What's Up With Dick?

 

 

Dick Shelby and the Shelby-Corker Bill?

 

The headline font diminution was intentional, because SBC Chairman Dick Shelby (R-Ala.) lists only himself as the sponsor of his major banking “reform” proposal—issued last week--yet everyone knows the additional lacerating GSE language was supplied by, Shhh, Sen. Bob Corker (R-Tenn.). 

So, did Shelby get Corkered? Only Chairman Shelby can answer. 

(Read Josh Rosner scathing review of Chairman Shelby’s notions below in the “What Others Are Saying” segment.)

 

Shelby “knows his onions”

I don’t blame Shelby for not wanting Corker as an early named co-sponsor, let the Tennessean slither in later. But just what is Dick Shelby up to?  

With Shelby, it’s easy to suggest, whatever it is you think you see, in mini-this omnibus package, you don’t see at all; too many hot buttons and unearned benefits, he’s more stealth than this. 

The senior Alabama Senator is one of the shrewdest, most cautious, smartest vote counters and pols I’ve seen (did I mention prodigious fundraiser), with a war chest estimated 2 years ago at @$18 Million. Senator Shelby is up in 2016 for re-election. 

It’s clear on the surface: his discussion draft appeals to small and community banks (small cha-ching); will make the TBTF institutions ecstatically happy (big time cha-ching); screws the Federal Reserve Board (more bank and Conservative cha-chings) by diluting its power and spreading it to other reserve banks, and likely repulses many F&F supporters, by prohibiting steps that this or future administrations might take to free F&F from some of “conservatorship’s” indentured servitude dictates. 

There also is the major sop to some of the MBA, TBTF and Financial Services Roundtable guys (Dick, tsk, tsk, the friends you maintain), that unnecessarily legislates schemes to turn the GSE’s “Common Securitization Platform (CSP)” project  into a pig trough for the large bank community making them CSP board members.

 

So does this all just mean continued great fundraising for a guy who doesn’t need that much help and seldom faces tough Democrat opposition? 

Certainly, but Shelby’s more than a grand fundraiser, he’s a smart legislator. So, I am looking forward to the continued evolutions of this script—publicly and behind the scenes--and the inevitable changes when Democrats and other stakeholders divine what the Chairman is really doing and raise their voices? 

 

Shelby’s (Corker’s) GSE-CSP Proposals

 

Let’s step back a moment and go to 30,000 feet for a “big picture.” Like most things involving major mortgage moves, this set of ideas when/if it becomes a numbered Senate bill--assuming the GSE stuff stays in—is all about who will control the nation’s mortgage markets.

 

GSEs Versus the Big Banks? 

Someone needs to explain to “America” why these ideas are the very “camel’s nose under the tent” I labeled them last week. 

When they ponder it, do people living in those reliable GOP “red states” really will trust large commercial banks-- either on their own or controlling the nation’s mortgage finance system--to give consumers a better deal than they now get from local, regional, and national lenders working through the Fannie and Freddie systems? 

Besides the Congress (but, illogically, not their own Senator or local Congressman), the banks rank high in those institutions least liked or least respected by consumers. (Latest Gallup poll I could find.) 

http://www.gallup.com/poll/171995/confidence-banks-remains-low.aspx

 

Shelby-Corker’s CSP step is totally gratuitous because there is no hurdle stopping the major banks—or subset thereof, like the fat cat Financial Services Roundtable (FSR)—from putting together their own CSP project, funding it,  producing a broadly accepted common security, and letting it compete for the US mortgage backed securities market. 

It could be the GOP dream of a “private security,” created by the best non-government minds money can buy, right? 

Ooops, but the flaw--as we all know--is that those bonds will be guaranteed by those same financial institutions which most investors don’t trust as far as they can bench-press the bank’s CEOs. (Hmm, you don’t think anyone is thinking of extending federal guarantees to those private label securities, do you?) 

It was these same “Bigs” who totally soured the non-F&F mortgage backed securities punch bowl in 2005-2007, with their version of private label securities (PLS) which the world still is cleaning up. (Ooops, see Nomura and Royal Bank of Scotland last week.)

Why do the banks want in? 

But there is something near term attractive for the banks, Senator Corker (and Shelby?) getting their grips on FHFA’s CSP and trying to position themselves to get back in the MBS game, from which their own systemic shortcomings have barred them. 

