Lots of F&F Bull S--- Flying Around, Thanks to the Government

 

 

Happy May; Let’s Hear It for Warm Weather

 

Three GSE major happenings this past week: the sudden appearance of a second conservatorship implementation memo from Treasury’s Jeff Goldstein, written in 2011 (AKA Goldstein 2.0); an Alex Pollock/Mark Calabria,  AEI/Cato, respectively, proposal, which effectively does away with F&F but pretends it doesn’t; the FHFA’s publication  of its F&F “stress test”, devoid of practical reality—even in the world of theoretical financial crisis--but a document which allowed the political crazies, like Sen. Bob  Corker R-Tenn.) to bloviate about his GSE agenda.

 

Treasury Memo

 

Not being a lawyer –instinctive sensing how it might play in the dizzying remaining GSE court cases--and not believing in coincidences, I think somebody (former Treasury official?) gave Goldstein 2.0 to an obscure publication, hoping to stir things up—politically and legally—as the leaker sat back to see who among us bayed at the moon loudest and most effectively. 

He/she must be disappointed. I didn’t sense any mountains moving in the Court of Claims (Judge Sweeney), in the Appeals Court (Judge Lamberth’s peers), on the Hill, or among the media. I could be wrong, but....

 

The expected comments/questions about Goldstein’s memo run the gamut.

---“It’s the smoking gun (for the plaintiffs).” (I don’t think so.)

---“It’s been out before and Lamberth and Sweeney have it.”

---“It was withheld from Lamberth and Sweeney, both will be pissed”

---”It makes clear FHFA wasn’t running the show, contrary to what the law (HERA) stipulates.” (Tru dat!)

---”Where’s the reference to the taxpayers money being ‘invested” not loaned to F&F.”

---“The memo claims the GSEs only need between 3 and 4% to capitalize their business.”
---”It shows the Obama Administration just followed the agenda that Paulson previously developed.” (That theme is David Fiderer’s favorite, as well as for several other sources.)

---”Looks like the big plan always was to do away with F&F, giving the primary and secondary markets to the TBTF banks.” (We may have a winner!)

---“Will Goldstein be deposed, if he hasn’t already?”

---“If the report was withheld, will Sen. Grassley go after the Treasury and DoJ for their shoddy antics?”

---“It says they should be reprivatized after getting recapitalized. But how can they get capital, if Treasury keeps taking….”

(Naturally and par for the course in DC, on Friday night, as this blog was being drafted, there were rumors of additional “heretofore secret memos”  circulating and soon to be revealed.)

 

Maloni’s Take

 

While I was delighted to see this document emerge, I sense the very smart lawyers at the big firms working this case know all about the memo and the issues contained. 

My conclusions don’t change, the Hill doesn’t care enough to do anything and likely can’t for the reasons we’ve been identifying for weeks. 

So far, the courts seem to think that hedge funds dwell in that  the part of our economy doesn’t merit benefit of the laws. And, at the end of the day, the delays are only screwing Fannie and Freddie, right? 

Voters have no idea of what’s going on and how conservatorship will impact them.

 

If/when it happens, the public won’t understand until it’s too late. 

The public will get upset when F&F are gone, which will be too late,  and suddenly consumers find themselves paying more for fewer mortgage options—including much more for fixed rate financing, if its obtainable--and not liking the control lenders wield over them and their choices.

Right now, it’s all about convincing those jurists still in the action—ultimately the SCOTUS--that the US government lied, bent and likely broke the HERA law, had little intention to preserve and restore Fannie Mae and Freddie Mac, made some really dumb financial and political moves--which they are having trouble hiding or disguising--and which they hope to slow walk long enough to let them get out of town and leave the mess in Hillary’s or Jeb’s lap (Oops, or Bernie’s?).

Maybe some new disclosures will turn up the heat on the White House and the courts and maybe even Congress, but I ain’t betting the grandkids' college funds on it.

 

The AEI and Cato Cooperate on Killing Fannie and Freddie?

 

This past week, the AEI’s Alex Pollock, whom I know, and Cato’s Mark Calabria, whom I don’t know, proposed keeping Fannie and Freddie going forward as mortgage market participants.

