You don’t have to be smart to blog. I prove that. Since starting more than a year ago to write about Fannie Mae and Freddie Mac matters, though, lots of people including strangers as well as Washington policy makers have solicited my opinions. I’ve been interviewed by TV networks, wire services and newspapers. The other day a London financial columnist called to ask my view on “the U.S. Treasury’s GSE options?”
“Blimey. Well, as I told Hank over cigars…..!”
The point is that I’ve gotten enough feedback to know that what I say and write makes some sense to others, which is why I hope the message in today’s blog gets through to Treasury Secretary Henry Paulson.
Dear Mr. Secretary, I am Writing…
I wish for lots of nothing to happen now that Treasury is armed with GSE-takeover authority. I hope that Treasury’s new power stays unused in Hank Paulson’s closet.
The Bush Administration has gotten lots of advice about how to manage the GSEs, most of it hostile. I have preached “do no harm” and “approach this matter with a soft touch,” etc. etc.
Before President Bush leaves office, the powerful conservative right—to which many Bushies pay homage—wants a Fannie or Freddie scalp to decorate the lodge and they are determined to force Paulson get the bloody souvenir for them.
Bad dog, WSJ. You Went on the Rug, Again!!
The Wall Street Journal and its editorial fellow travelers lead the “scalp ‘em” school. By rough count, the WSJ has done nearly 50 anti-GSE company specific editorials, since 2004, excoriating or belittling the two companies, their secondary mortgage market work and calling for their demise.
.
It seems that Paul Gigot, Susan Lee before him, Mr. Murdoch and their cohorts obviously believe that no single subject in the business, domestic or foreign policy worlds has greater importance or priority than scuttling Fannie and Freddie.
Wars in Iraq and Afghanistan, Russian military adventures, Chinese business competition, India, our nation’s schools, world hunger, oil prices, Republican deficit spending, GOP Katrina pratfalls, torture, tax policy, Cabinet level incompetents, crumbling domestic infrastructure, UN shortcomings, Darfur, etc. etc. none has garnered more WSJ editorial ink, in the past four years, than the paper’s angst over Fannie Mae and Freddie Mac.
The WSJ and friends’ advice for the Bush Administration and Hank Paulson is very predictable:
--At the first opportunity, take the GSEs over, fulfilling a conservative wish first established by Ronald Reagan;
--Bust the GSEs into 10 parts, sell those pieces, and then let the banks vie for total control of all mortgage lending; or
-- “Nationalize” Fannie and Freddie (whatever that means), fire the senior managers, run the places with governments overseers. (God save us!).
The political timing for the Secretary can’t be worse. Because of the November elections, everywhere Paulson looks there are partisan bear traps. If he doesn’t do something quick, he may not have an opportunity later to “produce” the conservatives’ destruction fantasy.
The longer he waits the greater the chance that the companies can manage themselves out of the problems without government assistance.
Mr. Presidemt____?
On Nov 5, a just elected “President Obama” or President “President McCain” still will have ongoing problems in residential real estate, major public works needs, huge deficits, no national energy plans, no consensus on immigration, high food and fuel prices, other demands for relief from across the broader economy. And, he will face continued foreign intrigue, complete with buckets of US spending and GI deaths in Iraq and Afghanistan.
The next President likely will "enjoy" larger/stronger Democrat majorities in both chambers, which is good since it will facilitate Obama’s agenda or check McCain’s. But, just because they won’t take office until January doesn’t mean the Senators and Congressmen—including all of the “newbies”--won’t be Paulson-yakking, woofing, and press release threatening over things they can’t really affect. (Someone should immediately strangle the first freshman Member—from either party--who says, “When I get to Congress in January, I plan immediately to demand that Speaker Pelosi .…….!)
Nobody should be surprised if Hank Paulson one day—between now and the end of the year--turns to the TV cameras and cries out, “GSEs? What’s a fella to do?”
Just Chill
My heart-felt advice to Secretary Paulson is to be a minimalist. He should do nothing until he absolutely has to and even then I’d wait a week or two and make the most marginal changes necessary to insure that the companies keep their doors open and businesses functioning. Their housing role is too important and there isn’t a viable replacement.
The GSE losses will continue for some period (hopefully short), Mr. Secretary, but let both Fannie and Freddie exhaust all of their available capital before acting.
Despite the flow of red ink, the GSEs continue to earn money, but lose more. Their earnings allow them to first grow their loan loss reserves before they turn to core capital to cover their net losses.
I could make a case that one or both of the GSEs could go the next five or six quarters losing no more than they lost in the Second Quarter 2008 and still have real capital to deal with any additional losses in 2010.
Real estate is cyclical. The nation could escape this housing malady in 12 to 18 months. If this economic malaise lasts much longer than that, the United States will have far greater problems than what to do with Fannie and Freddie.
If the Bush Administration ignores the principles of the Hippocratic Oath, to first “do know harm,” but instead rushes to precipitously restructure Fannie and Freddie, the already significant consequences could mushroom.
Will the Bad Guys Accept Responsibility or Hide and Blame Others?
Are those who agitate Paulson to quash Fannie and Freddie prepared to accept responsibility if the Administration’s premature GSE strangulation unleashes a tsunami of world financial fear, uncertainty, and doubt about US credit worthiness? That incoming storm could crash onto our shores and wash away more domestic wealth, American lifestyle, and relative prosperity than anyone can imagine.
It doesn’t have to happen that way. Show extreme patience Mr. Secretary and let Fannie and Freddie try and work themselves out of their problems. It has to be cheaper and far less wrenching than dealing with a “financial services Armageddon.”
I, for one, wish Henry Paulson’s middle name was “Prudence” or he, at least, had that word tattooed somewhere on his body!
Pearlstein and Later “The Post”
In Friday’s Washington Post, Steve Pearlstein, a financial columnist for whom I have great respect, argued that Secretary Paulson should take over the companies ASAP and end the uncertainty and the market brittleness caused by doubt and confusion over Treasury plans and timing.
A day later, the Post joined in editorially, making essentially the same call.
I sympathize with what Pearlstein is suggesting, but might not the same market calm get generated if the Secretary announces that he’s not going to consider any “takeovers or capital infusions, until either Fannie or Freddie falls below the lowest capital level recognized in their statute?" This will draw a line, which all can follow based on quarterly earnings, and end the “Will he do it today?” kinds of doubt that impair mortgage market efficiency.