Sweet, Because it’s Taxpayers’ Money 

I suspect part of it is because all CSP work is funded by F&F and paid for by the taxpayers, since those F&F revenues if not used for GSE business needs go right to/come from the Treasury’s general fund. 

It looks like Senator Bob still wants to crush F&F, but before doing so he wants them to pay his big bank buddies to dine at the GSE common platform table. His next step will be to let the banks take over that government funded platform and then turn it into the CSP into a “non-profit,” whatever the Hell that is?  

And that’s fine with the banks, why should they pay anything—or even repay F&F for what they’ve already invested in the CSP--if Uncle Sam (thanks to Senator Corker) will pick up the tab for them? And they get the red-white-and blue patina for whatever they would do. 

The seldom GSE-helpful MBA executive, David Stevens  was quoted this weekend saying—he has been lobbying for the Shelby proposal and  hoped that the housing finance provisions would gain support once Senators grasped what was being proposed. "I think it's fairly well understood that not all of this can go through," Stevens said of Shelby's overall package, "but the question is there enough to agree on." 

Come on Dave, poll your members and see if they really want F&F to disappear. Don’t forget to share those results. Word is your smaller guys like the GSEs (as do some of the larger ones, too), but why listen to them, right?

 

Other Shelby Propositions 

There are Too Big to Fail (TBTFs) instituions and G-SIFIs. Give those G-SIFI’s some room, boys. From Wikipedia, “A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis.” 

SIFIs are almost always bank holding companies, sometimes with dozens or more subsidiary companies. They’ve always been ad hoc monitored by the US and international financial regulatory authorities, with the Fed formally proposing rules for the US SIFIs last year. 

Some Senators don’t like those rules and believe they are constraints. 

Afraid that these big financial institutions might get too closely watched, Dick and Bob also want to force the Fed and the Financial Stability Oversight Council (FSOC)—made up of other federal regulatory heads—to individually review certain financial conglomerates worth up to $500 Billion in assets, with an eye toward reducing their regulatory burden rather than automatically categorize them based on size ($50 Billion) as now is the Fed’s intent. 

The Senators’ goal is to remove as much “government regulation” from a few multi-hundred billion dollar financial institutions, which complain they are creaking under Uncle’s tough thumb? 

The duo gets there when they would raising the current SIFI regulatory threshold from the piddly $50 Billion of assets to $500 Billion; any holding company in the middle—with size of $51 Billion to $499 Billion--are those Senators want the federal financial regulators to back off a bit. 

No risk there in principle or fact, right guys? 

Needless to say, those likely are many of the same financial giants which have violated a bevy of federal laws and regulations, paying fines in the billions to Uncle Sam. 

Those hardly are the people who need more help from the GOP; haven’t they filled their relief quota a few times over? Yep, those are just the people who need more help form the GOP. 

Anyone else see really undesirable patterns here? 

 

Smalls Banks and Shelby Legislation

A few words to my friends—and they are my friends— representing the US community banks and who may be mesmerized by the “reg reform” features Chairman Shelby is huckstering. 

There is no free lunch in DC; be careful for what you sign up because there will be a reciprocal “ask.”

 

My own message to the ICBA  

Cam Fine, there’s a reason why your members fear the big guys, don’t forget it when appraising this plan.

As mentioned, there’s a review below of the Shelby proposal by Graham Fisher’s Josh Rosner. I urge you to play particular attention to what he sees major bad for the smaller depositories. 

Let me add some thoughts from very wise former colleague of mine, who has a gut feel for all issues banking, big versus small institutions, mortgage finance, and the salubrious impact of US financial regulatory regime. 

I share your sentiment that the beneficial effects of regulatory relief are muted if the broader support structure for community banks and their customers are eroded.  

Included in such an erosion would be legislative proposals weakening the Federal Reserve, including its vital lender of last resort functions.  

Or proposals inflicting further existential damage on Fannie

Mae and Freddie Mac leading to greater financial concentration.

And its evil twin-- greater systemic risk.  

If Fannie and Freddie are even more severely handcuffed or taken out can the third housing GSE, the Federal Home Loan Bank System, survive over the longer term?.

As regards the Federal Reserve I support former Fed Vice Chairman Don Kohn's position as told to the Financial Times, " I want the Fed to be able to do what it was founded to do in 1913, which is liquefy illiquid assets for solvent institutions that are suffering a loss of confidence because of fire sales and panics that threaten real economic activity.” 

 

This current Shelby bundle makes that desired/necessary Kohn position much tougher.

