The Volcker Rule

Ho-hum, there they go again. Former Fed Chairman and current Obama financial advisor Paul Volcker has proposed a limitation on banks financially speculating, creating conflicts with their federally insured deposit responsibilities.

The inevitable “Why now, why us, what’s the problem?” crowd comes out and opposes it. Retiring Senate Banking Chair Chris Dodd (D-Conn) has some doubts about the idea and, naturally, Sen. Dick Shelby (R-Ala) has concerns, and the big banks have their constant doubts about codifying in law what Volcker wants.

They tweet and twitter, “Maybe give the regulators that authority, but don’t put it in statute.”

In 1992, Fannie Mae and Freddie Mac insisted that the new GSE risk-based-capital rule—which had no precedent in US financial laws--be put in statute and made very explicitly. We did not want our inexperienced regulator interpreting vague legislative directives, making a tough new law even tougher. We wanted the law clear for all to read and see, including the regulator, so if the regulator decided to take out some anger in an extreme implementing reg, the world would have easy access to the facts.

You seldom get that kind of certainty, if a statute is vague and represents just a general call to the regulator to put something in place.

Most business interests seldom want statute, seeking regulations instead, because while the risk is there for tougher regulatory treatment, regs are not laws and regulators often can be lied to, cajoled, or even threatened, out of their regulatory intent. (“If you issue that reg, we will lose our market for widgets and 10,000 Ohio workers will lose their jobs and benefits and go to bed hungry.”)

The two biggest untruths the financial regulators hear now from their regulated entities are, “We need to grow. If we can’t grow to be the biggest in the world, we won’t be able to compete with foreign financial services companies” and, “We need to pay our senior employees top dollar or we will lose them to other employers!”
Bull pucky! Haven’t we seen this show before?

Whether it is the “Volcker Rule” or any related reform, Congress should listen carefully to every commercial banker, investment banker, and financial spokesperson and then do exactly of the opposite of what they advocate.

It’s simple, no bank exec or trade association official ever will endorse anything that might limit their money making ability. Risk reduction is one of those things. Remember the Wall Street bylaw: “The greater the risk, the greater the reward.”
The path is clear, if Congress wants to do anything on the “Volcker Rule,” just head for where the banks—and their congressional apologists--say don’t go.

How much BS does it take before Congress understands that and then just does right thing?

Voters to the Congress: “Scott Brown, Scott Brown, boogah, boogah! The public is tired of you kowtowing to the banks.”

Hank Paulson, the GSEs and his book “On the Brink”

After reading Hank Paulson’s account of the takeover of Fannie and Freddie, in his new book, I didn’t come away with many insights. Maybe he’s saving them for a sequel.

At the time of the takeover, many of us thought the action re Fannie was premature and that the DC Company was in much better shape and better managed than Freddie Mac.

Paulson seems to share those views in his book, but that relative “financial strength” was meaningless, since he felt that he had to treat both companies the same and at the same time. (Son, yes you’re sick, but your sister has only a slight fever, so I am going to chop off both your heads. Goodbye.”)

His description of Fannie CEO Dan Mudd being upset and somewhat angry when he heard Paulson’s plans and a laconic somewhat relieved Freddie CEO Dick Syron, when he got the same news, comports with the differences that many of us saw at the two GSEs.
Simply stated, the Fannie board and management always was far more involved with what the company did and more dedicated to the company’s congressional housing mission. The Freddie counterparts were less so.

Before the public takeover announcement, Paulson writes of his surprise conversations with the Democratic presidential and vice-presidential candidates. First, Barack Obama called Paulson to discuss the GSE issues, and a day later when Paulson called Joe Biden. Paulson’s suggests that the two public officials were knowledgeable ,thoughtful, and incisive in their comments and questions, and offered support for what was a daunting financial and economic action.

Paulson seemed not to gain the same confidence in his conversations with Senator John McCain and Sarah Palin, who still were enjoying the positive buzz of the Palin VP announcement which on that day was barely 24 hours old.