The suggestion in the previous paragraph originated with a very smart individual whose opinion I often seek on financial services matters. Many exchanges with him contain candid answers interspersed with colorful history lessons, going back centuries, when he frequently identifies despots acting much the way that GSE foes now behave and you should hear his opinion of Alan Greenspan! (And no, he’s not “Mr. Z”)
Maloni 8-25-2008
Monday, August 25, 2008
Tuesday, August 19, 2008
“Hey Ref. Al Saud 'Faud' Me!”
“Brace yourself Bridget,” is more than the punch line to an old joke about Irish lovemaking preliminaries.
It also could be the only alert Fannie and Freddie get when the Treasury department pays them some new unwelcome and unwanted attention.
If reading Jonathan Laing’s article in Barron’s about an imminent Treasury takeover of the two GSEs didn’t shake you, then Monday’s stock market action should have, since it stripped each company of more than one fifth of their market value.
It feels like the walls are closing in around the GSEs and nothing can stop the inevitable.
Why did some Administration official blab all of that policy design to Laing, assuming the Barron’s writer was being honest about his sources?
Was the White House insider just being a nice guy and educating the media? Not in Mr. Z’s “Tonkin Gulf” view!!
The curmudgeonly Z suggests one obvious answer is that it is easier to take over, wipe out, nationalize--employ your favorite verb or verb phrase here--a company which takes a 20% plus hit in their market value and has their share price driven toward the “penny stock” zone.
With the two stocks trading where they are now (Fannie at $6.15 and Freddie at $4.38 at Monday’s close), it doesn’t take too many hits to make that a 33% or 50% loss. I never can remember which is the numerator and which is the denominator, but in this case, those numbers all spell trouble for these two “Bridget’s,” trying to avoid Paulson’s machinations.
Federal Financial Analytics, owned by Basil Petrou and Karen Shaw Petrou, two very capable financial services analysts, put out a recent report on the new GSE reform law, pointing out that the bill’s “details,” as in “the Devil is in the…,” make a Treasury takeover not the easy task that some of us think.
The report suggests that a GSE nationalization-inclined Secretary Paulson still would have to go through some hoops before he could “come to the rescue” of two companies which don’t really want to be rescued. (As I wrote before, I hope the lawyers at both companies and their outside counterparts are hard at work figuring out ways to stop such an assault, IF it is being planned.)
If you are not a FFA client, contact the firm and become one or say positive things to Karen and Basil and see if FFA will send you their report or even its précis, since it is quite thought provoking and well done. (FFA, 202-589-0422.)
All of this takeover talk forced my old mind to wander.
“Back in the old days,” when I was employed at Fannie, we used to encounter a periodic rumor--which never materialized--about “Middle Eastern interests” trying to buy the company or even acquire the “Williamsburg” motif red brick headquarters building at 3900 Wisconsin Avenue.
While we used to concern ourselves somewhat with such things (not mightily as it turned out), we felt certain that Congress never would allow something as “American” as Fannie Mae or even Freddie Mac (being in Virginia, we didn’t see them as “American” as we were) to be acquired by overseas investors or any other investors.
Well, flash forward to the present and that picture might be different.
Today, some oil country potentate—and the Bushies would know most of them quite well-- could probably have either GSE right down to the flag poles for about $15 billion, give or take a few barrels.
I am sure that any such cash buyer would be greeted with great warmth by the Bush Administration, which then could avoid having to front any GSE capital infusions, since if that became necessary--after a sale--it likely would fall on an Obama or McCain administration. I also suspect that a potential buyer could get some months of regulatory slack from Secretary Paulson and that “son of OFHEO,” which might be all the time a new owner would need to start their investment on the road to a five or ten bagger, over time.
Policy makers shouldn’t care who owns Fannie or Freddie, as long as the new owners sign up for all of the housing mission goals and limitations. There’s a Bush family aphorism that fits this possibility. “If they are good enough to guard our ports and buy the General Motors and Chrysler buildings, they’re good enough to oversee our secondary mortgage market.”
One super positive in this scenario, considering what the Saudis do with their petty criminals—lopping off a hand or parts thereof—is if the Al Saud family bought Fannie or Freddie, we probably wouldn’t have to worry about national mortgage fraud anymore, or faulty appraisals, MI overcharges, and red lining!!
Speaking of the President and his friends, a former colleague shared this story with me, swearing that it is true. Personally, I believe it, but you know how Washington gossip is.
The man claims that President Bush was rehearsing his Bejing Olympic greeting speech. On the first try, the President approached the podium and stared into the teleprompter and said, “Ooh, ooh, ooh...ooh, ooh,” whereupon his speech coach ran up and whispered in his ear, “Mr. President those are the Olympic symbols, your speech text appears beneath that!”
Maloni 8-19-2008
It also could be the only alert Fannie and Freddie get when the Treasury department pays them some new unwelcome and unwanted attention.
If reading Jonathan Laing’s article in Barron’s about an imminent Treasury takeover of the two GSEs didn’t shake you, then Monday’s stock market action should have, since it stripped each company of more than one fifth of their market value.
It feels like the walls are closing in around the GSEs and nothing can stop the inevitable.
Why did some Administration official blab all of that policy design to Laing, assuming the Barron’s writer was being honest about his sources?
Was the White House insider just being a nice guy and educating the media? Not in Mr. Z’s “Tonkin Gulf” view!!
The curmudgeonly Z suggests one obvious answer is that it is easier to take over, wipe out, nationalize--employ your favorite verb or verb phrase here--a company which takes a 20% plus hit in their market value and has their share price driven toward the “penny stock” zone.
With the two stocks trading where they are now (Fannie at $6.15 and Freddie at $4.38 at Monday’s close), it doesn’t take too many hits to make that a 33% or 50% loss. I never can remember which is the numerator and which is the denominator, but in this case, those numbers all spell trouble for these two “Bridget’s,” trying to avoid Paulson’s machinations.
Federal Financial Analytics, owned by Basil Petrou and Karen Shaw Petrou, two very capable financial services analysts, put out a recent report on the new GSE reform law, pointing out that the bill’s “details,” as in “the Devil is in the…,” make a Treasury takeover not the easy task that some of us think.
The report suggests that a GSE nationalization-inclined Secretary Paulson still would have to go through some hoops before he could “come to the rescue” of two companies which don’t really want to be rescued. (As I wrote before, I hope the lawyers at both companies and their outside counterparts are hard at work figuring out ways to stop such an assault, IF it is being planned.)
