Monday, February 28, 2011
“Mister Market” is funny. Last week, he went crazy, dropping 200 points in one day, because of concern over terror in Libya, a country which produces two million gallons daily of high quality crude, primarily for European export.
What the market was not signaling, however, was concern over psychotic leader Moammar Gadaffi or the fact that this S.O.B was machine gunning his own people.
The market jolt all was about the oil supply, which became less of an issue later in the week when our “friends” the Saudis started producing more “black gold” and filling their own coffers based on the rapidly escalating oil price.
I’m not surprised that the stock market responds to threats to commerce not civilian murder, but whoever ends up running Libya isn’t going to leave that oil in the sand.
To President Barack Obama: If the Libyan people are willing to give their lives to overthrow a scumbag, who hates the US, let’s figure out a way to help them, not just cheer them on. The best help is given when it is needed by the helpless not when it is convenient for the helper.
If Gadaffi can hire mercs from Africa, we and/or our European allies could provide the same; just give them a name like the “Libyan Freedom Fighters!”
How about just having the Egyptians smuggle in some its US provided arms and trainers for the elements of Libyan’s army which have “defected” from Gadaffi? Maybe even suggest that the nearby French Foreign Legion or the vaunted Turkish military—both NATO members--might want to help end the slaughter?
I don’t think it would take much to topple Gadaffi and his “Devil’s spawn” children. C’mon Mr. President, get your mad on and man up!!
If you take my advice re our “allies,” suggest that the French not use those military vehicles with the one forward gear and five reverse gears, unless they employ them backwards.
And please make sure whomever tries to take him out gets the right guy, not Qadaffi, Quadafi, Gaddafi, Gaddffi, but Gadaffi (the guy with the yellow umbrella, who was wearing what looked like used TP on his head!)
Fascinating GSE Market Developments
Lots of interesting news in the mortgage market this past week, including financial news about Fannie Mae and Freddie Mac.
It’s likely the two financially are healing faster than anyone thought; witness the losses they reported last week and the much lower requests from Treasury than even the former GSE regulator the Federal Housing Finance Agency (FHFA) predicted at the end of last year.
I hope Congress is watching and understands what is happening.
Rob Zimmer, a long time friend, who now represents several small banks and other mortgage lenders, said that the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie and the Federal Home Loan Bank System, just a few months ago over estimated just how much federal support Fannie and Freddie would need, even applying the most optimistic of the agency’s three “likely business scenarios.”
“Improvements from projections are coming faster than even the most crazed GSE could have foreseen, Zimmer explained.
In fairness, some credit must go to FHFA--they are conserving assets, as is their defining mission currently. They seem to be doing a good job at it.
“Both entities are now doing better than government predictions less than 6 months old, and are essentially profitable on a "current" basis were the punitive 10% dividend to be adjusted to the 5% rate that applied to big banks repaying Uncle Sam,” wrote Zimmer.
No Lost Money on the GSEs?
Stuart McFarland, a managing partner of Federal City Capital Advisors (FCCA) and an experienced industry veteran of large mortgage workouts, believes that the Fannie and Freddie’s combined trillion dollar plus mortgage portfolios—if carefully managed—can slowly be sold off with the federal government getting almost all of its investments in the two companions returned, with even the possibility of a taxpayer profit.
Ironically, McFarland told me that that Freddie just reported a last quarter profit before preferred payment to the Treasury, underscoring Zimmer’s point that the GSEs interest costs are both exorbitant and, ironically, puts them in a deeper financial hole from which they must borrow more from the Treasury!
(Post publication edit. I got McFarland's information backwards. It was Fannie which would have shown a profit last quearter, had it not had to pay Treasury a 10% dividend. My bad!)
As I often have written, if a 5% repayment rate was good enough for the big TARP fund recipient banks why not apply the same to the former GSEs?
Fear the Big Banks!
Zimmer points to another issue that most small lenders view with great concern, big banks –specifically Bank of America, Wells Fargo, JP Morgan and Citicorp—dominating the mortgage markets.
A lot of his clients, Zimmer states, believe that the Treasury is tilting the table toward these big four bank lenders, even to the extent of undermining the GSEs, to permit these behemoths to be the ultimate market survivors.
In Zimmer’s view these “lender GSEs”—large commercial banks with the implicit power of the former government sponsored enterprises--have been made “too big to fail,” have many advantages beyond just federal deposit insurance, including Treasury and Fed acquiescence on general regulatory questions, and often act as Washington policy agents’
Small lenders are the ocean’s food supply to the large lenders voracious game fish. The Fannie and Freddie mortgage function always meant that the small guys could sell directly to the GSEs without having to”pay a toll” by going through the large banks first. That’s likely to change if the Obama Administration and Tim Geithner have their way.
