Sunday, August 25, 2013

Treat Them Equally





Fannie and Freddie Need an Ally,
Or Need to Be Treated Like One!



How can Ally Financial (GM’s former financing arm) buy itself out of federal "jail", but F&F's hefty repayments don't produce the same “turn them loose” treatment?  



Ally Financial helped consumers buy some cars while Fannie Mae and Freddie Mac bolstered up the $ multi trillion US conventional mortgage market for over 5 years since being "bailed out."

As I asked several friends and former colleagues, “What am I missing?”


Wikipedia and Hank Paulson


Speaking of missing some things, regular blog reader and commenter, Robert Mae sent me a “comment” to the last blog (actually sent several), but the significant one dealt with a “Wikipedia” description of some of former Treasury Secretary’s actions—and possible motives—when he “Bushwhacked” Fannie Mae and Freddie Mac.


Robert Mae sent this in response to me observing that “the victors write the history” and I want to be there—at the end—to make sure that future discussion of F&F is accurate.


This is interesting. I have read Wiki's 'Fannie Mae' topic page many times in full, but this morning is the first time I noticed the following edit:

"The Administration PR effort was not enough, by itself, to save the GSEs. Their government directive to purchase bad loans from private banks, in order to prevent these banks from failing, as well as the 20 top banks falsely classifying loans as AAA, caused instability. Paulson knew that Lehman Brothers and other banks were in trouble and would soon require Fannie Mae and Freddie Mac to purchase their toxic debt; this meant that he would need a fast method to bailout the banks, so he devised a method to use Fannie and Freddie as a backstop. Paulson's plan was to go in swiftly and seize the two GSEs, rather than provide loans as he did for AIG and the major banks; he told president Bush that "the first sound they hear will be their heads hitting the floor", in a reference to the French revolution, and the taking (fifth amendment) of their assets -- without compensation:.[39] The major banks have since been sued by the Feds for a sum of $200,000,000, and some of the major banks have already settled: . In addition, a lawsuit has been filed against the federal government by the shareholders of Fannie Mae and Freddie Mac, for a) creating an environment by which Fannie and Freddie would be unable to meet their financial obligations b) forcing the executive management to sign over the companies to the conservator by (a), and c) the gross violation of the (fifth amendment) taking clause"

History being written....

From the Mouths of Babes 

Spent a few minutes explaining to my very precocious granddaughter, five year old Daryn Kelly Maloni, about my blog and why I write it. 

This produced the following exchange.


Daryn: "Grandpa?"

Me: "Yes Daryn?'

Daryn: "If you ever write a movie, don't put any naked people in it."

Me: "Why not, sweetheart?"

Daryn: “Because that is so 'inappropriate.' "


Return of the “Hebrew Hammer”


The slightly odd but heavily reported story about the Federal Housing Finance Agency IG’s report (twice in the “we’ll go with anything anti-Fannie Mae” Washington Post) produced several clones, but then some sharp rebuttals.

One sharp rejection was written by my friend and former Fannie colleague, Tom Lawler, writing in his own daily newsletter


Calculated Risk”  picked up Tom’s angry rejection of the Washington Post’s FHFA IG story, a slight variation of the same story appeared today in their Sunday edition, too.

Another most comprehensive rebuttal was written by our friend, David Fiderer, aka “THH” (see headline above).

Anyone—obviously few of the professional reporters—who read the IG’s letter and report could see that IG Linick, was upset at FHFA for giving F&F more time than he felt desirable to implement a new FHFA dictated loss accounting rule.

IG Steve Linick—writing with or without his gun--didn’t suggest either company was misrepresenting quarterly numbers, hiding losses, or were not GAAP compliant. He was bitching at his FHFA colleagues for giving F&F too much time to operate under the new proposal.


That fact didn’t stop lots of headline writers and some journalists from jumping to predictable anti-F&F conclusions. 

Here’s a link to Fiderer’s smashing rebuttal.



One more wrinkle in this matter.

I exchanged emails with one writer whom I suggested had gotten the story wrong.

In doing so, I challenged him by saying (paraphrasing): “Do you really think that their outside auditors, FHFA, the SEC, OMB and also Treasury are complicit to blessing Fannie and Freddie for falsely reporting their earnings?”

