Sunday, October 27, 2013

Ed Falls Down and Goes "Boom"


Ed DeMarco’s Crappy Speech
And Other Noteworthy Matters 


GSE Earnings, a Revenue Surprise?

The Lowdown on GSE Buyback Activity for Early 2013
Fannie Mae and Freddie Mac got $16 billion back from repurchases in the first six months of 2013, lenders succeeded in getting another $7B withdrawn and still $5B in demands were outstanding as of June 30. GSE Repurchase Activity: First Half 2013, a just-released IMF data report.

Concentrate a second on that $16 Billion news item from Inside Mortgage Finance this past week. 

Freddie and Fannie will announced 3Q earnings in early November (reportedly on Nov. 6 and Nov. 7, respectively), but this past quarter’s earnings—all of which minus capital will be swept directly to the Treasury’s general fund (a process now subject to multiple shareholder lawsuits)—could get a major boost from the above mentioned buyback activity, as well additional revenue from the just reached JP and BofA settlements ($2.74B Freddie, $1.26B Fannie), depending on when it’s booked. 

Those numbers would be major gravy on top of existing grand expectations of what their normal business operations will generate.

And still, you have the possibility of Freddie’s earnings jacked up, super-sized, through a payment to Treasury payment based on its Deferred Tax Assets (DTA), which represent about $30 Billion.  

Fannie used their DTA earlier this year and sent $50 Billion to Uncle Sam, supplementing an additional $9 Billion in 2Q earnings. 

For me, the exact earnings are less significant than the fact that both entities will report very positive numbers and the two will move ever so much closer to “repaying the Treasury” the $186 Billion the taxpayers infused in the companies in 2008.

I know, the principal can’t be repaid, blah, blah, blah.

However, don’t discount the powerful political and rhetorical point that will be made when F&F give back to the Treasury more than they “borrowed.”  

That threshold will be crossed with fourth quarter’s earnings in March of 2014, or sooner if Freddie uses some/all of its DTA in 3Q. 


 “Why is it important that public officials understand history, Professor Maloni?” 

Because, “Grasshopper” (defined as current congressional types, the media, some regulators and those friends who accuse me of dwelling on the past), it is the path that leads us to the present and the future.

If you study a history of a topic/nation/political movement.. You can understand the present better.... and perhaps deal with any crisis that may arise in the present..

Sadly few people seem to look very far back in History in regards to current events.

DeMarco’s Outrageous Anniversary Comments 

Laying out that fabricated exchange occurred to me after reading Ed DeMarco’s Zillow conference remarks, on the five year anniversary of Hank Paulson’s takeover of Fannie Mae and Freddie Mac. (Ed, have you noticed that because of Hank, Treasury is being sued for billions by 10 different plaintiffs with the cases being managed by some of the nation’s best and brightest lawyers?) 

Here’s are Director DeMarco's remarks.

Generally, I’ve been positive on DeMarco, questioning only a few of his decisions, when I believed he leaned too heavily toward ideology and not “conserving enterprise assets,” which is part of his job. 

But his comments last week exceedingly rubbed me the wrong way.

He lauded his agency’s work, naturally, but so much that it makes you wonder why he deigns allowing 8,000 or so F&F employees to come to work each day. (The answer is to responsibly manage the nation’s crucial secondary mortgage market and send billions to the US Treasury.)

His statement smelled of fear. He kept reminding his audience that the Fannie/Freddie business model failed, is dead, and can’t ever work (all the while, I assume, looking over his shoulder at the growing number of commentators disagreeing with him), as if repeating it enough times would make it true and in a wonderful “sleight of hand/speech” trick, slid over the fact that the legislation which put F&F into conservatorship and created FHFA merely “addressed some shortcomings” in F&F oversight.


Have You Forgotten So Soon, Ed? 

Holy Batpoop, Mr. Acting Director!

OFHEO, the agency--filled with hacks and incompetents—five years previous gave birth to the problems which they first couldn’t identify and then couldn’t solve, forcing Congress to do away with the outfit, but kept most of the personnel—including you--in place with a new name, almost like the federal witness protection program.

C’mon Ed, you’ve nailed other things, how could you miss this one? You were there, at a high OFHEO level for a few years before the 2008 conservatorship legislation? 

Working through DeMarco’s speech was like reading the three novels of Berlin Noire and encountering  innumerable World War II German citizens who claimed they never knew a Nazi. 

Let me draw a straight line from F&F post-1992 regulator, The Office of Financial Housing Enterprise Oversight (OFHEO), to the Federal Housing Finance Agency (FHFA), the current one begat in 2008 with many of the same OFHEO folks in senior posts (including Mr. DeMarco). 

(It bears noting, too, that DeMarco only is “acting” director of FHFA, while President Obama tries mightily to replace him.) 

OFHEO’s Fingerprints On the Murder Weapon! 

Ed’s paean to FHFA on its fifth anniversary belies the principal role his predecessor agency, through malfeasance and misfeasance, played in setting the table for Fannie’s financial demise (and Freddie’s too, because it always mirrored Fannie) when both chose to swim in Alt A (no doc mortgages) and Private Label Subprime (PLS) purgatory. 

