Monday, October 19, 2015

Lots of Corker and Will Stegman (Follow Weiss) Rebut Political Alpha?

(Can't ignore Antonio Weiss' Monday morning article dumping on recap and release. He ignores seven years of GSE regulation which make a return to pre-2008 days next to  impossible. But he also seems to conveniently forget what the TBTF depositories and investment banks did in the same era. They had to be bailed out at an even greater cost to the taxpayers, and their regulation--despite the rather weak Dodd-Frank law--has not been significantly improved. Weiss is another shill for the big banks, who came know where so I don't have to even mention that place. I'll write more about Weiss and the WH position later, but get ready for Mike Stegman to repeat the same drivel.)

Does Senator Corker Understand
Financial Issues and  Institutions?

The Sen. Bob Corker (R-Tenn.) soap opera continues in an embarrassing, bumbling but possibly revealing manner.

A few paragraphs below, I share a personal educational experience and suggest why I see my own history in Corker’s personal vexations.
He was frustrated. Frustration that he most recently displayed at the Bipartisan Policy Center conference--when he ran up the legislative white flag of surrender--and then, again, last week with his TV opinion that the GSEs could move forward and survive as “utilities.”

Think about that, in barely a week, he flew from “wind Fannie and Freddie down” to “keep Fannie and Freddie alive as utilities.” That’s an extreme policy trek flip-flop which only feckless or not very bright politicians make, hoping they won’t get called on it.

In between, there was Corker’s “private gain and public loss” F&F claim, then a call for investors to “short” the GSE preferred and common stocks, and constant references to them as “hedge funds.”

When I first came to Washington, working as a press and legislative assistant for a Congressman on the House Banking Committee, he asked me to support his committee work, for which I had no formal education or vocational background (my degree was in journalism and political science).

That thrust me abruptly/immediately into the arcane world of financial services and banking system relationships, which were as foreign to me, as ordering from an exotic Asian dipping menu.

Frankly, I faked it.

I bluffed my way through issues and meetings, getting by with nodding approvingly and smartly employing “buzz words,” at appropriate times in conversations with constituents, media, and other staffers. Without totally comprehending them, I would drop financial phrases like “McCarron-Ferguson, thrifts, Reg Q, the differential, Davis-Bacon, the Fed, and Glass-Steagall*,” as if I knew what they all meant. (*They all refer to major housing and banking matters of the early 1970’s.)

In my first 18 months on the job, I didn’t have the core knowledge of mortgage lending and financial services. But I listened hard, asked a lot of questions, and learned fast. Soon, I knew how the parts fit together and when and how to “operate the engine.” (The first part was factual and history, the House politics.)

The difference between Senator Corker and me is while we both shared ignorance, I wasn’t a US Senator making floor and other speeches, expounding in the media, sputtering in the hearing room, getting flustered on television, and spouting off these phrases and concepts—eventually exposing my lack of knowledge—while pretending I grasped them all and their relationships.

The “does not know” cubby hole where I now place Sen. Bob Corker. (He shouldn’t feel alone, since he has a lot of congressional company.)

Despite all of Bob Corker’s ranting, raving, and media preening, he really doesn’t know much about the financial institutions and operations he rails against or how they worked in the past and now work.

The Senator still is thundering about the GSEs portfolio interest rate risk, even as both Fannie’s and Freddie’s portfolio risks are slowly cured or are sold off, when that hasn’t been an issue for years. Today, it’s all about F&F increasingly pristine portfolios possibly encountering future credit risk.

However, that hasn’t stopped Corker from uttering—as he has many times—the GSEs are “hedge funds” (once again, an out of touch but “hot” sounding charge); or  they engaged in “private gain and public loss;” they should be abolished; investors should “short” their stocks, and most recently, maybe they could be “utilities.”

He gets attention with his ignorance. Some examples…

Corker: The GSEs are “Hedge Funds”

(Here is a definition of hedge funds.)

“A hedge fund is an investment vehicle and a business structure that pools capital from a number of investors and invests in securities and other instruments.[1] It is administered by a professional management firm, and often structured as a limited partnership, limited liability company, or similar vehicle.[2][3] Hedge funds are generally distinct from mutual funds as their use of leverage is not capped by regulators and distinct from private equity funds as the majority of hedge funds invest in relatively liquid assets.[4][5]

The name "hedge fund" originated from the hedging techniques used by some of the first of these funds. Over time the types and nature of the hedging concepts expanded, as did the different types of investment vehicles. The term came to represent many of these types of investment vehicles, so hedge funds today do not necessarily hedge.[1] Hedge funds invest in a diverse range of markets and use a wide variety of investment styles and financial.[3]

Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public.[1]”

Let me count the ways, Senator, the preceding is not what  GSEs are or do and why claiming it shows an out of touch public official.

