Monday, November 3, 2014

DoJ Games, R's Coming on, F&F Earnings

Justice Seeks to Razzle Dazzle Judges
How Long Can it Play the Shell Game?


It makes sense when you have some momentum to try and leverage it and push hard against your competitors/adversaries. 

It happens in many facets of American life, certainly sports, politics, dating, marriage, at work, and in our work places. But I am pissed it’s happening in our courts as the federal government seeks to fend off law suits claiming Treasury and F&F’s regulator, the Federal Housing Finance Agency, violated laws while overseeing the two in “conservatorship.” 

This Administration—its Justice Department—has been urging various US courts pondering “F&F Third Amendment and takings” cases to accept Judge Royce Lamberth’s “the government wins” conclusion contained in his recent opinion, the first of multiple cases heard.

In a decision two weeks ago—which is being appealed—Lamberth ruled there were no Treasury/FHFA violations of law, either of the Administrative Procedures Act (APA) or the Housing and Economic Recovery Act (HERA). Therefore, argues DOJ, the remaining judges—specifically Judge Sweeney in the Court of Claims and Iowa Judge Ross Walters--just should follow Lamberth and dump their cases or “stay” them until a forthcoming Lamberth appeal is heard. 

One doesn’t need to interpret heavily the DoJ filing, because the government makes clear it doesn’t want Sweeney’s approved “document discovery” to move forward. 

That’s why it’s playing the shell game and hiding the pea from the Judges. 

I don’t know how judges feel when lectured or dressed down by defendant’s counsel, told the work they’ve started isn’t important, their opinions don’t matter and they should just chuck their work and buy into Lamberth, especially when the disagreeing plaintiffs’ lawyers already have signaled an appeal? 

But in reading the government’s filing, it certainly looks (and sounds) like their lawyers fear the “discovery,” which, as noted, Judge Margaret Sweeney already approved because she felt she needed those facts to make a proper decision.
I would be offended at the DoJ interference (and I hope Sweeney and Walters are) and continue to wonder what the feds are hiding? 

What’s in those Records?

I joked the Treasury/FHFA files must contain secret “Area 51 and Roswell” alien data because of the importance the feds are applying to them. 

More likely those archives, which DoJ wants kept hidden, reveal Treasury dictating policy to the FHFA,  which in 2008 Congress named the exclusive F&F conservator. I also think there are corroborating records showing that FHFA abdicated the conservator’s responsibility, ceding it to Treasury, when Treasury created the confiscatory “Third Amendment.”  

Also. there is ample evidence that Treasury/FHFA wrongly read the mortgage future tea leaves, when very quickly the 2012 GSE earnings turned upside down Treasury’s original 10% dividend repayment plan and prompted Treasury to substitute its “2012 sweep,” seizing every penny F&F earned.

Ergo, 20 lawsuits law suits. 

Lamberth convinced himself that he didn’t need discovery because he argued the law was clear on the subject and federal authorities could do whatever they wanted to F&F. Something, as a layman, I thought was extreme and which I hope the appeals court overturns. 

Several lawyers claimed to me Sweeney will not yield to the government’s pressure, but will go forward with her trial. 

Can you say, pariah, children?

What concerns me is this is the case is about Fannie and Freddie. The principal plaintiffs are hedge funds. Neither the GSEs nor the hedgies—for different reasons--are loved or respected and therefore may not get the full benefit of the law. 

“The Hammer Expounds” 

Here is what David Fiderer, whom I labeled the “Hebrew Hammer,” for his forceful opinions, thinks about the Lamberth decision which the Administration wants adopted by any court reviewing F&F issues.

At first blush, it looks as if Judge Lamberth did not read the statutes carefully, or perhaps he is financially illiterate. He seems to imply that FHFA can do whatever it wants, with no judicial review, ever.

He cites, one section, 12 U.S.C. § 4617(b)(2)(A)(i), which says, “No court may take any action to restrain or affect the exercise of powers or functions of [FHFA] as a conservator or a receiver.”

But FHFA’s powers as conservator are not unlimited. FHFA’s power must be exercised for a specific purpose:

(D) Powers as conservator

The Agency may, as conservator, take such action as may be—

(i) Necessary to put the regulated entity in a sound and solvent condition; and

(ii) Appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity. 

FHFA cannot make up its own definitions of “sound and solvent,” which is the crux of the case. Anyone who knows what financially “sound” means, or what “solvent” means knows that FHFA’s choice to prevent F&F from ever growing retained earnings, and making cash distributions in excess of $90 billion, to cover the pre-period adjustment that restores deferred tax assets, is antithetical to its stated powers.

