Monday, July 8, 2019

Only the GSEs face historic regulatory abuse; will they still?



  
Post July 4, GSE Cats and Dogs

OK, it’s lay off the POTUS week, since he did enough to himself with his “Fourth of Trump” show.
God decided to show her displeasure with his administration/him by soaking the Mall; then the Prez—on his own, with the tanks watching and the jets overhead—waxed ineloquently about airports subdued by brave US warrior forces in the late 1700’s.
Hey, I believe him. That was the teleprompter’s fault, not DJT's lack of knowledge or memory of US history. 
One of these days we will see a decision from the Fifth Circuit Court which, either, blesses the abuse the Bush and Obama teams imposed on Fannie and Freddie or the judges strike a blow for logic and rationality and rule Treasury secretaries cannot aggrandize the profits of the two in perpetuity, i.e. see 2008 GSE Conservatorship and resulting sweep. 
The offending actions—which generated multiple federal lawsuits--occurred when various government officials and courts ignored the 2008 Housing and Economic Recovery Act (HERA) mandate requiring US officials to preserve and protect the GSE assets and return them to public ownership and private management control. 
BS, BS Everywhere 
I still am mesmerized by those who care deeply about this issue (I’m part of that group) doing their best to guess legal timetables and implications of a future court decision backing the investor plaintiffs or one which says, “Nope, you’re wrong shareholders and you lose again.”
We all still guess but we know nothing about the true event schedules or possible judicial results.
I don’t know which is more frustrating, reading about the fantasy financial multiples these folks see as future GSE stock prices--- based on their unique formula and belief of what stock values could be--or how they fashion their certainty about when the Fifth Circuit will speak, employing historic guidelines, phases of the moon, the entrails of goats, all of which are useless when the money and political play is so weighty. Wishing doesn't make it so.
I often write about why—in DC—it’s never over until the Fat Lady sings. Mainly because the Hill and the White House always have innumerable deflating options in responding to offensive or defensive events, including a Fifth Circuit ruling for the plaintiffs. 
And, I still have trouble seeing any Court award numbers in the tens of billions ($100 Billion?) to anyone over anything involving the GSEs.
That doesn’t mean plaintiffs won’t win this case, it’s just that a win may not produce the windfall so many pro-GSE people are predicting/expecting. 
OFHEO, FHFA, the Fed and the Home Loan Bank Board 
As some readers know, before joining Fannie Mae, I worked at two federal financial regulatory agencies, the now gone Federal Home Loan Bank Board (FHLBB), which oversaw thrift institutions, and the Federal Reserve Board, which still  exists and is as powerful as ever. 
I was at Fannie--working assiduously with a wonderful team of in-house lobbyists and lawyers--to cooperate with the Congress to enact the seminal Federal Housing Enterprises Financial Safety and Soundness Act of 1992--creating the first non-HUD GSE regulator, the Office of Financial Housing Enterprise Oversight (OFHEO), and also introducing statutory affordable housing goals for the two secondary mortgage market giants. 
Much of my following commentary—especially the contrast--is based on those experiences and the first dozen years of OFHEO, which in 2008 (four years after I retired) evolved into the Federal Housing Finance Agency (FHFA). 
I mention this history only for what I write, now, about the GSE regulatory scene and why it has and still remains today, different than other financial institutions regulation, mainly in how the nation’s big banks are treated by their federal overseers.
It’s germane now because the ball is in the FHFA’s court--with Mark Calabria, its new Director--as it seeks to finally fulfill a 10-year-old outstanding objective to publish a GSE capital plan, as well as helping shape President Trump’s recent request for a method to end the conservatorship of Fannie and Freddie, a major component of which will be the FHFA GSE capital requirements. 
Let me establish my premise upfront. 
Bank regulators—the Fed, the Comptroller of the Currency, and the FDIC--coddle their regulated institutions, despite industry claims to the contrary. While OFHEO/FHFA has been hostile.
History has shown both OFHEO and FHFA guilty of badgering, pestering, and actively harassing the GSEs and their execs (see OFHEO early 2000’s), and establishing unprofessional behavior, some of which remains ingrained. (A former OFHEO/FHFA Inspector General once wanted to arm her lawyers when they interacted with GSE personnel.)
For me, it begs the question of what “tone” Mark Calabria will establish and what regulatory oversight mantra he will project?
Is he a new broom, with new assistants, seeking a fresh approach? Or will he succumb to the old style and listen to the “old OFHEO/FHFA hands,” who have been around for years and who perpetuated the GSE antipathy, while earning their varsity letters in “screwing over Fannie and Freddie?” 

