Monday, June 2, 2014

Millstein & Parrott Disagree Over F&F Changes


Cats and Dogs* Redux 

(*Several people have asked where the term “Cats and Dogs” came from as my blog uses it. When I ran Fannie’s GR operation, I would prepare a daily report for a select group of senior company officials on industry, political and congressional issues. I labeled it “Cats and Dogs,” because of the variety of matters and people included. Occasionally I steal the title for blog matters.)

Jim Millstein and Jim Parrott 

The “Jims” mentioned above, both former officials in the Obama Administration (and more), have had a wonderful back and forth over the months generally disagreeing over the future course for Fannie and Freddie, with Millstein—who now runs a named for him consulting group, has written and testified in support of a F&F revival through aggressive regulation—which is writing closer to my heart. 

Parrott, working now out of the Urban Institute, seems to find the Obama Administration’s desire for legislation more to his liking, which is way distant from where I am. 

I hope the congressional and media worlds are watching these two guys and paying attention to Millstein but not ignoring Parrott, just yet. 

My rub with Parrott is his false case for the status quo, when it comes to making significant regulatory changes—meaning no Congress--to the F&F conservatorship, as Millstein advocates. Although buried in Parrott’s material is the concession that   creative lawyers likely could make those Millstein changes happen (“From your lips, Mr. Parrott…”).
If the President (this one or the next one) stood up and supported a comprehensive regulatory change to the F&F conservatorship, I think Millstein’s plan, largely, could be achieved.  

Yes, people (the Hill) would bitch and complain, but that occurs with every Obama initiative these days and the same thing could happen to his successor. 

FHFA Director Mel Watt has declared he has the authority to make conservatorship changes, which seems to undermine Parrott's "can't do that." 

Here are links to the recent Millstein and Parrott exchanges. (Thank you Guggenheim’s Jaret Seiberg for alerting  me to Parrot’s response, after I sent him Millstein’s.)

Phill Swagel 

I had a very enjoyable first meeting (lunch) last week with Phill Swagel, formerly a Treasury official for three years under Hank Paulson. He is currently a Professor in International Economics at the University of Maryland School of Public Policy, a non-resident scholar at the American Enterprise Institute, and a senior fellow at the Milken Institute

We were joined by Rob Zimmer, a longtime friend/colleague, one time Fannie and Freddie (sequentially) lobbyist, who currently represents a group of community lenders. 

Needless to say the three of us discussed a variety of GSE related matters, most of which won’t be mentioned here. But, in response to one question I did ask him, Swagel was adamant that Hank Paulson--in trying to work out details of F&F conservatorship--was not motivated by any latent GOP ideological desire to end the companies, a point I and others have made in the past. (He was equally clear that Paulson’s absence of bias wasn’t shared by others in the Bush Administration working on this project.) 

Unlike some of us in the conspiracy world, Swagel believes that Paulson knew the nation would need F&F for some time into the future, to manage the nation’s mortgage finance system, and the Secretary’s pragmatic approach meant to insure that near term result. 


Federal Financial Regulators 

Having worked at two federal financial regulatory agencies and closely observing—as well as interacting--others, I am familiar with the agency version of the “Stockholm Syndrome,” where federal regulators overly identify with and sometimes become protectors for their regulated institutions. 

At FHFA (and OFHEO before that), I never felt the agency cared for the Fannie and Freddie and, at times, wished them ill will often acting to create situations designed to injure the companies. 

Not very many rose to the level of the 2004 infamous OFHEO bogus finding that Fannie’s senior execs committed securities fraud, a charge which fundamentally changed the nature of the company’s mission direction and ushered in new leadership which chose to chase down yield and profit buying copious amounts of soon to fail private label subprime securities. 

Eight years after that fact, a federal court dismissed all of that “securities fraud” BS with a resounding decisions. But—as I’ve noted before—the near term institutional and long term personal damage was done.

Recently, much of that negative ardor has been muted, but not totally erased. (Fixing that would good chore for the new Director to take on once he gets settled in his new post.)

What this particular rant is aimed at is the report's tone which produced the recent headlines, such as those in the articles linked below, based on the FHFA’s annual “Fannie Mae and Freddie Mac “stress tests, which the agency published a few weeks ago.

After reading the agency report, my position is simple when will FHFA ever highlight the GSE very good news? 

The Very Good News

Fannie and Freddie have been in “conservatorship” for about 6 years and under very strict rules governing the types and quality of loans they securitize.
By every public report extent they each have put on exemplary business books in the past four or five years. They have trimmed their old “legacy” portfolios and some of their old bad loans have cured or moved beyond the shaky stage, as property values improve. 

Fannie and Freddie are not the financial basket cases they were in 2008, when this Kabuki dance began, and it behooves someone to take note of that and not endlessly feed the insatiable inside the Beltway “F&F “suck and deserve to die” mentality. 
The stress test report—or any subsequent commentary--failed to allude to the mitigating notable achievements and some encouraging differences between today and six years ago, which bear positive attention and likely more accurately reflect the financial state of the two entities. 

