Batman and Robin Need Villains and I Want to Turn Around the Score!!
(The following begins a two part blog, with the second segment airing later this week, which discuses a variety of issues related to the approach Senators Bob Corker (R-Tenn) and Mark Warner (D-Va) are taking in marketing their proposed bill to suck dry what remains of Fannie Mae and Freddie Mac and then do away with the institutions. I don’t challenge their desire to engage in this discussion, which has been going on for years, but I do challenge their rationale, their allegations which I believe contain distortions, and their castigation of Fannie and Freddie which deserve much better treatment and, may be a small legislative fix away, from meeting all of the needs of those who use and rely on the nation’s mortgage finance system. Thanks for following this discussion.)
In growing up with a sports enthusiast father, who loved all Pittsburgh professional athletic competition, I was surrounded by winning and losing, runs, and points.
That personality element never has waned. I’ve always been into scoring (no, not that kind Dear, certainly not after we met 47 years ago), settling disputes however possible, and winning.
Right now, I believe the score is Bad Guys-10, Fannie and Freddie-1, and I want to alter those numbers and possibly reverse the advantage.
New to the battle are Fannie and Freddie opponents, “Batman” Bob Corker (R-Ten) and “Robin” Mark Warner (D-Va), who play another game, they are into a perverted “good versus evil” and their Batman and Robin gestalt needs a bad guy, a villain, and enemy who people can hate and root against.
“The Joker” and the “Penguin” are taken or gone. So they’ve chosen Fannie Mae and Freddie Mac, two entities which nobody really knows but with cutesy names and the remaining fabricated air of financial scandal about them.
“We need to save Gotham City from these miscreants, Boy Wonder!”
Their draft legislative proposal—now widely circulated in DC—carried with it the C-W candid explanation to potential allies and co-sponsors, “All we need is the descriptive clause, which proclaims that the legislation purpose is to replace Fannie Mae and Freddie Mac, all else is fungible.”
They seem to believe that Fannie and Freddie have been so maligned and surrounded in political muck and confusion over their histories, that—with a little help from their friends on the Right—in their Batman and Robin cloaks, they can crush any opposition to atomizing the two housing giants.
Maybe, but maybe not!
Why Are F&F Unnecessary and What Are the Replacement Costs?
The Senators reject any thoughtful disagreement suggesting their legislative approach is unnecessary, bloated, and redundant because a close examination of Fannie and Freddie shows far more systemic pluses than minuses, unless you work at the American Enterprise System, CATO, the Heritage Foundation, or on the Wall Street Journal’s editorial board.
I’m also waiting for the mandatory “budget scoring” if this bill which appears to nationalize the mortgage finance system.
(Where are Jeb Hensarling and the Tea Party when we need them to rail against increased federal spending?)
For the longest time, I argued—mainly against the forces on the Right—what the mortgage market of the future need going forward is federal presence (like Fannie and Freddie) to insure the transparency, efficiency, consistency in the pricing of standardized mortgage products and fair mortgage access for all mortgagors, because I believe that a commercial bank dominated system would not produce all of those elements---at least not in concert.
But then I began looking more closely at what Fannie and Freddie accomplished before 2004 (which is when Fannie stopped being run by seasoned housing professionals who understood and respected the company’s unique charter, but then supplanted by less sophisticated and thoughtful execs, by Bush Administration political machinations).
My anger grew when I realized that in the eight years it took the Federal courts to dismiss and disdain a lawsuit based on the first specious but politically fatal Bush Admin allegation that Fannie senior execs enriched themselves committing securities fraud, the company had been so badly besmirched and demonized that the brand name turned into dog s***.
It didn’t help—indeed, it hurt grievously--that the Bush-Blessed post-2004 Fannie officials lost billions doing what virtually every other major mortgage investor around the globe did, when they bought Wall Street private label securities (PLS), bonds with inflated ratings which collapsed faster than a balloon with air vents in it.