If you are not a FFA client, contact the firm and become one or say positive things to Karen and Basil and see if FFA will send you their report or even its précis, since it is quite thought provoking and well done. (FFA, 202-589-0422.)
All of this takeover talk forced my old mind to wander.
“Back in the old days,” when I was employed at Fannie, we used to encounter a periodic rumor--which never materialized--about “Middle Eastern interests” trying to buy the company or even acquire the “Williamsburg” motif red brick headquarters building at 3900 Wisconsin Avenue.
While we used to concern ourselves somewhat with such things (not mightily as it turned out), we felt certain that Congress never would allow something as “American” as Fannie Mae or even Freddie Mac (being in Virginia, we didn’t see them as “American” as we were) to be acquired by overseas investors or any other investors.
Well, flash forward to the present and that picture might be different.
Today, some oil country potentate—and the Bushies would know most of them quite well-- could probably have either GSE right down to the flag poles for about $15 billion, give or take a few barrels.
I am sure that any such cash buyer would be greeted with great warmth by the Bush Administration, which then could avoid having to front any GSE capital infusions, since if that became necessary--after a sale--it likely would fall on an Obama or McCain administration. I also suspect that a potential buyer could get some months of regulatory slack from Secretary Paulson and that “son of OFHEO,” which might be all the time a new owner would need to start their investment on the road to a five or ten bagger, over time.
Policy makers shouldn’t care who owns Fannie or Freddie, as long as the new owners sign up for all of the housing mission goals and limitations. There’s a Bush family aphorism that fits this possibility. “If they are good enough to guard our ports and buy the General Motors and Chrysler buildings, they’re good enough to oversee our secondary mortgage market.”
One super positive in this scenario, considering what the Saudis do with their petty criminals—lopping off a hand or parts thereof—is if the Al Saud family bought Fannie or Freddie, we probably wouldn’t have to worry about national mortgage fraud anymore, or faulty appraisals, MI overcharges, and red lining!!
Speaking of the President and his friends, a former colleague shared this story with me, swearing that it is true. Personally, I believe it, but you know how Washington gossip is.
The man claims that President Bush was rehearsing his Bejing Olympic greeting speech. On the first try, the President approached the podium and stared into the teleprompter and said, “Ooh, ooh, ooh...ooh, ooh,” whereupon his speech coach ran up and whispered in his ear, “Mr. President those are the Olympic symbols, your speech text appears beneath that!”
Maloni 8-19-2008
Friday, August 15, 2008
Do We Need A New non-GSE Mortgage Wholesaler?
Secretary Paulson proclaimed last Sunday that he doesn’t believe it’s necessary to bolster Fannie Mae or Freddie Mac with federal funds, since neither currently requires the capital help to conduct their daily business. I hope that situation prevails for a long time.
Paulson’s statement won’t stop people from speculating on what a world without the two governments sponsored mortgage enterprises would look like and, indeed, lobbying Congress—or Secretary Paulson--for those changes.
In the current environment, where villains appear plentiful and there is a lot of angst and confusion, policy makers and everyday citizens are directing their scatter shot rage at the mortgage market’s structure and various participants.
In my view, they are no desirable alternatives to Fannie Mae and Freddie Mac administering our nation’s secondary mortgage market, without unnecessary and undesirable cost, upheaval, consumer negatives, and restructuring downsides.
To reduce some risks, the nation could all but do away with fixed rate mortgage finance; pulverize Fannie and Freddie into tiny pieces and reintroduce a lot of market inefficiency, which the GSEs have removed from the mortgage finance system; give banks new Fannie and Freddie like secondary mortgage market authority; or nationalize the two GSEs, run them out of Treasury and either stop there or wait a reasoning period while the bodies cool off, and then recreate Fannie and Freddie under different names.
Banks—which already control the primary market place, where borrowers go to take out a mortgage loan--would be the changes’ major beneficiaries. But when people complain about Fannie’s and Freddie’s “government subsidy” and not being “free market,” I wonder how they ignore the huge government benefits which flow to commercial banks from federal deposit insurance.
Federally insured deposits supply banks with over $5 trillion in working capital at rates far cheaper than what Fannie and Freddie pay for their GSE debt, but somehow that federal bank “subsidy” gets ignored.
And do you really think any bank would do 55% of its annual business with low, moderate, and middle income families as the GSEs must now do?
Certainly there are non F/F options, but none are appealing since they involve dramatic mortgage market or consumer changes. Given the real possibility of better GSE management and oversight going forward, we should just hold onto what we have and improve it.
Bank Mortgage Lending Without the GSEs, a Failure
A successful secondary mortgage market requires a constant presence and a principal—the authority of which is acknowledged and accepted by all--that can move assets in common form among all of the buyers, sellers, investors, and other competing mortgage market interests.
That’s not what commercial banks do.
The US has lots of different home mortgage lenders--you can find them on every street corner--and some of them quite large commercial banks. But as the banks quickly would testify and, frankly, as they have shown, banks are not structured to hold onto and manage a home mortgage’s embedded long term interest rate risk and, sometimes, even the inherent credit risk bothers them.
Nor are banks inclined always (since they are not compelled) to invest exclusively in mortgages—the key Fannie and Freddie function--when economic setbacks occur. Commercial banks can, unlike Fannie and Freddie, look elsewhere (including overseas) for non-mortgage lending alternatives often where the return is greater.
Despite what they will say, most banks like knowing that they can lay off the mortgage loans they originate on Fannie and Freddie, take the money and go re-lend it.
Recently, the commercial bank and investment banking mob mistakenly undertook a major GSE-copycat effort without employing Fannie Mae and Freddie Mac and used a cabal of mortgage brokers and Wall Street firms to originate untold thousands of low quality default prone mortgages, which were packaged in securities and sold all over the world.
That exercise is what produced the subprime crisis, which currently is ravaging our domestic real estate market and shutting down financial services companies across the board.
It was a no good, horrible, very bad experiment for which the nation has paid a very heavy tab and may do so for a long time!!
Of course, Congress could leave the banks unchanged structurally and just mandate that all home mortgage activity be conducted with short term adjustable rate mortgages (ARMs), the rates on which change—both up and down—as national lending rates move. That might encourage more commercial banks to hold them in their portfolios. But we are a nation of fixed rate mortgage (FRM) borrowers and we like the certainty of that same monthly mortgage payment for as long as we live in the house.
