Friday, January 10, 2014

He Said What


What Did Sen. Corker Say About them,
And Will the “Preferreds” Get Happy?


I know that public official obfuscate, prevaricate, spin, “gild the lily” and, occasionally, just lie.  

But, a funny thing happen this week at a hotel near the Senate, when Senator Bob Corker (R-Tenn.)-- appearing on a mortgage finance panel, hosted by the Financial Services Roundtable—seemed to suggest there is merit to the claims of F&F preferred stock holders and that Congress would have to address those demands. 

Here is Corker’s statement answering a question about F&F preferred stock investors.

Senator Corker

``A lot of those folks are my friends although they are temporarily on vacation.''

``I'm sure a good deal of money has been made in that investment meaning its run up, profits have been yielded. I'd like to point out that there would be not one single dime of earnings at Fannie and Freddie if it were not for the government taking them over… it's a minor detail that people continue to forget. On the other hand, I think we recognize that somehow or another, that has to be dealt with. We've been working on language. Actually in the beginning wanted to use the word receivership in our bill. There were some issues on the executive branch relative to that language. We've begun to look at things like… relative to fair value so we understand that there is going to be an appropriate settlement here. We've looked at things like how would a bankruptcy court handle these things so we understand that there's some fine tuning that will need to take place. At the end of the day, I just want to triple underline, these entities would not have had one penny of earnings had the taxpayers not have stepped in.''

(Listen to the exchange at @46.00 minute mark of the video linked below.)


Unless I missed something and am grossly misinterpreting Corker, that’s the first time any public official involved in the mortgage reform legislative process adopted such an accommodating stance vis-à-vis GSE preferred stock investors.

Currently, they are some 17 court cases pending against the Treasury over claims by the preferred investors (many of them hedge funds) that the federal government illegally took Fannie and Freddie assets from the companies when, in 2012, Treasury changed the method of dividend repayments each had to meet, from 10% of earnings to all revenue generated by each, minus minimal capital.

F&F stock, both common and preferred, jumped, but that was a day before Corker’s very pregnant statement. 

Someone may want to go back to the Senator and ask him to flesh out or expand the thought he shared with Wednesday’s Roundtable attendees.


What About the Common Holders?


(I wrote the following segment three days before Senator Corker spoke to the FSR. It was prompted by a question--at Tim Howard’s very successful book signing event at DC’s Politics and Prose--from a former SEC employee, who asked me if I was aware of anybody was organized to support F&F’s “common stock” shareholders. My answer then and still is “no,” beyond Bill Ackman.)

Is Bill Ackman ahead of his time with his major investments in Fannie Mae and Freddie Mac common stock?

I am betting (not with money, but with words) that he is and wisely.

We know that F&F have paid back the government more than they received in 2008, even though technically that’s impossible. But in layman’s understanding, it’s happened. 

The taxpayers’ return from their F&F investment will only get larger and quickly (like as soon as their Q4 2013 earnings get announced). 

Most are aware of the well-organized efforts on behalf of the “preferred shareholders,” largely hedge funds which picked up their investments at pennies on the dollar from small community banks, who had been maced into buying those securities by then Treasury Secretary Paulson.

When Paulson led the takeover of F&F, the value of those preferred shares he touted to the little guys went south faster than Paulson’s reputation for honest dealings. 

Back to my point: there is almost no organization among common F&F stock owners. 

Bill Ackman owns about a tenth of each entities outstanding common shares, but there doesn’t appear any other concentrated owners or advocates who have organized into advocacy groups, hired lawyers and lobbyists or spend much time in DC or on Capitol Hill.

But, in my humble opinion, for the stock value to rise, there doesn’t need to be.

I have no earthly/technical/practical reason to predict the following, just an instinct. 

With greater attention to the utility F&F represents and the chance that others see the incredibly long and obstacle filled path that Corker-Warner (or its reported clone Johnson-Crapo) faces, interest in owning Fannie/Freddie common stock will grow. 

Like the junior preferred stock, there seems to be an active market for the common shares.

Legislative uncertainty, combined with F&F 2014 earnings, should boost the value of the common beyond where it is now, which will make Mr. Ackman (and other common holders) happy and wealthier, if I am right. 

Caution: When asked, I’ve always told both current preferred and common investor that before there is a final resolution of any kind, there will be “peaks and values for both,” so watch and sell when it makes sense. 

If the value and use of “bitcoins’ can flourish why not the common stock of two entities which seem to have things working for them, a confused Congress which doesn’t know whether to “s*** or get off the pot,” billions flowing to the Treasury from F&F earnings, and a looming court case which could throw a velvet monkey wrench into everything.  