--Fannie and Freddie finance only one asset, mortgages, and are responsible for providing national liquidity for that product throughout the United States, in all economic environments, good and bad.” Like other large financial institutions, they can’t run from the market.

--They borrow capital in the national and international debt markets and only can securitize mortgages made on US properties.

--Fannie and Freddie actually do hedge their mortgage holdings, with callable debt and derivatives, and actively manage their interest rate risk exposures.

--Fannie and Freddie are highly regulated, with a gaggle of regulatory officials sitting in each of their offices, every business day of the year. Their assets to liability ratios are closely watched and managed by their federal regulator.

--Under current law and the “Third Amendment” agreement--now being heavily challenged in federal court--F&F are not permitted to keep any of the annual earnings and are not permitted to accrue protective capital, beyond a de Minimis amount.

 Does that really sound like a hedge fund operation to you Senator Corker?

Corker: “The GSEs engaged in ‘private gain and public loss.’ ”

I’ve challenged Corker and his staff, at least twice in this blog, to show me one instance where F&F didn’t pay every penny of any of their losses, with their own revenue, until they were forced into conservatorship in 2008.
Freddie Mac and the modern Fannie Mae (which first was a federal agency psawned in Rosevelt’s New Deal) were created in 1970, which means for a combined total of 76 years—until conservatorship—they never needed one penny of federal financial support.

Corker’s taunting jab is a fabrication but makes for great ideological sound bites.

After 2008, Fannie’s and Freddie’s stocks dropped into the dollar per share range, having once traded at $70 to $80 and their shareholders lost billions of dollars in personal wealth. Later F&F’s corporate leadership were vilified, with some forced out of office by politically driven, fictitious regulatory accusations  which later failed judicial scrutiny in the federal courts.
Sounds to me as if Fannie and Freddie suffered a huge amount of private loss.

Corker: Investors should “short” F&F

As I and dozens of other have written, including some to the Senate Ethics Committee, no public officials—let alone a Senator a member of the Banking Committee—offer stock investment commentary about two companies he actively has opposed and authored legislation to abolish.

It’s both unseemly and possibly illegal, displaying bad Senatorial judgment.

Again this “short” call from a Senator who less than two weeks ago would have, if he could have politically disassembled the GSEs. He now says something which has a ring of hope and an operational future for Fannie and Freddie, but no meat on its bones.

Corker: Make F&F “utilities”

Queen: "Another one bites the dust, uh huh, another one....."

That’s how I described Corker’s capitulation in this video report, when he attempts to quash rumors that Administration is discussing recapitalizing the GSEs—which may be true—but suggests, instead, F&F could become housing finance “utilities.”

Do you have a plan Senator Bob or are you just mimicking what you heard Jill Millstein, Tim Howard, Frank Raines, Bill Ackman, Bruce Berkowitz, Mark Zandi or several others say?

In Congress, as you know well Senator Corker, the “Devil always is in the details.” What are your utility proposal’s specifics or were you just again filling the air with “buzz words,” concepts and labels you don’t grasp?

You may get another chance, Senator, if you swear off being punitive and try being constructive.

Let’s the world see a Corker utility legislative plan. Make it more than “Fannie and Freddie run a CSP (common securitization platform) for the TBTF banks or BlackRock or other major financial firms.”

That dog won’t hunt in most places, albeit in Tennessee hinterlands.

You had one bright (yes, a pun!) young guy work on your Corker-Warner bill, before he toddled off to Wall Street and a job with BlackRock.

If you want to still be a “player,” employ another staff person to produce your GSE utility bill. Start by meeting with several of the individuals I listed above, along with others who would—honestly/candidly—educate you about how the mortgage market truly works and what the real interaction in it is between those heavy hitting financial players who collide and occasionally cooperate.

(I wouldn’t be shocked if you found a TBTF bank or two that appreciates/values F&F in their market position, just the way they are now.)

If you really are worried about risk to the government and not—as many of your critics believe—just how to give the big financial guys the entire mortgage market, that lesson can be delivered now. But you need to open your mind, drop your biases, and understand how.

Have your staffer call/contact me and I’ll put together a meeting  for you—which I don’t need to attend--with a half dozen or so utility stakeholders who will describe how this idea might work.

But, keep this in mind. Utilities often are privately owned, regulated, and they generate revenue for their owners. So if you are bothered by the latter keep away from the concept and the buzz word.