Given the near mythical role that the “small guys,” banks as well as mortgage lenders, play in the ideological heart of every Republican, Zimmer and the small mortgage lenders are hoping that Congress understands this big lender-small lender history and won’t force structural legislative actions which help the big guys at the expense of the small lenders.
Listening When Genius Speaks!
Lew Ranieri often called the “father of mortgage backed securities,” on the Obama Administrations new mortgage plan.
--"We have to, especially if you look at the Treasury plan, the three alternatives to the Fannie and FHA [Federal Housing Administration] are bank portfolios, which is why we created the mortgage security in the first place, 'cause it can't fund housing on a balance sheet because it requires too much equity—you can do some, but you can't do most," Ranieri said.
--He continued, "Covered bonds, which really don't work for our type of mortgage in this country, 30-year loans. And the alternative is some form of a securitization, if not Fannie, Freddie, it's got to be a RMBS, we just have to do it better this time."
--“The housing market is very fragile and that is really a function of the overhang, Ranieri said, "We have something like 23 months inventory—that's three times the normal and it continues to grow."
--"I do not believe people realize how tight credit is from the banking system.”
From Robert Scheer –editor in chief of Truthdig, writing last week about the Admin’s mortgage plan.
“A most dastardly deed occurred last Friday when the Obama administration issued a 29-page policy statement totally abandoning the federal government's time-honored role in helping Americans achieve the goal of homeownership. Instead of punishing the banks that sabotaged the American ideal of a nation of stakeholders by "securitizing" our homesteads into poker chips to be gambled away in the Wall Street casino, Barack Obama now proposes to turn over the entire mortgage industry to those same banks.”
Sunday, February 20, 2011
“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.
Sunday, February 13, 2011
Tramp, tramp, tramp the banks are marching, watch them try to gobble all
With help from Timmy G and their PAC money invested in the GOP
The big banks hope the GSEs soon will surrender on the mall
In commenting on the Obama mortgage plan.
"The cost of mortgages is probably going to go up, and homeownership is probably going to go down," said Daniel Mudd**, the former chief executive of Fannie Mae who is now CEO of Fortress Investment Group. "Both of those things arguably could be a good thing."
This Past Week
Some truly amazing events the past several days, which herald both major positives for the world as well as some continued confusion here in the United States.
--EGYPT: Congratulations to the Egyptian people for their brave campaign, peacefully, to rid themselves of a long time leader they felt no longer was doing the job.
I hope Mubarak’s departure allows his country to discover a true fledgling democracy-- which won’t be an easy process but is a highly desirable one-- and Egypt becomes a beacon for other Middle Eastern autocracies.
--TEA PARTY R’s: A mini-revolt from conservative House Republicans--regarding contents in a GOP budget alternative--makes me hope these newbies stick to their guns (no pun intended) and insist of greater federal budget savings than either the WH or the Speaker Boehner seeks.
The only way to scale back federal spending is to bite the bullet and cut programs and expenditures which benefit people in congressional district somewhere. Entire congressional districts can't get exempted if the budget cutters take hold.
The new Members have less a vested stake in preserving some of these than their senior colleagues, in both parties--even those that benefit “back home”--and their Tea Party insistence on leaner federal spending could just be what is needed to shake up some of the more hypocritical comfortable congressional spenders.
Although I’ll be less skeptical when I see serious Ag and defense cuts approved by the House GOP Caucus.
--Anticlimax: And finally, we had the Obama Administrations long awaited pronouncements on the future of the nation’s mortgage finance system and the fate of Fannie Mae and Freddie Mac. (I could write 10,000 words on the latter topic, but won’t.)
The Obama/Geithner Mortgage Plan
The Obama Administration’s and often delayed policy statement on the future of the mortgage finance system and, parenthetically, Fannie Mae and Freddie Mac.
I guess this finding really cleared things up, right? No, It didn’t.
I am tempted to say the Secretary Geithner labored long and produced a “mouse,” but since there are some alternatives listed in the very brief paper, they are better called mice. Very tiny and predictable looking “mice.”
What an opportunity and what a letdown.
Two groups in this town made happy with this thin gruel are the GOP—who will find something in there they can accept and then say “Obama agrees with us”--and, naturally, the large commercial banks, which once again has been gifted by their blood brother, Tim Geithner.
The new scheme would give the big financial guys access—both by enhancing their charters and reducing Fannie’s and Freddie’s—to the one part of the financial services market for which they long have lusted but never could control, Fannie’s and Freddie’s piece of the secondary mortgage market.
