Sunday, April 28, 2019

..because that's where former regulators go for their next breadbowl!

Color me GSE-confused, but that’s not new

(Make sure you read Tim Howard's new blog, published this morning.)

As with most of you, I am attempting to deduce/interpret what happens next in the Fannie and Freddie world between a possible Fifth Circuit Court decision, White House calls for a plan to get GSEs out of “conservatorship,” and (confusing and sometimes incompatible) comments Mark Calabria made in a WSJ article written by Andrew Ackerman.
Tim Howard’s adroit comments on Calabria’s statements tell a far better story than I, so you can read them in this link to his blog.
As I told a blog commenter last week, Calabria’s academic achievements, his time on the Hill, work at CATO, and whatever he did for Vice President Pence suggests—but doesn’t necessarily prove—he understands markets or their interplay amid shifting GSE politics.
Listening to his public remarks reveals to me, as their primary regulator, he hasn’t clarified his role or what he wants to do with the GSEs although—at the end of the day--everyone knows Treasury will pull all of the strings and FHFA is the passive tail wagging dog.
But to say he wants the GSEs free and out of “conservatorship” and seeks the Hill‘s help to get there is either boilerplate institutional BS or utterly naïve about the Congress and Wall Street.
Calabria just should keep reminding himself, “Senator Crapo (R-Idaho) and Chair Waters (D-Cal.)” and drop the "congressional help" line and remember “money wants to make more money.”
Since the new FHFA Director hopes investors will provide $100 Billion or more in capital for the GSEs to operate—which Calabria says is core necessary--he can’t suggest to those who would invest, he also wants to pull the Fannie/Freddie charters, largely the only thing worth buying!
That’s like trying to sell an exclusive Mickey Mantle or Babe Ruth baseball card, but only after you ask the buyer if your kids, first, can paint on it and your dog chew it?
The Director soon will learn there is nothing easy involving the GSEs and nothing which, politically, doesn’t create rancor on either side of what he proposes or supports.
Even though he’s been in town for years and babbled in his interview about those clashing objectives, I give him a pass because he’s new to the position and, likely, just realizing how few options he might have, given what he’s written/spoken about, i.e. ending the “sweep,” GSE privatization, and dozens of other related things.
Good luck, Mark and lean on your new assistant, former Fannie executive Adolfo Marzol.

One of these things is not like the other...

I had an interesting exchange with one blog reader and explained my perspective on how large banks and GSEs contrastingly are regulated at the federal level.
Basically, in sharp contrast to what I’ve observed of GSE regulation since 1992—which I saw as interventionist, controlling, and sometimes hostile--in TBTF bank regulation, the banks are welcomed, adopted, shepherded and cared for by the Comptroller, Treasury, and Fed (looking ahead to post government jobs?).
Despite constant industry bitching, moaning, and whining, bank regulation is soft, big bank regulatory treatment is almost benign.
Despite $175 Billion in banks fines for breaking laws and regulation, since 2008, which big banker has gone to jail, let alone trial??
My advice to Director Calabria, wait a few weeks before giving interviews and broadcasting your grand schemes (too late???). Wait to see where your Admin bosses want to go, then travel there with them. If you don’t like where they are headed, announce your disagreement and then resign.
If he wants, Calabria can/should help make the GSEs operationally free, again. He can be supportive.
He can remind himself of the GSE’s community importance and the very clear practical reality (and history) that the American consumer and every professional in the mortgage finance chain succeeded and were profitable during the GSEs halcyon years, including the nation’s largest financial institutions, which still are doing well (see revenues, profits, and happy shareholders).
Calabria can grasp it’s not a zero-sum game unless the big guys get even more greedy. When the GSEs are free to do what they always have done for those seeking mortgage finance, the mortgage market is buoyant and uplifting and there is no incentive for lenders to return to fraudulent practices.
Thoughtful regulation already has squeezed much aberrance from the mortgage industry.
The housing/mortgage finance industries benefit from a healthy Fannie and Freddie involvement, but more importantly, so does the nation and its mortgage seekers. That’s far more desirable for Calabria's resume than,  “He succeeded in frustrating the GSEs return to operational success.”
Contemporary legal matters
First off, a reminder, I ain’t a *&^%$# lawyer, now shorthanded to “AAFL.”
(But, I did learn that Judge Margaret Sweeney’s photo has been put in the latest Funk and Wagnall’s encyclopedia under the term “not in God’s lifetime.” You be the judge—Sorry, I couldn’t resist that line.)
The Fifth Circuit en banc review of the Collins decision still is pending. 
GSE hope springs eternal in this season of renewal.
If there is a Fifth Circuit decision for the plaintiffs, i.e. the investors’ side, the government could appeal to the SCOTUS, unless the finding is benign enough to accommodate whatever Treasury, FHFA, and Crazy Larry Kudlow support.
I also was told a favorable ruling for the plaintiffs ending to the sweep would happen immediately, with future earnings going to the companies for capital purposes.
"AAFL," but any of you who is, might want to answer—if the Court decides for the government—what would make a SCOTUS, which can refuse to hear an appeal, hear this one???

