Wednesday, October 15, 2014

Preserve F&F, New Voices and Ideas



Fannie and Freddie as Utilities


Some “F&F resurrection” suggestions emerged from the “inside the Beltway” ideas cauldron this past week, not surprising in their concept but for their sources.

I’ve written before that I have a lot of respect for Karen Shaw Petrou, who along with husband Basil, runs DC’s Financial Analytics Company and long has represented bank clients.

Over the years, I’ve disagreed with some of her/their positions, but last week Karen Petrou penned a piece  which I think is the kind of pragmatic, clear headed approach to Fannie-Freddie mortgage finance issues that seldom surfaces, at least from those not labeled “F-F fans.” 

Petrou endorsed converting Fannie and Freddie into government sponsored “utilities,” although she’s not the first one to offer that thinking.

Here is a link to KSP’s report in which she writes about this possible approach. 


Now the Devil always is in the details when these kinds of suggestions pop up. But when someone with Petrou’s congressional bank cred and gravitas advocates a solution, it could attract those who knee jerk oppose anything which keeps Fannie Mae and Freddie Mac alive (which is why some years ago, I suggested the GSEs be renamed Thing 1 and Thing 2).

Presumably, the new “F&F utilities” would have ties to the federal government, be regulated as to prices they charge and revenue they can generate, but still would be permitted to respond to market demand and provide affordable mortgage finance throughout the nation, utilizing common products and prices, facilitating standardization and securitization.

Again, KSP isn’t trailblazing here, but she also doesn’t start with “destroy the GSEs.” 

What I like most about Karen Petrou’s approach is that she acknowledges the folly of disrupting the US mortgage finance system, with some questionable behemoth replacement substitute. Her inherent disdain reflects her veteran sense that whatever Congress views as the F&F successor will have significant negative financial and systemic costs, as well as jeopardizing the fixed rate mortgage which Americans desire and have come to expect. 

Petrou is clear headed and non-emotional in discussing GSE alternatives.

Left unsaid—which is not really her job—is that traditional utilities have true private shareholders. This model must have that characteristic, too, if working capital is to come from outside the government.  Petrou’s F&F should primarily securitize but might need to hold some loans in portfolio especially if the latter don’t lend themselves to easy securitization.

Constructively recreating F&F has virtues, unless the “Kongressional Keystone Kops” just opt to punish or be punitive. That approach would be as much a non-starter as the SBC favoring Senate CorkerWarner-JohnsonCrapo (CWJC) legislation. 

As a knowledgeable friend described the virtue of the “utility” model-- with FF having access to capital, private shareholders, and utility regulation-- “The benefits of lower returns on capital (through regulated pricing), less required capital, less intrusive regulation and access to a federal backstop all would flow through to homebuyers.  The trick will be getting the balance right.  Too low a permitted return and investors won't put up the capital for these "utilities;" too little capital or regulation and the risk to the taxpayer goes up.” 

Use F&F Earnings to Recapitalize 

The other positive suggestion came in an American Banker article from University of Maryland Business School professor, Clifford Rossi.

Rossi says forget legislation, the answer is for the Obama Admin to employ its existing regulatory authority to recapitalize F&F and stop taking all of their earnings. (Poor guy is being logical, but he is trumpeting what I said months ago.)

Rossi echoes the incompetence of the legislators and the breakdown of the legislative process in arguing that this major change should be done via regulation, since the Hill can’t agree on much and its paralysis has a  cost.

When it comes to F&F, the difficulty is instituting any agreed upon changes—given how riven the Congress is—which is why Rossi calls for the WH to  use its embedded authority to declare F&F have sufficiently repaid the Treasury and how best to get them  back to work.

Beyond the “stop the sweep and use their earnings to recapitalize,” Terrapin prof Rossi doesn’t describe what F&F’s relationship to the government would be. That would be crucial especially when they enter the debt markets.

Tim Howard 

Judge Margaret Sweeney has more on her mind, i.e. Lamberth decision and DOJ agitation for her to follow Lamberth’s lead, than Tim Howard (former Fannie CFO, not the blogger with that nom de plume), but she still hasn’t ruled on letting plaintiff  Fairholme retain Tim as a consultant, an action to which the government objected.

The government argued that Howard might abuse the information he peruses via “discovery.” But Howard—if hired—would be bound by the same Sweeney “discovery” rules and sanctions as all other Fairholme employees and lawyers.  

DOJ’s position really screams of discrimination because Howard toiled at Fannie and has spoken out that the former Fannie regulators erred (how about acted dastardly and with venom) in their Fannie treatment and their false claim that he and others violated securities laws, an allegation later thrown out by a federal court judge in 2012.
(Sweeney disappoints; see new note at the, added 10-15-2014.) 

AIG and Fannie and Freddie


Even though the F&F and AIG cases have some duplication among counsel and common use of the phrase “takings,” they are different, since the institutions are different. 

AIG’s lawyer, David Boies, certainly is eliciting some embarrassing (for them) responses from Hank Paulson and Tim Geithner over the government’s rationale in taking over the AIG insurance company, re impact on investors and possibly vindictive thinking which influenced their decisions. 

Given an opportunity—c’mon Judge Sweeney, don’t stop now-- the public should expect to see more of that and more tortured government rationales when/if Ted Olson—Perry Capital’s lead attorney--gets to question Geithner, former FHFA Director Ed DeMarco, current Treasury Secretary Jack Lew and maybe Bernanke and/or Paulson. 

If Hank Paulson’s book notes—which surfaced during the AIG hearing  and crowed over his “nationalization of Fannie and Freddie”-- indicate that he and other federal officials publicly said one thing, but behind the scenes acted with intent to do something  harmful and destruction, those could be an ugly set of court deliberations. That especially would be the case when most in Congress thought they were voting to “conserve” F&F for future revival and operations. 