The WH Behind the IG’s Report?

Try and solve this one. (I wouldn’t make this up and I have the email exchange to prove his statement.)

When challenged, the person claimed that the “White House” was supporting the IG’s report.

I asked him (once again, paraphrasing), “So, is the WH pissed because DeMarco won’t do their bidding and they are going to back an IG report which suggests DeMarco and his team are falling down on the job?”


The guy hasn’t answered me, yet.


What Others Say







Maloni, 8-25-2013


Sunday, August 18, 2013

Keep Them Working for Us



What I Think and Why?


My last blog about the President's speech stirred up a lot of static, which was my hope, plus generated a challenge from a long time industry observer whose opinion I value. 

I’ll shorthand his comment—and throw in something he didn’t say but I suspect he thought—and that was, “Why all of this talk of Fannie/Freddie history?  People want to know what you think about Fannie and Freddie going forward, since nobody believes they can be resurrected as they were and, frankly, few want that.” 

Fair enough, although I’ll just say “maybe” to his last point. 
My complete response is to remind readers that to understand what you want to build in the future, you need to comprehend what happened in the past.  

In the past few months, I’ve described my mortgage market of the future and what a revived F&F might look like and do. But, it never hurts to repeat it.

Let me start with something which should be obvious to those who read my blog.

Concentrated commercial bank power, no matter what the market endeavor, sets off my alarms, because I don’t think anyone—or certainly any US regulatory agency—can stop the banks when they choose aberrance. 

The PLS debacle--only a few years ago--proves that, as do the more recent violations which I noted last week, manipulating LIBOR, laundering Mexican drug cartel funds, cornering commodities to inflate prices, and having financial dealings with sworn US enemies in the Muslim Middle East. 

Control the Banks 

Banks exist to make money, nothing more. We need them, they are near indispensable in a democracy. 

But, as long as our nation and its public officials lack true governors to control industry excesses, bank behavior requires vigilance and scrutiny. 

The US doesn’t have quality financial services regulation. It may never have because the banks are too nimble, the regulatory process too plodding, and some bank regulatory staff just act as industry cheer leaders and guardians. 

I don’t want to get rid of bank home mortgage lending, I just want it well policed. 

So, the trick—for the “get rid of Fannie and Freddie, at all costs, and let the banks control the market” crowd--is to put in place something which the large commercial banks must fear/respect to engage in the mortgage lending game. 

Because of their secondary mortgage market position, the “old” and even current Fannie and Freddie had/have that mortgage monitor’s role, setting primary market underwriting standards, creating acceptable mortgage products, improving operational delivery systems, helping create and pricing mbs (mortgage backed securities) and therefore the underlying mortgages, etc.

That’s why they worked well pre-2005 and why they have worked fabulously post-2008.
Few Appreciate the Good News

Not many mortgage market observers regularly acknowledge that the major “problems”--most critics attribute to Fannie’s and Freddie’s operations/existence--have been stamped out or are proscribed by their current regulation, which is why the two have performed so well financially.

Wake up Congress! Congratulate yourselves.

The FHFA regulatory regime has solved much of the “GSE dilemma” and you just don’t realize it. You are fighting issues which haven’t been in place for years. 

Post 2008 Improvements 

Since 2008, the Federal Housing Finance Office (FHFA), F&F’s current regulator has:

--- prohibited F&F from securitizing or dealing in below market quality mortgages=no possible subprime investments:

---ordered F&F to reduce their existing portfolios by 5% annually=shutting down their riskier business activities and pushing them into safer mortgage securitization;

---overhauled and reduced the onerous and confusing housing goals  (which at one time required each to invest 55% of their business in mortgages serving “low, moderate and middle income families, or those living in underserved areas”)= removing the role which few policy makers understood or appreciated but which acted as a lightning rod for critics and enemies;

--- Required Fannie and Freddie to increase their guaranty fees charged lenders (and ultimately consumers) and the two now must hold higher capital, ironically which may be too high given their tiny loss rates=more loss protection on their books to deal with any business problems, which seep through stricter regulation, and create more financial space for other mortgage investors. 

These important operational changes are the reason for F&F’s solid financial performance (ironically, with commercial banks employing them happily and heavily) and F&F now sending billions of dollars to the US Treasury. 