But—as we all know—the Devil is in the details and since the Treasury didn’t leave much behind except the mindless, “We want to get the government out of the housing business and make way for the private market, we will have to wait until a divided Congress, with factions in both parties and both chambers, decides what it is going to do with “Obama Plan.”
Fannie and Freddie Ain’t Leaving Soon
Because of congressional conflicts, elections, real estate market reality, and the existence of a few ideological foes confronting this “lay down,” I feel confident that Fannie Mae and Freddie Mac—as poorly as they are being run by the Treasury and their regulator, the Federal Housing Finance Agency (FHFA)—still will be with us, maybe for as long as six or seven years.
This Congress doesn’t have the market understanding, confidence, and deftness of touch to make major structural changes without producing a real estate crash that would fall on all of their “I hope to get re-elected” heads.
So, they will—as the Treasury did—punt to ball to future congressional session for a final solution. Ironically, every year they diddle will only make a better regulated Fannie and Freddie look like a stronger option.
That doesn’t mean they won’t be a plethora of congressional hearings, resurrecting the GSE carcasses and beating them up again, hoisting the same old lies and canards that have been around for years and —and mostly shot down.
We’ll see fresh, but not insightful, harsh rhetoric and hyperbole, preening for networks and cable for back home consumption, yawn, and yawn.
The simple fact is that the two entities they want to kill still are providing 90% of all conventional finance and there is no current viable alternative, and no certainty that which they might legislate can do the job, starting with even giving the large banks everything which they are seeking and that is a lot.
The Big Banks Still Want More
In case you’ve missed it, the banks have been lobbying for a newly created federal reinsurance program to cover mortgage related losses they can’t; a definition of “qualified residential mortgage,” with a very nigh down payment, meaning those loans without big down payments will cost borrowers far, far more; a significant cut in the size loan which Fannie and Freddie can buy, and giving the banks exclusive statutory access to funding those “non-conforming” loans.
The White House and Congress both already are lining up to give those things away. The only good news is that the banks have decided to wait a few weeks before seeking the “partridge in a pear tree,” which was on their original wish list.
Have We Become Ostriches and Fearful?
What might disturbs me the most and should rankle the public is the Administration’s hand wringing (add the Washington Post Sunday editorial, both written by folks who already have nice homes) and moaning about too much federal support for homeownership.
“Oooh, helping middle income Americans buy houses is a problem, let’s just stop doing that.”
Near sighted, near sighted, near sighted.
Ever think about really serious financial regulation or will Geithner and Bernanke now never crack the whip since they sent Paul Volcker out to pasture?
Did the subprime debacle—with Wall Street in the lead creating, originating, marketing, and selling, poorly underwritten, quick to default private label subprime securities all over the world—really emasculate policy makers and force a conclusion that homeownership is no longer important; that homeownership aspirations should no longer garner broad government support; did it obliterate the fact until recently most people understood that homeowners create neighborhoods, which create communities, which create towns—in which people who own their own homes are more civically active, vote more often, and whose children perform better.
Did the subprime debacle cause us to ignore that this same “housing industry”—sure now to suffer, because banks cannot or will not step up--created millions of jobs, making housing about 20% of our gross national product?
So, are we now going to hand all of that over to the large commercial banks—(just read the Obama and GOP plans, if you doubt me and think I am distorting)—which have no mandate to lend for housing, no mandate to offer 30 fixed rate mortgages, no mandate to serve minorities (don’t anyone say “CRA” the most toothless of fair lending laws), no obligations to lend in times of need, and which abandoned housing mortgage lending and the “jumbo market,” where they had no GSE competitors, when market risks grew?
Needed: Profiles in Courage
This is far less about Fannie and Freddie than what institutions do we, as a nation, trust to provide support to the residential real estate markets. Where are the Democratic descendants of Franklin Roosevelt, Harry Truman, Wright Patman, Sam Rayburn, Lyndon Johnson, who saw banks for what they were?
Tim Geithner and Ben Bernanke, with their trust and belief in big banks. do not speak for me. And where are all of those GOP voices supporting small businesses and opposition to financial conglomerates.
The Obama Administration and the congressional GOP now will move and trust all to the very large banks which—after being filled with taxpayer’s money by the Bush and Obama administration—refused even to lend any of those fresh new funds to small business people or those seeking mortgage loans. (Don’t we ever learn?)
Have the Banks Been Anointed?
