Monday, February 7, 2011

A Great Super Bowl and Other Painful Things

Lots to blog about this week.

Obviously one of those items is the result of Super Bowl 45, which I’ll save to the end of the blog. The Admin’s GSE “reform” plan is supposed to come out this week. There were some thought provoking “debt” suggestions for the Treasury. And, speaking of which the Treasury, it wants to give some more revenue to the big banks as part of its long awaited GSE restructuring plan.

However, since humor is so soothing and the big banks are such easy targets (small banks don’t give their officers $15 Million bonuses), with their arrogance, corner cutting, and profits. I wanted to share a favorite comic strip character, which has been around for 80 years, but recently has become far more contemporary in his humor, “Dagwood” of the “Dagwood and Blondie” strip.

Here, our friend Dagwood, asks a question which everyone of us should ask ourselves or our banks and then act on the all too obvious answer. (Yet banks still claim their “cost of funds”—which mostly come from federally insured deposits like friend Dagwood’s--is higher than Fannie’s and Freddie’s.)

And then there is the recent advice to the Treasury department, courtesy of one of its advisory groups, made up of banks, securities dealers and investors….who else?

I’ll rely on the original Bloomberg story, rather than excerpt it.

Treasury Advisory Panel Suggests ‘Ultra-Long’ Debt
Rebecca Christie and Liz Capo McCormickFeb 02, 2011 4:37 pm ET

Feb. 2 (Bloomberg) -- The committee of bond dealers and investors that advises the U.S. Treasury suggested the government consider adding “ultra-long” bonds of as much as 100 years to tap into investor demand.

The Treasury Borrowing Advisory Committee, known as TBAC, suggested the U.S. investigate additional types of securities that would target banks, pension funds, insurance companies and individual investors. A presentation from one member, offered on behalf of the panel, estimated $2.4 trillion in potential demand from these investors over the next five years.

The “ultra-long” bonds proposed were defined as debt with a maturity of 40-, 50-, or 100 years, according to comments from one member as reported in the minutes of yesterday’s meeting, which the Treasury published today.

That’s not necessarily a bad idea, although I expect when some of that 50 year debt matures in 2062, President Justin Bieber may have some doubts about extending the program.

Why Do the GSEs Have To Pay Double What Banks Pay?

In last week’s blog, I tried to show why allegations of the GSEs engaging in accounting errors or even being:”private companies” were both based on a myopic misreading of history and possibly a successful SEC political mugging of the gaudiest order.

What also has been overlooked in all of the GSE post 2008 takeover chatter is the usurious repayment rate which the Treasury has been charging Fannie and Freddie.

The two companies have to repay the federal government at a 10% interest rate, far more than it costs the Treasury to borrow those funds. Just for a benchmark, the large commercial banks and other which were beneficiaries of TARP funding only had to repay Uncle Sam at a rate of 5%.

Why the harsh treatment of the GSEs, which committed the same sins as hundreds of other financial institutions, buying ruinous Wall Street created subprime mortgage bonds. Why the continuation of a punitive repayment rate?

And Why No GSE First Amendment Rights?

It’s also worth reminding that no other surviving financial institution, which accepted the federal government assistance, lost its First Amendment rights re talking to the Congress and Administration, except Fannie and Freddie.

The F&F Treasury arrangement bans the former GSEs from lobbying Congress. Like it or not, while Treasury owns 80% of the companies, both still have a limited amount of private shareholders whose voice with their elected representative has been yoked.

I guess when you have been “slagged” as much as Fannie and Freddie by Congress, the media, and their former business partners--eager still to get their hands on Fannie’s and Freddie’s market--nobody cares about constitutional rights.

(Speaking of stock, why has the former GSEs stock—trading in pennies still—gone up 300% in 10 days, albeit dropping on Friday and still trading below a $1 a share?)

Refi, It’s the Only Answer

Fannie and Freddie should do what every American family does when they are paying too much for their mortgage and have options, they should refi!!!

That’s right, the former GSEs just should go into the market and borrow some of that “long debt” and use it to repay the Treasury at major savings to what they are paying Treasury. Of course that assumes there is someone willing to lend them $50 Billion for 40 years or longer.

But, if you can borrow $20 Billion a pop, at 5% or even 6% and pay down principal which is costing you 10%, it might save you a dollar or two.

It’s the American way, right?

Change the Conforming Market

Treasury Secretary Tim Geithner, the large banks' and Wall Street's "bestest friend,” is giving it away again.

If Geithner’s last bank-generous “no quid pro quo” or “Here banks take all of the taxpayer provided TARP money and don’t do anything for it, like lend it to small businesses, families or for mortgages”--wasn’t enough, his latest giveaway—due out this week?—might open an eye or two.

It’s been widely reported that the Treasury plans to scale back the “conforming mortgage market,” meaning the loan size that Fannie and Freddie now can purchase. (Currently, the former GSEs can buy “conforming mortgage loans” and cannot buy “non-conforming” loans, which is anything above the conforming ceiling. The latter is set through government regulation.)

On an emergency basis, a few years ago, Congress raised that amount to $725,000, primarily because the banks had stopped lending for these “jumbo loans” (which is a technical mortgage term) and the only way people in New York, Boston, parts of LA, etc. etc. could get financing was if Congress permitted F&F to buy those loans. Once again, in the face of bank cowardly bank business behavior, Fannie and Freddie stepped in rescued that bank abandoned market segment and provided the necessary liquidity.