Paulson, who very much establishes himself as the Administration’s “driver” on the takeover confirms how weak was the GSEs’ regulator, the Federal Housing Finance Agency (FHFA,) formerly the Office of Financial Housing Enterprise Oversight (OFHEO).
FHFA had just spend years, every three months, announcing how well capitalized each company was and Paulson was taking them over because—in his opinion—Fannie and Freddie lacked sufficient capital.

OFHEO/FHFA

OFHEO/FHFA was a basket case from Day 1 and never improved. Conservatives argued that the GSEs hamstrung the agencies and fought them over their budgets on the Hill. Nothing was further from the truth. I was there and I know, At Fannie, OFHEO’s budget and oversight specifically were “off limits” and we were told not to lobby the Congress on them, just to respond to congressional inquiries if asked.

IMO, the GSE regulator used its budget funds, poorly, never bringing in enough examiners and financial talent; instead they hired and kept on board a number of Fannie/Freddie foes who for years conducted a guerilla political campaign against the GSEs rather than overseeing them.

For every quality employee OFHEO/FHFA brought in, it seemed to me that they matched him or her with two slugs and a hack and it showed and still shows.

The best evidence I can offer to substantiate that the GSEs didn’t interfere with the regulatory budget (funds, BTW, which came from the companies themselves) is to note that, in every budget sent to the Hill by the Office of Management and Budget--under Democrat and Republican Administrations-- OFHEO/FHFA got exactly what the OMB sought for them, suggesting no lobbying the appropriations process and the staffing levels they supported.

We didn’t like OFHEO and their political agendas and were open about that, but we never challenged their spending requests.

The one thing Paulson mentions –beyond his personal certitude about doing in the GSEs—is how much he worried about Fannie’s (most notably) and Freddie’s political clout and their ability, at least outside the courts, to stop the Treasury action.
What a misread that was.

In 2008, by the time Paulson got the congressional authority to act (four years after I retired), Fannie--at the direction of its new CEO Dan Mudd, named in 2004—was into its third year cutting back substantially its entire external affairs team, dropping dozens of political consultants, cutting internal PR staff and in house lobbyists, and dumping major field staff who worked on grassroots efforts. Fannie long before Paulson moved was politically weaponless. Mudd wanted to change the muscular/pugnacious culture, which he felt preceded him.

The battering that the GSEs took from their business opponents, the Right, and the Bush Administration weakened the companies substantially and they could fight back if they chose to, except in court, which they never did.

That made it easy for Paulson to do what the GOP Right demanded, as well as what Russian investors wanted, the latter according to the book.

One major hole in the Paulson takeover drama—which for me raises questions about his motives--is the fact that the Obama Administration (as I suspect a McCain Administration would have found necessary) continues to utilize and rely on Fannie and Freddie.

Now that Chairman Barney Frank (D-Mass) has announced March hearings to produce a new national mortgage finance system, the public should get some insight as to why the GSEs still are required to be there, because it seems—even in their weakened and abused state—they remain the best secondary mortgage market option for the public as well as those institutions still making first mortgage loans.

So, Hank gassed them, but Fannie and Freddie still remain necessary.

The large commercial banks and other financial services behemoths, which many think can replace Fannie and Freddie, haven’t bothered to fill the void or even hint at their interest.

When a pair of institutions, being poorly run by government overseers, still cuts the mustard better than all of the faux private sector lenders (which non-Fannie and Freddie financial institutions have no tap on Uncle Sam?), those who aspire to be smart policy makers should take note.

Congress, careful what you discard with the bath water after you bathe this baby.

Maloni, 2-8-2010

(For those of you not living in the DC area, let me assure that this past weekend’s snow was the absolute heaviest/worst I’ve seen in the 40 years we’ve lived here. School closings, event cancellations, and digging out will go on for days. And we may get more snow on Tuesday and Wednesday.)