges which were the crux of the NYT and Wash Post news stories.

In an effort to provide more information to market investors and a better analysis of value, the Financial Accounting Standards Board (FASB), in 2003, proposed a controversial rule (FASB 133) and sought comment on the regulation requiring mortgage investors to “mark to market” on a continuous basis, the value of those securities, if they were going to be sold or not.

(End of Part 1; Part 2 will apear on Wednesday, February 2, 2011.)

Maloni, 1-31-11

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