Can he embrace his tabula rasa opportunity, or will he reject being a fresh voice, but instead become another oppressor, not championing the GSEs and their mission?
I hinted last week odds are that he will be yesterday’s tyrant, but wear a different suit and tie.
I have to keep pointing to the REGULATORY CAPITAL issue because his first major test will be the capital standards the FHFA Director seeks. 
For the consuming public, i.e. those who need a mortgage to start the wealth-generating cycle of homeownershiphigher  Fannie/Freddie capital is bad because it increases their monthly costs. 
Big bank GSE opponents will offer any excuse for more capital because it hamstrings the GSEs (which their regulator should not want)! 

See a pattern here?



Maloni, 7-8-2019




18 comments:

Unknown said...

Bill - you criticize people's views on multiples, stock prices, ultimate outcomes etc. My question is twofold: (1) how can anyone reasonably have a basis for investing or not investing in the common or preferred stocks without going through that exercise, and (2) what is your view of what the stocks will ultimately be worth? Just my humble opinion, but without an opinion on the second point, and commentary is just random useless musings.

- A guy who thinks 1.9x TBV is a reasonable valuation for a fully recapitalized Fannie/Freddie

Unknown said...

any* commentary

Gustave H. said...

I’ll preface my comments with IAB... I Ain’t Bill, but I happen to agree with him that not all is financial as far as the GSEs go.

First off, financial analysts often count the outstanding stock after their preferred recap scenario, count the earnings, account for the fact that the GSEs operate one of the better businesses on this earth, and then apply their preferred ratios and multiples to the results. This method, while entirely de rigeur in most purely business-related arenas, belies the fact that no one knows what will happen around the negotiating table. Even if one assumes that the integrity of the US’ financial system must be preserved, and the NWS be reversed, and Hank Paulson be dragged through the streets for his callous and partial treatment of players, what would happen without charters and guarantees?

Bill mentioned in the blog that it took one of the mightiest lobbying machines in the world (plus a little help from the always reasonable Paul Volcker) to pry a wonderful capital standard and charter from Congress’ greedy, often ignorant hands. Maxwell, Howard and the S&L crisis (grimly, also the result of dumb Reaganite policies) firmly established the financial fate of the GSEs; Johnson and the 90s established the political fate of the GSEs. And let’s not forget that it was the RTC, a government agency, that invented some of the newer tranching/securitization methods that put MBS on the map as it had to clean up the S&L mess. Who’s the new Maxwell, careful as he was in battling the administration and Ranieri? Who’s the new Johnson, imperious and ready for the grand political battles of his time?

What will your earnings or book value multiple be if the state of your company depends on the might of its political dealmaking department? That is the question every consolidating Big Bank mortgage department asked itself during the 1990s before they succeeded in gaining 2004’s “triple A rating = conforming = GSE worthy” credit standards for mortgages. Before they succeeded in doing to the GSEs what the GSEs did to them during the prior decades.

Some folks want caviar, others want power and a soggy ham sandwich. The caviar eaters often do not understand the ham sandwich until it is too late.

Bill Maloni said...

Anon--As a GSE shareholder, I hope you are right!

And I am guilty of "pointing" at the hypothesis generators, but note I didn't criticize, just said I am "in awe" of the various twists and turns they put on possible stock price and court deadlines. The former I stay away from because nobody can consistently predict "tomorrow."

Notice I included myself in those ranks, but...

I never try and predict stock prices because I know I can't, successfully.