And, I haven’t even mentioned the possibility that some smart Senator (s) still might realize that totally junking Fannie and Freddie makes little practical sense and opt, instead, to move in a more positive direction for the American public and the mortgage finance system. 

I’ve written this before and will restate it, virtually every legitimate operational complaint about the former GSEs has been addressed by current regulation. 

These aren’t the “bad” PLS-buying Fannie's and Freddie's which existed after 2004 and before 2008. 

Congress doesn’t do omnibus, earthshaking, market moving legislation well, especially over a period of years when partisan feelings are running so high, and with this year’s congressional elections looming and 2016’s presidential candidates already preening. 

Approving simple and understandable legislation is easier than trying to secure complex and radical proposals.


Mark Warner, Deserving a Rebuke


Let me throw an earned brickbat here.

To Senator Mark Warner (D-Va.), who thinks no amount on top of total F&F repayment is enough, I should ask, how much was it worth to the government and its taxpayers (who also are consumers) for F&F’s execs and employees to keep the nation’s mortgage finance system alive and functioning through the mess which those in Congress, as well as many of the federal financial regulators created? 
Have you ever tried to monetize 5 years of efficient mortgage markets, satisfied consumers, and even happy and productive mortgage professionals which F&F produced? 

If it was such a slam dunk to operate, why didn’t Treasury do it on its own or maybe employ HUD? Why didn’t the GOP turn to its big bank friends allies to take on those responsibilities?

Wasn't going to happen, everyone leaned on F&F and—for the most part—bitched the whole time, while the two did the job at no cost and repaid the Treasury all that was invested in them. 

So why, when weighing the past five years do you only look at one side of the scale, Senator “I could have gotten 30-1 return” Warner? 

Gee, weren’t you a venture capitalist for a while. Can you show us other “30 baggers” you produced? 

How about a 20 or even a 15, maybe a 10?

Shock to Me

Thanks to Inside Mortgage Finance--and my friend publisher Guy Cecala—who told me, based on a quarterly F&F mortgage business report they did, that Fannie Mae’s business in the last quarter of 2014 was almost twice the volume of Freddie Mac’s, although both were down from the same quarter a year ago. 

I had no idea that the disparity between the two was that great, although even in my day, Fannie almost always had higher business volumes than the guys in Virginia, but the gap never was that gargantuan.

What Others Are Saying 

The Columbia Journalism Review lambasts the New York Times for printing tired AEI mortgage propaganda, “The Big Lie,” which has been rebutted so often that Ed Pinto and Peter Wallison have permanent tire tracks pressed into their suits. 


Two separate pieces from CNN’s Donna Brazille and the Washington Post’s Post Kathleen Parker on the political and social perils of the GOP dividing into factions and attacking each other. 



Yahoo Finance sounds alarm on TBTF banks, again!


The New York Times says banks will pay $50 Billion for their mortgage meltdown responsibilities.

(Imaginary: Corker to Warner, “Hey I have this great idea. Let's give the US mortgage markets to the big banks.”)

Maloni, 1-10-2014








Qualified Observer said...

Nice one. I suspect you're on it, but I'm really looking forward to your comments regarding Mel Watts' special advisory team. You like these guys?

Bill Maloni said...

Truth, I am not ("on it/them", yet), but I have seen one negative comment about participants.

Frankly, I was taken up with what Corker said, although he may just have been playing to the crowd and BS-ing, and I published this blog early to get in front of that story.

When you throw Watt's potential into the mix with the other things happening, I believe all sorts of options appear, most of them positive.

Thanks for the comment, QO.

Chris Roberts said...

Bill -

As always, the Fannie n Freddie crowd enjoy & appreciate your posts.

Your point about the GSEs providing mortgages (counter-cyclical) and 'being there' when America needed them was spot-on.

Various entities & people have chimed in that without FHA & GSEs, real estate values would have dropped another 10 to 30% (depending on who reported; I recall Susan Wachter / Mark Zandi)Conservatively, 10% drop in prices could have sent the country into GD2.

What was that worth?

As for the 'new' advisors, they are much like the old ones. Political and no one from industry.

As you point out, the companies have already been reformed (i.e. regulatory oversight, lower retained book - except for the back-door bailout mortgages they absorbed, and stricter underwriting - but RMBS were the ones that were giving pulse checks only before approval).

One new advisor is on record as supporting "co-op" / mutual, which is code for giving FnF to big banks. As a preferred (mainly) and common (minor) holder, that is the only thing that scares me.