--Even the old Democrats and political activists--who once twisted GOP panties in a bunch--have long since moved from Fannie (and didn’t exist at Freddie). Upwards of 60% of current staff are new since 2008.

And, I certainly haven’t heard complaints that there isn’t plenty of fixed rate financing available for mortgagors from any lender which does business with F&F. 

How I Would Remake F&F 

To give the two entities and the nation’s home buying public what will work for each, I would separate F&F from the federal government and “reprivatize” them.

--Disjoin them from the federal government, over some reasonable time period, and allow them to stand on their own (much like a bank or insurance company), employing their own capital. 

--Let Fannie and Freddie truly repay Treasury whatever they owe, a mechanism which Treasury Secretary Jack’s Lew can approve on his own. 

That functional crossover event will occur naturally in the next few quarters, but Hank Paulson’s takeover deal prohibits GSE repayment.   

--Have F&F pay back more than they were given. so Treasury has additional revenue and can argue that the American taxpayer made money from the F&F fix, especially since most observers have failed or won’t monetizing all of the systemic pluses  F&F provided the nation for the past 6 years. 

--After repaying the Treasury some agreed upon figure ($200 Billion?) and--after paying taxes and allotting capital--permit Fannie and Freddie to keep excess earnings as a capital base for the future 

--In reprivatizing F&F, keep their current regulatory structure to insure the sufficiency of their capital formation and maintain current limitation on the types (quality) of mortgages they can securitize;

--Finally, permit F&F to re-enter the mortgage market—WITH NO FINANCIAL TIES TO THE FEDERAL GOVERNMENT-- to perform whatever roles the market demands from them.

Despite fears to the contrary, that’s all Congress can do, boldly make a statement that this Fannie/Freddie are different from the old ones. The Congress can’t legislate away historical memories.

Why Demolish a Valuable Asset?

Which Wall Street investment bank or major TBTF bank—with their DNA all over the 2008 financial meltdown—did the Congress or any Administration abolish?

The answer is “not one.”

Why should the Congress (especially the Democrats in each chamber) destroy the two facilities which by law were put in place to provide mortgage liquidity to low, moderate, and income families and have performed that mission quite well?

F&F have succeeded in the past, they work now, and can continue to work well in the future.

I noted that major steps already have been taken to reduce whatever systemic risk their critics see or allege. 

There is no need to do away with Fannie and Freddie, save the Conservatives’ desire to produce a scalp to wave around and satisfy some bizarre partisan political bloodlust.

The misguided Fannie/Freddie hostility is based on a tranche of political lies and distortions so deep that the Congress, the media and parts of the public never will be able to wade through and reach the truth. Although more and more attention has been given in the past two years to exposing those spurious political attacks which helped bring down the former GSEs. 

If you read the NYT and Washington Post—including today’s (Sunday) NYT editorial—you’ll see how much campaign money the financial services industries heaps on Senate and House Financial Services Committee members, especially the latter. 

I worked at Fannie for 21 years and before that another 15 on Capitol Hill and in federal financial regulatory agencies. I know how and why the various banks, investment banks, MI’s and insurance companies do what they do. I know what Fannie did and  more importantly, I know what the company accomplished—given the congressional mission it was given to spur homeownership—which many knuckleheads now try to paint as tawdry and phony. 

Reminder to all rushing to enshrine our nation’s banks as the overseers of the primary and secondary mortgage markets: F&F were given the “low income housing mission” in 1992 because the primary market lenders balked at making those loans.

The 1992 statute put F&F at the “choke point” of the mortgage delivery system. Congress wanted Fannie and Freddie to use their market pressure to force banks, mortgage and savings banks and other lenders which were “reluctant” (that’s the kindest interpretation) to make mortgage loans to poor and minority families.

It worked, since before that law, all the fair lending and liberal bleating failed to make that lending happen.

 Fannie then was an industry leader and a ball buster, at a time when that behavior was needed (and welcomed by many in Congress on both sides of the aisle). 

It still is needed and I have no idea if my “new Fannie” can perform that function. But if future execs run it properly, Fannie still can be a standard setter and market eyes which won’t allow lenders to cut corners, discriminate, cheat, and take advantage of mortgagors.

