Maurice
Greenberg, Raisins,
And
Other Good GSE Things
Some small GSE positives emerged this past week, in court
cases not involving directly F&F but close enough to have real implications.
And then there was the strange letter from a Treasury congressional liaison official
to Judiciary Committee Chairman Senator Chuck Grassley (R-Iowa) responding to
Grassley’s questions about transparency and the Administration’s possible slow-walking
the “Third amendment” discovery process.
Still in the mail, presumably, is the Justice Department’s
response to a similar but more specific letter, Grassley sent when Eric Holder
was our Attorney General.
The nation has a new Attorney General, since the Senate last
week approved Loretta Lynch, but with Grassley voting “no,” against her nomination.
We’ll see where that fits into the Grassley/Department of Justice relationship
dynamic.
Court
Cases
A somewhat skeptical United States Supreme Court, also last
week, heard arguments in a case where the government under a Depression-era law
has been “taking” raisins from producers,
as a means to support prices paid to the growers.
News reports (see
link below) had the SCOTUS’s conservative justices asking lawyers if this
wasn’t a possible violation of the Constitution’s Fifth Amendment against
government “takings.”
As the GSE world knows, there are cases before Judge
Margaret Sweeney’s in the Court of Claims, and an appeal of Judge Lamberth’s
early decision against plaintiffs arguing illegal “takings” from F&F common
and preferred stockholders, following the 2012 Treasury “sweep” change.
In a case a bit closer to the financial world, lawyers
(David Boies)—who also arguing the GSE case—are challenging the Federal Reserve
Board’s alleged “takings” of 80% equity in American International Group (AIG)
and charging it 14% interest on the $185 Billion lent, when the Fed stepped in
to help the troubled insurance company in 2008. The case has been ongoing since
last autumn and closing arguments were heard last week.
In listening to lawyers summing up for both sides, federal Judge Thomas C. Wheeler, seemed skeptical
as to whether the Fed had the equity remedies it claimed when it acquired the
ownership interests, possibly opening the way for plaintiffs—primarily former
AIG Chairman Maurice Greenburg—to be awarded $40 Billion in damages.
As noted, Judge Wheeler had doubts.
What’s it mean for F&F? Simple thought, while neither
case is dispositive relative to the fate of Fannie and Freddie or their
shareholder suits, any decision which rejects federal government “takings”—whether
raisons of or Maurice Greenberg’s cash-- could be precedential and help the
F&F plaintiffs when their turn eventually comes in the lower courts or the
Supreme Court.
The
First Response to Grassley Letters
Last week’s Treasury letter to Chairman Grassley was a bit
confounding.
It’s clear this agency to congressional committee give-and-
take is not over and could heat up, if Grassley decides the Admin “dissed” him.
There appears to be no love lost between the Admin and
Grassley. It’s understandable and was expected that the Treasury wouldn’t admit
to any errors when it was sued by F&F investor plaintiffs over the “sweep.”
But, Treasury raised a somewhat distorted argument to
justify taking every single penny F&F earns, beyond an annually shrinking minimum
capital requirement. I am not positive, but Treasury’s rationale which I don’t
think I ever heard before.
Unlike every bank recipient of Treasury “Troubled Asset
Relief Program” (TARP) which was loaned
taxpayers funds to support their balance sheets, Treasury’s Grassley letter claimed it’s $187 Billion infused in
F&F was an “investment”—reflecting
Treasury’s great risk and need for reward—and therefore F&F’s financial obligation was ongoing and without end.
In the years following TARP, banks were permitted to pay
off their borrowings—while charged only half the rate that F&F (5%
versus10%) initially were charged—but like the Energizer Bunny, F&F just has to pay and pay and pay.
(I guess even the New York
Times’ very competent Gretchen Morgenson misinterpreted the financial quid pro quo, when
she wrote in her widely read, quoted, and touted, April 7, column—discussing
the GSE’s original payments with 10% interest that morphed into the total
vacuuming of their profits--“Initially,
Fannie and Freddie paid interest on the taxpayer
loan.”)
The GSEs already have repaid the taxpayers more than $40
Billion over the government’s “investment” of a $187 Billion.
Whether it matters in court or not, the letter exposed some
truly head shaking Treasury thinking and highly suspect timing.
There has been about almost two years’ worth of media
coverage noting in some way, shape or form, that the GSEs’ have repaid more
than they were loaned, with that number now growing to $40 Billion with more on
the way when the two announced their next quarter’s earnings.
But, when you are Treasury and make/change the rules (as
they go?), you can call it whatever you want, especially if it helps covers significant
political errors.
The other element I find funny—curious, not ha-ha--Treasury
made its 2012 “sweep” investment decision
to gobble up all earnings (and subsequently draw about 20 lawsuits—owing to its
fear of the GSEs could be possibly “borrowing from Treasury to pay borrowings from
Treasury” (isn’t that lending terminology?)—but this fear/justification about a penniless Fannie and Freddie occurred just
as both companies were about to revenue ripen and burst into significant
profitability.
How could Treasury have missed this pending turnabout in
2012, unless its scheming was based on something else??
Since both companies took advantage of the existing tax
laws (which Treasury oversees and administers), plus regularly reported to
their regulator their monthly revenue streams, is the Treasury claiming that it
had no inkling about those hopeful financial possibilities--or maybe it overlooked
the GSEs additional fresh revenue from traditional business--when it chose to
cop all of the companies’ revenues just when F&F were about to become cash
cows?