It started in 2004 (DeMarco was not on staff then) when OFHEO in a flight of incompetence and political paroxysm issued a report suggesting that Fannie’s top officials, Chairman Frank Raines, CFO Tim Howard, and Comptroller Leanne Spence, committed “securities fraud” in willfully failing to implement a new accounting rule created by the Financial Accounting Standards Board (FASB) requiring financial institutions to mark to market mortgage backed securities eligible for sale. 

When a principle-challenged, politically supine SEC, headed by another George W. Bush toadie, weighed in and agreed with OFHEO, the die was cast and all three were forced from Fannie.

This allegation, which was a frustrated civil servants “so’s your Momma” whack at a corporation which OFHEO officials felt failed to kowtow.

Federal Judge Richard Leon, in 2012, finally quashed all three charges, which subsequently had manifested themselves in a shareholders lawsuit against the officials, but the lasting institutional and personal damage was done. 

Successor officials—significantly deviating from Fannie’s traditional approach to mortgage financing--chose to respond to 2005 market share and revenue losses, like a gambler putting everything on red, and plunged into the subprime securities pool (pun intended), acquiring everything they could, with the inevitable losses taking down the company. 

The world needs reminded while people inside Fannie advised the new Chairman not to buy the useless bonds, OFHEO missed identifying the evils of subprime and stayed silent until the horrible investment was widely recognized.

Very few people who knew the business and the individuals believe that Frank Raines and Tim Howard would have led the company down that same primrose path, made those Alt A and PLS mistakes, and bet the ranch on poorly underwritten, rating inflated, worthless mortgage bonds. But, they never had the chance to exercise their judgment and reject that path, since they were hounded from their jobs in a GOP witch hunt. 

If some people have trouble reading between my lines….. 

…Let me make be more clear. 

I believe had OFHEO and the Bush team not forced out Raines, Howard, and Spencer with a politically malicious set of allegations—later to be shown false—the company and the nation’s financial history would have been dramatically altered. 

Fannie Mae with Raines and Howard at the top never would have bought the Alt A and PLS their successors did; shareholders would have quieted down, there would have gotten happy with reasonable not huge earnings, and there would have been no need for any Fannie Mae taxpayer financial relief. (I am not including Freddie in that because I wasn’t there and don’t know what those officials would have done, but I believe they would have followed Fannie’s lead.) 

Thank you Mr. DeMarco’s predecessors--who created a position for Mr. DeMarco and his colleagues, via their bureaucratic incompetence, screw ups, and ego—for giving him  unsurpassed regulatory power over the two largest and perhaps the nation’s greatest generators of  affordable mortgage credit.

The only things which have grown faster than F&F’s earnings in the last two year earnings is the FHFA IG’s staff demands—which oversees the agency, not the two companies—and the core agency workforce. 

Ed, you could have done a better job than the “look at what good boys/girls we are at FHFA” speech on the fifth anniversary of the Fannie/Freddie bushwhacking.

You more or less crapped on the “enterprises” (as you so politely announced you call them) and attributed their recent earnings success to tax tricks.

But buddy, you wouldn’t be shaking in your boots if you weren’t a wee bit frightened about their positive financial future, which no matter what you do, will be dictated by a Congress, which might not carry your bias.

Speaking of which…… 

The Howard Book 

I was told Tim Howard’s soon to be released “The Mortgage Wars” was discussed in the coffee and break times at the two major housing reform conferences held in DC this past week and picked up by others. 

The tome will discuss a lot of the “who struck John” in the “OFHEO-Fannie Mae disputes,” much of the latter owing from an amazing degree of agency insecurity (which I think flowed directly from their leaders, who most people acknowledged were in over their heads).

It will not only open eyes but open minds and immeasurably add to the GSE debate Congress is having and which will grow in coming months. 

For years, the flacks and log rollers at OFHEO still were pronouncing the “t” in “mortgage.” 

They had trouble regulating and required the goodwill, physical and intellectual support of the two companies they were supposed to oversee, but as befuddled as OFHEO was, it sure could and did cause trouble. 

Maybe DeMarco, before he reaches his dotage, will realize that. Or now, he could opt to read Judge Leon’s voluminous hearing records and minutely examine Leon’s court decisions, when his Honor threw out of his court the laughable but destructive “securities fraud” charges—which started as an “OFHEO report.” 

Or, Mr. D could take an easy way out and just consume the following excellent short hand reviews of the OFHEO follies, written months ago by old friend David Fiderer. They appear here, again, for those who initially may have missed his dazzling work. 

As I noted in last week’s blog comments section to a questioner, Howard says he has a Jan. 6 (?), 2014, event at DC’s Politics and Prose book store, on upper Connecticut Avenue, NW; pre-orders (at a nice discount) are available on Amazon, for those like me who value saving a buck.

AEI Apostasy?

From Issac Boltansky’s Compass Point.

