Monday, January 17, 2011

Mortgage Warning Clouds and Football

"The British are Coming....."

Have you noticed those ubiquitous signs asking citizens to warn officials if we see anything that is suspicious or otherwise doesn’t look right to them?

Clearly I need to sound the alarm with somebody in Washington’s financial regulatory world and to their attention a development which just doesn’t look right—given our recent national mortgage experience.

In a January 9 Gretchen Morgenson’s column in the New York Times (see link below, I think she found an issue that should curl the toes of many in Washington and around the world, especially those who hope the worst financial news is behind us.

Columnist Morgenson primarily discusses the fact that Bank of America paid off some debts to Fannie and Freddie, based on bad loans the two acquired from Countrywide Financial, the California mortgage company which BofA acquired in 2008.

Morgenson felt that the precedent, if not the actual dollars exchanged, was helpful because it establishes that lenders are responsible for some of the low quality assets that overwhelmed the mortgage finance system in past years, mostly running up to 2008.

500-1 Capital Protection?

But the situation which caught my attention and that would cause me to go “Paul Revere” to the Fed, CoC, FDIC or Tim Geithner is the fact that while paying back $2.6 Billion to Fannie and Freddie is a positive, BofA, along with JP Morgan and Wells Fargo are holding a scant $10 Billion to protect themselves and the nation’s taxpayers against $5 Trillion of mortgage backed securities they issued from 2005 through 2007.

Even with my limited math skills that a 500 to 1 ratio.

These numbers from the third quarter of 2010 are reported by the banks and, presumably, blessed by their Washington regulators and those other Obama Administration officials who monitor systemic risk.

Will The GOP Respond?

How about bringing the reality of that startlingly insufficient capital to the new GOP House majority's attention?

Reprsentatives Bachus (R-Ala), Barrett (R-NU), Hensearling (R-Tex), et al, are yopu cvoncerned with this I nformation?

I know many of the House newbies are learning where their offices and the elevators are, but you don’t have to be expert to know that this is a pretty small financial fig leaf to cover such large “figs?”

Fannie and Freddie used to get beaten up and abused because their capital ratios—with far better mortgage assets—were 50 or a 100 to one.

The banks will argue that there is no need for more reserves, while secretly hoping that a rebounding economy will “float all boats” and dramatically reduce potential losses on those residential mortgage assets.

Isn’t that kind of putting all of your chips on “red” and hoping scarlet shows up?

It’s OK for the banks to play that game, but should the nation and the bank regulators take that risk? Wouldn’t it be prudent for those banks—which still have a ton of capital—to put twice or more of the $10 they now have set-aside into loan loss reserves for those older securities.

If no significant losses occur then the banks will have the earnings on their capital. But, if there is another deluge of residential red ink, they’ll have more reserve protection handy to manage that and maybe no need for TARP II.

The Washington Grinch Post

“The moon on the crest of the new fallen snow (yadda, yadda)…..lustre of…
To what in my wondrous eyes should appear…..”

But another crappy Washington Post GSE editorial Thursday, Jan 13, claiming consensus on Fannie and Freddie where there is no consensus, save in the minds of the Post editors.

I’ve conceded the corporate mistakes and Fannie and Freddie purchasing Wall Street originated subprime—which virtually every other large financial institution in the world did, a GSE major foible easily handled through better regulation—but the Post also tries to use that episode to wipe out the preceding 25 years of GSE history of meeting housing finance needs, especially for low income and minority families, where subprime never was a concern.

I’ll waste little breath on the Post savants, save arguing for them to read the many blog links I’ve offered rejecting some of the ideas on which the paper claims “consensus.”

All of those, who choose to pontificate on the former GSEs, just should read the McLean/Nocera “All the Devils Are Here” story of the 2008 meltdown. It might open their minds and eyes.


A few Fannie things to consider.

-Rumors last week had the much discussed Fannie cutback of employees/contractors/consultants beginning the end of this month.

-If the Administration sends up “options” to restructure Fannie and Freddie, rather than advocating a single proposal, it will further cloudy the waters and likely won’t facilitate any legislative action this year and possibly not in 2012, because of the presidential ele3ction.

I hope the Administration advocates a specific GSE policy. Whatever it is, it will meet opposition, but better to do something (single plan) than the equivalent of nothing, i.e. offering multiple choices.

A buffet approach makes the Administration look weak and uncertain.

This Past Football Weekend!!

Ahem, maintaining my less rowdy approach to fierce athletic competition, I merely will note that my Steelers beat Baltimore and the Jets surprised and upset the New England Patriots setting up in Pittsburgh next Sunday a Jets-Steelers American Conference championship game.

The winner of this game will meet the survivor of Green Bay versus the Chicago Bears National Conference championship game on the “frozen tundra” in Chi-town.

I think it only fair to acknowledge that both home teams will face formidable opponents!!

Maloni, 1-17-11

(A little late with this blog,because of a brief weekend hospital visit which threw off my scheduling, not to mention my equilibrium. Better, now.)

No comments: