Sunday, November 3, 2013

Book, Earnings, and DC Personalities



Timely Debut for Howard’s Book;

Who’s Peeping the F&F Watchers?



Could former Fannie CFO Tim Howard’s book, “The Mortgage Wars” (McGraw Hill, due out Thanksgiving) come out at a better time? Not likely. 

Lots of F&F Talk 

I am sure the timing has more to do with holiday sales more than anything else, but the Congress and others seem to be spurring book interest with their ongoing GSE issues nattering. 

Whether its attention to the Corker-Warner bill, or possibly a new proposal from Senators Tim Johnson (D-SD) and Mike Crapo (R-Idaho), fallout from the initial Senate vote--a procedural one—to approve Mel Watt to succeed FHFA’s Ed DeMarco, and even the floundering Hensarling bill which still lacks sufficient GOP support in the House, despite it’s “go forward without F&F and let the big banks do everything approach. 

Each of these topics, as well as the next few, heighten interest in what Mr. Howard has to say about DC’s past mortgage finance perfidy. 

Good F&F Earnings Coming 

In addition, Fannie and Freddie will announce significant earnings soon, possibly this week, moving ever so close to repaying all of the money Treasury put into them.

Recognition of Their Value 

If the preceding doesn’t wet appetites for Howard’s disclosures, one reads conservative Jim Glassman arguing to keep Fannie and Freddie around and hears the immensely capable and always quotable, Lew Ranieri (“the father of the MBS”) telling a DC conference this week, “There’s no viable alternative to Fannie Mae and Freddie Mac.” (Source: Inside Mortgage Finance.) 

Howard offers a very detailed dissection of Fannie Mae’s approach to its business challenges, its successes before and during “The Mortgage Wars” (the bitter fight between business and ideological opponents with the Bush Administration joining the “bad guys”) and initially how Fannie’s tactics prevailed against the opponents’ skullduggery. 


I bet that there aren’t 10 people in Washington who realize one absolutely amazing irony, amid their flawed memories of Fannie as a law breaking wilder. 

In the political mugging which started it all, a regulatory dispute over appropriate execution of a major new accounting regulation—and peddled by GSE enemies to a clueless Congress and media as “Fannie cooked its books and then gave themselves bonuses”--Fannie Mae’s much maligned methodology prevailed and became industry practice.  

The book discusses in detail the bogus contention of “securities fraud”--ladled out in 2004 by the Office of Financial Housing Enterprise Oversight (OFHEO) and backed by a very wobbly SEC—and that claim’s rejection by a federal district court judge last year. 

A review of Fannie’s lengthy and tortuous fight with the Bush Administration over implementing the Financial Accounting Standards Board (FASB) “mark to market” regulation, or FAS 133, reveals the little known fact that Fannie had it right all along.

That's Worth Repeating!

The derivative accounting Fannie Mae used under Tim Howard as CFO—to which OFHEO and the SEC blindly objected--was judged by the accounting profession in 2007 to be the preferred compliance method for other large financial services companies to use.


Mel Watt (D-NC) 

Senate Democrats lost a procedural vote last week to make Mel Watt the new FHFA Director and dump Ed DeMarco. (Watt’s nomination got 56 votes, a clear majority, but needed 60). It might be resurrected, but that will be a tough fight. 

WH needs to do some more wheeling and dealing if it wants Watt that much; the easiest move would be to find the veteran Congressman a sinecure elsewhere in the Administration and move on and hope they can identify somebody who has a stronger mortgage finance and securities history.

DeMarco: Who Watches the Watchers?


Still lots of resentment from many, many senior Fannie and Freddie professionals over the gratuitous putdown comments Director Ed DeMarco offered at the Zillow DC mortgage reform conference. 

I was socializing with a usually tight lipped Freddie official, who suddenly erupted over DeMarco’s F&F “dissing” and then went on to scold the F&F regulator’s history of wasteful spending. 

The Freddie official literally was sputtering, as he discussed FHFA’s currently questionable folly, a “common underwriting platform.” 

“It’s FHFA’s wet dream to create a new narrow purpose corporation, get them their own HQ, and have them take the best from F&F’s and build something nobody really needs or wants. Who watches the guys who watch Fannie and Freddie? They are spending hundreds of millions of dollars on wasteful projects and nobody says, Boo. “

I suggested he should complain to Rep, Darrell Issa (R-Cal), the House Chairman of the oversight Government Operations Committee, pointing out that all F&F earnings, net of capital, not squandered on useless projects goes right into Treasury’s general fund. And whatever FHFA decides to divert for their own spending purposes, doesn’t. 

That should get some GOP Teahadist upset, unless they feel, “Oh, who cares, it’s just money taken from the evil twins?” 

Ted Cruz 

Speaking of the Tea Party and one of its favorite sons, Sen. Ted Cruz (R-Tex), here’s a brief story on the Senator’s father, who is a church “Pastor” and last year suggested that President Obama be “sent back to Kenya.”

Let’s see, should someone suggest that Senator Cruz be sent back to his birthplace Canada or his ancestral home in Cuba? 

I certainly hope no serious Democrat threatens such cowardly action—not because it wouldn’t be just desserts and represent “back at you”—but I don’t anything to slow down Senator Teddy’s campaign to get the 2013 GOP presidential nomination and “rent asunder” the Grand Old Party, as a Pastor might say, and forcing TC to generate a third party in 2016. 