Congress should give them a chance to reprise that role, as many people start to wake up to the systemic implications of the various proposals to do away with Fannie and Freddie.


Let the Dogs Out

Abolishing Fannie and Freddie only serves the Conservatives’ desire to produce a scalp to wave around and justify some bizarre partisan political lust.

These now friendly house trained, pets haven’t bitten anybody in 6 years. They are fenced in, hardly ever bark, fetch the paper, guard the house, and are very productive.
Why kill them? 

Hedgies and Preferred Investors Take Notice, the Adults Are Here 

Everyone knows about the Corker-Warner and Hensarling bills, but two fresh F&F proposals—reportedly—are somewhere between the conjuring and drafting stages.

One is from Sen. Jack Reed (D-RI.) and was   recently week discussed last Friday in Inside Mortgage Finance.

The second—according my poker group sources, quoting senior committee staff--will be a “Tim Johnson (D-SD) and Mike Crapo (R-Idaho) bill which  will be “the only F&F bill the Senate Banking Committee considers this year.”

Who knows what all of that means, save Reed is a more potent committee player than either Senators Corker or Warner and, at the end of the day, Committee Chairman Johnson and  ranking member Crapo can control almost any agenda.

What Others Say



And, listen to these entertaining real estate guys for facts and laughs. 


Maloni, 8-18-2013

Monday, August 12, 2013

It's Long, But Worth Reading!

President Obama's Misguided Speech
(I wrote the majority of this blog right after I heard President Obama speak in Phoenix and watched his TV commentary. I let it sit in my PC for a few days, not sure if I was happy with the written rancor I displayed, so I dialed it down a click. Now I’ve decided  I am satisfied the blog reflects what I think, certainly about who benefits from killing Fannie and Freddie and who doesn’t.)

Following the Obama speech, it seems most of the DC and media cognoscenti agree with the need to do away with Fannie and Freddie, ASAP.
The question becomes “Now what?”

Ooops, before answering that, let’s do a news update from last week noting that those “quasi companies,’ as President Obama dismissively called Fannie and Freddie—which now hold up the US conventional mortgage market on their shoulders—just sent the US Treasury $15 Billion in second quarter 2013 earnings to allow this President to continue his fight against the GOP over pending budget deadlines. Also, this suggest they will ship another $30-$40 Billion, or more, over the rest of the business year. Now, back to DC nonsense.

My imaginary Obama-MoC dialogue.

BHO: “OK guys how are we going to do this and remember, I don’t really care what you do, except I want fixed rate loans available and all of the money those two earn sent to the Treasury until you kill them. You over there, Capuano, right? What do you say?”

Rep. Capuano: “Er, um, how about letting them pay back the Treasury everything the taxpayers gave them—which will happen in six months or so--and then let them re-enter the mortgage market to compete with every other financial institution?”

BHO: ”Kid, do you know anything; we have to kill these suckers to let the banks—who I admit have screwed me left and right—get what they need to do what F/F do now. The banks need another federal subsidy and we’re going to give it to them!”

I'm Still Angry

When I heard the President’s Phoenix speech and his televised faux Q&ampA, I got pissed and, frankly, I still am.

I watched  President Obama rant and fume, in full campaign mode—and disappointingly, spew far more AEI imaginary history than mortgage facts—call for the destruction of Fannie Mae and Freddie Mac, and insist on more private capital investment in mortgages. (I guess from the banks, who else has any?)

He said this, while his Justice department filed suit against Bank of America for mortgage fraud, and then he canceled his coming summit with Vlad Putin. (Maybe Mr. Obama does read my blog??!!)

Putin will abuse the US and Obama more in the coming months, so get ready Barack to waive Olympic withdrawal at him or prepare just to smack Putin in the knee, again, with your groin, as you’ve been doing.

After watching the President, I am beginning to feel almost Tea Party-like in my anger at how mortgage lending naïve or just uninformed is our President. 
Did Wall Street Flummox the Chief?
Perhaps all of that Wall Street lobbying money sloshing around the streets of Washington has eroded the President’s last bit of responsibility to the 90% who believed his rhetoric about creating a better deal for the little guy.
His Fannie and Freddie comments and what  his Administration has done for “underwater” homeowners both are laughable, since his efforts to restructure upside down mortgages have been blunted by the Republican he’s left in charge of F&F regulation. And the Senate R’s are blocking his Democrat successor.

