Thursday, March 31, 2011

Happy April Fool’s Day, Play a Joke on Someone!!

An April Fool's Day Interview with a GOP Member of the House Financial Services Committee.

Congressman, you’ve introduced 8 bills designed to reduce Fannie’s and Freddie’s role in the nation’s mortgage finance system and to scale back the federal gCovernment’s stake in the same operation.

Yes, that is correct. We think disassembling the old GSEs piece meal is better than trying to abolish them all at once.

Before we get into the substance of these bills, following the introduction, did you hear Committee Chairman Spencer Bachus (R-Ala) say, “The measures are intended ‘to create a well-functioning, private, competitive secondary mortgage market to price mortgages according to risk, be more innovative and efficient, and operate with less political interference?’ ”

Yes I was and truer words were never spoken.

Sir, do you think the Chairman intentionally ignored how much campaign money the banking industry—after abandoning the Democrats--spent mainly on the GOP to produce the bankers’ legislative and regulatory agenda? It’s been rather well documented how massive was the bank lobbying effort both to mash Fannie and Freddie and then last year to get Congress to pass weak legislative changes, memorialized in the Dodd-Frank Act. Now the same actors are doing the same level of lobbying now with every federal financial regulator, trying to water down new regs. Has Chairman Bachus missed all that and how can he hope people will view him as credible or believe him?

Also, a quick follow up, after making that statement, did the Chairman turn to stone or have his proboscis grow significantly larger?

Look, where you stand is where you sit and I believe that’s just corporate America—God love them--exercising its First Amendment rights, just as our, I mean the, Supreme Court said they could.

OK, back to your proposals. If you succeed with these legislative approaches, what institutions will provide mortgage finance and act as the nation’s secondary mortgage market?

Well Silly, our big banks of course, excuse me, I mean the nation’s large diversified fully integrated bank holding companies and other large depositories.

And why would you—in effect—cede the nation’s entire national mortgage market to large financial institutions, which have a spotty record on mortgage lending? The banks were pioneers in “redlining,” prefer to lend adjustable rate loans rather than fixed rate and seem to oppose every pro-consumer finance proposal or appointment made in Washington. In addition, they abandoned some markets in tough times and never have presided over a national secondary mortgage market. Yet, in your legislative scheme, the banks face no natural competition?

Not an issue, we also are going to have “covered bonds” and the “Danish system,” although I don’t know why pastries help with mortgage lending. And, as soon as the Financial Services Roundtable tells me what a covered bond is and what they do, I’ll have a better answer for you. At first, I thought this was a punch line to a “blonds” joke, but now I know they were saying “bonds,” not blonds.

But, we need to get the federal government out of the mortgage finance business and the best way is to give everything to be banks money, so that we have private money instead of tax payers money used for mortgage loans..

Obviously Congressman you are aware that those major regional and national banks rely on a variety of federally offered and supported initiatives for their working capital, which is a neat way of saying they are federally subsidized? The biggest banks, likely, all are “Too Big to Fail,” meaning the federal government would bail them out, if they ran into difficulty, which sounds more like the Fannie/Freddie story than not. Your approach just may be getting the federal government deeper into the mix than they are right now, not to mention creating a not-consumer friendly United States mortgage market.

Note that your proposals, state explicitly, that the GOP wants Fannie and Freddie—while they still are around--to charge consumers more for their mortgage loans to make it easier for these banks to compete. How does that help anyone but the banks?

Nonsense, I don’t know about “your” banks, but these banks--our banks, as I like to call them--are private and need help. Let me spell that for you “P-R-I-V-I-T, private." They’re all good local businessmen, entrepreneurs and--unlike Foo and Fat-- don’t use the federal government for much of anything. Nobody in the private sector does. That's why the banks call themselves


So, don’t try and confuse us. Did I mention the banks are going to employ “covered bonds” and great coffee cakes and whatever other goodies those Danes bake and what generous contributors these guys are? I mean all we have to do is mention a number and “boom,” we get it from them. It’s like having our bank-provided Republican ATM machine, but—of course—with no swipe fees for us.


Even Haley Barbour supports us. You remember when Haley worked in town, his old lobbying firm (Barbour, Griffith, and Rogers) was part of the successful effort to wound Fannie and Freddie and that was before we all even heard the word “subprime.” No we just have to finish the job that old Haley started.

"Colorblind Haley”—as he wants us to call him—was a Fannie killer, before most of us even came to Congress. So how much more evidence do you need that we are doing right by the banks, I mean the American people?

Congressman, who is going to buy all of these covered bonds and can they finance a trillion dollar US mortgage market?

I don’t know. I told you I needed to speak with the boys at the Roundtable. I am sure that they have answers to that question, especially since I don’t.

I am sorry sir, please tell me again why you want to get rid of Fannie and Freddie?

Simple, they caused the entire 2008 financial meltdown, with their efforts to make poor people homeowners. Damndest idea I ever heard, telling poor people—who didn’t know if they were going to have a paycheck from one month to the other—that they could afford buying a home. That was the problem.

You must be referring to the subprime debacle, on which your committee held days of hearings?

Yes sir, that and more, Frannie and Feddie or Frankie and Johnny were the cause of all of that, too.

