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

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