Wednesday, December 5, 2007


You know what happens when you get mad at people or things you love, like the GSEs or your favorite pro football team?

You expect certain behavior from them. You feel you are entitled to it and when you don’t get it, you feel you have a right to sound off, because you “care.”

When the star running back on your all time favorite football team fumbles four times in one crucial game, you want to say, “Don’t give to the ball to Willie Parker when the Steelers game is on the line.”

These issues compellingly overlap. Willie Parker should hold onto that football, keep it close, protect it, “cherish it” and never let anyone take it away from him. Just as the GSEs should nurture their franchises, protect them, cherish them, and never let anyone take them away.

But when they don’t, sometimes you just have to call out your homies.

Both Dropping the “Ball”

I complained to all my pro football buddies about Parker’s case of the “fumble-itis” and I am angry at the GSEs recent clunky handling of their charter responsibilities.

Willie Parker will run for well over 1000 yards this season, maybe lead the NFL, and possibly carry the Steelers deep into the playoffs on his legs and his speed (hopefully holding onto the football). But the GSEs clumsy play reveals something that close observers are beginning to suspect. Fannie and Freddie may not be as agile or as managerially adept as they once were and they need only look into the mirror to see who is responsible.

Have Fannie and Freddie been beaten down too much or have they lost too much talent? Do they no longer remember the fundamentals, why they were created and for what? Or is it just that there less than top tier managers piloting the ships and hard times are exposing them?

Someone at Freddie put a ton of questionable mortgages on their books and didn’t do a good job of managing that risky load. Fannie could have similar issues, although not as severe, but someone or some people at 3900 sure lost the book on how to introduce new and positive developments to a skeptical public.

While Freddie was acknowledging record losses, the folks on Wisconsin Avenue seemed surprised when they were questioned about a perfectly reasonable accounting change, that appeared in the quarterly financial documents which finally made them “SEC compliant.”

Fannie seemed caught unawares when analysts and media said “Huh, what’s this about?”

Worse, in a hastily generated conference call, the designated Fannie explainers just added to the confusion with more obtuse verbiage.

The “Fannies” totally failed to introduce and present the change to their various constituencies and then did an abysmal and confusing job explaining it when they were given an opportunity to do so. Thus they made a Fortune Magazine article—written by a long time critic--look more like another expose of ongoing GSE perfidy rather than just a snarky look at a new accounting technique.

Coming within days of Freddie’s announced heavy quarterly losses, Fannie’s accounting faux pas made the company look clumsy and ham handed, two very bad things when you are trying to emerge not only from a sad business chapter but doing so during a very difficult time in the mortgage finance industry.

Hold onto the ball, Willie!


The GSEs boards should look closely at who is at fault in each company’s respective debacle and demand accountability. Someone should be sanctioned (a rolling head or two would help) and comp cuts should be considered both in McLean and Northwest DC to those responsible for these costly and careless adventures. And nobody involved should qualify for end of the year bonus, when their actions cost tens of billions in market cap.

After spending hundreds of millions of dollars and nearly three years trying and reestablishing some of the credibility and respect that the institutions previously had by the buckets full, Freddie’s recent red ink and Fannie incompetence stole much of the healthy momentum.

Did Fannie "game plan" the announcement, did they rehearse (and rehearse, more) the presenters, press people and anyone else dealing with their publics over what to say and how to explain the changes? Did they have a “murder board,” where the prime presenter was assailed with unrehearsed questions from a variety of corporate officials who best know what kinds of details would be raised by media, analysts, and policy makers?

If so, what happened? Where were the adults?

Both stocks are down almost 50% from their 2007 highs, with a big slug of that coming in the past several weeks. Management isn’t responsible for the macro economy, but they do share responsibility for the conditions leading to some of the huge losses in shareholder value in that minuscule time frame. Lots retirement nest eggs and children’s’ college funds got buried, if not wiped out, in this slide into $30 stock prices and who knows if that money ever comes back to investors or lower level GSE employees, who can’t afford to “buy on the dips, as several company officers and board members have done recently?