Sir, Mr. Congressman, didn’t the President’s Financial Crisis Inquiry Commission, as well as many others, point out that it was Wall Street, in concert with large banks and the rating agencies—not the former GSEs-- which introduced subprime lending, told their paid-by-the-contract mortgage brokers to ignore all underwriting standards and just send all of the signed paper they could to New York?

These same banks and investment banks created, packaged, guaranteed, and sold the poisonous mortgage backed securities all over the world, causing dozens of lenders to fail or lose huge sums of money--and international financial chaos to set in--as thousands of borrowers quickly ran out of money to make their monthly mortgage payments. Didn't that dishonesty and treacherous behavior cause the huge mess in late 2007 and 2008, from which we just now are digging out, albeit slowly?

Pure bull pucky! Our guys on that Commission had the facts they needed--before the hearuings--and made their case well. Who cares if nobody else on the Commission agreed with them?

They also got out in front of those Democrats and put out our own report early, making it clear that Fannie and Freddie were the sole culprits.

Our guys wouldn’t say that if it wasn’t true, would they? Based on what our Commission members wrote and later said, I am not even sure if "Wall Street" investment banks were involved, since that name never appears in their findings.

What other evidence do you need that you are wrong and we are right, er Right?

Congressman, isn’t there the possibility that all of this power concentrated in the big banks--with no natural competitors and their opposition to serious regulation--scares you and makes you wonder if you are taking the correct action, especially given the big boys proven ability to manipulate the Congress?

Let me answer your question this way. Did I mention their campaign contributions?

Well sir, thank you for your time and um, good luck.

We don’t need any luck, son, we have the votes and lots of campaign money? Damn did you notice that Spencer now is using handkerchiefs that are two feet by two feet? I guess you got to have those when your nose grows so big, so fast.

Maloni, 4-1-11

Monday, March 28, 2011

Republicans and Libya, Bank Regulation, and the GSEs

Suddenly the GOP--who allowed George W. Bush to violate all sane budget dogma with his war his phony war in Iraq and combat later Afghanistan--are concerned over what Persistent Obama is spending on Libya and what congressional blessing he is getting for military action.

It’s Mickey Mouse partisan hassling, since the R’s read the papers listen and often appear on television and know exactly what is happening in Libya and the fact that President Obama, unlike his predecessor Bush, quickly put together a real participatory alliance, which early on committed their sovereign wills, planes, pilots, and other military resources to stop Gadaffi from killing his own people and further mucking up the economically important oil rich northern African.

The alliance quickly has opted to give NATO control of the military operations and our President will tell the American people Monday night, what he believes are the US’s goals and opportunities in shutting down Gadaffi

I learned professionally—and have said often in this blog—that when you toil in DC and have a profile, you are going to be rebuked either for being a sheep or a wolf. I hope Barack Obama agrees with me that it’s better to be a predator then a lamb chop.

That doesn’t mean that President Obama’s messaging on Libya has been sound, but his actions are to be applauded. I’ve been wrong plenty of times in my political prognostications, but continued GOP opposition to what Obama and NATO are trying to do will hurt the Republicans, especially given their “gung ho, kill the Commies and all enemies of the US” Christian Conservative/Tea Party elements.

It Isn’t 2006

I don’t know if Gretchen Morgenson is aping me or the reverse is true, but—once again, in her Sunday NYT column—she takes the large commercial banks to task for trying to dilute regulations being fashioned by the federal regulatory community or favorably shape them.

The scary and not so surprising thing is that Treasury Secretary Tim “I Haven’t Seen a Big Bank I Don’t Like” Geithner isn’t vexed by what the banks want and may end up supporting them, with appropriate veils hiding his work. (Link to GM's column.)

Colonial and Equine Heroes and F&F

There are both House and Senate hearings this week on mortgage finance issues, which means Fannie and Freddie, will come up and likely trashed, in part because the of the heavy campaign of mistruths which have been dumped so hard and heavy on them.

It will be very tough to polish the companies’ wheels from what will be another crap shower.

Plus the Congress has in front of it, the fresh grist of GSE borrowings from the Treasury, based on the Bush GSE takeover, which should be heavily discounted literally and figuratively.

Oh and don’t forget all of the congressional “outrage” over paying legal fees for former GSE officials facing legal challenges. Those purse string watchers on the Hill—in both parties--better hope those outside counsels do their best Perry Mason imitations and do it well, because their fees are scant compared to what the Treasury--which owns Fannie and Freddie—would have to pay litigants if the former GSE officials lose. (Hmm. Think that one over Reps. Issa (R-Cal) and Hensearling (R-Tex).)

Treasury insists that the companies maintain loan loss reserves against assets already owned by the government and liabilities which—if actualized—immediately become the responsibility of the taxpayers. That’s the government’s choice, not the companies. And F&F are being charged an exorbitant interest rate, which too has to be borrowed from Treasury and then promptly paid back to the Treasury. Duh?!!

Of course this both makes the companies look—on paper—in worse financial shape then they are and also allows Treasury to boast that it is earning money on what it “lent” the former GSEs.

Isn’t that something like offing your parents and then crying because you are an orphan?

Once you get over those minor hurdles, you likely don’t have the political will among many D’s to subject the GOP’s “facts” to a grueling review. Plus, we know the GOP won’t cross the Wall Street Journal, AEI, and their Tea Party screamers no matter what a factual review shows.

The Grand Old Party and Tim Geithner just want to get rid of Fannie and Freddie or “abolish them,” in Barney Frank’s famous phrase.