At one point in his televised exchange, sponsored by the real estate site Zillow, the President suggested that we need to simplify the system and go back a few years when the government didn’t play so large a role in mortgage finance, specifically, the President said, “In some ways, it’s a return to earlier (mortgage)  models.”
Let’s Just Go Back in Time
To what earlier mortgage era Mr. President should we return?
20’s and 30’s

Maybe he was yearning for the last century’s first great crash, which was precipitated by a real estate bust. I guess nobody in the White House has read the story of the Depression finance.

It will sound familiar. The Roaring 20’s saw a major run up in housing prices fed by private mortgages. Back then mortgage investors were on a wild run of private innovation. With mortgages supplied by private lenders and insurance companies, mortgages tripled in value from $9 billion to $30 billion, according to US Census Bureau Data. 

There was also a newfangled type of securitization by real estate bond houses that helped write billions of dollars of mortgages. But those mortgages were short-run and required 50 percent down payments. Everyone had to refinance every three to five years. 
Throw it in the blender with a stock market bubble, commercial banks running their own investment bets, and skimpy state financial regulation, and you got the Great Depression.  
The Savings and Loan Days of the 1970’s
But maybe the President wants a return to the 1970's, when the savings and loan ("thrift")  ndustry (just small banks), was unable to manage the interest rate risk on mortgages they held, and lost $200 Billion.
What about Just 6 or 7 Years Ago? 
We could just look over our shoulders, six or seven years ago,  when the very commercial  and investment banks to whom the President wants to transfer the nation’s mortgage market issued more than two trillion dollars in worthless subprime mortgage securities—outside the Fannie Mae and Freddie Mac systems and undeterred by the Bush Administration “see no evil” regulators—and brought financial calamity to every major developed nation?

In 2009, President Obama and his Treasury Secretary, Tim Geithner (or as I named the latter, “the best friend the banks had”), gave most of those banks an unsecured federal cash gift with a no job-generating reciprocal lending required. And these same banks have been getting a taxpayer subsidy of $83 billion a year ever since -- according to Bloomberg News!  Yet they still don’t have enough capital to operate safely, according to the same Bloomberg analysis.
Big Banks Tawdry and Illegal Behavior
Your Troubled Asset Relief Program (TARP), which  Secy. Geithner administered,  sent hundreds of billions of dollars not for bank lending to small businesses or home buyers, but to the banks’ bottom lines as they arbitraged the taxpayers’ funds mostly invested in Fed overnight funds and Treasury securities.

This is the bunch that you want to run the nation’s mortgage system after you and the Republicans get done obliterating Fannie and Freddie?

It is the exact same Too Big To Fail (TBTF) bank crew your regulatory agencies have fined billions of dollars in the past year for other mortgage crimes and deviations; working cooperatively with Mexican drug cartels, laundering funds; and business dealings with radical Muslim regimes and fronts. These are the guys who manipulated the London Interbank Borrowing rate (LIBOR), which provides the index on most of this nation adjustable-rate mortgages (you know, the ones the banks want people to have rather than fixed-rate loans).

It’s the same mob that sought and mainly succeeded during Hill consideration of the Dodd-Frank bill and throughout the regulatory process to weaken its provisions and dilute its impact.

Oh, and it’s the crowd which gave most of their campaign cash to the GOP and Mitt Romney.

Mr. President, shame on you.  No one can truly be that naïve or gullible, so unprepared to candidly discuss in substance what mortgage finance system is best for the nation.