Let’s see. According to "The Plan,” the Administration would force Fannie and Freddie--before they are forced to disappear--to raise their costs (see the section of increased F&F guarantee fees) to match what the banks charge consumers? The last time an Administration proposed that--Ronald Reagan in 1983--it was labeled a “homeownership tax” and quickly rejected.
Have all all Democrats fallen down the rabbit hole, with Alice?
Fannie and Freddie—with no real regulatory oversight—kept the banks and other lenders, often bank subsidiaries, honest, introduced efficiencies which kept market costs down, brought new mortgage products to market, and kept 30 year fixed rate mortgages alive.
The powers that be in Washington would leave no such institution or institutions on our real estate national scene.
That is a huge mistake.
I'll ask again, who will stop the banks??
(**Dan Mudd’s shocking observation that it is OK that the Obama Plan will produce more expense mortgage costs and fewer homeowners was met with a large degree of hostility from former Fannie officials, with whom I spoke. They knew the seminal and disastrous role Mudd played when the company decided to pursue huge investments in Private Label subprime securities (PLS). “Contemptible and callous” were used repeatedly to describe the man who made the decisions which toppled Fannie.)
Monday, February 7, 2011
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?”
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?”
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.
Wednesday, February 2, 2011
(I broke this week’s blog into two parts, because I had a lot to say about issues raised by the New York Times and the Washington Post in articles written last week.Hopefully you find the overall blog thoughtful and provocative.)
OK, fans, friends and enemies, let’s look very carefully at the Fannie “accounting scandal” charges which were the crux of the NYT and Wash Post news stories.
In an effort to provide more information to market investors and a better analysis of value, the Financial Accounting Standards Board (FASB), in 2003, proposed a controversial rule (FASB 133) and sought comment on the regulation requiring mortgage investors to “mark to market” on a continuous basis, the value of those securities, if they were going to be sold or not.
Broad Opposition to Initial FASB Proposal
Fannie, Freddie and dozens of large financial institutions commented negatively on the FASB plan citing the unrealistic nature of “M2M” securities whose values change continuously throughout the day even within the hour.
When the reg became final—working with its outside accountants—Fannie adopted its corporate M2M plan, which it believed produced all the information that FASB wanted for the investing public. .
The first suggestion—that Fannie had “missed the mark”--was brought by their own regulator, which many observers believe was and still is, the shakiest of federal financial regulatory agencies, the Office of Federal Housing Enterprise Oversight (OFHEO), which now is the Federal Housing Finance Agency (FHFA).
Its senior officials, in the first few years of the last decade, admitted great frustration in trying to control and bend Fannie Mae and Freddie Mac to OFHEO’s will. For years, OFHEO’s largely untrained and inexperienced staff had been battling the GSEs over a variety of business procedural issues.
This very much was the case when Armando Falcon was the Director and his minions produced a report containing accounting charges against the three Fannie officers?
(A Senate report from the HUD Inspector General suggested that OFHEO officials tried to drive down the GSEs stock prices in order to gain control over them.)
At the same time, on a larger battlefield, Fannie’s ongoing political war with the Bush Administration flared hot Fannie Mae Chairman Frank Raines dispatched a strongly worded letter to White House Chief of Staff, Andrew Card, complaining about White House and Administration interference in Fannie’s mortgage business operations.
The Raines missive was not well received downtown and may have been the proverbial “last straw.”
The SEC headed then by Christopher Cox—who earned almost zero credibility for his securities industry regulatory achievements, as we learned by 2008--got into the act, blessed the OFHEO allegation, on the thinnest of evidence, and decreed that Fannie missed the FASB goals. After much sturm and drang and back and forth, the three primary Fannie officials involved eventually resigned and Frank Raines’ successor CEO, Dan Mudd, later agreed to pay a $400 Million fine to the SEC.
Those who consumed the Times and Post articles may say. “Over and done with, federal regulators accused Fannie officials of presiding over accounting errors, the responsible company officials were forced to leave and Fannie paid huge fines.”
Hardly Ended There
The Bush Administration, as history has shown, was as politically devious and cut throat as they come and had no scruples about misusing their political positions to inflict damage on political opponents. The record is filled with dubious extra legal actions taken by Bush officials (Lewis Libby, Alphonso Jackson, Alberto Gonzales, Harriet Miers, Josh Bolten, Paul McNulty, Lurita Doan, Karl Rove, et al), many of whom were charged with criminal acts or forced to leave government because of highly questionable official actions.
I believe the White House schemed to force Frank Raines out of Fannie Mae.
Nobody should be surprised if Bush White House asked a lap dog SEC--to employ a lamely disguised OFHEO assault on Fannie--and punish its perceived political/personal/institutional evil
I believe that the White House—at the urging of the big banks and the Far Right elements of the GOP and maybe just a PO’d Andy Card--gave the SEC a political green light to finally strike down Fannie Mae.