Historic legal matters

An old friend and GSE savant, who calls himself "Doc Cartoon" and produces GSE artwork, came up with a rare find, something quite useful especially for that DC audience still very ready to believe any criticism of GSEs, even the distorted suggestion that 15 years ago, Fannie’s mortgage operations featured mismanagement and legal violations.
Most of that original noise stems from actions of a gaggle of lazy and weak GSE regulators at the FHFA predecessor, the Office of Federal Housing Enterprise Oversight (OFHEO).
In 2004, frustrated because certain Fannie execs refused to hew to OFHEO’s cant which sought to substitute  inexperienced regulators’ business thinking for management’s expertise, OFHEO decided to willfully retaliate and announced the company’s senior leaders were guilty of “securities fraud.”
Doc's find was a legal publication’s article discussing Federal Judge Richard Leon’s dismissal of those charges against former CEO Frank Raines and former CFO Tim Howard (as well as a third Fannie official, Leanne Spencer Garmon).

It took eight years for that malignant Fannie claim to be rejected by the courts, which is proof of the adage (attributed to Mark Twain), “A lie can travel halfway around the world while the truth is putting on its shoes.”

But also be alert this smear and variations still are employed today by the anti-GSE crowd.

Maloni, 4-28-2019

Monday, April 15, 2019

Fifth Circuit and other meanderings...

GSE Scuttlebutt and other Informa$ion, some interesting!!

First off, I have a tiny clarification to last week’s blog, where I mentioned the world might hear a decision from the Fifth Circuit Court “in the next couple of weeks.”
That was accurate, but it also was pure guesstimate/speculation on my part.
Nobody knows when we will hear a Fifth Circuit decision and nobody knows the parameters of same—although a decision indeed could be coming shortly.

