Sunday, February 16, 2014

Gretchen to the Rescue


Siphoning off the entities’ profits is the opposite of conserving their assets and property, the plaintiffs contend.   Gretchen Morgenson



Gretchen Morgenson Column Says
Treasury Misled F&F Shareholders



What’s next, will the Chicago Cubs win the National league playoffs and go onto triumph in the 2014 World Series? 

I am referring to Gretchen Morgenson’s astounding article in Sunday’s NYT business section in which this long time GSE critic—in an about face-- declares that the Obama Treasury may have violated the rights of Fannie Mae and Freddie Mac common shareholders, when it failed to make public a crucial Treasury document, written in 2010 and unearthed this past month as Treasury defends itself against various GSE lawsuits. (See link below to Ms. Morgenson’s column.) 


The Treasury document discussed the Obama Administration’s GSE policies, including a heretofore unknown plan to not allow the two companies to make any money, profits which might have boost common stock prices.

Ms. Morgenson argues the information would have been material and essential for the public to know at the time the policy was promulgated, since many investors continued buying F&F common stock in 2010 and 2011, when GSE revenue prospects were dim. 

“A material fact is an occurrence, event, or information that is sufficiently significant to influence an individual into acting in a certain way, such as entering into a contract.” (Source Legal Dictionary.) 

Below is the critical excerpt from Ms. Morgenson’s column: 

The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the undersecretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.” 

A glorious 2012 financial turnaround allowed F&F to make huge profits--because so many other investors had abandoned the mortgage finance market—and initiate a now virtually complete process of returning to the Treasury every penny invested in them. (Even though that is technically impossible, under the deal Hank Paulson forced on them, it does exist in a common sense manner.) 

One irony here. 

F&F preferred shareholders--many of them, but not all, hedge funds--sued both the Bush and Obama Treasury Secretaries over the original 2008 action (Bush)--to put the companies into “conservatorship”--and later, in 2012 (Obama), because Treasury changed Fannie’s and Freddie’s repayment terms from a 10% dividend of their federal debt outstanding to a total sweep of all quarterly profits each generated. 

Some 18 of the latter court cases currently are pending. 

(Elsewhere, Ms. Morgenson calls this profit sweep dividend change, “punitive.”) 

Now the common shareholders, with possibly mammoth investor Bill Ackman leading, may have major cause to go to the trial lawyers, again, and sue Uncle Sam for failing to disclose its plan to cripple F&F revenues. 

With the exposure of this document, Morgenson also noted a certain financial perversity in the 2008 conservatorship action, because—under the same statute--Treasury also implemented a warrant policy giving the federal government 79% ownership of Fannie and Freddie, with the warrant values (Uncle Sam’s) going up as common stock values stayed low. 

(Hypothetical discussion between Treasury Secretary Jack Lew and his boss. “So, let me get this straight Jack, if Treasury effects this, our warrants go up in value but the common stock doesn’t, right, and we are the only winners?”) 

As one prominent observer noted about the bubbling cauldron, sarcastically understating, “the plot thickens!”

Let me enthusiastically welcome Ms. Morgenson, the NYT storied financial columnist, to the “good guys” side of the F&F ongoing discussion, which I hope isn’t a premature acknowledgement and—for her—will be a long term stay.

Come on in, Gretchen, the water’s fine and the story is even better! 
(Oh, and if your pen stays sharp and pointed in the right direction, I’ll forget the AEI-driven, hatchet-job book you and Josh Rosner wrote about Jim Johnson and Fannie Mae.)

Who’s Making/Speaking F&F Policy?

HUD Secretary Sean Donovan, last week, spoke on mortgage finance reform predicting prompt Senate action on Banking Committee mortgage legislation. 

One observation: That development won't be particularly surprising as this blog predicted that possibility some weeks ago. 

But to imply a bill which can pass the Senate could get through the House Banking Committee and onto the House floor, without being “Tea Partied to pieces” is highly unlikely. 

But, Donovan--a loyal Admin guy--is just saying what his bosses want. 

What surprised me most about Donovan’s comments is that they weren’t being delivered by FHFA’s Mel Watt? 

Who—not working in the US Treasury--carries the GSE portfolio in this Administration? 

Is it the former 20 year plus, House Banking Committee veteran who had to scuffle to get Senate approval and now oversees Fannie and Freddie, or is HUD, the Cabinet agency which has the lowest profile, no matter which party controls the White House? (It’s been suggested that D’s sends their duds to HUD and R’s shuttle their liberals to those posts.)

Mel Watt might ask, “Why make me sweat and fight for this job, Val….er, I mean Mr. President, if you are going to give my portfolio to the guy whose building is called ‘11 floors of basement?’ ” 

On a more positive note, FHFA Director Watt has started reaching out to housing and mortgage finance industry groups, which report positive meetings and kudos for the Director.

