Cats
and Dogs* Redux
(*Several
people have asked where the term “Cats and Dogs” came from as my blog uses it. When
I ran Fannie’s GR operation, I would prepare a daily report for a select group
of senior company officials on industry, political and congressional issues. I labeled
it “Cats and Dogs,” because of the variety of matters and people included. Occasionally
I steal the title for blog matters.)
Jim Millstein
and Jim Parrott
The “Jims” mentioned above, both former officials in the
Obama Administration (and more), have had a wonderful back and forth over the months
generally disagreeing over the future course for Fannie and Freddie, with
Millstein—who now runs a named for him consulting group, has written and
testified in support of a F&F revival through aggressive regulation—which is writing closer to my heart.
Parrott, working now out of the Urban Institute, seems to
find the Obama Administration’s desire for legislation more to his liking,
which is way distant from where I am.
I hope the congressional and media worlds are watching
these two guys and paying attention to Millstein but not ignoring Parrott,
just yet.
My rub with Parrott is his false case for the status quo,
when it comes to making significant regulatory changes—meaning no Congress--to
the F&F conservatorship, as Millstein advocates. Although buried in Parrott’s
material is the concession that creative lawyers likely could make those
Millstein changes happen (“From your
lips, Mr. Parrott…”).
If the President (this one or the next one) stood up and
supported a comprehensive regulatory change to the F&F conservatorship, I
think Millstein’s plan, largely, could be achieved.
Yes, people (the Hill) would bitch and complain, but that
occurs with every Obama initiative these days and the same thing could happen
to his successor.
FHFA Director Mel Watt has declared he has the authority to make conservatorship changes, which seems to
undermine Parrott's "can't do that."
Here are links to the recent Millstein and Parrott exchanges.
(Thank you Guggenheim’s Jaret Seiberg for
alerting me to Parrot’s response, after I sent
him Millstein’s.)
Phill
Swagel
I had a very enjoyable first meeting (lunch) last week
with Phill Swagel, formerly a Treasury official for three years under Hank
Paulson. He is currently a
Professor in International Economics at the University of Maryland School of Public Policy, a non-resident scholar at the American Enterprise Institute, and a senior fellow at the Milken Institute.
We were joined by Rob Zimmer, a longtime friend/colleague,
one time Fannie and Freddie (sequentially) lobbyist, who currently represents a
group of community lenders.
Needless to say the three of us discussed a variety of
GSE related matters, most of which won’t be mentioned here. But, in response to
one question I did ask him, Swagel was adamant that Hank Paulson--in trying to work
out details of F&F conservatorship--was not motivated by any latent GOP
ideological desire to end the companies, a point I and others have made in the
past. (He was equally clear that Paulson’s absence of bias wasn’t shared by
others in the Bush Administration working on this project.)
Unlike some of us in the conspiracy world, Swagel
believes that Paulson knew the nation would need F&F for some time into the
future, to manage the nation’s mortgage finance system, and the Secretary’s pragmatic
approach meant to insure that near term result.
Federal
Financial Regulators
Having worked at two federal financial regulatory
agencies and closely observing—as well as interacting--others, I am familiar
with the agency version of the “Stockholm
Syndrome,” where federal regulators overly identify with and sometimes become
protectors for their regulated institutions.
At FHFA (and OFHEO before that), I never felt the agency
cared for the Fannie and Freddie and, at times, wished them ill will often
acting to create situations designed to injure the companies.
Not very many rose to the level of the 2004 infamous
OFHEO bogus finding that Fannie’s senior execs committed securities fraud, a
charge which fundamentally changed the nature of the company’s mission
direction and ushered in new leadership which chose to chase down yield and
profit buying copious amounts of soon to fail private label subprime securities.
Eight years after that fact, a federal court dismissed
all of that “securities fraud” BS with a resounding decisions. But—as I’ve
noted before—the near term institutional and long term personal damage was done.
Recently, much of that negative ardor has been muted, but
not totally erased. (Fixing that would good chore for the new Director to take
on once he gets settled in his new post.)
What this particular rant is aimed at is the report's tone which produced the recent headlines, such as those in the articles linked below, based on the
FHFA’s annual “Fannie Mae and Freddie Mac “stress tests, which the agency published a few weeks ago.
After reading the agency report, my position is simple
when will FHFA ever highlight the GSE very good news?
The
Very Good News
Fannie and Freddie have been in “conservatorship” for
about 6 years and under very strict rules governing the types and quality of
loans they securitize.
By every public report extent they each have put on
exemplary business books in the past four or five years. They have trimmed
their old “legacy” portfolios and some of their old bad loans have cured or
moved beyond the shaky stage, as property values improve.
Fannie and Freddie are not the financial basket cases
they were in 2008, when this Kabuki dance began, and it behooves someone to take
note of that and not endlessly feed the insatiable inside the Beltway “F&F
“suck and deserve to die” mentality.
