Monday, January 24, 2011

Who Will Say “No” to the Big Boys

The Biggest Financial Institutions, the Banks and Investment Banks

Three years after their near collapse and resurrection by the Bush and Obama administrations, there is no group showing more political clout and influence in the nation’s capital, right now—not to mention the international economy--than the behemoths in the financial services industry?

The banks and their political allies may not agree, but it sure is hard to argue this isn’t the case.

The reasons are several.

--despite their active role in the financial an economic collapse of 2008 large banks and their investment banking subs (making them bank holding companies) did not suffer greatly in the Dodd-Frank legislation designed to put new controls on them;

--the financial institutions received billions of taxpayer’s dollars under the federal government’s Troubled Assets Relief Program (TARP) and had no reciprocal lending responsibilities in return for getting Uncle’s helping hand. The additional funds helped the banks generate major positive earnings through 2009 and 2010;

-- in an industry wide “political pout,” the big guys decided to throw their financial weight behind the GOP in the 2010 congressional races and helped the Republicans win innumerable 2010 House, Senate, gubernatorial, and state house seats, setting up future friendly treatment at the hands of the GOP.

--the banks, wailing with loaves of bread under their arms, now have brow beaten the Obama Administration into slow walking any financial regulations the business institutions view as negative

--looking at the Dodd-Frank spanking new Consumer Office in the Fed, the bankers seem to have stifled Elizabeth Warren’s chances of a permanent appointment to head the new unit and are also intent on diluting the “Volcker Rule,” designed to reduce bank self dealing and trade. Both provisions survived the behemoths legislative opposition.

And with all of the government blessed, encouragement and financed mergers, since 2008, the banks—with witting regulatory allies—have managed to keep very much alive and make permanent the much maligned “too big to fail” (TBTG) reality, no matter what the law or the regulators say.

(As a gentle reminder, dear reader, the charters of Fannie and Freddie both contained statutory language stating that neither represented the full faith and credit of the federal government, suggesting that this phrase—defined nowhere in federal law--describes the ultimate existential federal power exercise, i.e., “We’ll know a TBTG business when we see it and act accordingly!”)

In 2011, the banks still have their eyes on taking over the Fannie and Freddie functions, once the Admin and Congress sit down to address this pending matter.

Shortly after his State of the Union message, although there are rumors of continued delay and no firm delivery timetable, the Obama Administrate will unveil it “plan” or a serious of policy options for restructuring the nation’s mortgage finance system, following the breakdown of 2008 and the perception that the current Fannie Mae/Freddie Mac secondary mortgage market model must be changed.

Many people—obviously including me—strongly reject that idea Fannie and Freddie should be abolished because they acquired tons of Wall Street created subprime securities, which largely went bad, since that is an activity which can be controlled through regulation (and should have been back in 2005-2007). In fact, in the current F&F interaction, PLS acquisitions already have been ended.

Structire Still in Place

The nation had and still has in place the elements of an efficient and smooth running national mortgage finance system, which insures equitable pricing, products, and efficiency, for mortgage market consumers and businesses all across in the country.

Other regulatory changes in the Federal Housing Administration’s (FHA) main lending program suggest that all future lower or moderate income lending will go through it, not the “private market,” so the GSEs former “affordable housing mission” also has been jettisoned.

Yet the demand for structural change, “abolish Fannie and Freddie,” has less to do with reality than political necessity and there is no guarantee that the latter will produce anything but a large bank dominated marketplace, where borrower needs come second to bank profits.

Why this Congress intent is on creating the confusion, disruption, uncertainty, and delays—all with no guarantee of success—rather than modify slightly the current Fannie/Freddie apparatus and iron out some popularly understood imperfections?

The only honest response is “inside the Beltway” candor—which nobody will utter--i.e. “We have demonized Fannie and Freddie, so there is no way we easily can “undemonize” it without looking foolish, even if resurrecting them is the right housing policy for the nation.”

The January 23 Washington Post

Yesterday's Washington Post was a cornucopia of GSE issues and related matters.

The most obvious was Steven Pearlstein’s column, which is a first in my 25 years of watching closely the GSE topic and that is a prominent Washington based reporter/columnist expressing concern about what the loss of the Fannie and Freddie might mean to the local economies.

Pearlstein expresses this fear as part of the larger issue—which I themed in my opening segment—that the large commercial banks soon could soon overwhelm the former GSEs, if Congress kept Fannie and Freddie alive in any way, shape, or form, while the Congress gives large banks the power to securitize mortgages, with some form of federal insurance or reinsurance, beyond those federal subsidies already meted out to the bank holding companies (BHCs).

Wells Fargo and their Washington allies have been calling for this new federal benefit for months.

Kudos to Pearlstein for not only the near term point, but implicitly addressing the larger issue that no financial institution of set of same could survive if the big bank holding companies truly want to eat their financial and market lunch?

