Monday, August 11, 2014

Book the ++ GSE Performance, Don't Fight It



F&F Second Quarter Cash Gives Prez
A Golden Chance to Lock in Success



What wonderful, superb Fannie and Freddie earnings! (Of course, in its classic “the glass is half empty” mode, the Washington Post’s headline writers wrote that F&F reported a drop in profits.)

The numbers were truly scintillating and timely for several reasons.

I hope mortgage market observers and Hill policy makers took serious note of last week’s GSE earnings, allowing them to send $5.6 Billion more to the Treasury/the taxpayers ($Fannie’s $3.9 Billion and Freddie’s $1.7 Billion).


Who’s on First? 

The payments to Treasury are under that screwy arrangement where F&F never ever can pay back the capital invested in them in 2008. Ask your Congressman to give you a common sense explanation of that transaction which a layman can grasp. 

Now work with me on this: because F&F didn’t start making money until 2012-2013, their 2009-2010 first payments, in part, were for cash borrowed from the Treasury to pay the Treasury interest on @$140 Billion of principal actually infused. That “interest” pumped the actual GSE debt amount to $188.7 Billion. 

But, why quibble over details, since OMB, CBO, and Treasury can’t agree on what F&F are or did in a federal budget sense? 

(Did I mention that F&F were stuck with a 10% interest rate, while the banks paid just 5%; ask your Congressman about that, too.) 

As most know, the Tim Geithner 2012 “Third Amendment” dividend change--that swept all Fannie and Freddie earnings to the Treasury--now is being challenged in court by different 17 plaintiffs. 

When F&F send Treasury their next quarterly disbursements in September, the two (in two years) will have paid back to taxpayers $208 Billion or roughly $20 Billion more than they were given or $60 Billion more if you somehow deduct the money borrowed to pay for the money borrowed. (No, this is not an Abbot and Costello comedy routine!)

Judge Sweeney Yet to be Heard 

Obviously the courts will deciding the “sweep and takings” matter on its own schedule, a decision which likely—but not automatically--will be challenged in the Supreme Court, but with no sense of when (or no guarantee this conservative business friendly court will want to hear the case, especially if the plaintiffs prevail). 

Just on the face on them—before looking beneath-- the earnings say that F&F have done a good job  holding up the nation’s mortgage finance system and delivering to Treasury (in lieu of shareholders, for now) healthy multi-billion earnings that would delight stock analysis and stockholders. 

F&F have both. But they all live in an “Alice in Wonderland” world where earnings mean little and the pronouncements of congressional ideologues or right wing think tanks count for more than financial results.

Let me make two observations, consistent with my ongoing suggestion that caught up in their ass backward myth that F&F caused the 2008 financial meltdown and need punishing, the White House and Congress are failing to take credit for a good story but also whiffing on a chance to cement in place much of the system which exists today, with little of the drastic and complex legislative architecture that many on the Hill propose as a solution to “What do we do with Fannie and Freddie?”

How about this, just do very little or nothing?


Solid Earnings Squared! 

Read both between the lines of the earnings statement as well as the exact words of their execs. (Both companies likely know right now that they will be profitable throughout this year and into the next and likely could give you a good estimate of what those 2015 numbers might be. But, why spoil the fun?) 

What we saw last week is going to be standard fare for the next several quarters.  Notice that neither company had any major credit losses undercutting their reports, which suggests that the positive numbers should continue for a long time as the quality of their quarterly business books gets better and better. 

Unless Congress enjoys beating its head against that concrete wall represented by housing interests, Realtors, Homebuilders, small and regional non-TBTF banks, and myriad other constituent and interest groups, it should look at the positive side. Congress has the opportunity—if it seizes the day--to fix its mortgage finance roof when it’s bright and sunny and not raining.


CWJC et al, Not Needed, Too Complicated

The nation’s mortgage markets don’t need the kind omnibus overhaul many mindlessly are demanding because advocates misunderstand mortgage finance or its diverse politics and are hung up on the false GSE fictions from 10 or more years ago.

Obama Opportunity 

This would be a perfect time for the Obama Administration to remove Uncle Sam’s teat from the big banker’s lips and use its bully pulpit to support a regulatory revival of F&F, letting the GSEs retain some/part/all of their current earnings for their necessary recapitalization. 

The two are healthy, sending money to the General Fund, and Congress has no real momentum to do them in and give away the mortgage market to the big banks (nor should they!). 

To appreciate the scale of the big bank corruption  and systemic degradation, count all of the fines and penalties that the big guys have paid Uncle Sam—in the past two years, mainly for screwing over Fannie and Freddie --and then add to that number the more $700 Billion the banks lost on their own subprime private label mortgage backed securities (PLS) misadventures, done outside of the F&F systems, and  you have pretty stark evidence about which institutions do not deserve to be handed functional control of the nation’s mortgage markets. 

The link above doesn’t include the recent BoA reported $17 Billion fine and Citicorp’s reported $15 Billion payment to the government.


Ignore All But Limited Fixes

Every business day Fannie and Freddie operationally work--and, with primary market lenders--supporting American families needing mortgage loans. 

If required--and I have no issue with it--legislation can be written to explain that the Treasury/Fed won’t come a running if there are any future mortgage market problems (which should be marginal as long as the two only securitize or occasionally buy QM loans).