The big banks are the last institutions you should be pitching as the ideal stewards to wield massive control over the nation’s mortgage finance system—which C-W would do--because they simply will continue to overwhelm and manipulate those federal regulators you expect to oversee the financial institutions. 
Financial Services Food for Thought
If they choose to, and when have they not, the guys who run the banks know they can just leave behind even more financial wreckage with total impunity.After all, your Administration has failed to bring a single criminal indictment against any of the CEOs who masterminded the 2008 subprime implosion, caused mainly by Wall Street machinations.  And the statute of limitations on all those crimes is running down fast; they literally have nothing to worry about.
The C-W bill cedes great market influence and control to the TBTF banks, at the expense of all others, and the consumer.
The big guys have shown themselves to be immune to current regulation, which doesn't change under C-W.
So why does anyone think with F&F out of the way, the big guys suddenly will perform like good corporate citizens and do the right thing, i.e. the pro-systemic stuff , pre-2005,which Fannie (and Freddie) provided did regularly??
No Disguise, Corker-Warner Big Federal Presence and Paying Banks to Make Loans
Open up the dirty little secret of the Senate legislation you romance but won’t quite endorse. The bill—still being shaped—by Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.) which reportedly will attract that private mortgage capital investment you and they claim will occur smartly.

To get that “new money,” they would create and put on the federal budget all the liabilities of a new Federal Mortgage Insurance Corporation (FMIC), plus any remaining Fannie and Freddie debts.

Now, exactly how does that get the federal government out of the nation’s lending system, or reduce the taxpayer’s obligation?

The legislation creates a huge new federal bank subsidy in the form of loan loss insurance on the bank’s mortgage bonds and it’s what the banks demand for crudely doing what F&F, seamlessly, do now.

How does that make this “new investment” private money if it only comes out of the banks’ pockets when Uncle Sam protects them against losses?  And duh, let’s not forget, this money in bank coffers is there only because of the welter of other federal bank subsidies, like deposit insurance.
Please Ask the Big Banks?

If the Congress succeeds in executing Fannie Mae and Freddie Mac will they respond to your clarion call for new mortgage investments without Uncle Sam’s additional sugar?

Ask them if they will originate 15- and 30-year fixed- rate mortgage loans at reasonable rates—as F&F did and does—but keep those loans on their own books using their own due diligence and underwriting skills without some new federal loss insurance?

If their  “NO” answers shock you, it’s because your staff has misled you or you are hoodwinking the nation about who in the mortgage business are good guys and bad guys.

You were “Zillowed” on TV and asked softball questions and many of your answers were not on point, but I won’t go through the list and embarrass you.

Your coy C-W endorsements may just force the GOP to throw sand in the legislative gears, allowing the next President to show some cajones and take the appropriate steps assuring that the American people and the mortgage market will continue to see the F&F produced efficiencies, controls, and products.

Last Thing (for now)

During your interview Mr. President, you copped a variation of the Right Wing lie and implied that Fannie (and Freddie) wantonly made profits while the federal government stood by to pick up losses. But, it's Fannie for which I worked and am most familiar.

Mr. President, that charge is Bullshit!
A Proposition for You and a Question for Jack Lew
But, don’t take my word for that allegation's falsehood.

Ask Bill Daley your former white House chief of staff, who was a Fannie Board member; ask Jim Johnson, a former Fannie CEO who vetted your 2008 VP candidates; ask Tom Donilon, your former National Security Advisor, who was a general Counsel at Fannie; ask Tom Nides, a former Fannie SVP, who was Hillary’s top deputy at State; and--if you know him-- ask Frank Raines, a former Fannie CEO and Clinton OMB director for whom Jack Lew worked (and knows quite well).

See if any  agrees with you and you say Fannie Mae—before it was taken over by the Bush (whacking) in 2008—believed that its mortgage business operations were conducted believing that the federal government--not the corporation itself--was responsible for any business errors  or losses it incurred.
When you get that question answered from close friends and allies, it might cause you to rethink your penitent to question the institutional honesty of Fannie Mae.
Speaking of the very competent Treasury Secretary Jack Lew who once was a protégé of the House Speaker Tip O’Neil (D-Mass.), I have a question for him.

“Secretary Lew, you have a major hand in the President Obama’s mortgage thinking. Is a national mortgage finance system—potentially controlled from origination through securitization by the major TBTF commercial banks, and their subs—a model that Tip would have endorsed as supporting the homeownership aspirations of low and middle income American families?
Related/unrelated to the Washington Post to The Wash Post

Last week, I was told--something I can’t verify--that Amazon visionary Jeff Bezos—the new owner of the Washington Post--is/was a major Fannie Mae fan from the company’s early success and later recognition in the book “Built to Last” by business guru Jim Collins. Given all of the ass-kissing (fear reflecting?) columns I’ve read in the past week, now that the Grahams sold the newspaper, if I was on the Post editorial staff, I’d want to know where my new boss is before I write another one of those specious “kill Fannie Mae” screeds.)
Maloni, 8-13-2013

Thursday, August 8, 2013

Nothing Happens in DC in August, Redux

Summer Fun! 