But, if they don’t want—as they naively claim-- the federal government dominating the nation’s conventional mortgage market, both sides will have to come to grips with the fact that their proposed mortgage market saviors--the nation’s large commercial banks--are barely one step below Fannie and Freddie on the “who is getting all of its working capital because of federal supports and subsidies?”

All of Those Federal Benefits

One just has to think and understand federal deposit insurance, access to Fed and Home Loan bank windows, exclusive markets where they face no competition because the Treasury has walled off others, And their continued efforts to both dilute Dodd-Frank regs or twist same to their decided advantage, i.e. return to Morgenson’s column.

Since the GOP doesn’t care for stringent federal regulation or much regulation at all and the banks are trying to get full ROI on their 2010 GOP campaign contributions—and Tim Geithner keeps doing his best Treasury secretary Andrew Mellon impersonation--what’s to prevent a replay of the last real estate financial disaster, since we know those big banks, top heavy with their investment banking subs, are the ultimate TBTF?

Of course in five years to seven or even 10 years (pick your “fix the national mortgage marketplace” time frame), most of the current Members of Congress and Admin officials will be gone, but they mess they create by caving to the big banks-- or more accurately re-create--will require someone’s cleanup.

A Hero and a Derby Winning Horse!

If the big financial behemoths are the 18th century British Redcoats then I am happy to be Paul Revere, riding through every “Middlesex, village and farm” warning, “They’re coming, they’re coming.”

Mixing our metaphors, what we really need to is for F&F to be the famous smallish racehorse “Carryback,” but in the second decade of the 21st century iteration.

Carryback was the little horse—often laughed at or even pilloried by peers and critics, as F&F are now—which in big races started out neat the end of the pack but then his core strengths would kick in and he would roar past the competition to win.

Maybe the former GSEs can just stay alive and win the big one for consumers, small lenders, and the nation.

Maloni, 3-28-11

Sunday, March 20, 2011

Libya, Japan, and the US Mortgage Market


I was going to concentrate on “mortgage stuff” this week, until the French—quickly followed by the US and Britain-- acting on the UN resolution sicced their jets on Libya. Now, if they all would continue blowing up s*** and not watch from 30,000 feet while the Gadaffi’s army overwhelms the rebels, I’ll feel much better.

Italy, Spain, Canada, Denmark, Qatar, and the United Arab Emirates now are part of the UN effort.

I still hope that some of these US arms sitting in Egypt to find their way into the hands of Libyan rebels, along with some necessary “weapons instructors” and maybe a few Special Forces operatives, just to give this movement a chance to oust Muammar.

About two thousand well armed French Foreign Legionnaires would also help.

Oh and, naturally, the opportunistic Russian leadership is staying on the sidelines speaking out of both sides of its mouth regarding aggression.


Has the world in recent years ever faced such simultaneous disasters--each pregnant with horrific consequences--than the earthquake and tsunami in Japan and the UN response Gadaffi murdering his own?

I know the US and its people will do that is possible to help Japan and its brave citizens in their hours of need and I only can hope that China, with its wealth but ugly history with Japan, will offer maximum support to its neighbor. You help people when they need help, not when it’s convenient for the helper.

Mortgage Finance

There were a plethora of “Hey, Wait a Minute on Fannie and Freddie” articles recently, links for which I add at the end of this segment, But almost as interesting was Gretchen Morgenson’s article on the department SIGTARP,” Neal Barofsky, who was the federal government’s watchdog on Treasury implementation of all of the major deals with financial institutions wracked by the 2008 financial debacle.

As someone who believes that Secretary Geithner has erred on being too bank-friendly and working out sweetheart arrangements for these institutions, I call your attention to the problems that Barofsky had with that situation, detailed in Morgenson’s column.

And, now, Geithner wants to turn over the nation’s mortgage finance system to the large commercial banks. Tsk, tsk!

GSE Legislatio

I was a bit intrigued by a new GSE proposal from Randy Neugebauer (R-Tex), a senior Member of the House Financical Services Committee, which he claims is designed to “totally privatize” Fannie and Freddie, in four years or so, and allow them to compete in the mortgage market on their own financial strength, probably against some large commercial banks on steroids, thanks to new Obama Administration proposals,

His “privatization” might be a desirable objective, if the Congressman sincerely want a national secondary mortgage market which features viable major non-bank players. Although I suspect that some of his colleagues--and maybe even RN, himself--would want to clip some of the GSE business capacities before setting them free.

Not Private Cash and Still TBTF

But Congress better realize—as I’ve been writing—that, no matter what some on the Hill pretend or even believe, banks only are another form of federally subsidized financial institution and most of their working capital comes via federal appliances, so don’t get too caught up in your rhetoric about "private capital" because it might turn around and bite you in your sensitive rumps.

The "federalization" problem that Neugebauer and others in Congress want to conquer is twofold. Claiming (wrongly) that they are bringing in all of this “private capital” and getting rid of the federal presence in the conventional mortgage market is almost beyond their ability to manage. Since banks are not going to give up their federal benefits and the congressional conservatives can't erase the very recent memory of the Bush Administration--and later the Obama crew—writing checks on the taxpayers because some financial institutions just are “Too Big to Fail.”

Yes in future financial secrecies legislating, Congress will write into law some version of “nothing in this statute should assume that (fill in your list of favorite financial services companies) are backed by the full faith and credit of the federal government,” hoping to erase the TBTF residual. But saying or writing it doesn't make it so.

