Sunday, February 20, 2011

Playing Doctor and the FCIC Report

“You show me yours and I’ll show you mine. But, you go first.”

Is this an exchange between five years old playing “doctor” or President Obama and the GOP sparring over the universally accepted need to slash federal spending and offer which politically sensitive cuts each would support?

In the past, I’ve complained that President Obama has not been tough “enough” in dealing with the Republicans and that Obama often came away from those spats with a political black eye and looking weak.

But you can’t argue, in this current budget exercise, that Obama--the politician—fails to challenge November’s big winners, in effect saying, “You’ve campaigned on cutting federal spending and a large group of your Members and Senators won election last year saying they want deep federal spending cuts. So, where are your tough cuts, not your ideologically easy ones?”

The President wants to know which GOP favorites, i.e. oil and gas subsidies, agriculture subsidies, military spending, etc. etc. he can go after with GOP support.

Ok, smarter politics, maybe. But I would hope the President would be bolder and not leave the Democrat sacred cows Medicare, social security, etc.” alone, just to deny the GOP the short term argument that, ”Obama wants to hurt our senior citizens.”

Any serious efforts at curtailing our national deficits have to include changes in those entitlement programs and I would like my President to shape that agenda.

Independents, acting as swing voters, likely will elect the next President assuming D’s and R’s all but cancel themselves out, Appeal to them Mr. President with boldness and candor.

Regulators: “We Don’t Need No Stinkin’ Regulators!”

Here were the Senate Banking Republicans, last week, openly saying that they were going to cut US financial regulatory budgets to frustrate implementation of last year’s Dodd-Frank regulatory reform bill, which—surprise, surprise--many of the large financial institutions opposed and ergo, the GOP opposes.

Wasn’t it just “yesterday” that the same conservatives accused Fannie Mae, albeit incorrectly, of lobbying against their regulator’s funding and bemoaning the fact that OFHEO couldn’t conduct proper oversight if it didn’t have its money for more initiatives and staff (which, interestingly, nobody ever offered)?

Fannie never did that, which didn’t save the company from being criticized for it, but the GOP forces on Senate Banking were not bashful the other day and were very clear about their strategy.

The FCIC Report, A Major Wallison/Pinto Smackdown

Peter Wallison, a lawyer, a veteran of the Reagan White House, and now with the American Enterprise Institute (AEI), has been a long time Fannie Mae and Freddie Mac critic. If the bad guys offered tenure, Peter would have the longest.

In many recent activities, Wallison was been joined by Alex Pollock, former President of the Chicago Home Loan Bank, who signed on with AEI.

A recent addition to the AEI anti-GSE cabal is Ed Pinto, who did a two year stint at Fannie Mae in the late 1980’s as the top credit officer, and for two decades has been an industry consultant.

I have encountered folks who can’t get or keep real jobs—because of skill deficits or difficult personalities—and often become “consultants.” I have no idea if that is/was Ed’s situation. But his sudden appearing as a vociferous GSE critic, after 20 years of a low industry profile, seems very opportunistic to me, not to mention the questionable quality of his “research data,” which inevitably indicts the GSEs for some crime or other.

Ed Pinto now supplies Peter Wallison with a lot of GSE mortgage loan data that Wallison uses in his base theory. The Pinto provided “data”—also given freely to policy makers in Washington—supports the Wallison proposition that Fannie Mae—long before Wall Street subprime existed--had been acquiring mortgage loans which were the functional equivalent of subprime.

Maybe If I Go First, I Can Corner the PR

Named as a GOP member to the “Financial Crisis Inquiry Commission (FCIC),” Wallison pursued his agenda and then decided to leap ahead of the Commission’s official report and issue his own multi-page document blaming a lot of the 2008 financial calamity on the former GSEs and their support of homeownership.

As most people know by now, the Commission found that Fannie and Freddie had a role in the 2008 meltdown but not the causative one and went onto to place much of the blame on the Wall Street subprime mortgage securities, originated—via a broker workforce-- guaranteed, marketed and sold throughout the world, to the everlasting despair of those major financial institutions and their central bank authorities.

Lax Washington regulation and overwhelmed and in-the-dark rating agencies too easily handing out AAA ratings to Wall Street firms structuring worthless mortgage securities also were major contributors.

Over time, I have tried to change Peter’s mind about his most critical theory, that Fannie Mae began buying “subprime” loans 10 or 15 years before the other major financial institutions bought huge amounts of the “Wall Street poison.”