(Yes, that’s the same “soon to be atomized Fannie and Freddie" which are holding up the current conventional mortgage market.)

Now the Administration wants to knock the loan size back down to $600,000 or so, which means that the only institutions by law that will be able to make those loans—likely the large commercial banks—won’t be able to sell them to F&F (which also supposes the latter two exist).

Hello “exclusively ARMs in the jumbo market.”

The last time Congress invited the banks without competition to make those sized loans—which was when the meltdown was taking hold—our national legislature got “bank punked,” when the lenders raced to the mortgage sidelines so fast, their FDIC shields were spinning and all but stopped non-conforming mortgage lending.

And, just why Congress thinks the banks won’t stop originating loans in the high cost areas, again, if they suffer another bout of “market jitters?”

Another Question

This all raises another question.

If the main plank of the Obama GSE reform proposal is to create a new “federal re-insurance of conventional market mortgage loans,” how does that get the government out of the market?

Basically all primary market mortgage lending, lenders with whom the public deals, are either commercial banks or their mortgage banking subsidiaries. The six or seven bank holding companies are massive and already are “Too Big to Fail” (TBTF).

The other banks all rely on FDIC insurance to attract low cost deposits (see Dagwood above) and now you are going to add a third level of federal protection with a new form of federal reinsurance?

The large commercial banks may never lose another dollar, but someone will.

Right, it is the US taxpayer who is underwriting this transfer of cash to depositaries (not a typo!). And tell me again Congress, why—with all of this old and possibly new federal financial props—the banking system is called “the private market?”

Short Takes

Excellent, excellent review by Kevin Hall, of the McClatchy newspaper chain, on Fannie and Freddie, their history and accomplishments, which also debunks a few of the myths. First rate information for those still in the dark.

The Super Bowl (sniff, sniff)

Congratulations to the Green Bay Packers and all of their fans for an exciting and well played Super Bowl and your victory. I wish my Pittsburgh Steelers could have come back fully from their self inflicted wounds (3 turnovers), but the Black and Gold showed their championship lineage, too.

I was impressed with the mutual respect and sportsmanship each team displayed and Pittsburgh fans shouldn’t be too upset at losing to a quality Packers squad, especially when our guys played so well and still had a shot to win with just two minutes remaining.

Maloni, 2-7-11


Russ Jensen said...

Well Bill, I wasn't surprised by the Obama paper. They certainly would have sent the housing market into a tailspin by completely backing out. So, the next best thing to do was to gradually dissolve the Gov's interest and simultaneously leave some regulations behind.

My question concerns F&F's long term future. As the acidic mortgages continue to dissipate and their balance sheets start to reflect such, will they become take over targets? Many of the US banks have recovered much quicker than our European counter parts and I imagine they are looking to expand their markets by expanding their reach into smaller stable regional markets. i.e. areas such as SD, Neb, IA, etc. These areas weathered the recession quite well and have been overlooked as they don't fit the sexy massive lucrative mold such as LA, NY, etc. Would F&F fall into this same idea of expansion? Would WF, BoA, hell even Credit Suisse, think of taking over the future role that F&F will morph into? Just a thought?

Russ Jensen
Elder of CJ

Bill Maloni said...

Russ--Your brother is a stand up guy; a man who doesn't know the meaning of the word "fear"--or as I have found out, 25,000 other words either.

CJ is stopping over tonight.

Your question:

No, F&F are private companies, but.... I am not sure their "charters" are worth much, since the Admin seeks to develop financing alternatives and--at the same time--drive up the GSEs costs.

if it were me and that approach became the law of the land, I'd wait and get whatever the Admin is creating as a substitute and start de novo.

If you acquire them now, (assuming Treasury would permit a sale), you also would have to acquire their assets, some of which--but not all--have major problems.

Then, what would be the relationship of a successful acquiring company and the FHFA or Treasury?

It just doesn't seem in the cards, although--I have written and will write for Monday--I think Fannie and Freddie will be an active part of the mortgage market for five or six years, maybe more.

There is no reliable alternative, unless Congress re-creates them, but that just puts the federal government right back in the business all of the pols claim they want the government to be in no longer.

It's also "big casino," in that the mortgage market and its various "parts" (homebuilding, land development, equipment, furnitures, carpenters, painters, landscaping, electricians, Realtors, etc. etc.) is around a quarter of the GNP and millions of jobs.

Nobody can screw with that and hope for positive changes overnight which won't create the same economic problems we now are seeking to get behind us.

And none of the previous even gets into politics and the ever growing commercial bank role in the economy.

BTW, re your "bank" observation. Banks will go wherever there is money to be made and that criteria has no geographic limitations today, given electronic finance.

If the pols were smart, they would say, "F&F made mistakes, but they were the same as dozens of other large financial institutions all over the world. We can control F&F with better regulation, But the two were keystones of a very efficient and consumer friendly national mortgage finance system. Let's keep them in place, but watch them closer. We've solved the low income issue but giving all of that to HUD's FHA. So, let's move forward."

Don't hold your breath!

Thanks for the question.

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