Berkowitz and Ackman put a solid floor to the bidding wars, and also put the government on alert that they stand ready to counter a bank buyout for cheap money.

Keep up the good work!


Anonymous said...

Corker seemed worried about something. He said a few times, "if something were to happen", "unless something happens". He even specified a time frame of a couple of weeks... Still to be seen if what worries him will be our content.

What could be a road block for his bill?

Bill Maloni said...

Let me answer small elements of both Chris Roberts' question and Anon's.

Ryan, I'm told, worked 25 years at Freddie as a risk analyst and is not political.

I don't know if he is good or bad, but after looking at the four appointees, I knew none of them and had to ask around about their bonafides.

I had the same reaction about Corker--who has since, in a Bloomberg article, walked back some of wehat eh said, suggesting he may just have been fulfilling the roles I laid out in the opening paragraph of that segment, i.e. he was bullshitting--and it wouldnt' surprise me at all if he sees some waning interest.

After all, it a a mammoth undertaking, based on a lot of trust me, at a time when the things he and Warner have tried to demonize look better and you have some heavy legal actions pending which could be game changers.

For me, it underscores how factually shaky the anti-Fannie/Freddie foundation is, but--at the same time--minds don't seem to be open to viewing events
in different lights.

But, as I sued to tell my colleagues when we were lobbying, "The lobbying starts when people say no; none of us would have jobs if everyone agreed with us."

Anonymous said...

Sen. Corker's thinking has a fatal flaw and it is surprising that nobody has called him out. Yet.

The first thing he says is: "not one dime of profits would have been made had the government not backstopped or guaranteed GSEs MBS". Implying the Government support is what is behind the companies powerful earnings. The non-stated inference here is that shareholders have no part of this profit. It is all uncle Sam's.

The second thing he says is that hedge funds or mutual funds proposing a purchase of certain assets/businesses of the GSEs under a scheme that closely resembles his Bill provides a de-facto confirmation that his Bill is the right path. Briefly, it gives validity to 1217. Furthermore, it proves that there is appetite by hungry private capital to enter the business.

Sen. Corker cherishes these two thoughts. And he is specially enamored with the second one.

Yet nobody told Sen. Corker that the private attempt by money managers LEAVES OUT the guarantees by the government which will eventually have to be purchased at market prices, if ever available.

Someone should tell the smartest managers on the planet that -according to Senator Corker- they won't be making "one dime of profits" without the government backing the businesses they have offered to purchase. Or that perhaps if the guarantees stop being free then they "won't make one dime of profits" by having to now pay for them.

Message to Sen. Corker: Yes, the companies can make money even without Uncle Sam! And can compete successfully on a level-playing field.

There seems to be something inherently wrong with the math of "30-1 returns" and "not-one-dime-of-profits" dynamic duo.

Someone please tell him?

Bill Maloni said...


My friend, with the facile mind, you are headed on a collision course with the one argument I keep hearing when I make the same point.

It runs like this:

"Because of the name and the history, no matter what the law says, nobody ever will believe the federal government will not stand behind F&F, which in turn will lower its borrowing costs and give them an unfair advantage. The only way to protect against that is to destroy them."

Scary isn't it?

That contention doesn't sway me, but there is an element of truth in it which could carry over to a revitalized Fannie (and/or Freddie).

For years, Fannie--despite what the critics claim--operated under the principle, which was required by statute on all of our debt and mortgage securities, "not the full faith and credit of the federal government."

Until the 2008 Bushwhacking, that was true, but--for the first time in history--it changed when Treasury infused $187 Bil in both to keep the market afloat.that changed.

Yet, despite the declared separation from the federal government, the market always accorded Fannie's debt a slight borrowing advantage over other AAA rated companies and financial institutions (although there were very few of the latter)and below Treasury's.

I agree with you about congressional intelligence and logic and whatis becoming more clear as question get thrown at the senior backers of the Corker-Warner bill.

Its named sponsors are not as smart as they think they are and their flip answers often reflect their doubt and mortgage finance illiteracy.

Thanks for your continued interest.

Anonymous said...

No problem, Mr. Maloni. It's good to have a high-level blog where we can read meaningful discussions. On behalf of all your readers thank you for posting.

Qualified Observer said...

And then Corker backpedaled?