Huzzah, hardly?

From some GSE corners, their views were welcomed and seen as the Right retreating from doing away with F&F and moderating or expressing a new Conservative vision.

Nope. It’s the same-o, same-o; lipstick on a pig, an old fish in new paper, which still is going to stink. 

I am not being purposefully negative. I like Pollock from his days running the Chicago Home Loan Bank and I thought Calabria’s work with Krimminger rebutting the “sweep” was very impactful.

But, while they take away a lot from F&F, they aren’t giving them squat. 

There was a lot unsaid in their proposition, but they made pretty clear all of the things that they want F&F give up to attain the Cato and AEI “seal of approval.” 

But anyone who wants F&F in the market financing American homes should want them to have some systemic tools to do the job.

In an email, I asked Alex, “What would be left for after the AEI/Cato haircut.

“What would be left is just two very big financial institutions among a number of others. Of course, they have to get their actual leverage capital ratio up to 5%, but after that, they prosper or don’t like every other big bank.”

 

So F&F would forfeit all the benefits Congress has given them over the years to finance a secondary mortgage market and facilitate the primary mortgage market, where people visit a lender to get a home loan? Would lenders even want to use them, since, absent a re-creation of the GSEs, who/what would manage the mortgage risk that lenders don’t want? What becomes of the secondary market?

In order to pave this level playing field, would banks give up access to the Fed’s discount window, the “non-conforming” mortgage market where the big guys alone operate because F&F are denied that segment by law, estimated to be 10% of all mortgages written but 25% of the dollar volume?

Banks have FDIC insurance which affords them a huge federal benefit in their cost of funds, since most of their working capital comes from the checking and savings accounts (remembering what you are earning on yours?) which consumers have in the banks. Would that go?

Currently, there are some $3.5 Trillion in deposits insured by a $50 Billion FDIC insurance fund.

Can Fannie/Freddie then take deposits, too, and is that desirable, if you want a healthy, diverse set of financial institutions, in size and function, serving the nation?

Alex, Mark, and thanks for your GSE required “4% to 5%” capital level, when even this Administration says it should be 3% or so.

I see fish some old fish being wrapped and I see a porcine lipstick container.  

Look out for this idea, America.

 

The FHFA Stress Test Report! 

Let me offer my hardly non-analytic view of the FHFA’s Fannie and Freddie FHFA stress test report, which came out this week, speaking of smelly fish.

Here are my simple musings, which shouldn’t be ignored just because they are based on common sense. In the blog, later, I’ll add the technical perspective of an expert.

 

How many in the media or on the Hill reacted to the numbers (“Fannie and Freddie may need an additional  $157 Billion taxpayer dollars, if…”) and didn’t look at what’s behind the tests, didn’t notice that most of the catastrophic predictions are about accounting not real every day earnings and losses. 

Let me keep it simple, we all (friends and foes, alike) want F&F to have more capital. 

But, how can any company survive an extreme “stressing," when the F&F regulatory agency, in real life,  hypothesizing and then applying this theoretical has cooperated in stripping the company of any earnings it requires to protect against the terrible conditions forecast in the stress test??

What does this report say about FHFA, when the only have two companies to oversee and they can’t devise a protective regime which allows the GSEs to generate enough capital to protect themselves? Is that a comment on the companies or the regulation and regulator?

For the blog readers looking for something other than my musings, the following opinions should be widely read read and shared.

 

Bill:  

I couldn't help but notice that, just as occurred during the 2008-2011 period, the Treasury draws produced by these stress scenarios are almost entirely the result of non-cash accounting losses (most of which would be reversed in future periods) rather than operating losses.  For Fannie Mae, the operating results of the stress scenario-- pre-provision net revenue ($19.2 billion) less credit losses ($24.9 billion) -- are a pre-tax loss of $5.7 billion, or $3.7 billion after-tax. The only reason such a loss would require a draw from Treasury ($1.3 billion in this case) is that Treasury has taken all but $2.4 billion of the company's retained earnings over the previous three years as part of the net worth sweep.