And which Senator or Member of Congress would want to do away with something consumers so prefer, just to make it easier for the banks to protect their assets?
Take a Deep Breath, Leave the GSEs Alone and just Exhale(r)
Congress might just decide to scuttle Fannie and Freddie and create new institutions, with different names, to do what the two existing GSEs now do.
That’s a guaranteed few years worth of work and they’ll never get it right---once all of the voices seek their piece of the action--plus the market will suffer in the interim.
Lawmakers could structurally change one large national bank or an amalgam of same, investing that institution with Fannie and Freddie powers. The new GSE could set the mortgage lending underwriting guidelines for the nation. That might work, if you prohibited it from doing anything else besides mortgage lending, but who really trusts the big banks to do the right thing, especially when they now control the entire primary mortgage market, too?
When all is considered, the best step for the maximum interest of the country’s mortgage system and its home buying consumers is to stand with—not behind, but with—Fannie Mae and Freddie Mac and let them work themselves out of the current problems, which well could be short term (a year or less) and not fatal, as Secretary Paulson seemed to suggest this past weekend.
A new regulatory regime has been passed into law and can deal with any GSE excesses, but an incoming Obama Administration would do well to apply a deft hand when choosing an Administrator to oversee two institutions which—if you listen between the polemics--policy makers and public officials in both parties claim are necessary to lead our nation out of its current real estate credit crisis.
Vlad the Impaler!
--On his trip to China when he spoke to Vladimir Putin, did George Bush look into Vlad’s heart and see the “Slayer of Georgia?”
And it is not true that when informed that the Russia army had crossed into Georgia that President Bush said, “Those people in Atlanta are going to be real upset!”
Edwards the Impaler!
--CNN conducted a poll asking readers their opinion on John Edwards’ political future? What future? He cheated on a wife, who both has cancer and had shown amazing energy and support for his political dreams, while he engaged in hubristic “Me” antics.
What kind of political future can he possibly have or deserve? He may have trouble just being a trial lawyer!
Larry Kudlow the Inhaler!
I laughed when I read an online copy of Larry Kudlow’s National Journal article, gushing over the very tough stand that John McCain took (in a St. Petersburg Times op-ed) against the Paulson bailout mechanism for Fannie Mae and Freddie Mac. The always- lacking-in-credibility and pompous Mr. Kudlow waxed eloquent over McCain’s tough stand against the two companies who Kudlow tut-tutted had spent “$170 million dollars” for lobbying over the past 10 years.
I wonder if Mr. Kudlow would be surprised or annoyed to find out that three of the top people still around Senator McCain—and two seasoned veterans who just left the Senator's campaign in the last few months—once were GSE political consultants and on the receiving end of that GSE political gold.
Jim DeMint the Free Speech Derailer
Sen. Jim DeMint (R-SC) wants Fannie and Freddie to stop lobbying his colleagues or making campaign contributions to them, since he doesn’t think its right. (What is it with these right wingers when it comes to casually tromping on constitutional rights?)
Well, I agree with Sen. DeMint, but only when and if Fannie and Freddie take a penny of Treasury financial support. If the latter occurs, in my view, their right to be private companies ends and they should operate under the same rules as any other federal instrumentality, meaning their can have congressional liaison officials but not lobbyists and no political giving.
But, until that time and until Congress changes the law, Fannie Mae and Freddie Mac enjoy the same First Amendment rights as any other American corporation.
The Senator might want to check his history. More than 10 years ago, GOP Majority Leader Dick Armey (R-Tex.), angry over some Fannie/Freddie lobbying antic challenged those rights and asked the then General Accounting Office (GAO)--Congress’ investigative arm--to look in the matter. Mr. Armey wasn’t happy when GAO affirmed that Fannie Mae and Freddie Mac could lobby and make political contributions just like other businesses.
Maloni 8-15-2008
Paulson’s statement won’t stop people from speculating on what a world without the two governments sponsored mortgage enterprises would look like and, indeed, lobbying Congress—or Secretary Paulson--for those changes.
In the current environment, where villains appear plentiful and there is a lot of angst and confusion, policy makers and everyday citizens are directing their scatter shot rage at the mortgage market’s structure and various participants.
In my view, they are no desirable alternatives to Fannie Mae and Freddie Mac administering our nation’s secondary mortgage market, without unnecessary and undesirable cost, upheaval, consumer negatives, and restructuring downsides.
To reduce some risks, the nation could all but do away with fixed rate mortgage finance; pulverize Fannie and Freddie into tiny pieces and reintroduce a lot of market inefficiency, which the GSEs have removed from the mortgage finance system; give banks new Fannie and Freddie like secondary mortgage market authority; or nationalize the two GSEs, run them out of Treasury and either stop there or wait a reasoning period while the bodies cool off, and then recreate Fannie and Freddie under different names.
Banks—which already control the primary market place, where borrowers go to take out a mortgage loan--would be the changes’ major beneficiaries. But when people complain about Fannie’s and Freddie’s “government subsidy” and not being “free market,” I wonder how they ignore the huge government benefits which flow to commercial banks from federal deposit insurance.
Federally insured deposits supply banks with over $5 trillion in working capital at rates far cheaper than what Fannie and Freddie pay for their GSE debt, but somehow that federal bank “subsidy” gets ignored.
And do you really think any bank would do 55% of its annual business with low, moderate, and middle income families as the GSEs must now do?
Certainly there are non F/F options, but none are appealing since they involve dramatic mortgage market or consumer changes. Given the real possibility of better GSE management and oversight going forward, we should just hold onto what we have and improve it.
Bank Mortgage Lending Without the GSEs, a Failure
A successful secondary mortgage market requires a constant presence and a principal—the authority of which is acknowledged and accepted by all--that can move assets in common form among all of the buyers, sellers, investors, and other competing mortgage market interests.
That’s not what commercial banks do.
The US has lots of different home mortgage lenders--you can find them on every street corner--and some of them quite large commercial banks. But as the banks quickly would testify and, frankly, as they have shown, banks are not structured to hold onto and manage a home mortgage’s embedded long term interest rate risk and, sometimes, even the inherent credit risk bothers them.
Nor are banks inclined always (since they are not compelled) to invest exclusively in mortgages—the key Fannie and Freddie function--when economic setbacks occur. Commercial banks can, unlike Fannie and Freddie, look elsewhere (including overseas) for non-mortgage lending alternatives often where the return is greater.
