Saturday, September 10, 2011

The President’s Jobs Speech

I liked his speech. I thought it was concise, logical, understandable and even bold. President Obama spoke to the fears and concerns of millions of unemployed and underemployed Americans, not to mention his own political frustrations.

It certainly called for enough spending to generate attention and make an impact. But, he will get little Republican support for what he wants to do.

I haven’t seen anything in the earlier GOP responses to the Obama proposals which indicates they will go along and “pass this bill,” as the President frequently exhorted.

Through the weekend, I am sure that we will hear more from the GOP about less regulation and more tax cuts for business and the wealthy, the standard Republican mantra. But nothing resembling any jobs plans.

The Select Committee

The wild card in all of this may be the “Select Committee,” currently working on deficit reduction proposals, complete with preemptive legislative power, if they choose to use it.

The world is just waking up to the fact that this super committee’s mandate seems limitless—with only a seventh vote—stopping it from offering major spending and tax change proposals in its final report to the Congress. That package then needs only a majority vote in each chamber to pass and be sent to the President.

Only time and repeated polling will tell if President Obama succeeded at his second speech goal, i.e. trying to aim the American people and their collective opinions at the recalcitrant congressional Republicans, costing the GOP massive support in 2012 if the “party of Lincoln” refuses to back off its opposition to most any proposal Obama recommends or supports.

The Select Committee might be the fastest legislative vehicle in getting real bipartisan policy changes.

Hey, I can wish and hope can’t I??

FHFA’s Tough Task, Standing in the Middle

Let me give everyone involved in the future of Fannie Mae and Freddie Mac the benefit of the doubt. That’s tough in this town where most of the GSE influence peddlers are high end schemers and promoters.

The simple reason for that is the money involved.

Even in their confused and weakened state, Fannie and Freddie still represent “big casino,” because of their size, business volumes and potential future revenues. That attracts people who have their eyes on that revenue for their own pet plans or other selfish reasons.

But, again, for the time being let’s assume none of that exists.

I started thinking along these lines when examining some recent actions of Director Ed DeMarco and the Federal Housing Finance Agency (FHFA), which he heads. Is it possible that DeMarco might not be the anti-GSE ogre many people believed?

Is DeMarco “Horatio,” standing in between those who would fatten the two before cannibalizing them or is he maintaining/sustaining them because they work and still are needed?

I don’t know Ed DeMarco. Although he and I both have been around these mortgage finance structural and political issues for many years, I can't remember meeting him. So, nothing I say is based on any first hand knowledge of him or his priorities. I’m just giving him the “benefit of the doubt.”

He is in the awkward position of being the financial regulator of the two companies which were put into federal conservatorship by the Bush Administration, three years ago, and kept there by the Obama Administration.But, the mortgage firms are working and quite successfully.

As such, he has to try and conserve the companies’ resources offering them some hope for future economic activity.

Still There Under the Democrats

Despite DeMarco’s Republican history, he has not been replaced—yet--by the Obama Democrats.

DeMarco also wears a Fannie/Freddie safety and soundness hat trying to insure that their past troublesome misadventures—notably buying tons of Wall Street created subprime securities in the middle of the last decade--remain in the past and never occurs again.

He may have come to appreciate that what happened to Fannie and Freddie was an aberration, desperate managements in both companies taking disastrous steps—buying billions in private label securities to retain market share and grow revenue—which failed and cost their shareholders and the taxpayers billions.

It also was an aberration which didn’t have to happen had his predecessors done a better job.

He might also realize that F&F merely did what virtually every other large financial institution in the world did buying those poorly underwritten and likely fraudulent mortgage securities.

Other federal housing programs, notably HUD’s Federal Housing Administration (FHA) mortgage guarantee efforts, have risen up to insure almost all of those credits that would have gone subprime in the past.

Better regulation and the absence of major subprime lending activity make those mistakes unlikely future events.

Most important, DeMarco—despite the conservatorship status—now might envision Fannie and Freddie as vitally important, still adding value as the chosen investor for more than one in two US conventional mortgage loans. In other words, their business model still makes systemic sense.

That’s because the “private sector” (mostly the large commercial banks and their investment banking subsidiaries) has not stepped up to provide an alternative to Fannie and Freddie and likely cannot or will not.

Future GSE risks look way down and the higher quality loans which both companies have put on their books in the past three years will begin reaping profits and erase much of the red ink still imbedded in bad PLS on their books.

Also in this mix--and weighing against doing away with Fannie’s and Freddie’s federal function as primary mortgage investors—is my belief that some of the companies’ major business opponents don’t want to see the GSEs demolished. Many big lenders don’t want to lose two entities to which the banks frequently transfer their mortgage lending business risks.

That investor role continues to be a major, major plus for bank lenders chary about carrying fixed rate mortgage assets on their books.

DeMarco has to navigate these waters, as the Obama Administration seeks to use Fannie and Freddie more—see the President’s jobs speech—and as the GOP rhetoric and efforts seek to use the GSEs post 2004 business activities as political weapons against the presumed 2012 Democrat presidential candidate.

Links and Things

To close this blog, let me offer links to two recent articles, one related and the other not quite but very chilling in itself.

The first—which discusses facts I didn’t know and speaks well of DeMarco—notes that the FHFA’s PLS lender lawsuits name dozens and dozens of lender officials as responsible for hiding the true nature of the bad loans sold to Fannie and Freddie. The story appeared in the Columbia Journalism Review last week.

While the lawsuits are appropriately aggressive, going after the people who worked at these companies and were responsible for selling the garbage, contrasts sharply with other federal financial regulators who seem happy to sue the institutions, but not their senior employees.

The second link (unrelated) is an absolutely superb and scary analysis, written by Mike Lofgren, a senior Republican Senate/House Budget Committee staffer, who just retired from the Hill when he became convinced that the GOP’s objectives were misguided and destructive. Lofgren’s article also ladles out plenty of blame for Democratic cowardice in the face of the bizarre GOP agenda, intensified by the latter’s Tea Party membership.

In Our Hearts and Minds

I hope we never allow mortgage finance matters nor political fanaticism to get in the way of our 9/11 obligations and memories, honoring the innocent victims of that national tragedy.

God bless and protect all of the 9/11/2001 first responders, all of our countrymen and women killed or injured on that fateful day, as well their grieving family members and loved ones. I hope their fates unite us stronger as a nation and make us a bastion against extremism wherever it exists.

Maloni, 9-10-2011

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