Judge Sweeney wanted FHFA to demonstrate that it was acting as an independent entity on behalf of F&F, but FHFA has been stonewalling any and all requests to hand over the records to demonstrate it did. 


A Little Forked Tongue on F&F? 

Speaking out of both sides of one’s mouth is DC standard fare, but when the action suggested is more positive than the verbal flip side, I’ll can live with it.

I am referring to the latest rumor I heard that some Admin and/or FHFA people are suggesting to lenders and mortgage industry interests, “Watch what we do, not what we say.” 

If true, somewhere inside this Administration--and make no mistake, while FHFA claims it’s “independent,” the Watt version it is very much part of this administration--some gnomes* are doing the Lord’s work and trying to make it easier for F&F to provide more support for low and moderate income families.

More power to them because after next week’s elections, the anti-GSE cacophony will grow.

(* For those of you old enough to remember 20 years ago, Freddie Mac had a massive and continuing ad/PR campaign portraying themselves and their corporate efforts as “housing gnomes,” capable of doing wondrous things.)


How Far Will the GOP Rise and Will It Fall? 

I expect that by the time most people consume this blog, the Senate will have turned to the GOP or it will be razor thin; the House will increase its GOP strength, and while there could be one or two Senate races not called, the Democrats will pray for enough votes (at least 45 or more) to stave off 60 Senators voting to overrule Obama vetoes, since those should be multitudinous as the congressional GOP seeks to choreograph the 2016 presidential election.

Here Come the R’s; D’s Not Looking Good 

One the eve of the November 4 contest, it doesn’t look hopeful for the Democrats, not only because President Obama and others have observed that off year elections always penalize the party controlling the WH, but because this President has suffered horrendous Hari Kari policy choices and lame implementations.

It’s his fault, as well as those who have counseled this likeable but underwhelming chief executive. 

The constant GOP obstructionism and conservative media abuse have accelerated Obama’s and his D’s weaknesses. 

If the next Democrat presidential candidate is not an alley fighter, capable of delivering policy and political knockout punches, she/he should not seek the job.

Democrat Hope in 2016? 

Barring a massive political catastrophe which leaves them no prospects even in two years, D’s have to hope that the build up to 2016, when the GOP has 24 Senate incumbents up while the Democrats only have 10, might allow them to reverse the nation’s growing anti-D attitudes. (See POLITICO story link below.)

The Democrats will need the congressional GOP to barf on itself and produce a continuous array of Lilliputian presidential candidates (i.e., Rubio, Cruz, Christie, Romney, Palin, Kucinich, Perry, Jindal, and Bachmann) seeking the brass ring in 2016. Democrats will need to prevail in the big electoral vote states in 2016 and hold onto a few purple states.  

Even with both of those happening, turning red states could be a step too far.

GOP Could Set an Ugly Policy Buffet 

To me all of this just portends a higher pitched “more of the same’ political behavior we’ve seen for the past two years, as the R extremists seek not to govern but turn back the clock to an era long gone. 

No doubt, we are in for a boatload of right wing shrieks and war cries against: immigration reform, Benghazi, tax reform (lowering the corporate rates but not closing loopholes which favor the 1% and their allies), abortion rights, women’s issues, minority voting rights, any cuts in military spending, minimum wage increases, limitations on political spending, education outlays, global warming advocates, tighter or any additional Wall Street reforms, gun control, movement away from fossil fuels, Benghazi (I know I said it once) and much more. 

If I am right—I hope I am not--and the R’s prevail heavily, it means a large segment of the American public will be convinced to vote--because of social issue frustrations—against their own economic self-interests,  owing to Right Wing zealots frightening voters into forgetting how our democracy is supposed to work. 

They will fear monger middle income Americans into believing that black and brown citizens don’t deserve to share in initiatives that have helped generations of American, no matter their ethnicity, color, or heritage, climb the economic ladder. And the irony here is the beneficiaries of these GOP voters won’t be the millions of their faithful” but primarily those at the top or the “1%.”  

We’ll see and hear a lot of GOP, “I got mine, so let’s pull this ladder up behind us, disguised as cutting federal domestic programs. 

That’s shortsighted, punitive, and dangerous.


What’s This Mean for F&F?

In this context—and despite a slight chance of Frank Lucas (R-Okla.) taking the House Banking Committee from Jeb Hensarling (R-Tex.), I don’t think GSE restructuring legislation is any closer than my previous 2017 prediction, until one party owns both houses and the presidency. 