With regard to the case before Sweeney, the F&F conservator, FHFA—which I described last week’s as “Tonto” to the Treasury’s Lone Ranger”-- reportedly has very few records of its deliberations, especially on the “third amendment,” which Treasury seemed to drive and control. 

So, who in the Administration was controlling what and what were their  objectives when all of F&F’s earnings were aggrandized?



Lamberth and the Appeals Court

Below is my comment to a friend when he observed that Judge Lamberth’s decision was not supported by the underlying statute and that Lamberth ignored certain protocols.

“Unfortunately, this just causes me civic heartache, because if Lamberth can rule this way--given what we all perceive are his ‘mistakes’--why should we have faith that the appeals court will rule differently?”

(The lawyers among you will know that there are at least two more levels of appeal, if the Appeals Court doesn’t overturn Lamberth.)


Fiderer article


Below is a link to David Fiderer’s very thoughtful article on structural flaws in the private label mortgage backed securities market (PLS), which is what loan securitization is called when the guarantors are not Fannie and Freddie and also a scheme inherent in most of the anti-GSE legislation in Washington.

In 2005-2007, when the banks and the investment banks last tried this business venture in huge volume, they unleased on the world more than $2 Trillion in soon-to-fail, poorly underwritten and scandalously rated mortgage backed bonds (you know, all of the stuff the GOP seems to ignore), which failed in numbers and percentages far greater than anything, in the same era, which had F&F’s stamp on them.

The reason why the big banks and their allies were hot for the SBC CWJC bill was because it provided government insurance for those private label MBS losses.

Yet for policy makers, Fiderer’s well-argued column is what they need to understand when they attempt to throw sand in the gears of the US mortgage market, which heavily relies on loans being turned into bonds so that investors—not limited insured bank deposits—finance the bulk of America’s future homeowners. 

Panetta on Obama

In his new book, the portrait former Secretary of Defense Leon Panetta (and also former CIA head) sketches of Obama sometimes makes the President look more like a college professor than a chief executive (sound familiar?).

“He relies on the logic of his presentation, with the hope that ultimately people will embrace that logic and then do what's right. You know what? In 50 years, my experience is logic doesn't work in Washington. You gotta basically go after people and make them understand what they have to do. And that means you create a war room. You go after votes. You push people." 

Carter on Obama (Ouch!) 

Former President Jimmy Carter joined the “Let’s kick Barack” crowd when he, too, suggested that the President waited too long to engage ISIS and let them build momentum in Syria before they moved into Iraq. Oh and Hillary suggested the man who appointed her to the top State Department job also kind of screwed up, too.

Maloni on a Limb….. 

Contrary to what President Obama has vowed, I believe that there will be “US boots (back) on the ground” in Iraq and elsewhere in the Middle East within the next year. (It’s important to clarify, no matter what the WH says, I am sure there already are many US contract and special forces combat personnel at work in those countries, but my prediction has to do with recognized US military units publicly joining the fray.)

If things get worse, which seems likely, the Pentagon and the American people will get frustrated relying on foreign troops who have different priorities to fight ISIL, plus these bombs-only assaults, which few tangible results, tend to get very costly $$$$$. 

The President’s anti-ISIL declarations already have “written bigger results checks than politically he can cash,” especially if he doesn’t OK US forces in combat. 

What Others Are Saying 

Economist Justin Wolfers handicaps Senate races in NYT column.


Senator Elizabeth Warren (D-Mass.) unloads on just about everything in Salon interview. (Thanks, JV.)


Turkey’s Big Price for Engaging ISIS/ISIL


In conflicting opinions on whether Congress will soon pass mortgage reform legislation, consumer activist Ralph Nader and Sen. Mark Warner (D-Va.), sharply disagree. 

Warner “Yes way”

Nader “No way”


As per usual, I think Warner is all wet and wrong.


NY Post Says Ackman Buys More F&F Stock??


More on AIG


Texas Not Turning Blue?

I’m disappointed, I know I’ve contributed to Wendy Davis’s gubernatorial campaign in hopes of her winning.


GOP Corner

Republican Bozell Spanks Karl Rove; Says Rove

Doesn’t Like “True” Conservative Office Seekers



Some details on which Palins did what to whom in their famous ‘trailer trash” brawl.


Juicy Unverifiable Rumor:  Reportedly, because plaintiffs don’t trust the US government to provide all records in “third amendment discovery,” there was a story of big dollar bounties being offered for sensitive docs. That all may be bubkis, but if government employees do withhold, some whistle blower is going to speak out.

Added on 10-15-2014

It's Not Fair, in fact it sucks!

As you age, you see more and more that strikes you as unfair. Today was a day for one of those mean spirited and senseless things. 

Judge Margaret Sweeney sustained the government’s objection to Fairholme hiring Tim Howard and an expert consultant to participate with Fairholme’s lawyers in the “discovery” which Sweeney earlier this year had approved.

I guess it could have been worse, she could have reneged on her initial discovery approval. 

Sorry, I don’t buy the government’s argument that Tim might misuse the information he might have seen, while subject to the same Sweeney discovery gag order which applies to everyone who sees the information.

Maloni, 10-13-2014



Matt Hill said...

This will get out of hand soon if the government doesn't fix this asap. Main street isn't as dumb as they think it is and these court cases are making them look very bad. Even if they do end up winning the cases, irreparable damage is being written into the history books as we speak.

Bill Maloni said...

I'll be out tomorrow (Monday) with a new blog and clearly the WH is backing off as they plan to give new tasks to F&F to carry out.

But, on a broader scale I hope you are correct.