From this point on in this blog, I am practicing-without-legal-portfolio, SINCE I AM NOT A LAWYER, a factoid I will reduce to an acronym for my future blog purposes (“AAFL” or “ain’t a *&^$#@^” lawyer”).
Court Cases
In the shareholders wet dream, the Fifth Circuit Court will find the federal government guilty of an APA violation or possibly “takings” under the Constitution. The remedies are more vague and multiple but—if the sweep is ruled illegal--one form of relief might be Treasury writing checks to Fannie and Freddie for their past payments over and above what they would have paid under HERA’s original pre-sweep dividends (2012). That development could mean payments of @$60 Billion for Fannie and $45 Billion for Freddie.
But the same decision could end the sweep but produce a tax credit which would wipe of the Treasury’s senior preferred, leaving Fannie and Freddie with future tax credits of @$10 Billion each, but could open the way for profits staying with the companies to build capital.
Part of my conjecture is will the WH want to engage in any operational step that adds to the deficit immediately, which check writing post Fifth Circuit decision to the GSEs would do?
If the judges decide for the plaintiffs (the shareholders), the Admin could appeal to the Supreme Court or—if the judicial resolution and financial hit to Treasury was more attractive to the government--possibly because it was consistent with some aspect of its Mnuchin/Phillips/Otting/Calabria GSE fix, which now might need the ideologically unstable Larry Kudlow’s blessing--the government might accept the court’s ruling and seek to implement it.
If the Fifth Circuit decides in favor of the defendants, the federal government, the logical legal procedural remaining to the GSE crowd is an appeal to the Supreme Court, which may or may not agree to hear the case.
If the Administration opposes the Fifth Circuit’s decision and chose to appeal, while it sucks, I expect the “Supremes” will hear the case in a heartbeat.
Big Kahuna, indeed!
The stakes involve maintaining Fannie and Freddie in some measure of their original form, doing what they do best for the people of the United States—or swapping over a long time—a mortgage financing arrangement everyone knows for a scheme they don’t.
Not to mention the billions of dollars at stake when and if, a court finally decides on the legality of the “sweep, “issues still present even if the Fifth Circuit doesn’t favor the GSE forces.
Let me dwell on a more propitious near term outcome, a court finds for the GSE plaintiffs which includes true Fannie/Freddie operating space and real capital generating capacity.
Note, this could come either from a favorable (Fifth Circuit or even SCOTUS) court decision or from an Admin plan removing Fannie and Freddie from Conservatorship and recapitalized. Fresh capital could come from legal damages accrued, future earnings not offset by weird federal obligations, or just fresh GSE stock issued.
In this example, don’t look for the GSE opponents to walk away empty-handed. Those forces are too DC present and give too much campaign money to totally be stoned by the process, judicial or political. That’s especially true if we get a regulatory plan, where the Trump Admin it can decide winners and losers.
Someone in the GOP/trade association cabal will attach some obstacle, limitation, or handcuff to any GSE freedom.
Don’t ask why, it just always happens.
(Good time to point out a quote from Paul Muolo in last week’s Inside Mortgage Finance, when discussing the GSEs, he called them “the straw which stirs the mortgage banking industry drink.” It’s a fact and makes me/you/one wonder, why the MBA, then under David Stevens and now, Bob Broeksmit, always can be found in rank opposition to the GSEs on any variety of issues????)
Related/Unrelated—Maloni on “Clean Political Kills”
The reason for what I just wrote is that there are very few clean political kills or one-sided wins in DC, although every DC lobbyist (including this former one) will swear they produced or help secure one or more.
Where that was true, they were small compared to the issues discussed here and the massive dollars and systemic changes implicit—the nation’s $10 Trillion mortgage finance system and billions of dollars embedded in the remaining lawsuits against the Treasury, not to mention ongoing efforts to try and replace the GSEs with something which won’t be as efficient or fair, will be more costly and not as good for consumers (who vote!!), and predictably will get screwed up in implementation.
Think “Obamacare” and how clean that was and is.
My point being, Washington never does anything simple, neat, and starkly correct.
I hate to skewer more windmills for the good guys, but think of what I’ve written when you see those discussions of hoped-for GSE stocks prices in the hundreds.
Remember, before I get any complaints about 5th Circuit or share prices….AAFL!!

Maloni, 4-15-2019

Tuesday, April 9, 2019

Congress is back, hide the women and children

Cats and Dogs to the Second Power:
Some silly GSE stuff and other matters

OK, let’s get right to the Fannie/Freddie issues of the week, of which there aren’t too many since Congress is returning from its Spring break and needs some time to decompress. 
Bulletin, Bulletin, Bulletin: “Federal Reserve Board Nominations...” 
This social media flash just in: After hearing President Trump announce he planned to nominate to the Federal Reserve Board both Stephen Moore, conservative commentator without portfolio and admitted federal tax scofflaw, and wealthy pizza magnate and briefly 2016 GOP presidential candidate, Herbert “999’ Kane, former Alaska Governor and John McCain’s 2008 vice-presidential choice Sarah Palin announced her availability, too.
The latest, in this already confusing story, came when Palin today told the media--in a hastily generated Hopscotch, Alaska, press conference (attended by two reporters and an unemployed Iditarod mush dog)--if there is a third Fed vacancy she, too, is ready to serve on the nation’s central bank’s Board.
She reminded the gathered reporting pair (and, presumably, President Trump) of her pluck, reprising and updating her self-comment from 2008, “I can be a sycophant, too. If Trump wants me and has the monetary rifles, I have the rack!”
(Why not Sarah, Herb, and Stephen? Moe and Curly had Larry??)
Just because the Hill mostly is GSE comatose, there still are some major events to keep an eye on, like the..... 
“Button, Button, Who’s Got the (GSE) Button?” competition
(Cue the GSE stuff..)
Okay now, participants, this is FATE asking if everyone is in place for a fierce elbows-up match of “Button, Button, who’s got the (GSE) button? (Youngsters, go to Google and review the rules.) 
Clerk, call the toll.
Senator Crapo? “Here Fate”;
Chair Waters? “Here and hear Fate”;
Secretary Mnuchin? “Here Fate”;
Messrs. Otting and Phillips? “Here, here, Fate”;
Director Calabria? “Right here, finally, Fate”;
Mr. Kudlow? “ZZZ. Yo, here, Bro”;
President Trump? Mr. President?? “I am “%^$#@*& here, but I don’t want to be; don’t ask me again, just talk to Newstein, Nuisance” or whatever his name is; you know the one with the ditzy Limey wife, he’s our numbers maven? (I only hire the very best in lawyers and accountants, but I never can get this guy on a Sunday night, he’s always “out for Chinese?”)
Fifth Circuit Court judges? “Collective roar, HERE, Fate.”
Chief Justice Roberts? Chief Justice Roberts? Silence. (Clerk, report the Supreme Court is biding its time, watching but not playing, right now.)
Now Fate,  will walk among all of you—as you have your hands pressed together, as if praying (as we know all GSE investors are)--and will deftly drop into the clasped hands of one of you, the GSE Magic button which opens the door to the GSE future.

