Take a GSE Break, Hank, a Long One!

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.
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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