Wallison rejected my explanations of why the loans could look similar but were in fact different because of larger down payments (more equity) and higher credit scores.

Facts Spoil His Allegations

I suggested that Wallison examine actual loan losses by type, which you would think would be there, if Fannie was taking in so much crappy business.

I explained to Wallison that roughly between 1988 through 2004—a year, ironically, when the SEC helped push out longtime Fannie CFO Tim Howard, as part of a White House effort to tear down and damage Fannie CEO Frank Raines-- the company never had credit losses of more than $250 Million annually even with mortgage business volumes in the billions.

In 2000 through 2003, when Peter claimed the company was loading up on it’s own version of bad loans, Fannie’s credit losses were about 2 basis points (or two one hundredths of a percentage point) on loans in its portfolio and guaranteed mortgage backed securities (MBS).

I mentioned that following the departure of Raines and Howard in 2004—with Dan Mudd, former Fannie Vice Chairman now named CEO--Fannie losses, which had averaged just about $250 Million annually, suddenly mushroomed to 100 times that amount, averaging $25 Billion from 2004 through 2008.

Before anyone claims that red ink just were business done under Raines reaching their loss zenith, they need to look carefully at the FCIC report which Wallison tried to front run with his misleading excoriations of Fannie and Freddie loans and MBS.

Wallison’s and Pinto’s little chestnut—accusing Fannie of buying bas loans years ahead of the PLS subprime—kept the Right Wing GSE assault machine humming for weeks and it also got the attention of the Commission.

Good for the world!

The FCIC focused on what Wallison and Pinto were suggesting, but it reached an entirely different conclusion in its analysis of more than 25 million mortgage loans and securities from FHA, VA, GSEs, “private lenders,” and Wall Street subprime.


In doing so, the FCIC politely rejected the AEI (Wallison’s and Pinto’s) contentions and suggested that their gerrymandered mortgage groupings and comparisons were “misleading.”

Notably and specifically, the Commission report—on Page 219--says that, “in direct contrast to Pinto’s claim, GSE mortgages with some riskier characteristics such as high loan-to-value ratios are not at all equivalent” to the lesser quality PLS subprime securities (non-Fannie loans).

FCIC said the Fannie Mae loans that the two claimed were equivalent to PLS subprime were not and that difference showed in the Fannie originated loans which performed much better than the Wall Street PLS. In 2008, for example, the GSEs troubled loans had default rates of 6% while the PLS mortgages defaulted at 28%.

More significantly, the FCIC provides reams of comparative mortgage data for researchers, the media, and policy makers—IMO, more than what was handily available before—showing how Fannie’s own loans, underwritten via its “prime mortgage standards,” out performed the loans the company got from the “Street.” .

I’ve provided a link to the chapter in the FCIC Report chapter on various loan performances of the GSE underwritten loans and those created by Wall Street—which refused to utilize GSE underwriting standards—but instead seem to reward their own brokers for eschewing any prudent underwriting standards. (Facts well spelled out in the McLean-Nocera book mentioned later.)

Others Pushback, Too

The current milieu of confusion and ongoing GSE animus helped AEI’s disinformation. But new information sources, in addition to the FCIC report, suggests that these conservative attacks are based on a purposefully distorted reading of the GSEs business activity and history.

This is a link to Professor William Black’s rejection of the Wallison position.

And, here is Joe Nocera (who, along with Bethany McLean, authored the recent book about the 2008 financial collapse, All the Devils Are Here) responded most recently to Wallison, in what now has become multiple exchanges.

BTW. Late addition to the literature. Read, what a world without Fannie and Freddie might look like. and likely systemic affects of same.

None of this will stop the conservative assaults on the former GSEs, but with the FCIC’s GSE mortgage tables now available, how can any objective individual still give credulity to the AEI ranting? I also wonder how Peter and Ed can continue their “act,” when faced with this type of refutation. (But, we know they will.)

Let me be quick to add, as I’ve written every time this subject comes up, Fannie and Freddie made gross mistakes in acquiring the PLS subprime securities and they should be and were sanctioned. For that, they earn no slack from me nor should they from anyone.

But so did hundreds of other financial institutions across the world.

That activity can be—and in fact has been--managed by additional regulation.

But, if Congress and the White House want to restructure the nation’s mortgage finance system—and cashier Fannie and Freddie--do it for the right reasons, armed with the correct information, not distorted data from folks who have ideological or personal agendas to pursue.

Maloni, 2-21-11

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