Despite what they will say, most banks like knowing that they can lay off the mortgage loans they originate on Fannie and Freddie, take the money and go re-lend it.
Recently, the commercial bank and investment banking mob mistakenly undertook a major GSE-copycat effort without employing Fannie Mae and Freddie Mac and used a cabal of mortgage brokers and Wall Street firms to originate untold thousands of low quality default prone mortgages, which were packaged in securities and sold all over the world.
That exercise is what produced the subprime crisis, which currently is ravaging our domestic real estate market and shutting down financial services companies across the board.
It was a no good, horrible, very bad experiment for which the nation has paid a very heavy tab and may do so for a long time!!
Of course, Congress could leave the banks unchanged structurally and just mandate that all home mortgage activity be conducted with short term adjustable rate mortgages (ARMs), the rates on which change—both up and down—as national lending rates move. That might encourage more commercial banks to hold them in their portfolios. But we are a nation of fixed rate mortgage (FRM) borrowers and we like the certainty of that same monthly mortgage payment for as long as we live in the house.
And which Senator or Member of Congress would want to do away with something consumers so prefer, just to make it easier for the banks to protect their assets?
Take a Deep Breath, Leave the GSEs Alone and just Exhale(r)
Congress might just decide to scuttle Fannie and Freddie and create new institutions, with different names, to do what the two existing GSEs now do.
That’s a guaranteed few years worth of work and they’ll never get it right---once all of the voices seek their piece of the action--plus the market will suffer in the interim.
Lawmakers could structurally change one large national bank or an amalgam of same, investing that institution with Fannie and Freddie powers. The new GSE could set the mortgage lending underwriting guidelines for the nation. That might work, if you prohibited it from doing anything else besides mortgage lending, but who really trusts the big banks to do the right thing, especially when they now control the entire primary mortgage market, too?
When all is considered, the best step for the maximum interest of the country’s mortgage system and its home buying consumers is to stand with—not behind, but with—Fannie Mae and Freddie Mac and let them work themselves out of the current problems, which well could be short term (a year or less) and not fatal, as Secretary Paulson seemed to suggest this past weekend.
A new regulatory regime has been passed into law and can deal with any GSE excesses, but an incoming Obama Administration would do well to apply a deft hand when choosing an Administrator to oversee two institutions which—if you listen between the polemics--policy makers and public officials in both parties claim are necessary to lead our nation out of its current real estate credit crisis.
Vlad the Impaler!
--On his trip to China when he spoke to Vladimir Putin, did George Bush look into Vlad’s heart and see the “Slayer of Georgia?”
And it is not true that when informed that the Russia army had crossed into Georgia that President Bush said, “Those people in Atlanta are going to be real upset!”
Edwards the Impaler!
--CNN conducted a poll asking readers their opinion on John Edwards’ political future? What future? He cheated on a wife, who both has cancer and had shown amazing energy and support for his political dreams, while he engaged in hubristic “Me” antics.
What kind of political future can he possibly have or deserve? He may have trouble just being a trial lawyer!
Larry Kudlow the Inhaler!
I laughed when I read an online copy of Larry Kudlow’s National Journal article, gushing over the very tough stand that John McCain took (in a St. Petersburg Times op-ed) against the Paulson bailout mechanism for Fannie Mae and Freddie Mac. The always- lacking-in-credibility and pompous Mr. Kudlow waxed eloquent over McCain’s tough stand against the two companies who Kudlow tut-tutted had spent “$170 million dollars” for lobbying over the past 10 years.
I wonder if Mr. Kudlow would be surprised or annoyed to find out that three of the top people still around Senator McCain—and two seasoned veterans who just left the Senator's campaign in the last few months—once were GSE political consultants and on the receiving end of that GSE political gold.
Jim DeMint the Free Speech Derailer
Sen. Jim DeMint (R-SC) wants Fannie and Freddie to stop lobbying his colleagues or making campaign contributions to them, since he doesn’t think its right. (What is it with these right wingers when it comes to casually tromping on constitutional rights?)
Well, I agree with Sen. DeMint, but only when and if Fannie and Freddie take a penny of Treasury financial support. If the latter occurs, in my view, their right to be private companies ends and they should operate under the same rules as any other federal instrumentality, meaning their can have congressional liaison officials but not lobbyists and no political giving.
But, until that time and until Congress changes the law, Fannie Mae and Freddie Mac enjoy the same First Amendment rights as any other American corporation.
The Senator might want to check his history. More than 10 years ago, GOP Majority Leader Dick Armey (R-Tex.), angry over some Fannie/Freddie lobbying antic challenged those rights and asked the then General Accounting Office (GAO)--Congress’ investigative arm--to look in the matter. Mr. Armey wasn’t happy when GAO affirmed that Fannie Mae and Freddie Mac could lobby and make political contributions just like other businesses.
Maloni 8-15-2008
Friday, August 8, 2008
Z Truth??
I am a conspiracy theorist. I don’t believe that Lee Harvey Oswald acted alone or the single pristine bullet theory, which authorities claim killed President Kennedy, wounded Governor Connally and appeared unscathed on a hospital gurney. I think that only one of those millions of UFO, Bigfoot, and Nessie sightings has to be true (in each genre) for there to be “something out there.”
So, here goes another one. Maybe this conspiracy has legs or maybe it’s bull pucky (which I hope) and I’ll merely entertain you with some fanciful thoughts. But, we have to start with a question.
Did the notorious Mr. Z hit the nail on the head?
Mr. Z’s Call
Mr. Z (my name for him), the knowledgeable Washington financial services expert, suggested to me—and likely others, the blabbermouth—that the Treasury’s announced plan to backstop the GSEs, “if” they ever needed help, really was part of a broader Paulson scheme to do away with those “damned GSEs” in their current structure.
Mr. Z speculated that the Treasury Secretary—who successfully sold his idea to the Congress—cunningly would employ his new authority to reduce the GSEs to a "government regulated utility" status, which the mortgage market still would heavily use, but which minimizes Fannie’s and Freddie’s overall financial risk as well as profit. The scheme would introduce some additional cost and inefficiency into the residential real estate market, but nobody would really question it or care, since so much else is going on with the economy and national politics.