Thank You Karen and Don’t Look to Lockie

I find it incredibly ironic that it took Karen Shaw Petrou—about whom I have written before in glowing terms re her financial services analytical ability--who has worked closely with and been employed by interests not friendly to the GSEs--to write that the accounting move made sense and Fannie Mae was appropriate in its adoption!

In tough times--and these are those--the GSEs can’t look to their regulator for help, since he is intent on doing as much damage to them as possible, without leaving his fingerprints directly at the crime scene. In the near term OFHEO’s Jim Lockhart forever will cite lofty reasons why he can’t or won’t reduce the additional capital or investment burdens which he imposed on Fannie and Freddie and which he just as easily can remove.

Although, because of his recent shenanigans, I now have found a surefire way to know exactly when OFHEO and Lockhart (one and the same) are “lying.” It’s when you see Lockie’s lips move.

Freddie always has been rumored to have more heavily invested in lower quality mortgages to reap a higher return. That’s OK, if manage those risks, carefully and constantly. Fannie no doubt has some of the same stuff on its books, too.

The different Fannie and Freddie issues bother me only a little bit less than the fact that, rhetoric to the contrary, neither company seems super willing to really dig into the housing mess the nation has encountered. What does “mission” mean to some of these officials?

One fact of the GSE world is that you will be slaughtered either for being a sheep or a wolf and I’d much rather meet my fate as a predator than a lamb chop provider.

There are pitfalls everywhere for those who undertake serious mortgage market initiatives, but that doesn’t mean you don’t do it. You’ll always find plenty of people to counsel prudence. But to many housers taking aggressive market actions is part of what the GSE franchise is all about.

(The Washington Post, which editorialized last week that the GSEs should not be given any new investment authority--ignoring that any current financial problems the companies have are from implementing current not new powers--just awoke to the fact, yesterday, that the GSEs have to manage to conflicting objectives: shareholders want high returns; Congress wants lots of missions activity; and their regulator wants them only to do things that are safe and sound and carry no risk. Gee, Posties, you only are about 15 years late in coming to that fact.)

This is and will continue to be the worst housing devaluation and heavy red ink experience that most of us ever have experienced, save those who lived during the Depression. But mortgage markets will adjust and real estate will survive and come back.

Fannie and Freddie more than ever need the support of their friends in the housing and mortgage finance industries, on Capitol Hill, and in public policy positions. To justify and earn that support, Fannie and Freddie have to step up and help home buyers and those various industries and interest groups when they need help, not when it’s convenient or easy for the GSEs.

Dick Syron, Dan Mudd and their senior people need to focus, prioritize, and extend their grasp and then r-e-a-c-h some more, making sure that they don’t drop that franchise ball!

But I always have believed that doing the former will insure success with the latter.


Steve Blumenthal a senior former OFHEO assistant, before Lockie came aboard, managed to make the news this past week, offering some predictions about his former agency and revealing that he’s now owns Fannie Mae stock.

Blumie predicted that OFHEO never will back away from its GSE constraints. I wish Steve would have talked more about his little guerilla effort against Fannie.

Steve’s name came up--a few years ago--in a most interesting HUD Inspector General’s report. The IG seemed to suggest that Blumenthal and then OFHEO Director Armando Falcon and possibly others, constructed and implemented a strategy aimed at coordinating bellicose OFHEO statements and actions with a variety of Fannie public events when Fannie Mae—through executive speeches or statements--sought to unveil new products or discuss new business initiatives.

The spoilers’ goal, apparently, was to squelch investor interest in the company’s stock and advocates interest in Fannie’s housing mission.

The HUD IG couldn’t quite bring himself to forward this finding to the Justice Department or even to the SEC, which I think still looks askance at people--even Republicans--trying to manipulate the stock prices of public companies, whether it's done intentionally or mindlessly through incompetence.

Steve now is in private legal practice in DC and is a Fannie shareholder (probably projects himself as a GSE expert, too).

I wonder if he owns enough stock so that Lockie’s antics are hurting Steve's wallet. One would hope so. Or does Stevie have a “long perspective,” looking forward to the days when Lockie is back in Texas doing the “greeter thing” and GSE values soar?

Maloni 12-5-2007