Monday, August 27, 2018

Stirring the ashes in the GSE world

What’s GSE-good these days…….?

Nothing in the courts that’s for sure, as another set of judges roll over and do a “lazy Lamberth”—a quite popular position for federal jurists-- meaning little original case-specific analysis but knee-jerk fall back to the original—but in my view erroneous—decision that the Administrations (both Bush and later Obama) can do anything they want to Fannie and Freddie, no matter what HERA says about mission or and the Constitution says about takings.

The current Administration defending against these allegations seem to twist itself into knots but no judge will call them on it.

That’s why I contend and have for months that the play is almost solely with Treasury Secretary Mnuchin and with this WH as to what it wants to do with the GSEs, and that included if any of these cases ever get to the Supreme Court (unlikely if the Admin doesn't want that).

Watch, despite a recent legal decision that the Consumer Finance Protection Board (CFPB)  regulatory structure--near identical to the FHFA--is flawed and inauthentic, I doubt any court will rule that way against the GSE regulator plus undo the flawed past dictates from it, including the “2012 all profit sweep.” It just won’t happen in DC because of the infamous “GSE shit wall.”

Yes, there still is “Delaware” and “Sweeney,” but why, except that it’s another at bat, should those cases go a different way from the past GSE lawsuit gaggle when judges trippingly followed Lamberth?

A small win!

In the ebb and flow, sturm and drang of GSE disputes—absent the good guys winning a lawsuit or getting a major in either of the two congressional Banking Committees supporting legislation to positively perpetuate Fannie and Freddie, one joyful thing is when one of your historic opponents backs a position you (in this case Tim Howard) staked out long ago and convincingly argued.

I am speaking about Tim pointing out in his blog and with his other commentary the flawed nature of the forced introduction of the GSE “credit risk transfer" programs, which Howard correctly explained in minute detail WERE HORRIBLY FLAWED, didn’t transfer any real risk, were very favorably investor-priced, were shaped by their regulators (hoping to claim they were “reducing risk”) to remove assets from the GSEs’ book which soon could produce positive revenue for F&F and the Treasury (the American taxpayer).

The CRTs were/are loved by two Administrations, the agency staffs who implemented them (under some logical duress since the transfers don’t make dollars or sense for the institutions), and naturally the institutional investors who flocked to them because CRTs were found money.

Anyway, this past week--of all institutions, shockingly he Congressional Budget Office CBO) which has been a GSE bane for the past 30 years—first wrote its obligatory Fannie/Freddie trashing in a congressional report, but then included this wonderful eye-opening affirming nugget:

"To date, the GSEs’ CRT transactions have not reduced costs to the government. In return for transferring some of their risk, the GSE effectively give up some of their income from guarantee fees to the private investors who buy credit-risk notes. Private investors must be compensated at market interest rates for assuming that risk, and thus they effectively charge more than the GSEs do to bear the risk. However, the GSEs have not raised their guarantee fees to cover the costs of those transactions. CRT transactions will reduce expected costs to the government only if the GSEs pass those costs along to mortgage borrowers." 

That’s as good as it gets in DC when a prominent GSE argument gets taken up and blessed by a historically Fannie/Freddie negative government agency. (I guess somewhere in their report, they forgot to give credit to the source of their position, Psst. TH!)

Oh, and of course Treasury, the FHFA, and Hill Republicans will ignore the CBO position and continue to tout CRTs as better than vanilla ice cream.

Juicy Trade Association Rumor

I was told last week about a trade association rumor, which—if accurate- is a confirmation/vindication for those of us who hinted at an association bias toward it largest members at the expense of its huge number of smaller dues payers.

The gossip involved a prominent trade association which had a ceremonial but not a real “changing of the guard” this past week, as the next new leader arrived but his predecessor stayed on board lurking in the background (although those situations never work out when the new guys wonders why the Hell the old guy still is there and the old guy doesn’t realize he’s not the “man” any longer).

But, I digress, the outgoing guy constantly was accused by critics that he pandered to the association’s largest members, i.e., not surprisingly large depository intuitions, and ignored the priorities of smaller shops in the same business. The smaller guys were far more numerous but had nowhere the bigun's heft.

I thought and wrote suggesting that was the case and tried very hard (as some of my friends know) to suss out the small guys and see if they felt they were being fairly represented?

I stopped when the task became too daunting, although the almost dramatic profiles of the old and the new might confirm part of my thinking.

But, I digress.

Here's the story shared with me last week by an industry insider.

Reportedly, when the old incumbent’s salary demands hit well north of seven figures and created parity as well as budget problems for the association, a handful of the largest members took it upon themselves (I am sure to the great relief of association officials, including the top guy beneficiary) to cover the exec’s big salary demands.

If that story was/is true, then I guess the individual would be every reason to embrace exactly what mortgage policies his enhanced paycheck signers wanted. (Did I slip and write “mortgage policies?”)

As noted—if true—it’s not as sexy as the CBO CRT story, but illuminating.


Sunday New York Times lead (and only) Editorial;
The Next Financial Crisis (no mention of GSEs, but lots on big banks)

Maloni, 8-27-2018


Fercris Hart said...

The Long GSE Wail (with my apologies to Johnny Cash and Folk Music):

Ten years ago, on this dreadful day
The GSEs had their profits stripped away
There were few at the scene, but they all agreed
The scam was run by the US Treasury

No judge has said “what is your alibi?”
“If you had conserved, Capital would not have died.”
And Trump tweets not a word about Fanniegate
Billions to Treasury sounds just great

And from the Hill comes a long GSE wail
Treasury visits their graves every ninety days
No network shows, no reporters see
Theft of the GSEs

Oh, their payback’s so high that eternity's closer
For it just ‘MAY’ be HERA was written by posers
But late at night, when the cool DC breeze blows
With a long GSE wail, shareholders cry over their bones

And from the Hill comes a long GSE wail
Treasury visits their graves every ninety days
No network shows, no reporters see
Theft of the GSEs…

Bill Maloni said...

Nice work, Fercris.

In your next show, can MrFiddlestix accompany you on guitar with me on harmonica??

G. Bickman said...

Wait, say it ain't so, Joe!

A Trade muckety-muck might have been carrying water for a few of the association's largest members (while ignoring the smaller ones) just for mo' money, mo' money, mo' money? Let me guess, said muckety-muck has also denied or failed to comment on such rumors. Unfathomable....

As always Bill, your GSE nuggets are much appreciated.

Bill Maloni said...


I don't think anyone has asked him, yet, but--if accurate, I'm sure he would deny it influenced him--but it could explain a lot of atypical political/industry behavior from the trade association and the individual.

Bill Maloni said...

A--Not sure why the delayed announcement but designated Judge Margaret Sweeney as Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

A July decision announced today.

Might help "the cause."

Bill Maloni said...

If I wasn't clear (and I wasn't), the POTUS named Sweeney Chief Judge of the US Court of Claims. The act occurred last month but was announced today.

Bill Maloni said...

On vacation; new blog next Sunday or Monday.