Good Luck Congress; Markets Are Smarter and Faster Than You Think

I suspect, if Neugebauer has his legislative way, that hard economic erasure of TBTF will apply to the newly “privatized” Fannie and Freddie and others. But remember, old F&F had “not the full faith and credit” reminder clause in their charters but that didn’t stop Paulson and Bush, for the first time in the GSEs history, from infusing real federal cash into the companies. And, it certainly didn't limit the Bush Administration from doling out major bucks to the banks.

No sane Administration will be bound by that cautionary restriction if the failure of a behemoth internationally connected bank holding company might bring down the US banking system or the world’s financial network, especially after the unprecedented federal government actions in 2008.

Good luck Congressman Neugebauer.

Who’s talking About GSE/Mortgage System Policies?

Are Fannie and Freddie beginning to earn some business respect and, if so, does that translate into political success?

Tom Vartanian, well know DC financial services attorney, thinks the 5-7 years which most people claim is necessary to unwind the mortgage finance system from Fannie and Freddie might, in reality, be 10 years or more.;_ylt=AithvdiYAEyF9xkpGXB5cnG7YWsA;_ylu=X3oDMTE2bGVza2ZzBHBvcwMxMARzZWMDdG9wU3RvcmllcwRzbGsDZmFubmllYW5kZnJl?x=0&sec=topStories&pos=7&asset=&ccode=

Paul Muolo

After scoffing at congressional efforts to restructure the GSEs, the National Mortgage News executive editor’ Paul Muolo suggests that Fannie Mae and Freddie Mac are too crucial to the national mortgage finance system, the economy, and to lenders to do away with them and that Congress won’t take any action until after the 2012 election. Muolo also notes that both companies are “profitable on an operating basis," meaning before they pay Treasury the unusually high 10% annual dividend which was a condition of the 2008 federal F&F takeover. (I never get tired of pointing out that Paulson and then Geithner charged the big banks 5 % on their Treasury borrowings.);_ylt=Al.5T2MisJZxRcv8IJ7kycDeba9_;_ylu=X3oDMTFnbzdocmZpBHBvcwMyBHNlYwNjb250ZXh0dWFsLXRlY2h0aWNrZXIEc2xrA2Zhbm5pZW1hZWZyZQ--

Mark Olson

Minnesota small banker, Mark Olson, discusses why the Fannie and Freddie based secondary mortgage market is crucial to the future of small bankers and small lenders.

Robert Schiller

Yale’s Robert Schiller, of Case-Schiller fame, appearing in a Bloomberg News interview, says that getting rid of Fannie and Freddie only would weaken the US housing market.

A Question?

Why are the big banks and their allies so frightened of Elizabeth warren and new efforts in Washington to protect consumers? I realize that the GOP and most in banking want to kill any remnants of the Dodd-Frank bill which established minimal controls on bank operations, but Ms. Warren seems to have a bulls eye on her back,

It couldn’t have anything to do could it with the fact that some/many banks know that their product and marketing efforts are designed to gull consumers and therefore Warren might be able to stop that assault?

Maloni, 3-21-11

Sunday, March 13, 2011

Five to Seven Years

Okay, so a Middle Eastern foreign policy wonk I’m not. But, at the end of last week, I had to get myself on the record with my views about Libya and our President’s caviling. Maureen Dowd’s column in Sunday’s Times kind of put me in my place and settled me down.

I have a more traditional comment about another overseas development. All hopes and prayers go to the Japanese people and government trying to manage the horrible results of the massive earthquake and Tsunami which hit their nation.

The words “fortunate” and “Japan” don’t easily go together. But, had the earthquake been closer to Tokyo—with the resultant Tsunami--the death toll and massive destruction would have been greater just because of the more dense population and supporting infrastructure systems.

As it is, I am sure the current estimated 10,000 casualties will grow much higher in coming days.

There also is a tragic irony Japan being the first nation struck in war by an atomic bomb now facing additional tragedy from radiation leaks caused by damaged nuclear power facilities, which the island nation employed to make their lives easier.

Fannie and Freddie

Some months ago, writing about the former GSEs and possible legislative changes, I speculated that-despite all of the angry “abolish them” rhetoric from both parties—it would take Congress five to seven years to complete any structural transition to a new national mortgage finance system.

Now I see the same “guesstimate” in articles and commentary, everywhere.

I’d like to think that I first identified and coined that epoch but I suspect I wasn’t.

Nonetheless, whether I am a seer or I’m one (of many) who better understands the difficulties facing policy makers and Congress, I thought I might try and establish a case for why it might take 60 to 84 months for this odyssey to end.

The Congress

First off, the Congress never does anything quickly, especially if the issue is complex, has lots of moving parts, and involves something beyond mumbling the buzz words du jour.

If there is a shift away from Fannie and Freddie, public officials and the media will need to confront—hopefully fairly—most of the following major issues and build a political consensus to remake the nation’s mortgage finance system and infrastructure. (Again, the following is not an exhaustive list, so I invite readers to share your own with me, in the “Comments” section or elsewhere.)