That F&F mistake—despite in-house counsel against the purchases and acquisitions--was hardly unique in the investment world, but it opened a broad highway through which the Bush Administration drove a ”conservatorship” fix. In the guise of keeping them healthy and alive, Fannie and Freddie were put under the thumb of its newest regulator.
Conservatorship Leads to Longtime GOP Wish to Throttle F&F
This move respond to manufactured anger against the Bush White House, the Congress, and the two companies, but also shrewdly accomplished a GOP ”wet dream”—which started in the first Reagan Administration in 1983--the shackling and ultimate destruction of the Government Sponsored Enterprises, Fannie Mae and Freddie Mac, because of their Roosevelt lineage and because they fostered homeownership.
Despite the occasional exception, subsequently media stories conflated GSE issues and personalities and allowed mostly Republicans to blame Fannie and Freddie for the 2008 international financial meltdown, and yet ignore the actual damage caused by Wall Street’s creation-- and sale across the world—of a trillion dollars of flawed subprime securities (the now dreaded PLS)..
Most thoughtful observers realize that it was the Wall Street commercial bank/investment bank PLS historical reality—far more than anything F&F did— paramount in the 2008 financial Armageddon.
The Private Label Subprime (PLS) was not overlooked totally. Dozens of official reports and media reviews of what happened in President’s Bush’s last year and the arrival of Barack Obama have correctly made the case.
However, seemingly none of those findings been loud or convincing enough to drown out the negative F&F allegations or to drill into the minds of Congress that Fannie and Freddie—while they bought the subprime crap, like hundreds of other institutional investors—at the same time issued their own mortgage backed securities which performed geometrically better than anything which came from the bankers’ private labels.
And now, lo and behold, even in the vise grip of “conservatorship,” Fannie and Freddie in a few short years have generated huge amounts of revenue—controlled tightly as they are by their regulator, the Federal Housing Finance Agency (FHFA)—while run by caretakers not entrepreneurs.
The black ink is so rich that F&F likely will “return to the Treasury” in the next year or sooner the $186 Billion invested in them, beginning in 2008.
Even manacled, every lender in the nation is using Fannie and Freddie and every mortgagor—getting a conventional conforming loan (those F&F can securitize under their rules)—likely owes legitimate thanks to the two for their work.
Enter Batman and Robin, er, Corker-Warner
Some complex question have been raised by their earnings, but more have been raised by a sudden appearance of new notions to replace Fannie and Freddie, all of which—except the most extreme which cannot work systemically, i.e. “Get rid of the government and just have banks make all of the loans“—have the federal government in a guarantee or secondary insuring role—to facilitate to make a lender offer the loan or an investor to buy the loan, providing refreshing lender capital. In other words, it’s Fannie and Freddie, named and shaped differently and with a new coat of paint.
But, break down these competing ideas and ignore all of the loose congressional sponsor rhetorical flourishes and the new schemes just rearrange the deck chairs on a ship under the federal government’s control.
Yet, week by week, Fannie and Freddie go about their business accruing huge revenue amounts to send to their government, but still hear claims and chants that the two must die for progress to occur.
If institutions could talk (or if their officials were permitted to independently appear before Congress, but the 2008 Paulson took away Fannie’s and Freddie’s First Amendment rights, an action not taken against any other corporate recipient of federal financial support), they likely would ask, “Why, what have we done wrong?”
The congressional Alice in Wonderland answer which echoes back is, “Because we say so! We really don’t know much about you or your operations and impact—just listen to us prevaricate—but we know you are not liked and that’s all we need to launch our ship and we don’t scare a lot what it looks like, as long the media spells our names correctly.”
The long winded answer as to why I am trying to explain to a sitting Congress with marginal institutional memory, marginal understanding of the national primary and secondary mortgage markets, marginal patience, and maybe marginal willingness to accommodate any scheme which enhances the federal government’s role in mortgage finance—even though it advertises the destruction of Fannie Mae and Freddie Mac—is that, today, this may be the exact opposite policy to carry out as the two entities are so close to financial and systemic viability.
(To be continued, in Part 2.)