The “Wise One” snarkily labeled the Paulson plan the “Gulf of Tonkin” resolution, analogous to what Congress passed when it used a questionable military incident in that puddle of water to give President Johnson the authority to declare war against North Vietnam.
This week, PIMCO’s Bill Gross suggested that both Fannie Mae and Freddie will be bailed out by Treasury within weeks. When the GSE bill was signed, a respected Washington journalist, who has covered GSE issues for years, confidently told me that she thinks that both companies would be “nationalized within a year.” Others have made similar calls and just in the past few days.
What do they know/see that I don’t??
Did Congress undertake the Vietnam War on a questionable pretext? Would Treasury use Freddie’s red ink or Fannie’s as justification to deconstruct and take over the GSEs?
Is Ben Bernanke’s middle name “Shalom?”
Paulson The Puppeteer
Hank Paulson isn’t the bad guy here, necessarily, merely the clever fellow who figured out how--possibly--to put this “disassembly” together, based on his understanding of markets, sense of politics, and insight into the amount of red ink facing Freddie and Fannie, and how those elements could be manipulated to produce an end to the modern GSEs.
It might never come to that, but signs are ominous.
Here’s how Paulson could roll up the GSEs with little or no complaints from their formerly adoring public, now reduced to a handful of scared shareholders, the immediate families of those remaining GSEs employees, not to mention the employees themselves, most foreign central banks holding a ton of GSE debt, and much of Wall Street which makes millions from the companies securities operations.
In the next month to three months, the Treasury Secretary would cite falling GSE capital (see Fannie’s numbers today, added to Freddie’s earlier this week) and escalating pending losses. He “insists” that the Treasury must come to the financial aid of Fannie Mae and/or Freddie Mac, by investing public money in their common or preferred stocks.
Who is going object and say “No?”
Will the companies balk, arguing that they still have sufficient capital to outlast the cascading red ink? Sure they will, but they have “negative credibility,” when they talk to the markets. Who will believe them? (If “neg-cred” ever makes it into the lexicon, I want credit for it!)
Will the GSEs go to court? I would if I was Fannie or Freddie. But wouldn’t the Secretary’s pronouncement and the resulting shareholder rush to sell underscore the very chaos Paulson says exists and requires his intervention? With the share price dropping to near zero, how would a court –in any timely fashion--differentiate between who caused what GSE problems and when? What judge rolls the Secretary of the Treasury and presumably the Fed, OFHEO, etc., when they concur that help is needed? And--what happens in the interim--until the Supreme Court is asked to get involved?
High stakes game, very high stakes game. But if a corporate putsch happens, I suspect that the market first erupts in anger and confusion, but then quickly settles down when Treasury guarantees GSE debt holders that they will be fine. Paulson et al win and the companies become government step-children.
Who Really Cares?
The “housers” might bitch and moan, but who listens to them these days? And, no matter what you think, the public—because it has no idea what is true and what isn’t and has no real idea from where mortgage money comes—likely has OD’d on the constant Fannie and Freddie soap operas.
Once under Treasury control, with no shareholder interests to bother them, Treasury uses up existing capital, starts to unwind the GSE portfolios which creates some more capital, and announces to the world that Fannie and Freddie will “stay in place,” as the nation’s secondary mortgage market pillars, but under Treasury/OFHEO (or its successor) control.
Some/many GSE employees will bolt, but others will hang around and get paid (less!) to do what the government wants.
Senators and Members of Congress, who will be back home seeking their own re-election or celebrating/lamenting the Obama win and the massive new Democrat majorities, will say much but do little.
President-to-be Obama might “harrumph” but then ask Paulson to hang around a bit until his own Treasury candidate can get his/her hands around the issue. But the world would move on.
Now, as I said, Mr. Z started me down this road. Rep. Henry Waxman’s recent request about possible Administration hanky panky in the stunning downturns in Fannie and Freddie stock prices caused me to wonder a bit about this White House, which consistently has used the media especially when the target was the GSEs, helping set a predicate for intervention.
Can The GSEs Avoid the Ax?
If these folks (Mr. Z, Congressman Waxman, Bill Gross, and others) are right, is there a way to avoid this takeover scenario? Is the end of GSEs, as we know them, inevitable?
“No,” it isn’t inevitable and “Yes” there is a way--albeit narrow--to avoid it.
The GSEs need to get their legal ducks in order today and plan what they would do, if Treasury tried a premature takeover, when capital still exists on their books. Get the lawyers working now, not after Treasury strikes.
And Fannie and Freddie, quickly, need to build their equity bases—with real capital—before they get close to the point where Paulson or others can argue they’re bankrupt. Move whatever has value, now. Shave whatever expenses you can, now. (Oh, and Fannie and Freddie should stop blaming the “housing mission” for the crap loans and the “Alt A” business decisions they made. That’s dishonest!)
The GSEs must then hope--if all of their amelioration efforts produce nothing--that the worst thing that happens to the companies is that Fannie and Freddie become clones of the gas and electric companies, regulated utilities with limited growth and earnings.
Maloni 8-8-2008
So, here goes another one. Maybe this conspiracy has legs or maybe it’s bull pucky (which I hope) and I’ll merely entertain you with some fanciful thoughts. But, we have to start with a question.
Did the notorious Mr. Z hit the nail on the head?
Mr. Z’s Call
Mr. Z (my name for him), the knowledgeable Washington financial services expert, suggested to me—and likely others, the blabbermouth—that the Treasury’s announced plan to backstop the GSEs, “if” they ever needed help, really was part of a broader Paulson scheme to do away with those “damned GSEs” in their current structure.
Mr. Z speculated that the Treasury Secretary—who successfully sold his idea to the Congress—cunningly would employ his new authority to reduce the GSEs to a "government regulated utility" status, which the mortgage market still would heavily use, but which minimizes Fannie’s and Freddie’s overall financial risk as well as profit. The scheme would introduce some additional cost and inefficiency into the residential real estate market, but nobody would really question it or care, since so much else is going on with the economy and national politics.
The “Wise One” snarkily labeled the Paulson plan the “Gulf of Tonkin” resolution, analogous to what Congress passed when it used a questionable military incident in that puddle of water to give President Johnson the authority to declare war against North Vietnam.
This week, PIMCO’s Bill Gross suggested that both Fannie Mae and Freddie will be bailed out by Treasury within weeks. When the GSE bill was signed, a respected Washington journalist, who has covered GSE issues for years, confidently told me that she thinks that both companies would be “nationalized within a year.” Others have made similar calls and just in the past few days.