 

The range of Fannie Mae stress scenario Treasury draws-- from $34.2 billion to $94.9 billion-- is almost entirely the result of assumptions FHFA makes about the non-cash accounting expenses the company would book in the stress scenario.  There is a high degree of subjectivity in these expenses: many may not occur at all, and most others would, if incurred, likely be reversed in subsequent quarters.  What makes them problematic is the fact that by design all draws from Treasury are non-repayable.  So non-cash accounting losses push up draws, eroding the "remaining PSP funding commitment," while reversal of those accounting losses go straight to Treasury as part of the net worth sweep without reducing prior indebtedness.

 

All three "problems," of course, are of FHFA's and Treasury's own making, and have little to do with how Fannie Mae runs its business.  The need for Fannie Mae to take a Treasury draw to cover its stress test operating loss is driven by its inability to retain capital because of the Treasury-FHFA net worth sweep; the much larger losses (and Treasury draws) produced by the stress test stem from FHFA assumptions about non-cash accounting charges; and the erosion of PSP funding capacity occurs because Treasury made all draws of senior preferred stock non-repayable.  Treasury and FHFA easily could reduce or eliminate each of these problems, but to this point have chosen not to.    

 

 

If one understands how FHDFA constructed its test, thoughtful people wouldn’t issue a thundering and damning press release, suggesting the FHFA report proves that he--and his “do away with F&F” colleagues—have been right. (Below is a press statement form Sen. Corker’s office website.)

 

Corker: FHFA Stress Test Yet Another Stark Reminder of Need for GSE Reform

Report Shows Fannie Mae and Freddie Mac Could Require $157 Billion Taxpayer Bailout During a Future Crisis

WASHINGTON – U.S. Senator Bob Corker (R-Tenn.), a member of the Senate Banking Committee, today released the following statement regarding a Federal Housing Finance Agency (FHFA) report that indicates government-sponsored enterprises Fannie Mae and Freddie Mac could require a $157 billion taxpayer bailout to keep them afloat during a future crisis.

“Today’s FHFA stress test is yet another stark reminder of the need for Congress to wind down Fannie Mae and Freddie Mac and reform our housing finance system,” said Corker. “With control of both houses and with the amount of effort that has been put forth to develop a bipartisan, bicameral consensus, this Republican-led Congress has the opportunity to demonstrate it is serious about protecting American taxpayers, and I hope we will not let this opportunity pass us by.”

 

I think this suggests Corker and his staff are less thoughtful and more “GSEs...fire, ready, aim” folks. 

Senator Bob, get back on that Iran thing, you are doing so well, there. 

 

What Others Are Saying

 

Capitol Cops—protecting GOP leaders--leave guns in the crapper.

(“I thought he told the Speaker he needed to go shoot..?” )

http://www.cnn.com/2015/05/01/politics/capitol-police-leave-guns-in-bathroom-stalls/index.html

 

Inside Mortgage Finance on what small bankers encountered on their Hill visits. 

Short Takes: Dead Silence on GSE Reform / EverBank Dumps More MSRs / Brian Libman’s Work History / The Ocwen Watch

By Thomas Ressler, Paul Muolo

tressler@imfpubs.com, pmuolo@imfpubs.com

The Independent Community Bankers of America held its annual legislative conference in Washington Wednesday and in the morning session there was scant talk from elected officials about the most important issue facing the industry: the future of Fannie Mae and Freddie Mac. Industry observers speculate the silence suggests that both lawmakers and industry executives believe nothing substantive can happen on GSE reform until a new president is elected with a decisive majority in both chambers…

A “Tweet” from the WSJ’s Nick Timiraos.

 

Nick Timiraos ‏@NickTimiraos Apr 24

Of all legal challenges by shareholders of bailed out companies, the GSEs' may have the best case

 

 

Does “Goldstein 2.0” help the GSE litigants?

 

http://www.marketwatch.com/story/treasury-document-helps-fannie-freddie-suits-analyst-2015-05-01

 

What Dick Bove thinks…. 

“Did Treasury Lie to Courts?” 

http://www.valuewalk.com/2015/04/fannie-mae-freddie-mac-dick-bove-calls-it-a-bombshell/

___________________________________________________________

 

Maloni, 5-4-2015