What Others are Saying 

Al Jazeera feels deeply about Fannie and Freddie.


Chuck Gabriel discusses Donovan comments.

Barclay’s says C-W requires beau coup fresh capital and may need a decade and a half to get it. 

Key excerpt from the above referenced report:

“We estimate that $400-450bn of private capital is needed to absorb the credit risk of all $4-4.5trn in government- guaranteed GSE mortgages, assuming a 10% first-loss piece. The private markets cannot raise this amount easily. In our view, a government retreat will need to be spread over at least 10-15 years, not the five years proposed by Corker-Warner.”


Biting the Hand that Feeds the Hand, or..? 

In checking on something else, I stumbled upon this surprising story, which is about three months old. But I missed it when it first appeared. 

Generally major fundraisers do not dump on the legislative projects of those for whom they raise funds. It could make possible campaign contributors think your candidate is a lightweight.

But that didn’t stop Tim Pagliara, the CEO of Cap Wealth Advisors, and a main Bob Corker (R-Tenn.) cash guy.


Maloni’s Movie Opinions

Leonardo DiCaprio and Jonah Hill deserve best actor and best supporting actor Oscars for “Wolf of Wall Street.
Lone Survivor is a gritty and excellent movie.


Maloni, 2-16-2014


Wayne Olson said...

Fairly bizarre that Mr. Maloni doesn't realize that FHFA is an independent regulatory agency (not really part of the Administration) given what we saw from Acting Director DeMarco over the last few years. AD DeMarco did a decent job for the most part and was about as independent as any acting director could possibly be.

Bryndon Fisher said...

Dear Bill,

Thank you for your continued articles and perspective on the plight of the GSE's, their current and former employees, and their shareholders.

I, too, was shocked and delighted with Ms. Morgenson's NYT piece, and I feel we have finally turned the corner with the media bias against Fannie Mae and Freddie Mac. Not that she'll respond, but I wrote to her to thank her for her article.

The future of these two entities seems as bright now as it ever has since they were placed (possibly, improperly) into conservatorship. But, our derivative case against the government will continue forward, nonetheless.

Thank you, again, and cheers for your efforts.

Best regards,
Bryndon Fisher
(USCFC Case # 1:13-cv-00608-MMS)

Anonymous said...

The suggestion that FHFA is not part of the government (and thus is at arm's length from the Treasury) is laughable, and if it ever had any merit, that argument is hurt by installation of a career politician.

The logic there is comparable to me renaming myself George, stealing a car, and when arrested telling the judge that it wasn't me, it was George, while showing a license that says Mark.

"It wasn't me! It was him!"

That kind of low-level sleight of hand is easy for any judge to see through and it's pretty shocking that they are using that weak argument.

Anonymous said...

It is a very good sign that Mel Watt is reaching out to industry in trying to understand the big picture instead of drinking the KoolAid engineered by Paulson, Lockhart, Summers, Geithner... and the many others, all whom have moved on from their high level government positions. Their interest at heart, were not for what is best for the taxpayer, but what is best for their own self promotion. Just look at them now.

If Obama were smart, he would assign Mel Watt to take an objective approach to the matter in understanding what exactly the problems are with the GSEs and how best to fix them. This step in reaching out demonstrates this might now be the case.

As for reform, there is nothing but attempts to lead us into a dark hole of the unknown. Not one reform advocate has yet to acknowledge the fact that the story of the GSEs were a huge success in saving the US economy from collapse. Corker says the government was the hero while ignoring how a structure in place for decades, was able to go back to the basics of responsible loan underwriting. Not to mention the mess they had to clean up from private securitization market.

But as Ralph Nader said, the most important ally will be the National Association of Realtors, without their concurrence, nothing will happen, and nothing is a whole lot better than the garbage that has been proposed.

Anonymous said...

Release the GSEs from conservatorship and require them to maintain 5% reserves and send the same invitation to others so long as they universally enforce strict underwriting standards. We're trying to re-invent the wheel here with nonsense.

Anonymous said...

"Not one reform advocate has yet to acknowledge the fact that the story of the GSEs were a huge success in saving the US economy from collapse. "

Only partially correct. It was the Federal Reserve providing ultra low interest rates and buying MBS who saved it, among other things. But it is correct to say that the GSEs were the enablers behind. Lose the GSEs and the Federal Reserve will be without that structure. They are at the center of the liquidity flow.

Bill Maloni said...

Wayne--Are you suggesting that regulatory agencies never give into political pressure from the parties which appoint them and to the industries they oversee?

If you are, that's what is fairly bizarre.

But, please keep reading and commenting.