What do they know/see that I don’t??
Did Congress undertake the Vietnam War on a questionable pretext? Would Treasury use Freddie’s red ink or Fannie’s as justification to deconstruct and take over the GSEs?
Is Ben Bernanke’s middle name “Shalom?”
Paulson The Puppeteer
Hank Paulson isn’t the bad guy here, necessarily, merely the clever fellow who figured out how--possibly--to put this “disassembly” together, based on his understanding of markets, sense of politics, and insight into the amount of red ink facing Freddie and Fannie, and how those elements could be manipulated to produce an end to the modern GSEs.
It might never come to that, but signs are ominous.
Here’s how Paulson could roll up the GSEs with little or no complaints from their formerly adoring public, now reduced to a handful of scared shareholders, the immediate families of those remaining GSEs employees, not to mention the employees themselves, most foreign central banks holding a ton of GSE debt, and much of Wall Street which makes millions from the companies securities operations.
In the next month to three months, the Treasury Secretary would cite falling GSE capital (see Fannie’s numbers today, added to Freddie’s earlier this week) and escalating pending losses. He “insists” that the Treasury must come to the financial aid of Fannie Mae and/or Freddie Mac, by investing public money in their common or preferred stocks.
Who is going object and say “No?”
Will the companies balk, arguing that they still have sufficient capital to outlast the cascading red ink? Sure they will, but they have “negative credibility,” when they talk to the markets. Who will believe them? (If “neg-cred” ever makes it into the lexicon, I want credit for it!)
Will the GSEs go to court? I would if I was Fannie or Freddie. But wouldn’t the Secretary’s pronouncement and the resulting shareholder rush to sell underscore the very chaos Paulson says exists and requires his intervention? With the share price dropping to near zero, how would a court –in any timely fashion--differentiate between who caused what GSE problems and when? What judge rolls the Secretary of the Treasury and presumably the Fed, OFHEO, etc., when they concur that help is needed? And--what happens in the interim--until the Supreme Court is asked to get involved?
High stakes game, very high stakes game. But if a corporate putsch happens, I suspect that the market first erupts in anger and confusion, but then quickly settles down when Treasury guarantees GSE debt holders that they will be fine. Paulson et al win and the companies become government step-children.
Who Really Cares?
The “housers” might bitch and moan, but who listens to them these days? And, no matter what you think, the public—because it has no idea what is true and what isn’t and has no real idea from where mortgage money comes—likely has OD’d on the constant Fannie and Freddie soap operas.
Once under Treasury control, with no shareholder interests to bother them, Treasury uses up existing capital, starts to unwind the GSE portfolios which creates some more capital, and announces to the world that Fannie and Freddie will “stay in place,” as the nation’s secondary mortgage market pillars, but under Treasury/OFHEO (or its successor) control.
Some/many GSE employees will bolt, but others will hang around and get paid (less!) to do what the government wants.
Senators and Members of Congress, who will be back home seeking their own re-election or celebrating/lamenting the Obama win and the massive new Democrat majorities, will say much but do little.
President-to-be Obama might “harrumph” but then ask Paulson to hang around a bit until his own Treasury candidate can get his/her hands around the issue. But the world would move on.
Now, as I said, Mr. Z started me down this road. Rep. Henry Waxman’s recent request about possible Administration hanky panky in the stunning downturns in Fannie and Freddie stock prices caused me to wonder a bit about this White House, which consistently has used the media especially when the target was the GSEs, helping set a predicate for intervention.
Can The GSEs Avoid the Ax?
If these folks (Mr. Z, Congressman Waxman, Bill Gross, and others) are right, is there a way to avoid this takeover scenario? Is the end of GSEs, as we know them, inevitable?
“No,” it isn’t inevitable and “Yes” there is a way--albeit narrow--to avoid it.
The GSEs need to get their legal ducks in order today and plan what they would do, if Treasury tried a premature takeover, when capital still exists on their books. Get the lawyers working now, not after Treasury strikes.
And Fannie and Freddie, quickly, need to build their equity bases—with real capital—before they get close to the point where Paulson or others can argue they’re bankrupt. Move whatever has value, now. Shave whatever expenses you can, now. (Oh, and Fannie and Freddie should stop blaming the “housing mission” for the crap loans and the “Alt A” business decisions they made. That’s dishonest!)
The GSEs must then hope--if all of their amelioration efforts produce nothing--that the worst thing that happens to the companies is that Fannie and Freddie become clones of the gas and electric companies, regulated utilities with limited growth and earnings.
Maloni 8-8-2008
Tuesday, August 5, 2008
There Will Be Blood
The GSEs are in a race for their lives, but they are not racing each other.
The race is between the huge amounts of red ink saturating the entire financial services world--and virtually every single mortgage lender/investor--and the amount of capital Fannie and Freddie have on hand or can raise to staunch that bloody flow.
Not to belabor the metaphor, but the Treasury/Fed relief is a triage, which neither company ever wants to apply. To do so will signal their corporate demise just as assuredly as swallowing poison would herald a human death.
We’ll get first hints and know more by the end of the week, when both Freddie and Fannie, apparently in that order, will have announced their Second Quarter
financials.
If the GSEs can manage their losses or can supplement their existing capital—via market means--they can survive the blood loss now and keep their unique status. Having thus succeeded, their managers will have earned the right to stay and prosper, along with the companies.
If they can’t and eventually need Uncle Sam’s financial help then the company’s leaders deserve to be kicked to the curb for errors of commission which bankrupted their enterprises.
In one sense it won’t matter because inviting or allowing the federal government in, will effectively nationalize the companies and end private management’s discretion, no matter what facade is erected to pretend that isn’t the case.
Simply stated the GSEs should always have sufficient capital to stave off catastrophic damage, if their portfolios were overflowing with the traditional GSE product. But neither is.
Both have some (too much?) of the subprime and Alt-A cancer which could drain their capacity to survive this “financial Armageddon.”
It is those stressed assets which are hemorrhaging and costing them, not the overall size of their portfolios, the cost of their debt, whether they lobby Congress effectively or not, or how much they pay their officers,
In retrospect those non traditional GSE “investment decisions” were the wrong ones, for several reasons, not the least of which was that they were inconsistent with historical GSE underwriting standards.