Game/Landscape Observations

Now those keen of eye and knowledge will note that neither the media nor the big banks are actual game participants at this stage, although everyone knows they easily can influence the Magic Button recipient.
So keep an eye on them when the game begins and play moves forward.
Maloni—not Fate, this time—will set the current game’s political terrain.
SBC Chairman Sen. Mike Crapo (R-Idaho) held his GSE hearings—which got him a lot more (thumbs down!) than he bargained for—and those sessions are over. Enough people questioned Crapo’s “GSE principles” that I suspect he won’t return to them for a while, save rhetorically.
I don’t think HBC Chair Maxine Waters (D-Cal) will do more than hold GSE hearings, emphasizing her interest (need for more affordable lending) but not try and write new legislation for which there likely is no Senate audience.
Although she always could borrow Maloni’s idea to boost low-income lending by giving all mortgage lenders some housing goals statutory requirement on loans which the GSEs then could acquire or securitize. Maybe as soon as Wednesday when she has a gaggle of bank CEOs before her committee?
Everyone assumes there is a Treasury “GSE fix” awaiting public unveiling, but still has some “missing jots and tittles”—likely because of uneven internal GOP support--which possibly new FHFA Director Mark Calabria can add?

Sometime in the next couple of weeks, we’ll see a decision from the Fifth Circuit Court’s en banc consideration of initial Collins decision which could accelerate action, decide much of the future action, or just leave behind the slackers. 
I won’t/can’t predict who among the above button seekers, preemptively, will move first and when, but will caution an announced Fifth Circuit Court decision would have massive political impact--on GSE structure, revenue allocation, and procedure—especially if the judges rules for the plaintiffs, possibly taking away much of the current “screw the GSEs”  ardor.
That also puts most of the players chasing the dogs in front of them, sniffing…..!
If that happens, the DC pols will scramble to get in front or accommodate the court’s legal implications in any way they can. (If the Court majority rules for the government, the issue, likely, is headed to the Supreme Court.)
Not being a lawyer (what a great defense when you discuss the unknowable!) and not knowing what flexibility (I assume a lot!) the Fifth Circuit has if it overturns Lamberth, I’ll ask does this Admin—apparently once inclined, before adding so many chefs to the policy kitchen—wake up and smell the Spring flowers, finally move and introduce an executive regulatory package, which resurrects, sans restraints, much of the quite well regulated, very successful GSE structure and operations by yanking back the unjustified Conservatorship? 
The Devil always is in the details—and even though major, major big dollars are involved and deep unfounded GSE animus exists that most in congressional R's have but can’t exactly identify, save, “They were run by Democrats, they made it too easy for poor (read minorities) to buy houses, the big banks tell me Fannie and Freddie are the Devil, etc. etc. etc.” 
Probably won’t hear too many knowledgable observers loudly declare: the GSEs operate fairly, with great efficiency, keep down the price of financing a home; they stop the big banks from discriminating in mortgage pricing and mortgage availability; operationally, they are very transparent; they work and have worked for years; there is no mortgage market emergency, except in the minds of those who will use any argument to replace the GSEs with wasteful, uneconomical, and unproductive—in comparison--Fannie and Freddie, so why waste even more time and money attempting to squash them??
Hopefully, long-suffering GSE fans—not to mention the nation‘s future homebuyers--will get answers to these matters, when the Magic GSE button settles in the hands of an interest that will use it…wisely?

Maloni, 4-9-2019