(At this blog’s end, I hope you will find a working pdf link to Dan Fidirer’s November 2010 story, from the Huffington Post, analyzing the Cox SEC’s Fannie decision. Blame me if it doesn't work, since I am major "low tech." If my publishing fears are realized and the link doesn't open to you, I urge anyone who has a "working link" to the Fiderer article to please bring it to my attention directly or through the blog “comments” section.)
The SEC Fine
Dan Mudd—unlike his immediate predecessor--was a moderate Republican. I believe that his motive in approving payment of the SEC fine and his decision to beat Fannie’s “swords into plowshares” was more a reflection of his disagreement over corporate tactics in securing policy wins.
In trying to turn his penchant for non-confrontation with the Bush Admin into a political plus--as he also sought to curry favor with the Bushies in his new role—Mudd naively put his head right on the executioner’s block, when the Administration came for him a few years later.
Proof of Innocence in the “Accounting Pudding?”
Most significant for me—and it should be for other observers seeking fire where all of this phony smoke exists--is the fact the Bush Justice Department had the OFHEO/FHFA report for four years and never acted on the OFHEO suggestions that Fannie Mae officials engaged in fraud or misrepresented financial statements. DOJ never filed charges against anyone at Fannie Mae, current or former officials.
The same applies to the Obama Administration which has had the OFHEO report now for two years.
Of course, the GSE political and structural damage—sought by their opponents—largely was successful just with the charges and the allegations. The GSEs later dalliance acquiring Wall Street subprime loans only gave their critics additional grist and hyperbole.
Yet, two years ago, even FASB trimmed back it’s “M2M” reg because of the problems it was causing financial service companies and the markets. (More than 1000 of which—in the first year of the often confusing FASB 133--had to redo their books.).
To many, the 2008 FASB changes suggested that Fannie’s original position on the FASB rule was the correct one.
Companies & The Federal Government Pay for Legal Expenses
Regarding the press stories which kicked off this blog, virtually every “private” financial services company has internal agreements with their officials which pay for legal fees when their executives have been challenged over their corporate actions. Even government agencies pick up the fees when their top officials are sued when carrying out their government duties. It’s not a unique policy.
Financial settlements with OFHEO, now FHFA, contained gaudy numbers but were in fact largely monetized underwater (worthless) corporate shares, allowing the regulator to save face.
Lastly, no admissions of guilt or wrong doing were offered by Fannie officers
Still in 2011, with all of the “bad guys” gone and lots of new folks, chosen by the Bush and Obama administrations onboard, Fannie Mae keeps fighting these law suits and eschews any legal settlements with these litigants.
It certainly appears to me that the company believes the facts its lawyers have compiled in a quite lengthy process of document discovery and witness depositions, on the both the 2004 accounting case and the broader corporate lawsuits, i.e. there just were no violations.
That’s what Messrs Raines and Howard, as well as Ms. Spencer, believe, which is why they continue to fight and utilize the resources at their disposal.
Why wouldn’t people fight to clear their names, if they believe they are innocent, have been politically victimized, and have the capacity to defend themselves?
In one of the articles, former Senate staffer and now law professor, Richard Carnell—who never supported the GSEs but also never rejected an expensive lunch on Fannie’s tab—somehow argues that the former Fannie officials are not entitled to due process and should not be able to defend themselves in court, with legal assistance paid for by their employers under valid employment contracts.
Rick, you might want to join the House GOP and go over the Constitution, again, and see just what rights people accused of violations have in our great country. I just hope you are not insisting that your law students subscribe to your distorted legal dogma!
Why Does It Matter?
Why should anyone care about any of this? If I am correct—once you get beyond the Wall Street originated subprime purchases*, which crushed investors worldwide, which everyone rightly criticizes and which we all agree can be managed through better regulation—the “case” against Fannie Mae (and Freddie) is a shaky house of cards, skillfully constructed and propagated by their business and conservative political opponents.
*Fannie’s overseer wasn’t the only agency asleep at the subprime switch. In the heyday of private label subprime securities (PLS or non-Fannie/Freddie securities), not one federal financial regulator intervened--with its regulatees--or tried to stop the development and sale of PLS or their exotic "hedges," until after the Wall Street mortgage bonds failed and caused hundreds of billions in losses and countless business failures.
My Super Bowl comments will come next week, by which time I hope to be in “Seventh Heaven.” ("7", Get it?).
Huffington Post: Fannie Mae -