Politics, 30 year fixed rate mortgage, fair lending, lower income families, securities market, monetary policy, Wall Street, “Too Big to Fail,” billions in overseas investment, “the American Dream,” 2012 congressional and presidential elections, rating agencies, the SEC, “the economy,” bank structural problems, control of Congress, bank mortgage lending history, Republicans control the House, Democrats have the Senate majority, interest rate and credit risk, industry competition, conservatives in Congress, New York Times, systemic efficiency, liberal/progressives in Congress, simple answers to complex problems, community investments, do homeowners do more civically?, lies and distortions, marginal congressional mortgage finance comprehension, ideological opponents, the Fed, systemic risk, dog and pony show hearings, federal subsidies, bloviation, convincing experts on both sides of an issue, Tim Geithner and the Treasury, jobs, powerful big bank lobbyists offering big campaign contributions, AEI, congressional minority caucuses, congressional legislative bias to “leave it to the regulators,” media attention, paucity of credible congressional experts, middle class aspirations, the “Angelides Commission,” a major chunk of GDP, Wall Street Journal, minority homeownership aspirations, rental housing, Aegean stables, federal deficits, can’t call a halt while fix is debated, small lenders, the subprime debacle, previous regulatory indifference, deposit insurance, mortgage interest deduction, property tax deductions, “If it ain’t broker, don’t…..,” and more politics.

Skeleton Music

Think of the old song, “Dem Bones,” as in the “toe bone connected to the foot bone, the foot bone connected to the ankle bone…”--and look at the list, again--also the fact that Congress doesn’t do "disassembly" well or sometimes, at all.

Historically, Congress tends to leave institutions around or functions alive to be reinvigorated if the need is there.

Need proof? You can cite all of the reasons you wish, but the much abused Fannie and Freddie (maligned incorrectly I need to repeat) not only still are around, but still do about 90% of all the “conventional loan” financing and, it appears, that both could start generating positive earnings soon, if the Treasury and FHFA removed their boots from the former GSEs necks.

What I tried to explain with the long list above--plus all of the similar elements about which you will remind me—is that they are related in substance or certainly politically (which is why politics gets mentioned twice!) and hardly can be examined for a congressional “fix” in isolation.

You can’t talk about getting rid of Fannie and Freddie, without dealing with the fate of the 30 year fixed rate loan. You can’t address GSE successors or replacement institutions without looking at what large commercial banks and the Wall Street investment banks (many of which now are own by the big depositories)—the obvious successor candidates--did when they controlled a large swath of the mortgage market, i.e. see “subprime.”

Tell Me, Again, Why We Are Angry?

We have a Congress and many in the nation upset over Fannie and Freddie but not sure why. This was the result of an effective campaign—run by their political and business enemies and helped by their own subprime follies-- that demonized both companies and took advantage of how little was known and understood about the two.

I see the Obama Administration seeking mightily to both endear itself to the large commercial banks and voters, but unsure just how to do that and still pass a Democratic political “smell test”

Most D’s know the big banks abandoned them in the 2010 campaign but now see Tim Geithner trying to smother the banks in new federal revenues and subsidies. Instinctively, that bothers the D’s but since so few spent time understanding the whys and wherefores of the financial meltdown; they’ll keep their heads down and play “follow the leader.”

Most public officials, including all Members of Congress, will tell that they are wizened and cynical, but that’s not true. Most among them, even the Democrats, want to believe the banks and believe that the banks will do the “right thing” if only the government gets out of their way and permits them.

It won’t take these folks very long to realize that the banks are for the banks and they are whippet fast, faster than those who regulate them, and will take advantage of every opportunity to fill their coffers at the expense of their customers and clients.

Which is a major reason to have secondary mortgage market institutions which the banks don’t control and which operationally can control bank treatment of mortgage products, consumers, and system prices.

The big banks play a game of “catch me if you can” with Washington regulators. Once a regulatory whistle gets blown, there are the inevitable “mea culpas,” exchanges of letters, and written understandings, in which the perpetrating bank will not admit wrongdoing, but agree to stop what angered the federal financial regulator.

Could 5-7 Years Become 7-11 (Aside: What a Great Store Name!)?

These obstacles are only some of why I see Congress needing five to seven years, or more, to resolve “issues,” which might be more gossamer than reality. But, admitting that possibility and dumping the empty fluff is what Congress does worst of all!

To further add to your intellectual please, let me add a few links to articles which suggest atomizing Fannie and Freddie is not the best public policy.

Links to F&F Articles

Maloni, 3-14-11

Thursday, March 10, 2011

Let’s Talk Libya Today, Mortgages Next Week

Does anyone really believe that within six or eight weeks, the United States won’t be militarily involved in Libya?

Something will happen which suddenly “forces Americans into this dispute”: think “Gulf of Tonkin.”

Picture two scenarios, if Muammar Gadaffi isn’t deposed, killed, or leaves his country:: he survives and begins exacting revenge on his citizens who challenged him, and blames the “West” for his troubles. He threatens us and Europe withholding his oil from the world market (can you say $150 a barrel and a plummeting stock market) and we develop a sense of greater outrage (meaning fear of spiraling oil prices) and we jump in, literally, to….(fill in the explanation du jour).

Or, NATO finally gets its weak ass together, again because of oil concerns cloaked with rhetoric about the civilian carnage and, we lead the effort with a few French and British soldiers and try and save the Libyan people from Gadaffi. Before you know it we are fighting on the shores of the Med.