Elsewhere in the Sunday Post Business section was a story—authored by by Anthony Effinger and Katherine Burton-- about successful hedge fund investments in mortgage backed bonds. This article—while certainly not intending to do so--contained this “left handed compliment” for Fannie and Freddie about how their securities activities worked to set limits on Wall Street pricing excess (a fact little understood or appreciated by those Hill folks who would take a sledge hammer to the current market relationships).

“After the (federal government takeover in 2008) takeover, Fannie and Freddie stopped a key activity, Kuhn says. In addition to guaranteeing mortgages, the companies bought and sold securities in order to moderate fluctuations in rates. That also helped control price differences, or spreads, between various types of mortgage bonds, making it hard for traders to find arbitrage opportunities.”
"There weren't a lot of nickels lying around," Taylor says.
“Without Fannie and Freddie trading, the market is rife with opportunity, Kuhn says. But government control of the companies means that traders have to watch for government programs that make it easier for homeowners to refinance. He watches hours of C-SPAN, the cable channel that broadcasts government hearings. Sometimes he records them to watch in the evening.”

A link to the entire article is below.

Any Volunteers?

Just who can or will stop the big financial institutions complete control of all financial services and products?

Steelers Football and the Super Bowl

I’ll take yesterday’s Pittsburgh Steelers’ win over New York—and coming Dallas trip to their eighth Super Bowl against the also victorious Green Bay Packers--but many thanks to the football Gods. The New York Jets showed me a lot and they are the team to be reckoned with in the coming years. Yes, a win is a win is a win, but…! In welcoming the Pittsburgh victory, I note humbly that it so easily could have gone the other way.

Maloni, 1-24-11


Anonymous said...

I think Wells Fargo has realized that is cheaper to give congress lobbyists a fraction of the billions they own to the GSEs. If the GSEs don't exist....

Bill Maloni said...

Wells has been very active, possibly the most active big bank, seeking to enhance its mortgage securities business at the expense of the GSEs (with its government reinsurance plan) and in the origination market, where it wants the federal government to bless only mortgages with at least 30% down, as mortgage loans qualified for lower capital treatment.

Again, I will be curious about who or which regulatory agency seeks to
slow down this train.

Bill Maloni said...

As I noted in this week's blog, Dodd-Frank did little to end "Too Big to Fail" (TBTF).

The Treasury more or less confirmed this fact today. (See link below.)

Bill Maloni said...

This "link" may work better.

Anonymous said...


I have really tried hard to get a handle with all the moving parts of the GSEs and get into heads of the politicians. I am long preferreds and a few of the issues I see include:

- Whatever they decide to do, how do they ultimately get there. Have you heard anything about a 1 day receivorship plan?

- I thought that one of biggest tragedies was how the community banks were treated. Many went under and lobbying efforts have quieted down after the Small Business Lending Fund Announcement. Which came out when the securities were delisted. I do believe this was a backdoor bailout.

- Why in the world don't they reduce the dividend? I mean FNM and FRE are barrowing to pay themselves.

- If Big banks feel like they have a guarantee then whose to say they aren't going to underwrite mortgages in the same poor fashion as before?

- Why don't proposals outline implications for current shareholders? Do you think a legal case could be made for current shareholders against how these companies were run in conservatorship and putback settlements?

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Bill Maloni said...

Sorry for the absence and not responding to two "comments," but--if you see my latest blog--you'll note we lost our electricity for four days, just getting it back yesterday afternoon.

Many of your question mirror my own and I am left with a huge dose of "nobody cares."

But, few but the small banks can relate to the lost capital when they were talked into buyign preferred, when Paulson right before Paulson launched his "putsch."

One hope would be that the matter is addressed--as things often are--at the last minute when they Congress believes it has wrapped up all of the major legislative issues and it turns to some "equity" matters.

The courts always are an option, but part of me sees a PO'd GOP changing the law before the courts make a decision on whether the "preferreds" are owed anything.
Of course, it also could force people to pay attention to the issue.

I also believe that you can count on one hand--with a few fingers not used--the number of Hill people who understand or care about the "preferreds." All you need is one dedicated and ideally senior Republican advocate and you needs could get attention.

Process right now eludes me. Garrett says he's not going to do anything for two years, the Admin is slow to make recommendations and/or settle on a single approach, the two companies still are being ridden, ineffectively but hard, by Treasury/FHFA, and I think they are on the cusp of generating black ink.

The dividend matter is ridiculous, almost punitive and I say so whenever I can.

I've also not heard any current or former Treasury official explain the disparate treatment.

ironically, the more nothing bad happens, the greater the chance that something good can happen, the best being positive earnings.

As you probably know, Fannie and to a lesser extent Freddie are shearing overhead--and they should, especially Fannie--and that will help bottom line, too.