How can any open-minded Judge not miss the active Treasury
participation in this GSE ham stringing—neutering FHFA’s authority--in view of
this provision of law and not be judicially horrified?
(Section of HERA)
[When acting as conservator or receiver, the Agency (referring to FHFA) shall not be subject
to the direction or supervision of any other agency of the United States or any
State in the exercise of the rights, powers, and privileges of the Agency.]
Psst, your honor that means Treasury’s should not have been
even in the “conservatorship-implementation” neighborhood.
Good thing we had Paul Revere near Concord that night and
not the US Treasury, we still might be waiting to hear which way the Redcoats
were coming and now all be speaking “Cockney.”
Stegman
Says Revive “Private Label” MBS,
Why
Mike, the Last Time It was an Ugly Bust
There is a Viagra joke here somewhere when Mike Stegman,
Counselor to the Treasury Secretary spoke to a group of financial execs and asked
them and their peers to re-enter and revive the private mortgage backed
securities (PLS) market, where banks and investments banks hope to sell their
own (not Fannie’s and Freddie’s) mortgage backed bonds to institutional investors.
These players construct their bonds with their own corporate guarantee and
compete against Fannie and Freddie, which also securitize mortgage securities
and guarantee investor payments.
History suggests the banks and others may have killed their
own market 7 or so years ago, when—without Stegman’s urging, they entered the
private label market, big time, and issued some $2.7 Trillion in PLS—totally
avoiding Fannie and Freddie operations—only to see their financial creations bonds
fail --three times as great as the F&F MBS suffered--when the banks poorly
underwritten and fictionally rated bonds quickly failed, when the US real
estate market softened.
History
Too Fresh in Principals’ Minds
Mike’s speech gives a lot of suggestions to the financial
guys, but what he can’t do is erase investors’ memories of that bad experience
with PLS. Nothing, unless he gives private MBS issuers government protection
against losses and he’s already tried to do that and lost.
David Fiderer extensively has written why the PLS market
may be history (Google him and his writings) because of structural flaws/shortcomings
and investor alienation.
He told me, “Investors
aren't dumb. They learned that their legal protections for RMBS are paltry, and
that banks and rating agencies can't be trusted. Stegman's private label RMBS
revival plan ignores the moral hazard problem and the math problem. Investors
still have paltry legal protections pertaining to banks and rating agencies
they can't trust.”
One of our nation’s most facile financial minds and a
mortgage securities authority, to whom I promised anonymity because of his day
job, sent me his thoughts on the Stegman antics.
“Gee,
Stegman touting private MBS at a Fitch conference. What a surprise.
“It
takes a special type of zealotry to continue to promote a flawed financial
structure or idea in the wake of a disastrous performance stemming directly and
unambiguously from that structure or idea (see, for example, "supply-side
economics.")
“Private-label
securitization has three structural impediments that make it less economic than
entity-based guarantees, such as Fannie's and Freddie's: (a) each pool has to
stand on its own, which requires much higher levels of subordination (or
capital) to achieve a given level of safety for the investor, (b) the interests
of the rating agencies that grade the risks of the pools conflict with those of
investors who purchase the riskier tranches, and (c) servicers of loans in PLS
face competing demands from holders of the different classes of securities that
do not exist in single-class Fannie or Freddie MBS.
“You
can talk about "private market incentives" and "Deal
Agents" all you want, but until the Treasury people figure out how to
overcome these three impediments (and also the fact that in times of stress the
PLS market dries up, whereas credit guaranty companies stay in the game,
because that's their only business) PLS will not be a reliable foundation for
secondary market finance for the $10 trillion U.S. home mortgage sector.”
Sophisticated mortgage market people
seem to understand what the Treasury and Stegman don’t.
What
Others Are Saying?
Anyone see/read anything in this
2008 Hank Paulson interview that is sketchy or has now been made bogus???
_____________________________________________________
Freddie hedges its hedges….from Bloomberg’s Jody Shenn
Riddle me this, why would the FHFA IG issue
a report which suggests, because of the temporary loss on derivatives, F&F
might have to borrow again from Uncle?
(Will FHFA issue another
"report" tomorrow saying, "Nope, our bad, we were wrong."?)
Is it just to be inflammatory or to
bolster/inflate its image as all knowing??
Why say anything negative about your
regulated institutions, especially since their stock (common and preferred)
doesn't move as a reflection of traditional indices?
____________________________________________________
“Hello,
Senator Warren’s office. I wish to report…….”
(Some tongue in –cheek from
the Onion.)
________________________________________________________
Motley
Fool,
why Congress might leave F&F alone
_________________________________________________________
Bad boy bank, bad boy bank!
First read this story
of another fine levied against a top international bank, for a transgression
which has legs into the US, too.
And then read
this Atlantic Magazine treatise on institutional
and financial cultural issues driving aberrant bank behavior. (Thanks,
Gwenn Hibbs.)
And these are the
guys to which Obama, Lew, and Stegman want to hand the nation’s mortgage
markets?
Shame, shame,
shame on the Admin.
__________________________________________
Jon
Stewart gets it though. (Thanks Bryndon Fisher!)
Bruce
Outs Himself……as a Republican
http://www.cnn.com/2015/04/25/politics/bruce-jenner-diane-sawyer-transgender-lgbt-republican-conservative/index.html
____________________________________________________________
Maloni-4-27-2015