The stress test report—or any subsequent commentary--failed
to allude to the mitigating notable achievements and some encouraging differences
between today and six years ago, which bear positive attention and likely more
accurately reflect the financial state of the two entities.
As most of this blog’s readers know, F&F now have,
together, returned to the Treasury the $187.5 Billion the taxpayers infused in
them six years ago. They have accomplished this with an additional cushion of
about $20 Billion dollars which likely increases in each remaining 2014
business quarter.
All of this repayment occurred, since the Treasury took
the dramatic step in 2012 of ending the original F&F 10% dividend payment
to the Treasury (interest on their outstanding debt) and replacing it with a
total “sweep” of all their annual revenue.
When something focuses on F&F limited capital—as the
stress test report did--it also should note that it’s pretty hard for any
company to establish protective capital when someone rakes every penny you make,
over and above your administrative costs, taxes and financial obligations.
My back of the envelope estimate (which could be a scosh high or low) is that, had the 10% dividend stayed
in place, the two—between them—would have @$135 Billion in capital to pledge
against any future losses.
Fair is fair (although not very often in F&F’s case),
whether required by statute or not, why doesn't FHFA mention those facts, instead of only putting out a report
which talks about worst case with no real context about positives?
In a twisted way, that success speaks to a good regulatory story.
Even though Treasury took that unorthodox step initiating
a total profit “sweep”—which is being challenged in court via 17 different
lawsuits against the Treasury—the FHFA seems to have done little to point out
that Fannie still has on its books about $45 Billion in loss reserves and Freddie
has an additional $24 billion to protect against downturns.
Could a sudden and sweeping real estate down turn wipe
out that protection? Maybe, but the entities are not as vulnerable as they were
six years ago, if the FHFA Doomsday scenario hits.
Their combined @$70 Billion in loan loss reserves—which
also grows every quarter--would likely stand them in pretty good stead if bad
times return.
Today, the two have less at risky assets and large loss
reserves, but what would the federal government do if that protective cash was
eaten up in a broad real estate setback, detach itself from F&F?
Not likely, they own them until the courts or Congress
same something else.
What
Others are Saying
--This excerpt from last Friday’s Inside Mortgage Finance attests
to something worth watching and relative to ongoing Fannie Mae and Freddie Mac congressional/media/policy
discussions.
The IMF information reported on refers to Mortgage
Bankers Association members which are depositories themselves, affiliates of
bank holding companies, as well as some independent mortgage businesses (not
subs).
I think it reveals that an important segment of the lending
community, along with the smaller community banks of the ICBA and the credit unions,
represented by NAFCU and CUNA, like the availability and role of Fannie Mae and
Freddie Mac. Think about that Congress (and those of you in this or the next
Administration).
(Note:
I assured Guy Cecala, IMF’s publisher, and Paul Muolo, one of their senior
journalists, that—contrary to popular rumor—I never employed Luca Brasi at
Fannie Mae!)
--As an occasional critic of some of this
Administration’s overseas actions, I thought Tom Friedman’s Sunday New
York Times column made some excellent points about the world scene Barack
Obama must manage.
Maloni,
6-2-2014
(Happy
77th birthday, in four days, to my only sib and late brother, Louis G.
Maloni, 6-6-1937-2003. Maloni family joke; too young to land at Normandy; too
ill for Vietnam; save me a seat, unless you’re in Hell!)
7 comments:
Bill, what do you think that the Carl Icahn investment means for F&F?
Anon--That their stock prices will rise, near term, and they did.
Again, everything that happens to push up the F&F preferred and common is less about corporate performance than it is about the court decisions--when they come--and speculation about Congress and the Admin.
The broader the appeal--evidenced by investors buying their shares--translates into some deeper political support, however.
But, Congress (in general) will express outrage about hedge funds and their principals (and principles) but take their campaign money just as readily.
Anon--I guess I should have added in my original response to your question that Icahn has that "mystery" element about him and a corporate raider persona, which will cause some people to think there's value wherever he puts his money.
That alone may be worth a point or two, near term, in the stock prices.
What a weird combo Ackman and Icahn. I agree that Icahn is a little more mysterious in that you don't know whether he will be a passivist or a raging tyrant. I bet the latter
I would have been far more impresses had Buffett and Munger bought in (and I guess there still is time for that), but if you are an investor, it's odd lot developments like this that helps rev the prices.
I'm still intrigued by how Icahn bought the stock from Fairholme at such a good and timely moment.
I am willing to bet that Icahn will be a political and legal tyrant.
Well, Icahn's track record suggests that kind of behavior (said the guy who bet California Chrome, yesterday).
Not sure what all CI can do to agitate the government into doing things which could benefit him or his current F&F stock position.
Also, if he acts out (some might say "when"), it could negatively impact Fairholme's investment holdings and I guess Bruce B. OK'd the Fairholme stock sale to Icahn.
Might be fun to watch his antics as the summer unfolds--and where he puts his political contributions.
BTW, that all is public information through the Federal Election Commission's website.
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