After putting together the above segment and before sending out the blog, I came across this follow-up story, which fairness suggests I link.

Senator Mark Warner (D-Va.) 

Mark Warner is half of “Corker-Warner,” the Senate tandem sponsoring the abolish Fannie and Freddie proposal, which seems to be flailing as dozens of questions are raised about its efficacy. “Corker” is Bob Corker (R-Tenn. 

Warner was on a panel last week at a DC mortgage reform conference to discuss their bill and was asked a question about “Fannie Mae,” which must have struck a raw cord or caused him to “geeze” about his imaginary pre-Senate financial acumen/success. 

The conference video sound wasn’t superb. Audience questions and comments were not well amplified. In quizzing Warner, it sounded as if a questioner suggested something positive about Fannie Mae. But with a dismissive wave Warner said (I am now paraphrasing), “Don’t tell me about Fannie Mae and Freddie Mac. I was a venture capitalist before joining the US Senate and if I had the $186 Billion they received from the government, I would have gotten 30-1 return from it.”

Really, Senator Warner, really?  Venture capitalist? You could do a 30-1 return? That’s how many four baggers to what power?

Let’s see Treasury's F&F $186 Billion cash injection, times 30, is a scosh under $5.5 Trillion and change. 

So the Obama Administration just could have given you all of that money or put you in charge of investing it and you could have wiped out a third of our cumulative national debt?
In your own mind, you are good and, obviously, underutilized!

I am curious if you would have put it all in pork bellies or some other surefire deal or would you have deigned also to run the nation’s primary and secondary mortgage markets, too, so that consumer, lenders, and mortgage investors could interact successfully?

You talk a good game, Senator, but your answer to the questioner says you display arrogance and hubris not needed today on Capitol Hill.

Some of us skeptics continue to worry --when you keep reminding audiences that your bill isn’t a finished product and that you are open for business to make changes--that you are trolling for campaign funds. But then I’m a cynic.

I suggest, next time, just do your homework and answer the guy’s Fannie Mae question. 

Maloni, 11-3-2013


Anonymous said...

Ed DeMarco is about as neutral as sulfuric acid. His statement about the profits of the GSE's being the result of "accounting tricks" is way out of line. DeMarco has made numerous statements and taken actions that will almost certainly be seen as being outside of the scope of his legal authority. On some things he has done a very good job.

It is wrong what Corker and Warner propose in their legislation. Enactment of the law as it is written would result in substantial monetary liability for the government. I'm getting tired of deferring my anger and hostility toward these people and their unjustified actions.

The reign of Edward DeMarco as the slave master of Fannie Mae and Freddie Mac has gone on long enough. It is time fro the end of these conservatorships. It is time for decency and the rule of law to prevail in this situation.

Bill Maloni said...

Funny, how much that issue has come up--with the same vehemence--if not the same words.

But, I asked two knowledgeable people yesterday if the WH can just dump him and appoint his deputy or someone else at FHFA to the post and the responses were not optimistic.

He can leave on his own, but it would be very difficult to oust this long time civil servant, who would be mightily defended by the House and Senate GOP.

Anonymous said...

If the hedge funds were smart they would pay offer him 5 million to quit. That might get him to change his mind.

Anonymous said...

Bill...question for you. Given the results out this morning from both GSEs and the headlines basically stating they've paid back in full (w/o actually paying back anything, or course), I've been thinking about this ~$187B figure that keeps getting thrown about. Do you have an estimate of how much 'borrowed' is actually from a capital shortfall ex- the 10% dividend payment?

What I'm trying to figure out is if they didn't have to keep borrowing to pay the divvy (ie. compounding the 10%), what the total tab would look like, etc. I'm guessing the number is well south of the $187B or so.

Does my question make sense? Basically, instead of being at breakeven right now, I'm thinking the govt. is actually well into the black...even considering the ridiculous 10% rate.

Bill Maloni said...

No, it make sense but don't expect anyone to glom on it.

I made part of that point in previous blogs, noting that Treasury rather than using the payments to reduce the F&F $186 Bil (or whatever is the actual number), they keep funding it with debt.

It is perverse, but not untypical when you get into the interstices of any of the Fannie/Freddie deal and treatment elements.
I had one prominent report form an equally prominent national publication suggest that F&F had "Tim Geithner" to thank for dumping the 10% dividend and substituting the "all earnings, net capital" sweep.

Really, sir, really???

I think these earnings--and sorry for beating this horse--but material in Tim Howard's book, will cause a lot of rethinking or fresh thinking among policy makers and media.

Duncan MacLeod said...

Great news today on the Earnings Release- Freddie is net Positive on payments received and paid to the Government.
I think it would be interesting to see what the Cash Draw would have been if the DTA was never taken off the balance sheet,
Another interesting analysis will be have much was drawn for reserves that were never needed?
Clearly much of the cash infusion was for paper losses that reversed. It just how do you quantify this?

Bill Maloni said...

Duncan--you must be "NSA-ing" my emails.

I exchanged with a reporter today my opinions that both F&F have huge amounts of additional loss reserves given their current loss history.

Eventually that will show up at the bottom line, too.

One would think a "smart Congress" would look at today's results and possibly begin asking itself or others questions in light of their plan to massive uproot the current mortgage finance system and exchange something which never before has existed or worked for a model which has.

But, there I go again, being rational in a city that isn't.

Freddie is over the lien and Fannie about $2.5 Bil below the "total repayment" line, so that die is cast and the coming debate will be great to watch.