Opinion Piece Calls For Lawmakers to Let GSEs Live. In an opinion piece being sent around D.C. this morning, former undersecretary of state James Glassman is arguing against the liquidation of the GSEs. As we have stated previously, our sense is that the conversation in D.C. appears to be shifting slightly toward support of simply re-branding the GSEs as we know them. There is a meaningful concern among some policymakers that liquidating the GSEs may create an unsustainable vacuum without a clear and capable replacement in place (i.e. PMI, banks, PLS investors). (Isaac Boltansky |202-534-1396| 


Jim Glassman, one time publisher of Roll Call the Capitol Hill newspaper, and now a fellow at the American Enterprise Institute (AEI) could lose his starboard side communications rights with his blasphemous Bloomberg article last week, calling for reviving Fannie Mae and Freddie Mac to serve the nation. (Linked at the end of this segment.)

Glassman never was a Fannie-fan at Roll Call and while I welcome his comments, I was most worried that Glassman’s heresy—especially if it caught fire and attracted GOP acolytes-- might make things uncomfortable for Peter Wallison and Ed Pinto, AEI’s resident Fannie/Freddie belligerents, to whom I immediately took my concerns. 

PW did assure me in an email that the AEI welcomes all kinds of wayward thinkers (my word, not his) and it has room in its big tent for Brother Glassman. 


Maloni, 10-27-2013











Anonymous said...

No comments?
Has everyone with a financial IQ above 90 gone to sleep?
The Howard book should serve as an opening to restore a modernized Freddie/Fannie. Let the dialogue begin!

Matt Hill said...

I think we are nearing a point where the light of truth is shining down so much that it's getting harder and harder to ignore it. At this point, I'm getting a little burned out at telling people they need to look out the window.

Anonymous said...

Ed DeMarco really pissed me off with that speech. He really loves the taxpayers.

Bill Maloni said...

One response with answers to all three points.

Tim's book, "The Mortgage Wars" will do that if the reader has an open mind.

But, with all of the rejection of the AEI's tortured analysis of Fannie's 1990's mortgage purchases--claiming most were "subprime"-- you still have MoC's using the totally fabricated definition of "subprime" and the AEI's statistical derogation of 10 years worth of loans, which were so well underwritten they hardly ever defaulted.

I loved the fact that the "Club for Growth" in calling for the defeat of Mel Watt's nomination, yesterday, also called for the "re-privatization" of F&F. I'll take allies wherever I can get them.

DeMarco angered me and that's why I wrote what I did about his comments. What surprised me was the number of people like you, who called me to say how much his remarks angered them.

Maybe he's worried about he companies continued profit-making and his efforts to slow walk the conservatorship part of his job; or possibly it's the Watt nomination, with an approval meaning the end of Ed's FHFA career; or just the continued noise about reviving F&F.

But, he sure seemed to vomit all over himself with what was a cold, patronizing, unctuous, and self-serving set of remarks.

Anonymous said...

Hey Bill...I know you've probably discussed it before, but what's your take on Mel Watts? I can't recall his stance on the GSEs (anti-, or pro). I imagine he's expected to support the "flush 'em!" camp. Anyways, I always enjoy reading your writings...keep up the great work.

Bill Maloni said...

I like him as an individual and consider him a good guy.

I've written that I think he doesn't have the history or expertise on mortgage finance and securities matters that I would choose in my FHFA Director, but he's an Obama choice to satisfy certain congressional priorities.

Mark Zandi, a far more substantive candidate, initially was mentioned and he has the right blend of substance, skill and politics, since I believe he is registered R, but really knows the markets and the business.

Zandi was talked about and then, suddenly, he was off the boards and Watt's name replaced it.

Watt's vote is about to happen, right now (shortly after noon on Thursday), when the Senate votes "procedurally" to take up nominations.

If this move gets the required 60 votes--meaning enough Republicans join the 55 D's--then Watt's specific nomination requires just a straight majority vote, which he'll get easily.

If there are no 60 votes, then Watt's deal is back up in the air and may never get enough R's to put him over the top.

His defeat, on a "procedure," might cause the Senate D's--once again--to consider changing chamber rules.

Bill Maloni said...

In case anyone missed it, the "Watt vote" failed, with only 56 votes supporting the measure, when 60 were needed.

WH claims it still will fight for Watt, but it's all uphill for him from here, but still could happen if they can get three R Senators to go along.

(All but one voted "No.")


Anonymous said...

Mark Zandi would be crazy to even consider taking this job.
What competent professional wants to be attacked and belittled by tea party antagonists.
This current political climate in DC reminds me of the early Nixon days when the WH plan was to block salary increases for well qualified senior government professionals to drive them out of government.
Then conservatives could claim that government did not work!

Bill Maloni said...

Well Reid might want to drop the "nuclear option" and try and change the Senate rules so a majority vote can approve more measures, but Harry easily could be in the minority after the 2014 elections and may not want to risk it.

Could see the WH try and pick off a few more R votes with "bridges and public works" offers.

They can't be happy with DeMarco in place.