Personally, since we will get blamed no matter how a Libyan war starts or ends, I would hope President Obama and his national security “team” go to the mattresses, now, before Gadaffi attracts too much support and the Libyan rebels’ ardor dwindles because they are being killed off.

What’s not to like about this fight?

Gadaffi is a scumbag and no friend of the US; he’s responsible for the Lockerbie bombing; he's killing his own people who want to be free of his yoke, in fits of megalomania, and we have a major economic interest in Libya’s oil. He’s also screwing up the “Arab spring.”

If Gadaffi survives, does anyone doubt that radical Muslims, whether Al Queda, the Taliban, or others will find a home in Libya?

So, wipe him out along with his extended family and get onto tomorrow’s crisis.

The Middle East is in active strategic and political play and we are either going to sit back and reap a bitter harvest--because we kept a low profile and did little--or we are going to engage and try and shape the "Arab summer and fall," which follows today’s “Arab spring.”

If it’s a lose/lose for us, let’s at least kick some Libyan bad guy butt.

Via NATO, let’s embarrass the French, British, the Germans, the Dutch, Turks, Italians, et al to join us in a “humanitarian” military engagement, quickly arm the Libyan insurgents and let them fight whoever remains after we take out Gadaffi in the literal sense.

We missed Gadaffi after Lockerbie, let’s not miss this time.

President Obama looks callow with all of this huffing and puffing producing no action. Why be the world’s strongest country if you won’t use your might in a good cause, if not a just cause?

Where is the closest “Tea Party” recruiting office? I am heading for it!!

Maloni, 3-10-11

Monday, March 7, 2011

Kindergarten and the GSEs

Something bad happens to many individuals when they become Members of Congress or United States Senators, they lose their common sense.

Most get carried away in some ego trip rants about “their district or state” and the federal laws they plan to change, when all they should do--in the two decade old words of author/poet Robert Fulgham—is remember “what they learned in kindergarten.”

I started thinking about this because of the many positive things I’ve been reading and hearing lately about the current mortgage finance system still with Fannie Mae and Freddie Mac, playing their historic roles as national mortgage investors.

Yet, there persists this ongoing debate, from people who presumably attended kindergarten, about why and how we should change our national mortgage finance system and scramble many of the institutions and business relationships that have allowed our nation to become so well housed. This systemic revamping could also might cost us many of the societal benefits which go with homeownership as some disdainfully would treat all existing home finance structures as just so much economic flotsam and jetsam.

Not Right or Wrong; What Works and What Hasn’t

Nobody is suggesting that Fannie and Freddie were always correct and everyone else wrong. Far from it, the errors of commission both made in choosing to buy copious amount of subprime mortgage backed securities--with high yields and hints of enormous finance returns to the two companies—never should be forgotten and never should happen again and likely won’t.

It happened and the GSE people responsible for those subprime decisions were identified and removed when the federal government took over both companies in 2008.

But that is history and today the Obama Administration and a very conservative Congress grapple over a replacement “system” for Fannie and Freddie, sharing far less common ground than folks like to think.

Good Bye 30 Year FRM?

Indeed, as the New York Times editorialized last week (link below), the very fate of the 30 year fixed rate mortgage, the choice of most Americans, may hang in the balance as this legislative odyssey plays out and the world learns if some version of the former GSEs get s to survive..

But, back to the simple things these bright men and women in Congress learned early in their lives and need to apply as they consider what the Congress should do with Fannie and Freddie and the system for which they are the keystones and continue to dominate.

After listing many of his life lessons, Fulgham reminded us, “
”Everything you need to know is in there somewhere.
The Golden Rule and love and basic sanitation.
Ecology and politics and equality and sane living.”

How should today’s Washington solons apply Fulghum’s wisdom to this to the GSE debate?

Future Do’s and Don’ts

One is Fannie and Freddie was not the cause of the 2008 debacle and before the introduction of massive subprime balanced many of the corrosive interests in the market and produced a very efficient and consumer friendly mortgage market place, pretty much as Congress deigned.

That model, with minor variations, has value and can be sustained, as long as national mortgage investors never engage in any business activity which involves trading in subprime mortgages. (That likely already has been addressed through regulations which followed the 2008 financial meltdown.)

Fannie and Freddie—if perpetuated--should not have federally imposed low income housing goals and targets, which might cause them to succumb to some well meaning but naïve financing for people who don’t have the wherewithal to afford the mortgage, i.e. those closest to needing the flexible underwriting that characterized subprime financing. It looks like that federal government already has solved that problem, with its major expansion of the Federal Housing Administration (FHA) primary single family loan program, which allows virtually any family or individual with five percent down to qualify for a federally insured mortgage loan.

Three, Fannie and Freddie shouldn’t finance risky conventional loans which structurally could encourage defaults. To wit, “Uncle Sam” is in the process of defining the minimum equity and capital of a “qualified residential mortgage” (QRM), so lenders selling loans to Fannie or Freddie would retain some “skin in the game” regarding that mortgage’s long term health.

The point of all of this is that rather than posture, bloviate and gas bag for months (years?) about Fannie’s and Freddie’s past subprime sins, the Congress can—and should--quickly return strength and normalcy to the nation’s mortgage markets.