I still am pissed at the wobbly and disingenuous Obama housing performance the past few days.

And my next few blogs will reflect that emotion and anger, but this came to me today from another longtime friend who has fought many F&F battles and I thought it was wonderfully humorous and too logical, whether his numbers add up or not.  

If you can’t laugh at some of these political hijinks, you’re dead from the neck up. So, I’ll save my vitriol for another day. 

With the author’s explicit permission, I want to share his meanderings with you.


A Summer Daydream and Dialogue





August is a good time for mental relaxation and exercise.  And opening the windows at night, on vacation, for cool night air.


Which leaves one time for chimerical thoughts that have little grounding in reality.


Let's try this mental exercise--just for fun.


Freddie and Fannie just had a quarterly profit run rate, annualized, of $60B based on 2Q.   This won't keep up for a host of reasons, including the ending of the refit boom and the shrinking of the retained portfolios.   (At the same time though, g fees will continue to rise.)   So let's say the companies make a much smaller amount quarterly and annually.  Call it not $60B, but half that--$30B.   Give it a P/E multiple--let's say 9, which is uber-conservative for steady, utility stocks (no more "growth stock" Fannie and Freddie--that was clearly an error.)  That gives us a total capitalization of the two at 9x$30B, or:


$270 billion.


Bear with me. 

Yes, I know, the political current thinking is they ain't going back to anything that they were.  (This is an August mental exercise only, not an expression of any current Washington reality.)   


But here goes:  the Feds, the US taxpayers, us folks, are about to get their money back, early in 2014 ($187B), and they (us) will STILL have a claim on 80% common stock warrants of the two.   This means, again just for fun, that if the government spun the companies back out, a la AIG, taxpayers could have a claim on 80% of $270B, or:


$216 billion.


Which means taxpayers would receive, all in, $187B plus $216B, or over $400B.


"It's not going to happen, Padre."


Fine, fine.   But Washington policy decisions have costs.  And this one, apparently--the decision to snuff bad Fannie and Freddie, will end up "costing" we the taxpayers $216B.  Of foregone money we could have had in our hands.  Real money.


"They're bad.  We have to kill them."


Why are they bad now?   They need reform, of course.  And real shrinkage.   But they still had lower default and delinquency rates than Wall Street or the prime market overall, all through the downturn.


"Well, among other reasons Padre, because they cost us $187B.  Maybe you forgot that."


Well fine.  But killing them will cost us $216B.  Which is larger than the original losses that made them "bad."


"You know, you just don't get it.   And besides, it's too late.  We're gonna kill 'em.  You're not grounded in reality."


Don't I know that.  I live inside the Beltway, after all.


Key the birds calling outside the vacation open window.  It's time for a swim, following baseball scores.  Surf fishing?

This is only an illustration of cost/benefit thinking.  Was the Iraq invasion worth it?   Maybe.  Setting aside the human lives, was it worth an expenditure of $1.5 Trillion?   It's a good question--what else could the US have done with that money? 

Is killing Fannie and Freddie worth it?   Could be.  But is it worth $216 billion of real money?

Don't ask me.  I'm on vacation.


The only thing I’ll add to my friend’s wonderful fantasy is that the real cost will be far greater when a politically riven Congress tries to implement its “square peg in a round hole” untested mortgage finance model, and scrambling all of the mortgage finance eggs, while the President wistfully talks about all of the new family formations who will need housing.


The F&F fix is simple, examine that thoroughly before junking the whole model.


Maloni, 8-8-2013

(I am exercising my blogger's prerogative by adding, post facto, a link to a well argued piece on the implications of the President's Phoenix speech. I am doing so because, it was sent to me by the guy whose thought piece is above and the article makes a lot of points I've made previously. The first 70 or so of those who read the initial blog didn't have access to this link.)