More on Lucas


The House in 2015 will be more conservative than it is today. I would be very surprised if the House GOP Caucus signs up for any bill which looks like CWJC, keeps F&F alive, and adds more than $5 Trillion to the federal budget, as both prominent Senate bills did.


Fannie and Freddie Earnings 

The Washington Post reports in its Sunday edition that Fannie Mae and Freddie Mac earnings will be announced on Friday, 11-7 (not sure how the paper knows), but let’s go with it.

(I enjoy the Post’s hypocrisy on these matters, because it editorially it calls for an end to the two entities, which it deems government agencies, yet dutifully trips over its biases and reports their earnings and stock performance.  When was the last time federal agencies traded on the US stock exchanges, Mr. Post?)

With decent mortgage market volume in the third quarter, I anticipate both F&F’s revenues will be solid—with few systemic credit losses--and they may even contain a little extra cash from legal settlements courtesy of the Justice Department and mandatory GAAP reporting. 

Kobani, etc. 

Come on DOD (or State Department??), what exactly is the problem in getting major weaponry (beyond M-16s and ammo) to the Kurds?

So much heavy weapons material already has fallen to ISIS through Iraqi Army theft, defections, desertions, and retreats, what’s to lose by giving tons more to the Kurds who seem willing to stay, fight, and maybe advance?

Hell, they could recapture some of that Iraqi booty from the ISIS bad guys.

What Others Are Saying? 

University of Maryland’s Dr. Clifford Rossi on “Urban Legends.”

Dr. Rossi participated last week in a conference sponsored by Tim Pagliara’s “Investors Unite” group, which supports the court cases and some resurrection of F&F.

Post endorses some new version of CWJC (Gag!),
Says Bipartisanship Should Prevail on This One


The Center for Economic and Policy Research Responds to the Above Post Editorial


Some thoughtful reader at CEPR cut to the heart of the Post’s call and suggests the editorial’s thought paucity.


Ex-GI fights for Kurds

(Note in the video, this kid says he has no bullet proof vest; if I knew how to reach him, I’d send him money for a bullet proof vest or buy him one! Anyone have a personal or family email for him??)


Lebanon--One More State to Monitor


GOP Corner 

A GOP Senate? 

WPost: Cold Shower if the GOP Wins?

GOP Senate, a Short Lived Victory??? 


Everybody, D’s and R’s, vote on Tuesday and take your eligible family members/friends with you or encourage them to cast their ballots.






Anonymous said...

Mr. Maloni, with all due respect,

||What concerns me is this is the case is about Fannie and Freddie. The principal plaintiffs are hedge funds. Neither the GSEs nor the hedgies—for different reasons--are loved or respected and therefore may not get the full benefit of the law.

The plaintiff for the case before judge Sweeney is Fairholme Funds. This is not a hedge fund and in fact, is radically different.

Mr. Berkowitz, who runs the Fund, has offered the government "help" as much as he did while invested in AIG, has provided Treasury with a specific win-win comprehensive plan and last but not least, seems to be wearing the American flag quite often. Not to mention he follows Mr. Buffett's precepts when it comes to being a steward of other people's money.

This guy, opposite to hedge funds, should be liked!

Bill Maloni said...

Anonymous--Thank you for the correction, duly noted.

However, not knowing Mr. Berkowitz but hearing that the visits around DC by plaintiffs and their reps were not well received by the public officials, I think my point--unfortunately-- stands.

While I don't agree with it, I believe that in the minds of many in DC--even in the GOP--investors who bought the proffered and even the common for cents on the dollar
("bottom fishers") somehow don't deserve their support. I believe that's wrong.

What's the difference between "bottom fishing" and buyers who invest on dips and secure a low basis?

Bill Maloni said...

Anonymous--Thank you for the correction, duly noted.

However, not knowing Mr. Berkowitz but hearing that the visits around DC by plaintiffs and their reps were not well received by the public officials, I think my point--unfortunately-- stands.

While I don't agree with it, I believe that in the minds of many in DC--even in the GOP--investors who bought the proffered and even the common for cents on the dollar
("bottom fishers") somehow don't deserve their support. I believe that's wrong.

What's the difference between "bottom fishing" and buyers who invest on dips and secure a low basis?

Qualified Observer said...

Hey, *real* links! Nice work (as ever).

Continued thanks.

Bill Maloni said...

Thanks QO--Just as I repeat that I am "not a lawyer," I also remind people that I am a "tech idiot" (you should see the changes I go through to transfer the blog from Word to the BlogSpot site), so when I get it right, it's close to miracle time.