I believe over time, most well-managed stocks--absent some internal foul-up--should rise. But beyond that, I have no way of knowing to what level.

(Not to cop a plea, but good friend Tim Howard, says variations of the same thing and rejects questions which ask him directly about GSE stock prices.)

***************************************************************************************

Gustave--Very interesting question for which I don't have a specific answer but will off an opinion.

If the GSEs don't get properly resurrected, it doesn't matter who holds the titles in each place.

If, however, they get largely returned to private ownership, with all of the emoluments, real BoDs--not the robots sitting in those faux chairs--wiht a revitalized competitive bit in their teeth, I would be shocked if you had the same people holding down the top jobs.

That's because the reintroduction of GSE competition, whether with one another or with the bigs banks and others, will demand a more active and aggressive leadership, the proto-types for which may not be in place today.

The new top woman or man might have to come from Wall Street and have a financial/government component as long as the GSEs have to deal with the Congress and an inhospitable regulatory regime.

Unknown said...

Bill I think that is fair, and I agree no one can confidently predict stock prices. But I think I can say confidently that: (1) the thrust is to recap and release the companies (lets see if it gets done); (2) if that is the course, there really is no way to do that unless you end the sweep and exercise the warrants, because no one would buy $1 of stock if they knew they could be diluted down to $0.20 tomorrow (who would buy that offering?); (3) if the warrants are exercised the Treasury is then 100% incentivized to max the value of the common; and (4) well capitalized insurers trade north of 1.5x book and sometimes higher.

That fact pattern and train of logic narrows the lane meaningfully I think.

Bill Maloni said...

Unknown--Thanks for reading and commenting.

What is daunting and leads to wild suggestions/predictions is both the unprecedented nature of the "sweep" and the potential number of dollars involved and the fact that in one way or another a whole lot of Washington interests DO NOT want the GSEs back or back in their pre-2008 form.

Despite, it may be the best way to help the nation fulfill the unmet "piece of the American Dream" desires held by so many and what that positive means for US businesses and the employment activity associated with a possible housing boom, this blogger doesn't feel safe in predicting.

The politics (including presidential) will drive what this Admin does.

But, you have the Courts positioned to deliver a major decision which could jumpstart the GSEs, but with no certainty of what the courts will say and how much--if anything--a positive plaintiffs decision will mean structurally or financially.

If you believe as I do the courts will not shower gold on GSE shareholders (although the issue of damages is relative), all that glitters is not.....

An unhappy Admin (losing in court) could insist that Treasury still bell the GSE cat (see Census question developments) and festoon Fannie and Freddie with capital and operational baggage or seek a SCOTUS appeal.

Yes, some of what you suggest may be automatic, but with the GSEs, my experience is very little ever is!

Anonymous said...

Justice got AIG wrong - He should have been awarded damages. Will Court do it again? Not likely - Govt (if you want to call those Thugs that) should get a boot up the arse.

Bill Maloni said...

Anon--I'm sorry, are you asking will the Courts get it "wrong" again, or get it "right" the next time and issue a pro-plaintiffs (pro-GSE) decision??

If it's the latter, realize I believe virtually all the decisions since the original Lamberth decision, got it "wrong?"

Presumably--according to those friends who are lawyers--the Trump Admin's position/opinion, should not influence the Fifth Circuit, Judge Sweeney, or other jurists! (Personally, I don't believe that. I think it will produce agreement--no matter the clash with HERA--somewhere along the judicial lines and penalize the GSEs.)

Gustave H. said...

As a fellow investor, I can say with a smile that it may have already been decided who is willing to invest; we need the help of tens of more billions in the ‘secondary offering’, however, and it is indeed evident that none of those billions of real capital (ours is just residual ownership, if even that) will commit to investing in a turd.

My only point is that the ‘narrowing of the lane’ cannot be a purely financial exercise. The shape, twists and turns of the lane have yet to be determined.

Examples include regulatory oversight, the presence of a first-loss fund to protect the gov’s funding commitment or other such guarantee mechanism, the presence of new affordable housing goals, and a certain power structure that guarantees investors that political shenanigans won’t repeat themselves (“yeah right!” said Machiavelli in the back.)