Someone claiming to be Tim Howard is posting on the Yahoo Finance message board for FMNA:

Tiny URL version:

Full version:;_ylt=Atnzu58c8mbayhIvT.Q3aGXeAohG;_ylu=X3oDMTB2N3F1dm02BHBvcwM0MARzZWMDTWVkaWFNc2dCb2FyZHNYSFJVbHQ-;_ylg=X3oDMTBhYWM1a2sxBGxhbmcDZW4tVVM-;_ylv=3?&bn=e0e2b58d-64fb-37a2-9273-29a5ce093d80&tid=1389235926298-ca72a5bb-f21e-466a-bd40-1e2add1038b2&tls=la%2Cd%2C7%2C3

or search for "Fannie Mae straight talk #1" by timhoward717 in the Yahoo Finance boards. Is there any chance you could vet the source? People would love to hear from him and an impersonator could get traction if he were clever.

I tend to agree with timhoward717's point about the significance of Corker's reversal. How has your initial impression been affected by his 'retraction'?

Bill Maloni said...

QM and others--

I just went on that site and noted my strong doubt that the person calling himself "Tim Howard" is the real Tim, with whom I exchange thoughts several times a week.

I urged caution to those posters and plan to inform the real Mr. Howard of the BS.

Corker's "walk back" disappoints me, but while I accept his statement, he may also have subconsciously expressed his true opinion.

More significantly, his view won't mean squat to what the Court will say when the "takings" cases get decided.

His views will stymy any congressional interest in dealing directly with the plaintiffs, but I think those investors realize Congress is an uphill journey for them.

But, who knows what Treasury may say or do if confronted with the fact the Court won't side with the government?

Finally, let me repeat my core and constant message to preferred and common stock holders.

The news, currently, is positive and with an active market for both securities the price will go up and down, but it's all about speculation--and fire shadows on a wall, not the fire itself.

Since the junior preferred guys have legal action pending, they may be in a better position than common holders, but the value behind your investments is related to political and judicial whim more than fundamentals.

Understand that and sell on the inevitable peaks (or buy on the valleys.

There will be both.

Anonymous said...

I'm not as much concerned about the passive impersonation of others on a message board, as I am seeing elected Representatives impersonating the truth in a public forum.

After listening to the roundtable, I am convinced that Senators Corker and Warner are in collusion with a group of people that have only one interest, lining their own pocket with cash.

Watching this group talk about reform is an insult to the intelligent people that understand mortgage reform. They talk about the urgency to move on a plan that has only an unknown prospect of success. To me this is a table of nit-wits trying to play Pin the Tail on the GSE Donkey.

In his quest for greed, Senator Corker likes to tell only half of the story of the GSE government bailout. He leaves out the taxpayer rescue of large banks that committed fraud. He fails to disclose the GSEs did not need all of the 187 billion. He ignores the fact the GSEs were handed toxic assets. He pretends the many years of GSE success never happened.

The triple underlining that government assistance was the result of success is really an oxymoron when you consider the plan to replace it will put the taxpayer at huge risk.

Why people like Tim Howard and Jim Millstein are largely ignored by the Banking Committee is obvious. The intent is get the business from the GSEs. It is what it is and nothing more.

I look forward to when they try to push to pass this bill on a floor and a public debate exposes the real truth of these imposters.

Bill Maloni said...

Anon--Thanks for sharing the burden which many of us involved in this "debate" carry.

The frustration level is high and not just with the Congress. As I've noted so many times, I still am waiting for the Washington Post to mention--for the very first time--that Judge Richard Leon, before he gained so much notoriety in his recent NSA decision, rejected all of the "securities fraud" allegations against Frank Raines, Tim Howard and Leanne Spencer and cleared their names of that bullshit charge.

JapanMontrealExpat said...

Agree with Anon. The truth has a way of coming out. Great blog, Bill.


Bill Maloni said...

Thanks, JME.

Praise always is welcome since I get plenty of the other.

Anonymous said...

Wallison keeps pounding away, regardless of the facts:


"An alternative view is that the financial crisis was caused by the U.S. government’s housing policies, which -- principally through the affordable-housing goals imposed on Fannie and Freddie in 1992 -- forced reductions in mortgage underwriting standards. By 2008, 58 percent of all mortgages were subprime or otherwise weak, and 76 percent of these risky mortgages were on the books of U.S. government agencies, principally Fannie and Freddie. When the housing bubble deflated in 2007 and 2008, these risky mortgages defaulted in unprecedented numbers, driving down housing prices and setting up the financial crisis."

Bill Maloni said...

Anon--Wallison and Pinto (and others) are not going to stop beating this dead horse, in their unique manner, until others just rise up and smite them.
Friend David Fiderer likes calling this the Right Wing housing/mortgage finance version of the "Big Lie."

DF is working on his latest response to this BS and I would look for him, soon, to "bust another move" against the BIG LIE.