It’s Ready to Go, Just Add Political Guts

The foundation already is in place to move forward with minimal GSE enhancements, starting with better regulation, which will maintain standardization, efficiency, and mortgage market competition, the latter being essential

Congress and the Administration might have to admit that the GSE “sins” were not so grievous given how many financial institutions, both domestic and foreign made the same mistakes; that future aberrant subprime investing has now been euthanized by regulations; and the fact that the two still, still are financing 9 of 10 US conventional mortgages, while being run by a bunch of bureaucrats.

The nation’s mortgage finance system works now and can work better. Congress doesn’t have to risk turning everything upside down and bringing in new names and institutional faces, which may not execute the job most Americans want accomplished.

Understand the New York Times editorial above and why many thoughtful individuals have warned about the possible loss of future fixed rate financing, as Tim Geithner seems willing to risk. Understand the structural and systemic shortcomings of banks holding mortgage loans in their portfolio, which makes the Times’ concern relevant.

Geithner, who should know better (bad kindergarten experience?), wants to turn the entire mortgage finance system over the large commercial banks and bank holding companies, the lenders which refuse to hold fixed rate loans on their books, unless they first have been securitized by Fannie or Freddie or they receive new federal securities reinsurance subsidies.

It may be that Speaker John Boehner’s “new Congress” is ready to pay back last year’s banking industry campaign favors, or the White House with an eye on 2012 has forgotten its “kindergarten experience,” and the Treasury Department leadership wants to hand the nation’s daily commerce over to the big financial guys. All are acting as if the right public policy is to establish few controls over big bank authority to conduct almost all of the nation’s commercial and consumer business.

Didn’t that fail, disastrously, once already?

Even when Mr. Geithner and others testify to Congress or to the Angelides Commission that it will take years to wean the mortgage finance system from Fannie and Freddie and then reconfigure it in some new structure, elected officials and media need to ask why and then question the wisdom of doing it compared with risks and benefits.

Homeownership Has Myriad Values and Matters

I hope that some of the recent discussion questioning the continued appeal or desirability of homeownership is just a witless carryover from the financial shock of three years ago and not some fundamental review of one of the elements which made this nation great and which acts as an aspiration for so many young families.

Right now, the D’s get to kick Fannie’s butt, while still getting mortgage finance, and the R’s get to scream about the GSEs while proposing but not producing any real legislation. And the banks get to sit on the sidelines and contemplate future earnings—with few systemic responsibilities—and near term take full advantage of F&F Fannie still being forced to take all of the loans the banking industry can generate.

I have no idea if there is any truth to the rumor about t-shirts showing up in money centers stenciled, “I am a now a ‘GSE bank’ and there’s nothing you can do about it!”

As Fulgham suggested our world would be a better place if “...all governments had a basic policy to always put things back where
they found them and to clean up their own mess.”

Last Week in the Baltimore Sun,0,1799402.story

Maloni, 3-7-2011

Wednesday, March 2, 2011

GSE Stuck in Dividend Tail Chasing

Tell Me Lies, Tell Me Sweet Little Lies, Tell Me….”
--Fleetwood Mac

I will list the things that most people associate with not telling the truth.

First, as Pinocchio knows, your nose gets longer; second, you turn to stone and-- depending on your religion--you’ve committed a major sin or denied yourself God’s respect. Worse, you may have to keep telling the lie, so that it becomes the “Big Lie,” which certainly didn’t help Stalin or Hitler.

I am sure that I overlooked one or two horrible results, but my purpose here is to warn Mrs. Timothy Geithner of all of the bad things that likely could befall her husband from his testimony about Fannie and Freddie yesterday before the House Financial Services Committee.

Treasury Secretary Geithner either believes the stuff he was saying to the House on Tuesday or he doesn’t and I am not sure which is worse.

In my view, Geithner’s testimony contained a conflation of two major fibs, paraphrasing, “We (the Obama Administration) want to get more private capital into the mortgage market and we want to get the federal government out of that financial responsibility.” Is that close enough Mr. Secretary?

I have problems with that statement. The large commercial banks, which Geithner seems to want more into the market, hardly are “private” and I will—once again—define why that is true.

Second, his “Option 3” plan puts the federal government right into the thick of financial obligations, providing “reinsurance” to the very institutions that created and sold worldwide the “private label” subprime mortgage securities that bankrupted many ongoing concerns and caused world havoc just a few years ago.

“You don't want to run a system where the taxpayer is on the hook when things go bad," Geithner said. (From Secretary Geithner, before the House Financial Services Committee, March 1, 2011.)

One of the major indictments against Fannie and Freddie is that they lost their way, confusing their public mission with their private nature and invested in lousy subprime assets to increase their profits,

People seem to forget that since 1970—when Fannie was first privatized—it was given a profit making function and despite the fact that it (later joined by an equally incented Freddie) did an excellent job on the mission side, helping millions of families become homeowners and making the secondary mortgage market efficient, its profit making side--post subprime--is what ended up indicting the company in the eyes of many.

We now have Secretary Geithner and others saying get rid of F&F and let’s pretty much turn everything over to the big commercial banks.

But wait, the banks have all of the authority to make profits at almost any asset generating activity they choose, but they have no federal mortgage finance mission or commercial lending mission, save some broad geographic requirements.

So commercial bank control of the mortgage markets, which is the stated Obama/Geithner objective—complete with their invitation to charge whatever the market will bear—is desirable, but the former GSEs market model can’t be trusted because the latter involved profit making?