The safest solution that will satisfy all stakeholders, one that will guarantee liquidity in times of crisis, is simple. It’s called ‘utility model’. Regulated profits for republicans. Affordable housing for democrats. Let the profits fill a first-loss fund to protect us all from judgment day. No more implicit guarantee. No more destruction of credit standards by private players racing to the bottom. No more private-public Frankensteins. No more buying of politicians by bankers who’d like to remove the neighbourhood cop of credit standards from their primary market.

Then again, that assumes that the US has enough virtue left to preserve its wonderful socialized mortgage system. Some Europeans, suffering under post-crisis privatization, bemoan what Buffett calls an economical tapeworm: inefficiently privatized health care. As mortgagers know, competition does lead to races to the bottom. Luckily, the 30-year fixed-rate is a magical institution here. Let’s hope it lasts forever.

Bill Maloni said...

Gustave--Interesting that you mention that, because of the last thing I removed from this blog before publishing it.

I repeated a line I had used previously which likely was overlooked because nobody on or offline mentioned it.

The line, (may have dropped a word or two) was this.

"If the Admin returns the GSEs to some form of public ownership and private management control, investors will flow to the "new" GSEs like a mountain stream rushing downhill!"

I based that on historical interest and appeal for the housing mission.

TruGld said...

Bill do you have any information on the conference that went on yesterday..with Odeon Capital, Dick Bove, etc...?
This drop has volume and I don't think it was just the BB article today

Bill Maloni said...

I don't and am trying to get some.

But, as I have been suggesting, there are a lot of moving parts here--if one assumes the courts and the Admin are not colluding or in some kind of dialog, which is--Ahem!--"against the law"--and when people see continued delays and read stories about no pressure to end Conservatorship soon (or ever), then hear/read Bove's dilution observations, they easily could panic and sell.

Most investors with whom I've spoken today take the position "in for a dime, in for a dollar." So, they are not running. But TG, GSE investing isn't for the faint of heart.

If I hear anything which explains something else, I'll post it.

TruGld said...

No worries, thanks for the reply...I don't waiver or get shaken easily, been doing this for way too long.
It just seems the further I dig the more despicable this whole thing gets...
As a result, the variables just seem to mount so I try to answer as many questions no matter how basic or complicated as I can from the most reliable sources, and use a more Bayesian approach to the investment.
I understand how some might view it as panic but I'm really trying to accumulate as much information as I can as quickly and unfortunately sometimes it may inconvenience some but it is what it is...I tend to see arrogance or a "teaching moment" from those with the answers.
Kind of funny how character shines through in those moments.

Anonymous said...

“God decided to show her displeasure”. God is the Father.

Prices for goods in the U.S. dropped 0.4 percent in June even as tariffs on $200 billion of Chinese imports rose from 10 percent to 25 percent, the Labor Department said Friday. Prices were unchanged from May.

The U.S. government has collected billions in tariffs.
When journalists (i.e Liberals) and lobbyists claim, “tariffs are taxes on consumers,” this is inaccurate.

President Trump, love him or hate him is making the past three decades of Presidents look like amateurs in every single category.

Your favorite,
Anon #1

Bill Maloni said...

One additional thought.

For "old-timers," where I put myself, GSE issues, including investing, has been a long series of ups and downs (the source of a lot of my cynicism) where someone, something, always seems to snatch away whatever good news seems to present itself.

It's the "GSE Shitwall" at which I occasionally thunder.

TruGld said...

No worries here, you're insight has been invaluable Bill.
It's only been of late have I been brave enough to wander out from the tree line to ask questions and engage available resources but I've been reading your informative pieces (and thundering) for quite sometime.
Be well.

Bill Maloni said...

Tru--I believe it's better for your heart and mind--occasionally--to thunder, rather than stay quiet.

Ask away at me, anytime.

TruGld said...

Is it me Bill or are the hit pieces hitting a crescendo?...perhaps something is afoot?