Congress Would Make TBTF Banks Bigger  

The silly thing is how much Congress rails against Fannie and Freddie and professes concern about “preventing the next time,” while, simultaneously, cobbling and proposing new legislative mortgage arrangements for the nation’s biggest banks which everyone knows already are “too big to fail” and don’t evidence anywhere near the regulatory and financial control the government holds over the two mortgage giants. (Oh, and the Senate bill would add still another level of regulation on the big banks with its Federal Mortgage Insurance Corporation.) 

Is that just congressional hypocrisy or idiocy? 

Iraq and Obama 

No matter what President Obama does in his term’s remainder, his critics will vilify him for being too late, too lame, too aggressive, too Black (oops), or something. 

As I keep reminding the President, no matter what you do in DC you’ll be killed for being a sheep or a wolf; you are not running, again, so don’t be anyone’s lamb chop.

Someone has to start a pushback to IS/ISIS/ISIL and it might as well be us, minus the boots on the ground (although we all know we have Special Forces types all over the place, killing folks and siting for attack planes).

Take all the help you can get from the governments of Britain, France, Germany, the Saudi’s, Lebanon, Turkey, certainly Iraq, the Kurds and even Iran—the last few being your effort's needed foot soldiers--and have them make it lavish—or their heads could join those poor IS victims, already violated. 

And remind the Russians—whom you never should trust—that they have some internal Muslim concerns themselves. If they want to kick in some help, keep the nesting dolls, but divert a few hundred Spetsnatz and their military supplies now headed for the Ukraine (or even pull a few out of Syria).

What Others Are Saying 

Joe Light writes about F&F earnings in the WSJ.

Rob Garver, writing for Yahoo, notes that the DoJ and Treasury might have discovered a major new tool to pursue banks for financial shenanigans, as illustrated by the reported $17 Billion Bank of America (BOA) fines/payments to the US.


Thoughtful piece by NYT’s Binyamin Appelbaum on Stanford University finance professor Anat Admanti, an academic who scares banks. 

The New York Times editorializes on Sunday about the faint of heart federal financial regulators overseeing the TBTF banks. (Regulators captured by the banks? Don’t those editors read my blog?)


The Progressive Policy Institute (PPI) opines on F&F legislative steps or lack thereof. (Read through to comments.)

WaPo attempts to read the President’s mortgage thoughts. (Read through to comments.)


Maloni, 8-11-2014


Unknown said...

Mainstream Media missed the real earnings story. Fannie N Freddie earning money without the Bank settlements and Loss reversals from the DTA and over reserves.

I also noticed the pvt mtg voice coming out in favor of raising the G-fee but Slowly.

Bill Maloni said...

What you said!!!

Anonymous said...

Bill your questions and comments regarding the Treasury Dividend Sweep can be easily explained by searching the internet for the Ma and Pa Kettle 25% divided by 5 video.

Anonymous said...

Bill, I see that Ma and Pa math video is hard to find because of copyright laws or perhaps the US govt. bought the rights for next years budget. Anyway a transcript...

I figure 75% to you and 25% divided between the 5 of us, that makes 5% for each one of us.

Aa ah ah, Billy you're cheating yourself. If there's 25% divided among the 5 of you. That's 14% a piece.

Oh no, listen Pop. I wouldn't cheat you, you know I wouldn't. Now look here.

Now 25 divided by 5 is 5. You see. 5 won't go into 2, will it? But, 5 goes into 25, 5 times.

You're wrong Billy. Now, I'm a pretty good mathematician. Now, 5 into 25. 5 won't go into 2, will it? But 5 goes into 5 once. Now, we didn't use the 2 before so we'll bring that down. Now, 5 goes into 20 goes 4 times. There you go 5 goes into 25, 14
No, look Bob, Now let me prove it too. 5 times 5 is 25.

I'm surprised at your learning. What? I'M SURPRISED AT YOUR LEARNING!
Now I'll show you. 5 times 14 is 25. 5 times 4 is 20. 5 times 1 is 5. 25 that's it.

No, no. Your wrong. I'll prove it to you. I'll put down five 14's here. I'll prove to you by addition that 5 14's is not 25.

4.. 8.. 12.. 16.. 20..

21 22 23 24 25
There you go. You better brush up. I don't want to see you boys cheated.

Bill Maloni said...

Anon!--Priceless, no pun intended!

if you use Ma and Pa Kettle examples, you hinting at your age and it likely makes you a Maloni contemporary.

But, can you see some of those Hill geniuses explaining what their government has done to the folks back home?

Anonymous said...

Hey Bill...wake up! Seems like wagon's are a circling and a posse forming. It doesn't look good for those lying thieves.

I think this will go down in history as one of the biggest debacles ever.

One day before I die, I'm going to put together a first hand account of this heist, with illustrations of the players that attempted to fleece this great country.

Whatta ya say, you in?

Bill Maloni said...

Always interested in creative approaches to tell a story that needs telling.

To be serious, the tale has to be told very simply to cut through the density or bias that many display who need to hear the "takings" truth.

The court cases--there is an 18th after today's Ackman suit--carry that potential possibility. If Judge Sweeney decides for the plaintiffs, it will be clear that she has no observable axe to grind ("dog in the hunt") and will call it as she sees it.

If she rules that the federal government &*^%$# up (possibly willfully), then lots of people will have insight into mammoth governmenterrors, likely punitively motivated.

It's one thing to make a mistake, but another if it was designed to intentionally destroy.

From what little has come out, in spinning this yarn, it appears as if the government lawyers are firing nails into their own sensitive body parts.

There will be a small but very useful piece on this issue in my next blog.

Unknown said...

August 17, 2012 2 year anniversary of the taking coming up!!

Bill Maloni said...

Duly noted.