Geithner would give big bank management the same basic tools as F&F (as memorialized in friend Rob Zimmer’s “GSE banks” description) and assume they’ll do the right thing. (I thought TG understood banks?)

Big Banks Live On Federal Handouts; Tim Wants to Create More

The large commercial banks—with their investment banking subsidiaries—are way beyond “too big to fail” and Geithner helped make them that way in the wake of the Dodd-Frank bill. The federally subsidized deposit insurance they enjoy, which attracts the majority of their working capital into low paying savings and checking accounts, is woefully insufficient to cover the vast amount of deposits covered. That’s a major federal subsidy.

First Republican Hank Paulson and later Geithner stuffed those banks with hundreds of billions of “free” taxpayer dollars and required no reciprocal lending for that money. How can those "firm up the bank's bottom line" deposits not be federal subsidies?

The Obama Administration’s newest regulations--scaling back the definition of “conforming mortgage loan”--cedes more of the mortgage market to the big banks without any competition. The Secretary—personally—seems to want to provide a new industry-demanded “federal mortgage securities reinsurance,” which the banks legally don’t need to issue mortgage backed securities but want desperately to protect them against losses.

This red, white, and blue lucre is the so called “private money” for which Treasury is the primary cheerleader?

Why does Tim Geithner think these big banks--which helped produce a "financial Armageddon" three years ago--won’t screw up the same way, but now with explicit federal reinsurance?

The large commercial banks—unlike their smaller brethren—have never shown themselves to be stable partners or pro-consumer in their mortgage dealings, elements of which are vital to stability, standardization, and an efficient secondary mortgage market.

Besides just “not being Fannie or Freddie,” what have the big guys done to deserve all of this faith and support?

Their Money Isn’t Private

Secretary Geithner, how can it be private money when so much of it comes directly from the taxpayers or through federal channels and easements? At least accurately define this “new” bank capital you advocate as “federally provided” or “taxpayer subsidized.”

Who cleans up the mess if the big guys foul up, again?

Mr. Secretary have you no shame, when you disingenuously describe actions you are promoting with phrases which are not accurate?

Even with insistence on a punitive 10% GSE interest repayment rate and forcing them to operate under intrusive over-regulation, Fannie and Freddie slowly are making their way back to financial equilibrium and soon will be generating black ink, which must scare the crap out of the Treasury and its toady bank friends.

Both Fannie and Freddie showed that resiliency in their most recent quarterly earnings reports and the limited amounts of cash they had to borrow from Treasury to cover that gap.

It’s now common talk that the former GSEs—even though you still have them financing most of the conventional loans in the nation—could wind up costing the federal government very little and possibly earning money for the taxpayer.

It took the Wall Street Journal, of all publications, to point out the absurdity of the two companies having to borrow money from the Treasury in order to afford to pay the Treasury its punitive 10% interest rate. Why punitive, because the banks that you helped make fat with limitless TARP—which also was given freely with no reciprocal bank lending required—was repaid at a 5% rate! (Hmm. If we offered that rate to Fannie and Freddie obligations, they might get healthier faster. Now, we wouldn’t want…….!)

(Link to WSJ article.)

Help the American People Not Just Your Political Opponents

For the Secretary: Why do you think you are earning GOP huzzahs? It’s because you are doing their heavy lifting.

You are paving the way to financial paradise for the big banks, which I should remind you abandoned the Obama Administration in record numbers—not to mention the American public--and threw their major financial contributions and their support to the Republican Party in the 2010 elections.

Do you think those campaign contributions had anything to do with the election tsunami D’s faced last November?

There is a much better way to “fix” the nation’s mortgage finance system and you know what it is, but it will take all of the GSE haters—Democrats and Republicans--eating a little crow to move in that pragmatic direction.

I feel confident saying the American people would support it, even if the GOP, the Wall Street Journal, the Washington Post, and the Obama Administration had some issues.

Small changes to the status quo can achieve efficiency and good housing finance policy.

The fallout from the President’s health care fight will be small potatoes compared to the damage you can cause pretending you are “taking the federal government out of conventional mortgage finance” and introducing “private capital.”

You wax eloquent about the 30 year fixed rate mortgage loan, but what in anything you’ve said will guarantee its continued availability if the banks decide they don’t want to offer FRM? Without Fannie or Freddie or your new federal reinsurance, the big banks cannot manage the mortgage loan’s interest rate risk? The bank credit risk systems didn’t exist or were shut down intentionally during the subprime experience, too.


At least be honest about the fact that “too big to fail” is still a likely federal government financial response if one of the big guys go belly up.

TBTF—which has been an implicit Fed power for decades--is a totally subjective tool, an almost existential concept, made more so by the Dodd-Frank legislation. And no responsible government will let one of these banks-cum-investment-bank-behemoths fail, for fear of what that collapse might do financially and economically to the nation and the rest of the world.

In that context, giving the big banks more market share and greater federal subsidies—as you champion—is a greatly flawed approach. I hope that policy makers, academics, the media, and the public begin to understand this dark reality.

I keep waiting for the two most experienced Hill Democrats, Chuck Schumer (D-NY) and Barney Frank (D-Mass), to respond to this one sided policy and begin putting their formidable intellects and political skills to work denying the banks this victory. I believe that Tim Johnson (D-SD) would be a most able ally in the cause.

In the meantime, here’s another voice that disagrees with your conventional wisdom.

Maloni, 3-2-2011