Shelby’s Fed attack and loosening the not very tight SIFI reins doesn’t make a hell of lot of political tactical/strategic sense to me, going into mid-term and presidential elections next year.

As noted, I feel very comfortable saying the public dislikes and doesn’t trust the TBTF banks, whether they are HQ’d in NYC, Charlotte, San Francisco, or Wilmington, Delaware.

 It could backfire on the Chairman and the Republican party. 

And everyone needs to realize “TBTF” doesn’t just apply to a half dozen behemoth financial institutions.  

In a “government bailout” context, TBTF is an existential term, which at the time bad things hit, gets applied to dozens of major US firms, all designated at the time by a combination of the Fed, Treasury, and White House (with some in Congress trying to butt in and get their constituent companies serviced similarly). 

If you don’t agree, look recently at F&F, GM, Chrysler and dozens of major banks not in the top 20, and before 2008, federal bailouts of Penn Central Railroad, Chrysler (again), Lockheed, and New York City. 

US Government Bailouts

http://www.propublica.org/special/government-bailouts 

 

The last thing Shelby item I will note--having worked both at the Fed and on the Hill--is we don’t anyone, certainly not the Congress or the Government Accountability Office (GAO, often called Congress’s investigative arm), tampering with Federal Reserve monetary policy functions which is what’s at stake in the Shelby plan. 

 

What Others Are Saying 

The Hill newspaper on the Shelby package.

 

http://thehill.com/policy/finance/241761-shelby-proposes-sweeping-financial-overhaul

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Graham Fisher’s Josh Rosner talks about the Shelby legislative cache.

http://www.scribd.com/doc/265320340/05-14-15-GF-Co-Has-Sen-Shelby-Gone-Corker 

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The NYT editorial board calls out SEC and DoJ. (C’mon government guys, you have to be able to find a few miscreants on Wall Street, right?) 

http://www.nytimes.com/2015/05/16/opinion/breaking-laws-in-the-mortgage-bubble.html?action=click&pgtype=Homepage&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region&_r=0 

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Peter Eavis--Nomura and RBS, Redux 

JUDGE RULES BANKS MISLED ON MBS — NYT’s Peter Eavis: “Many on Wall Street have long argued that the banks did not generally break the law when they packaged shoddy mortgages and sold them to investors in the lead-up to the financial crisis of 2008. But on Monday, in the starkest of terms, a federal judge dealt a strong blow to that version of history. She ruled that two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained numerous errors and misrepresentations. ‘The magnitude of falsity, conservatively measured, is enormous,’ Judge Denise L. Cote of Federal District Court in Manhattan wrote in a scathing 361-page decision.

“The ruling came in a closely watched case brought by the government against the Japanese bank Nomura Holdings and Royal Bank of Scotland. They were the only two of 18 financial firms that took their case to trial, arguing that it was the housing crash, and not deceptive loan documents, that caused the bonds to collapse. The other firms — including Goldman Sachs and Bank of America — settled, together paying nearly $18 billion in penalties but avoiding a detailed public airing of their conduct.” 

http://mobile.nytimes.com/2015/05/12/business/dealbook/nomura-found-liable-in-us-mortgage-suit-tied-to-financial-crisis.html?hp&action=click&pgtype=Homepage&module=first-column-region&region=top-news&WT.nav=top-news&_r=1&referrer=

 

Here comes Bethany McLean, again 

Good friend and previous GSE author, Bethany McLean (“All the Devils are Here,” with co-author NYT’s Joe Nocera), is writing another GSE book—solo this time, in conjunction with Columbia University--it will be out this fall, according to Ms. McLean, one of our favorite reporters/writers. 

“Shaky Ground: The Strange Saga of the U.S. Mortgage Giants” (Paperback) 

She has promised me, if it goes to film production (rights to the last one did), I can approach Antonio Banderas to play me. (But first, he has to promise to bring his former Desperado co-star Selma Hayek to rehearsals with him!!)

 

2014 List of G-SIFI’s

http://www.financialstabilityboard.org/2014/11/fsb-announces-update-of-group-of-global-systemically-important-banks/   

(A new list will be published in November, 2015)

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Washington Post, why Jeb Bush had “the worst week in Washington.”

http://www.washingtonpost.com/opinions/who-had-the-worst-week-in-washington-jeb-bush/2015/05/15/a39f7b02-fa72-11e4-a13c-193b1241d51a_story.html?hpid=z9

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Maloni, 5-18-2015