Matt Hill said...

What DC is not thinking about is that for every hedge fund pestering them, there are hundreds of us commoner folk out here that were just trying to make a good investment in the housing turnaround. We turned out to be right, but are cast into the fire as well.

Bill Maloni said...

Matt--the issue here is who contacts House and Senate members and staff and how they communicate.

There is a "Hill" tendency to ignore mass mailings which carry the same message. As noted, there also seems to be a bias when they hear from hedge fund representatives.

But an outpouring of original and individual letters and emails about an issue could open a few sets of eyes and a mind or two.

It generating that type of outpouring from your "hundreds of commoner folks (whom I have no doubt exists) that creates what you seek.

Anonymous said...

Bill...I believe you've discussed it before, but what's your take on the CSS these days? With Applegate slotted for the top job, it appears things are clearly moving forward with that platform. Not sure where I ultimately come down on it, but could this (as some will argue) be seen as a step towards a combination of the two and/or an eventual re-shaped release?


Bill Maloni said...

Anon--Certainly this development--which I have contended is absolutely unnecessary and a waste--could herald a combining of F&F, but that still would require an aggressive Administration and draw complaints from the industry which I believe like the idea of two competitors.

Notice that the announcement--which likely was written by FHFA--had the Freddie's crowing about a single security (since their MBS trails in strength and popularity, ergo price) and Fannie's more non-specific endorsement.

That's institutional ego at work.

(I still believe that Watt merely could have asked the heads of F&F to detail 30 each of their best and produce this security design in anywhere from 6 to 12 months, obviating any need to create a Delaware corporation, rent a building, blah, blah, blah.)

Eventually the F&F MBS will become identical; standardization traditionally has been good for the mortgage market and a common security will add to market efficiency not signal the demise of the GSEs (although that's what Ed DeMarco sought with this exercise).

That will take a much more ambitious and lengthy campaign.


Anon--I am going to highjack you post just to note:

(1) that Freddie earnings are coming on Thursday and, likely, Fannie's on Friday.

(2) I'll do a more detailed political analysis in the next blog, but nothing happened yesterday that dramatically changes my F&F legislative outlook or surprised me, save Mark Warner's very close call in Virginia.

Bill Maloni said...

Nice (and predictable) earnings reports.

Anonymous said...

My understanding is the current Basel accounting is not conductive to securitization, because if forces unreasonable capital to be tied up every time there is a securitization, thus rendering GSE's unable to securitize outside the conservatorship. My further understanding is GSE's are an exception under Basel, because they insure the collateral. The banks removed this roadblock by lobbying, and GSE's type of insured securitization is unrealistinc if they ever get out from the protection of the conservatorship.

The way I see CSS, and it's not being discussed at all, is a way to avoid the punitive capital requirements inherent in GSE's securitization accounting. CSS is a financial services firm, thus it's not subject to the same accounting as GSE's, and they can actually securitize MBS without punitive accounting of keeping all collateral on the book as marked to market assets, and liabilities (MBS bonds) as non market to market debt. Plus there is no added capital requirements that render GSE's unable to securitize, as they would need heavy capital requirements. So CSS is essentially a way around against unreasonable accounting rules, that are blindly accepted, because only GSE's are affected. They don't want to change the rules, so they create a work around, i.e. CSS.

What I don't know if either can move all the trusts under CSS, and stop with insane accounting, or it will be done in the new business to smoothly transition from those trillions on the balance sheet.

Bill Maloni said...

Anon--Sorry for the delay, but as per my post, I was busy trying to recreate the next blog (now complete) which will go out tomorrow (Tuesday).

Let me cut to answer, nobody (Hill or WH) will let the CSS--created to do one thing--somehow become a new amalgamated GSE, onto which you can mount baubles, like a Christmas tree, and hope to avoid Basel or any other applicable mortgage finance laws or regs.

Yes, clever and creative people like you can suggest those approaches and cite what the law might eprmit, but there isn't enough support--let alone creativity and paths with no political or business obstacles--which would husband your idea.

That's cold water in the face and doesn't answer everything you asked, but I think it an honest response.

I believe Congress--and especially this old and the newer version next year--doesn't do creative and flashy ideas.

It's conventional, traditional, and stodgy.

Anonymous said...

Bill, I understand what you are saying, but without CSS, GSE style securitization (self insured loans) are dead. The demand for pools is very limited, and structures like CMOs are dead. It could be CSS was created for whatever else pols want to do with it, but this is the only conduit these companies have of creating reasonable securitizations without shooting themselves in the foot.