Bryndon--And with the amount of money involved, it's likely a SCOTUS issue. The thought I exchanged with someone last night is would the Congress move--in any way--while the "big court" is considering the matter.


Anon--They still remains plenty of Americans--some of them social studies and civics teachers--who believe the little handout every congressional office offers, "How a Bill Becomes a Law," is stone cold the way the legislative process works.


Combining reponses tot he last two "Anons," "Yes" on the NAR and yes, there is a far similar way to improve the nation's mortgage finance system, then C-W advocates suggest.

Wayne Olson said...

. "Are you suggesting that regulatory agencies never give into political pressure from the parties which appoint them and to the industries they oversee?"

No. Independent regulators are influenced by political pressure, which is fair enough given they must follow statutes set by the legislature, can be overturn by the courts, and are appointed by the executive branch. They are also influenced by the industries they oversee and by the customers of those industries, again that's fair enough and isn't inconsistent with the idea that they are independent

Wayne Olson said...

I also want to mention that my fitness trainer thinks that Jonah Hill is overrelated and that his Oscar nominations in Moneyball and Wolf of Wall Street are totally ridiculous. I agree to a certain extent. I'd probably go for Bruce Dern and Bradley Cooper myself.

Bill Maloni said...

Wayne--I am not sure how you would define "independent"--and what it means in terms of policy--if you agree the agencies are guided by the hill and the industries--and companies--they regulate.

Sadly, they are very much influenced by the industries they regulate, as well as the Hill (says someone who worked at two federal financial regulators, before going to Fannie, and spent 10 years closely watching OFHEO/FHFA) evolve. (See the Raines, Howard, Spencer law suits.)

It's the nature of Washington and that saddens me, but it is the fact.

(BTW, keep your eye on Richard Cordray at CFPB, who seems to have taken some strong "independent" stands and, with you, I hope he sticks to his guns.)

Jonah Hill

I can't comment on the other two Hill films and maybe I just was blown away by LD performance, but I thought Hill--as "Donnie Azarov"--pulled off a multifaceted role with great success. I saw about four different people with whom I grew up in his performance.

Reportedly, JH only sought Hollywood minimum, $60K comp, to be in a Scorsese movie.

Wayne Olson said...

I'm working on a book on public utility regulation. FnF aren't really "public utilities" but have been regulated more-or-less like public utilities since 2008. And, FHFA now has the authority typical of a state public utility commission or FERC or FCC. It's not an exact match, but FnF have an "essential facility" that is important to capital formation in the mortgage markets. I've done a couple papers on this stuff, published in Electricity Journal rather than a possibly more relevant mortgage publication. At any rate, FnF has given me a "refreshed" perspective on a lot of standard public utility regulatory issues.

Bill Maloni said...

Good for you and I mean that sincerely.

My understanding of "utility regulation," generally involves some limits on the utility's revenue or earnings.

That hasn't been the F&F case, although, in an ersatz once removed manner, preferred and common shareholders see their holdings rise and fall and that is somehow related to the entities financial performance and the level of ongoing confusion facing would be restructurers.

We're in Plato's cave. Is that a real fire or just reflective shadows on the wall?


Prediction: We haven't heard the last from Gretchen Morgenson on the issue she raised in her column last Sunday.

Wayne Olson said...

"My understanding of "utility regulation," generally involves some limits on the utility's revenue or earnings."

Very true. FnF aren't a typical "public utility," they may have an "essential facility" that is important to the mortgage and real estate markets, they are somehow "affected with the public interest. They are a unique type of "private-public partnership," private capital capital but the gov't can step at times of systemic stress to the financial system. I think we'll end up with the GSEs as state-owned enterprises. The gov't can exercise their warrants, maintain control with an equity stake of 50% or more and recapitalize. Conservatorship wouldn't be needed at that point.

Bill Maloni said...

That's part of an answer, but if Uncle Sam goes that route, I assume the resulting operation would go "on budget, which would be the honest thing to do and a reflection of reality.

Anything less would be subterfuge.

And maybe, 10 or 15 years after that development, the Feds would free the two, which is kind of what happened, initially in 1970,
when the Congress "privatized" Roosevelt's Fannie Mae, created in 1939 as an "on budget" federal agency.

Anonymous said...

Are there any "public utility" mortgage models out there that that have demonstrated long term success? Other countries? This sounds like a socialist idea.

Bill Maloni said...

I'll have to ask around about that

But, I believe--and I may be way out on a limb here--when people discuss "public utility" in the GSE context, they mean a corporate entity tied to a public service goal, in this case the provision fo mortgage finance, with limitation on earnings.

Now when you work that back through the grinder, I am not sure exactly what the exact mortgage model looks like.

I would be shocked if there hasn't been some effort to put more detailed meat on those bare bones.

Again, I'll see what the "community" I can reach says.