As most of this blog’s readers know, F&F now have, together, returned to the Treasury the $187.5 Billion the taxpayers infused in them six years ago. They have accomplished this with an additional cushion of about $20 Billion dollars which likely increases in each remaining 2014 business quarter. 

All of this repayment occurred, since the Treasury took the dramatic step in 2012 of ending the original F&F 10% dividend payment to the Treasury (interest on their outstanding debt) and replacing it with a total “sweep” of all their annual revenue. 

When something focuses on F&F limited capital—as the stress test report did--it also should note that it’s pretty hard for any company to establish protective capital when someone rakes every penny you make, over and above your administrative costs, taxes and financial obligations.  

My back of the envelope estimate (which could be a scosh high or low) is that, had the 10% dividend stayed in place, the two—between them—would have @$135 Billion in capital to pledge against any future losses. 

Fair is fair (although not very often in F&F’s case), whether required by statute or not,  why doesn't FHFA mention those facts, instead of only putting out a report which talks about worst case with no real context about positives?
In a twisted way, that success speaks to a good regulatory story. 

Even though Treasury took that unorthodox step initiating a total profit “sweep”—which is being challenged in court via 17 different lawsuits against the Treasury—the FHFA seems to have done little to point out that Fannie still has on its books about $45 Billion in loss reserves and Freddie has an additional $24 billion to protect against downturns.  

Could a sudden and sweeping real estate down turn wipe out that protection? Maybe, but the entities are not as vulnerable as they were six years ago, if the FHFA Doomsday scenario hits. 

Their combined @$70 Billion in loan loss reserves—which also grows every quarter--would likely stand them in pretty good stead if bad times return. 

Today, the two have less at risky assets and large loss reserves, but what would the federal government do if that protective cash was eaten up in a broad real estate setback, detach itself from F&F? 
Not likely, they own them until the courts or Congress same something else.

What Others are Saying 

--This excerpt from last Friday’s Inside Mortgage Finance attests to something worth watching and relative to ongoing Fannie Mae and Freddie Mac congressional/media/policy discussions. 

The IMF information reported on refers to Mortgage Bankers Association members which are depositories themselves, affiliates of bank holding companies, as well as some independent mortgage businesses (not subs). 

I think it reveals that an important segment of the lending community, along with the smaller community banks of the ICBA and the credit unions, represented by NAFCU and CUNA, like the availability and role of Fannie Mae and Freddie Mac. Think about that Congress (and those of you in this or the next Administration). 


(Note: I assured Guy Cecala, IMF’s publisher, and Paul Muolo, one of their senior journalists, that—contrary to popular rumor—I never employed Luca Brasi at Fannie Mae!)

--As an occasional critic of some of this Administration’s overseas actions, I thought Tom Friedman’s Sunday New York Times column made some excellent points about the world scene Barack Obama must manage. 

Maloni, 6-2-2014

(Happy 77th birthday, in four days, to my only sib and late brother, Louis G. Maloni, 6-6-1937-2003. Maloni family joke; too young to land at Normandy; too ill for Vietnam; save me a seat, unless you’re in Hell!)



(Comments and questions invited and welcomed; see below. There are no "silly" GSE questions.)














Anonymous said...

Bill, what do you think that the Carl Icahn investment means for F&F?

Bill Maloni said...

Anon--That their stock prices will rise, near term, and they did.

Again, everything that happens to push up the F&F preferred and common is less about corporate performance than it is about the court decisions--when they come--and speculation about Congress and the Admin.

The broader the appeal--evidenced by investors buying their shares--translates into some deeper political support, however.

But, Congress (in general) will express outrage about hedge funds and their principals (and principles) but take their campaign money just as readily.

Bill Maloni said...

Anon--I guess I should have added in my original response to your question that Icahn has that "mystery" element about him and a corporate raider persona, which will cause some people to think there's value wherever he puts his money.

That alone may be worth a point or two, near term, in the stock prices.

Anonymous said...

What a weird combo Ackman and Icahn. I agree that Icahn is a little more mysterious in that you don't know whether he will be a passivist or a raging tyrant. I bet the latter

Bill Maloni said...

I would have been far more impresses had Buffett and Munger bought in (and I guess there still is time for that), but if you are an investor, it's odd lot developments like this that helps rev the prices.

I'm still intrigued by how Icahn bought the stock from Fairholme at such a good and timely moment.

Anonymous said...

I am willing to bet that Icahn will be a political and legal tyrant.

Bill Maloni said...

Well, Icahn's track record suggests that kind of behavior (said the guy who bet California Chrome, yesterday).

Not sure what all CI can do to agitate the government into doing things which could benefit him or his current F&F stock position.

Also, if he acts out (some might say "when"), it could negatively impact Fairholme's investment holdings and I guess Bruce B. OK'd the Fairholme stock sale to Icahn.

Might be fun to watch his antics as the summer unfolds--and where he puts his political contributions.

BTW, that all is public information through the Federal Election Commission's website.