Sunday, November 17, 2013

Somebody's Investing in the GSEs


“Fish Gotta Swim, Birds Gotta Fly,"
Hedgies Seeing What They Can Buy



Official Washington has been buzzing the past few weeks with optimism over the Fannie/Freddie earnings, which shortly will return more to the Treasury that the government gave F&F and talk of the political treachery carried out against Fannie Mae by some of the W. Bush Administration’s least competent and more venal financial regulators  (an assault I believe created core elements of the nation’s 2008 financial meltdown), a tale spelled out in former Fannie CFO’s Tim Howard’s new book.


Sell Me Some GSE


The other day, there was the announcement of a bouncing baby buyout in a letter from hedge fund CEO Bruce Berkowitz of Fairholme Capital to Fannie and Freddie’s regulator, Ed DeMarco, proposing to acquire F&F’s mortgage guaranty business from the federal government, an action which generated headlines. rankled Congress, and drove up the value of both F&F preferred and common stock (that Bruce!).

(Please see my post-publication correction in the "comments section.") 

And finally, another hedge fund, Bill Ackman's Pershing Capital, told the SEC that it has slowly has been increasing its investment in F&F common stock, for the past month, and now has acquired about 10% of the amount outstanding in both.

The obvious takeaway is there has been a lot of political and business interest in F&F, while Congress dithers over what to do with them.

People on and off the Hill are writing and talking about the virtues and shortcomings of these newer developments.


Articles claiming the Berkowitz/Fairholme scheme was good were offset by others saying it was a government and the taxpayer ripoff.

(Link to a Fairholme story in Bloomberg.)


30-1 or No Deal


Of course, Senator Mark Warner, the former venture capitalist was quoted by Nick Timiraos in the WSJ as saying, “Taxpayers can do a lot better than this deal (the Fairholme idea).” 

Some remember that Sen. Warner was on record, recently, saying he could get a 30-1 return on any money put into Fannie/Freddie; maybe that should be the congressional solution. But then, Warner would have to put up or shut up and politicians don’t often play by those rules.

(Incredibly, I sensed a note of disdain in Warner’s comment as if his pre-Senate “venture capital” career elevated him above “hedge fund” principals and into the “my waste products don’t stink” category.) 

I have no rooting interest here, beyond the fact that I think Congress will waste a lot of time uselessly debating the Corker (R-Tenn.)-Warner (R-Va.) proposal—on which the Center for Responsible Lending, continuing the previous metaphor, recently pooped (see link)--and will spin its wheels on the soon to exist Johnson (D-SD)-Crapo (R-Idaho) bill, which will look much like the C-W.  

The Berkowitz plan--forgetting whose DNA is on it--is just as rational a legislative vehicle as the C-W “recreate a monster of a different sort."   

It may be more attractive than the Jeb Hensarling (R-Tex.) House mortgage reform  bill--"go with nothing but the big banks"--which won’t ever happen, unless there is a GOP White House and Senate, after the  2016 elections and maybe not even then.


Sell Them, Let Treasury Make More Money


Berkowitz’s “sell us the company guarantee businesses” has parts (private capital, end to F&F) which D’s and R’s in both chambers claim they want, so why wouldn’t it be viable…and at least discussion worthy? 

Shhh, I know the answer. “Psst. He’s a Hedgie and you know what those guys are and do?” (I wonder if those Senators say that when BB hands them his campaign contribution checks, see Inside Mortgage Finance, 11-15-2013.) 

I want a brave Subcommittee Chair to achieve a couple of things before Congress folds its tent in a month or so. These actions would add immensely to the public’s and the Congress’s F&F understanding. 

The first is schedule a hearing on these hedge fund proposals and vet them vigorously so people really know what they contain, since detail is scant. But then, detail is equally scant on the forever evolving C-W legislation, too.

In any such hearing, the Hedgies also should discuss before Congress the elements of their lawsuit against the US Treasury over its shift from having pay a 10% dividend on amounts owed the Treasury (commercial banks were required to pay just 5%) to--save a minimum capital amount-- having all of their earnings swept to repay Treasury.


Litigation in Mix and What’s That Mean? 