But, when you look at decisions like these, I’m reminded of the Orange County, California, Treasurer Bob Citron, who back in 1994 presided over a $1.7 billion loss of county tax revenues because he invested that money in Wall Street securities which bet that rates were coming when the Fed kept them up.
Citron—who would have had statues built in his honor, if he only had invested in the opposite direction--lost his job and was shamed into retirement.
Citron bet red, but it came up black.
No stealing, nothing unethical, Bob Citron just looked at the financial/economic tea leaves and chose wrong.
Yet, private money managers or corporate officials who direct huge private investment face something of the same choice and if you make a mistake, like Citron, you should pay at least with your job.
I don’t think any Chairman/CEO in their right mind would drive decisions based on the belief that federal government would bail out his/her business mistakes. That person would go down in infamy, if a federal bailout was necessary. Bad judgments and decisions, sure, but—I hate to disappoint you right wingers—nobody who is rational factors in Uncle Sam’s help and thinks they or their company would survive its application..
The jury is still out looking at all of the GSEs 2005-2007 investment decisions which will decide the companies’ fates. There have been no lengthy commentaries about loading up on poorly underwritten or priced “liar loans” (where everyone, borrower and lender alike lies).
But, if these loans come back and fatally bite them, any GSE postmortem alleging “subprime and associated problems in the primary mortgage markets,” as the sole explanation for corporate failure should be rejected as a white wash.
As someone who called themselves “Anonymous” claimed in the comments section of one of my earlier blogs, he/she attended a Fannie Mae senior officials meeting where it an important personage lamented that Wall Street was doing a better job securitizing mortgages than the GSEs, implying the company needed to compete better against the investment banking giants and their mortgage broker networks.
If that exchange occurred, I hope it wasn’t codified as an on high directive since the Street guys were packaging poison in high yielding private label securities, which succeeded in horribly sickening the entire mortgage finance system and large parts of the broader economy.
That’s one competition from which they should have stayed away.
Mistakes have been made by the GSEs, mistakes made by people who should have known better and who gambled. Whether they bet “too much,” and the bets prove business fatal, we’ll know soon, possibly not this week, but soon after that.
(This blog was completed before I read today’s New York Times front page story on Dick Syron and the Fortune magazine article noting 10 CEOs on the Hot Seat.)
Maloni 8-5-2008
(Happy third birthday to Rex Ostos Maloni, Grandma Heidi's and Grandpa Cheerios's favorite three year old boy!)
The race is between the huge amounts of red ink saturating the entire financial services world--and virtually every single mortgage lender/investor--and the amount of capital Fannie and Freddie have on hand or can raise to staunch that bloody flow.
Not to belabor the metaphor, but the Treasury/Fed relief is a triage, which neither company ever wants to apply. To do so will signal their corporate demise just as assuredly as swallowing poison would herald a human death.
We’ll get first hints and know more by the end of the week, when both Freddie and Fannie, apparently in that order, will have announced their Second Quarter
financials.
If the GSEs can manage their losses or can supplement their existing capital—via market means--they can survive the blood loss now and keep their unique status. Having thus succeeded, their managers will have earned the right to stay and prosper, along with the companies.
If they can’t and eventually need Uncle Sam’s financial help then the company’s leaders deserve to be kicked to the curb for errors of commission which bankrupted their enterprises.
In one sense it won’t matter because inviting or allowing the federal government in, will effectively nationalize the companies and end private management’s discretion, no matter what facade is erected to pretend that isn’t the case.
Simply stated the GSEs should always have sufficient capital to stave off catastrophic damage, if their portfolios were overflowing with the traditional GSE product. But neither is.
Both have some (too much?) of the subprime and Alt-A cancer which could drain their capacity to survive this “financial Armageddon.”
It is those stressed assets which are hemorrhaging and costing them, not the overall size of their portfolios, the cost of their debt, whether they lobby Congress effectively or not, or how much they pay their officers,
In retrospect those non traditional GSE “investment decisions” were the wrong ones, for several reasons, not the least of which was that they were inconsistent with historical GSE underwriting standards.
But, when you look at decisions like these, I’m reminded of the Orange County, California, Treasurer Bob Citron, who back in 1994 presided over a $1.7 billion loss of county tax revenues because he invested that money in Wall Street securities which bet that rates were coming when the Fed kept them up.
Citron—who would have had statues built in his honor, if he only had invested in the opposite direction--lost his job and was shamed into retirement.
Citron bet red, but it came up black.
No stealing, nothing unethical, Bob Citron just looked at the financial/economic tea leaves and chose wrong.
Yet, private money managers or corporate officials who direct huge private investment face something of the same choice and if you make a mistake, like Citron, you should pay at least with your job.
I don’t think any Chairman/CEO in their right mind would drive decisions based on the belief that federal government would bail out his/her business mistakes. That person would go down in infamy, if a federal bailout was necessary. Bad judgments and decisions, sure, but—I hate to disappoint you right wingers—nobody who is rational factors in Uncle Sam’s help and thinks they or their company would survive its application..
The jury is still out looking at all of the GSEs 2005-2007 investment decisions which will decide the companies’ fates. There have been no lengthy commentaries about loading up on poorly underwritten or priced “liar loans” (where everyone, borrower and lender alike lies).
But, if these loans come back and fatally bite them, any GSE postmortem alleging “subprime and associated problems in the primary mortgage markets,” as the sole explanation for corporate failure should be rejected as a white wash.
As someone who called themselves “Anonymous” claimed in the comments section of one of my earlier blogs, he/she attended a Fannie Mae senior officials meeting where it an important personage lamented that Wall Street was doing a better job securitizing mortgages than the GSEs, implying the company needed to compete better against the investment banking giants and their mortgage broker networks.
If that exchange occurred, I hope it wasn’t codified as an on high directive since the Street guys were packaging poison in high yielding private label securities, which succeeded in horribly sickening the entire mortgage finance system and large parts of the broader economy.
That’s one competition from which they should have stayed away.
Mistakes have been made by the GSEs, mistakes made by people who should have known better and who gambled. Whether they bet “too much,” and the bets prove business fatal, we’ll know soon, possibly not this week, but soon after that.
(This blog was completed before I read today’s New York Times front page story on Dick Syron and the Fortune magazine article noting 10 CEOs on the Hot Seat.)
Maloni 8-5-2008
(Happy third birthday to Rex Ostos Maloni, Grandma Heidi's and Grandpa Cheerios's favorite three year old boy!)
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