Public Utilities, Defined

“Businesses that provide the public with necessities, such as water, electricity, natural gas, and telephone and telegraph communication.

A public utility is a business that furnishes an everyday necessity to the public at large.

Public utilities provide water, electricity, natural gas, telephone service, and other essentials. Utilities may be publicly or privately owned, but most are operated as private businesses.

Typically a public utility has a Monopoly on the service it provides. It is more economically efficient to have only one business provide the service because the infrastructure required to produce and deliver a product such as electricity or water is very expensive to build and maintain.

A consequence of this monopoly is that federal, state, and local governments regulate public utilities to ensure that they provide a reasonable level of service at a fair price.

“A public utility is entitled to charge reasonable rates for its product or service. Rates are generally established according to statutes and regulations.”

What Others Are Saying

Presidential Matters

Hillary Does "Benghazi" On Thursday. (My bet is that she gives better than she gets, because the hearing process is so clumsy and she will take advantage of that as a sharp witness.)

Oh, Oh Marco Rubio

Trump and Megyn Fighting, Again??

Dem Debate

Hillary Clinton prevailed in the Democratic debate, but almost as significantly her comments and demeanor, plus Bernie Sanders (D-Vt.) hammering the case for how the middle class has been left behind, will expose the participants in the next GOP debate for what they haven’t said about the middle class and other “bread and butter issues.”

From Wash Post on 10-14, James Hohmann

— Hillary Rodham Clinton was the only candidate on stage last night who looked like a plausible president. She had gravitas and filled the stage, while her four rivals came across as unelectable, unserious or both. In short, she solidified her status as the Democratic front-runner. Clinton’s strong performance will, at least temporarily, quiet doubts among party elites and make it less likely that Joe Biden enters the race.

The conventional wisdom among Washington elites that this was a T.K.O for HRC cemented overnight. This morning’s clips are, by far, the best Clinton has enjoyed all year. From nonpartisan reporters to thought leaders across the spectrum, there was a near consensus that Hillary won.

Wash Post 10-15, Hohmann, the next day

THE BIG IDEA: Hillary Clinton’s still got 99 problems, and Benghazi is one.
Dan Balz, warning that the reviews of Hillary Rodham Clinton’s debate performance were “perhaps somewhat too positive,” delivers a reality check on The Post’s front page this morning: “There is a difference between turning in a good debate performance and fundamentally changing voters’ perceptions. Anyone who doubts that should look back to Mitt Romney’s presentation in the first debate against President Obama in October 2012. Romney overwhelmed Obama that night and was judged the clear winner. But he was still saddled with questions about his candidacy and with the underlying forces in the campaign, which ultimately helped Obama prevail.”


Nine major debate issues which the D’s discussed, but which the GOP totally refused to raise.

Who got what valuable ($$$$)  time in Dem Debate?

Fannie and Freddie Matters

White House to push back on Political Alpha suggestions this week, as per Bloomberg’s Cheyenne Hopkins.

Bethany McLean’s 10-15 column in the Sunday Washington Post “Outlook” section.

(Post editors must have thought McLean said she was writing about “Banana and Eddie,” when they agreed to carry her positive GSE article.)


Mario Ugoletti, Gone But Hardly Forgotten


Joe Destefano on S&P GSE report

Hindes and Biden


Letter in Nashville Tennessean 
on Senator Corker’s Comments

Corker biased on GSE reform

After watching the interview Sen. Bob Corker, R-Chattanooga, gave to CNBC on Oct. 7, it is obvious that he has lost all objectivity in regards to government-sponsored enterprise (GSE) reform.

Sen. Corker appears to be obsessed with a handful of hedge fund managers that own stock in Fannie Mae and Freddie Mac. Corker’s crusade is to punish a few at the expense of tens of thousands of common shareholders.

To witness a sitting senator call for investors to short sell a stock on national television is mind boggling.

To make matters worse, that same senator also is actively engaged in creating legislation pertaining to those same stocks.

That is at best foolish and at the worst, illegal.

It is abundantly clear that Sen. Corker is allowing his personal grudges to trump the important process of GSE reform.

If Sen. Corker cannot set his personal feelings aside, he should resign his position with the Senate Banking and Finance Committee immediately.

Daniel Hutcheson
Portland 3714

Bank Matters

Banks Have Big Oil Debt Worries banks-jpmorgan-bank-of-america/index.html

Old article but explains why banks keep up their business aberrance.


Inside Mortgage Finance’s Brandon Ivey reports on Fed study saying mortgage lending profitable for small banks

1,000 Banks Can’t Be Wrong: Mortgage Activities Profitable for Smaller Depositories By Brandon Ivey

In the years after the financial crisis, returns on mortgage-banking activities have been more profitable for smaller banks than for large banks, according to researchers at the Federal Reserve.