An activist court—looking at some of the 17 plaintiffs lawsuits filed against the federal government by various F&F shareholders--just might marry these two issues in a way that preempts heavy congressional action, if the Treasury is found to have violated the “takings” laws and ends up owing the F&F shareholders so much money. 

It might be cheaper for the Court to give the plaintiffs the two companies, under some legal arrangement 

In addition to the hedge fund issue hearings, I hope the House or Senate would invite Tim Howard—and others (Frank Raines, OFHEO’s Armando Falcon, Steve Blumenthal, and Jim Lockhart, former SEC officials Chris Cox and Don Nicoliasen)--to testify on the issues Howard raised in his book, so that the Congress might  comprehend how vengeful and incompetent financial regulators sabotaged individual lives, careers, and mindlessly sowed the seeds of a massive mortgage system disaster and astronomical dollar losses. 

Read and React


While we are talking about wishes and hopes, my current political fantasy is that somebody–say among Senators Chuck Schumer, Jack Reed  Sherrod Brown or Elizabeth Warren--reads Howard’s book, grasps how the Bushies and the big banks perpetrated their ideological villainy and speculates that this “abolish F&F” talk might be the last refuge of know-nothings. And, further, that a staggeringly expensive lawsuit facing Treasury combined with offers to buy Fannie and Freddie, might lead some creative and thoughtful legislators to produce something other a multi-year plan to turn the current mortgage finance system upside down, give it to the big banks, and replace it with one equally dependent on Uncle Sam—if not more so—than the current one they all claim they abhor.

It doesn’t have to be that way, but dream on, Macduff!

I know that’s a lot of rational behavior and creativity to seek but maybe a coterie in Congress feels like doing the right thing once in a while, rather than mixing with the thrashing bulls in the F&F mortgage china shop. 

Get Jealous Non-CRTL Clients!! 

Michael Kim, managing director and partner at CRT Capital, just sent me a fabulous, fact rich, non-hyperbolic document which he and CRT produced, called, “GSEs: Evaluating Legal and Legislative Pathways.” 

It’s a valuable report filled with relevant GSE legislative info and data on the many pending lawsuits and proposed mortgage reform bills. Its comprehensive and current though the beginning of November. 

Here’s Michael’s email,
Contact him and see what you can negotiate. It will be worth your while.

Maloni, 11-17-2013


Bill Maloni said...

Rather than rewrite the beginning of my blog, let me own up to the fact that I mis-described Fairholme Capital and it's CEO Bruce Berkowitz.

FC IS NOT A HEDGE FUND, but a mutual fund.

It does own F&F preferred.

So, my BAD and I accept the responsibility for the gaff!

Doesn't change a lot of the congressional reaction to BB, but he is not a Hedgie.

Anonymous said...

Just finished Howard's book. The final chapter is an excwllent summary of the history of federal regulatory policy and principles for restoring the secondary mortgage market
The future of federal housing policy should not be left to AEI and fellow travelers.
Brookings should be encouraged to do two seminars.
First, an historical analysis of federal regulatory policies over the past twenty years, the collapse of the secondary mortgage market and the costs to consumers and taxpayers.
Second, an analysis of reforms that would revive the market and provide effective consumer benefits and protection.
Let's not continue to leave it to the tea party to determine future federal housing policy.

Bill Maloni said...

Bruce Katz, long time "housing activist, is a VP at Brookings, but--frankly--I don't remember him being super GSE friendly. (I think he may have worked for Senate Banking, on its Housing subcommittee, when the 1992 GSE legislation was produced.)

However, Howard's book could soften/open him up some.

Contact Katz and suggest why you believe he should consider your idea.

lee woo said...

When you are sorrowful look again in your heart, and you shall see that in truth you are weeping for that, which has been your delight. See the link below for more info.


andrea chiu said...

There are times that we encounter fear and disappointments in life yet we still manage to stand up straight and face it rather that being silent. That was a very good example of being a brave person. Well, I would like to thank you for sharing a very good article it is very much appreciated, good job! You can visit my site too if you want. Have a great day!

Cindy Dy said...

I like the way on how you put up your blogs. Wonderful and awesome. Hope to read more post from you in the future. Goodluck. Happy blogging!