In an analysis of about 1,000 banks, William Bassett, a deputy associate director, and John Driscoll, a senior economist, found that returns on mortgage sales and securitization have been higher for community banks than for larger banks.

Community banks also had higher returns on assets and equity than larger banks, and the share of community banks engaged in mortgage banking has increased in recent years.

The Fed researchers analyzed call report data spanning the start of 2007 through the end of 2014. “All told, these data suggest that smaller banks have not been, on net, deterred from engaging in sales and securitization of mortgages, have become a more important part of the market, and have profited from their activities, Bassett and Driscoll said.


Foreign Policy Matters

China Selling Treasury Securities


Maloni, 10-19-2015


G. Buckman said...

Good stuff Bill. It would be nice if Corker would take you up on your offer to help educate him, but unfortunately his ego won't allow it, imo. Oh well, hopefully the courts will shed some light sooner rather than later.

Nice win yesterday! Landry Jones, who'd a thunk it? Nice job Boswell...I gotta remember to send him a card when he graduates high school. lol

Anonymous said...

Bill, why is the admin being so forceful and organized about this today? To whom are they speaking? It’s not the public. I don’t even think it’s Ackman and Berkowitz, I think they would rather ignore them or be perceived to be ignoring them. To whom then are they making such a forceful case?

Bill Maloni said...

I'll speculate, Anon, which is all I can really do because I have no concrete idea.

First would be to respond to the surge in positive "noise"--not to mention in the stock prices--which occurred last week after the Political Alpha report, which ironically merely talked about (paraphrasing) "Administration reconsideration of GSE options," nothing about recap and release.

I would hope--given the Ugoletti and other legal developments, Delaware, etc. this WH might be smart enough to look for other options should things in court not go their way, making the PA report accurate!!

Two, they also could have been throwing a bone to their buddy in GSE crime , Bob Corker, who several people (including me) suggested looked really bad last week.

Finally, and this truly is "inside baseball" as well as "inside the Beltway," maybe the White House felt they owed the MBA a declarative statement, since the MBA has backed the Admin on lots of WH GSE capers, notably support for the original Corker-Warner bill and later Johnson-Crapo.

But, what that possibility raises for me is why the MBA--when its senior folks claim they want F&F alive and operational--would be so happy to get a message like this which can't be comforting to many of its smaller members???

I would hope that David Stevens and his leadership team wouldn't be that duplicitous and all of this just is idle speculation.

Wayne Olson said...

The GSEs may or may not be public utilities. But, they are regulated entities of some sort. They each have a "securitization platform" that comes close to being an "essential facility" or "bottleneck" that mortgages need to pass through in order to turn into MBS. Granted there is some securitization being done outside the GSE facility, but pretty small change really. During the 2000s, the I banks turned out to be absolutely incompetent at the securitization process. BTW, one of the common things with public utilities in the last 20-30 years is "open access" by competitors to an "essential facility" in order to accommodate competition somewhere else. That's really what the CSP stuff is all about, giving potential competitors access to the CPS "essential facility." Granted, public utilities tend to be absolutely opposed to giving competitors access to their facilties, but the GSEs are muzzled so that seems to be happening.

Bill Maloni said...

Wayne--I've been bugging several people (the good guys) who have mentioned "GSE public utilities" to put some meat on those bones and draft a plan or plans.

I said the same thing to Corker in the blog when I cautioned him "the Devil is in the details." Meaning just saying "public utility," doesn't cut it unless you know and can explain how certain issues inherent in the model will be defined.

So, employ your best "Missouri" imitation and ask those who use the term to give you some operational detail.

Wayne Olson said...

Here is something I found on gselinks.

Maybe the author will do an update at some point.

Bill Maloni said...

Wayne--My only point is ( which I lived as an active lobbyist)--which your experience will underscore --is it's one thing to describe/define a "utility," which I did when I mentioned the "GSE utility" in my last blog.

But, when you say, "Design a Fannie and Freddie mortgage utility," that's when the banshees come out of the closet; every Senator, Congressman, and financial interest group becomes a "legislative counsel," each with one "must have" idea or another (most of them bad or unworkable) which they insist this "mortgage utility" has to have or perform (generally for their favorite industry group)?

"The Devil is in the details."

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Bill Maloni said...

Being "spammed"--or whatever is the term for the crap directly above this.

Does that mean my blog has "arrived?"

Please disappear "Kenneth William" and don't return under another sham name.