Monday, April 27, 2015

Jousting with Grassley, Treasury Feints and Jukes


Maurice Greenberg, Raisins,
And Other Good GSE Things


Some small GSE positives emerged this past week, in court cases not involving directly F&F but close enough to have real implications. And then there was the strange letter from a Treasury congressional liaison official to Judiciary Committee Chairman Senator Chuck Grassley (R-Iowa) responding to Grassley’s questions about transparency and the Administration’s possible slow-walking the “Third amendment” discovery process.

Still in the mail, presumably, is the Justice Department’s response to a similar but more specific letter, Grassley sent when Eric Holder was our Attorney General.

The nation has a new Attorney General, since the Senate last week approved Loretta Lynch, but with Grassley voting “no,” against her nomination. We’ll see where that fits into the Grassley/Department of Justice relationship dynamic.

Court Cases

A somewhat skeptical United States Supreme Court, also last week, heard arguments in a case where the government under a Depression-era law has been “taking” raisins from producers, as a means to support prices paid to the growers.

News reports (see link below) had the SCOTUS’s conservative justices asking lawyers if this wasn’t a possible violation of the Constitution’s Fifth Amendment against government “takings.” 

As the GSE world knows, there are cases before Judge Margaret Sweeney’s in the Court of Claims, and an appeal of Judge Lamberth’s early decision against plaintiffs arguing illegal “takings” from F&F common and preferred stockholders, following the 2012 Treasury “sweep” change.

In a case a bit closer to the financial world, lawyers (David Boies)—who also arguing the GSE case—are challenging the Federal Reserve Board’s alleged “takings” of 80% equity in American International Group (AIG) and charging it 14% interest on the $185 Billion lent, when the Fed stepped in to help the troubled insurance company in 2008. The case has been ongoing since last autumn and closing arguments were heard last week. 

In listening to lawyers summing up for both sides,  federal Judge Thomas C. Wheeler, seemed skeptical as to whether the Fed had the equity remedies it claimed when it acquired the ownership interests, possibly opening the way for plaintiffs—primarily former AIG Chairman Maurice Greenburg—to be awarded $40 Billion in damages. 

As noted, Judge Wheeler had doubts.

What’s it mean for F&F? Simple thought, while neither case is dispositive relative to the fate of Fannie and Freddie or their shareholder suits, any decision which rejects federal government “takings”—whether raisons of or Maurice Greenberg’s cash-- could be precedential and help the F&F plaintiffs when their turn eventually comes in the lower courts or the Supreme Court. 

The First Response to Grassley Letters 

Last week’s Treasury letter to Chairman Grassley was a bit confounding.

It’s clear this agency to congressional committee give-and- take is not over and could heat up, if Grassley decides the Admin “dissed” him.

There appears to be no love lost between the Admin and Grassley. It’s understandable and was expected that the Treasury wouldn’t admit to any errors when it was sued by F&F investor plaintiffs over the “sweep.” 

But, Treasury raised a somewhat distorted argument to justify taking every single penny F&F earns, beyond an annually shrinking minimum capital requirement. I am not positive, but Treasury’s rationale which I don’t think I ever heard before. 

Unlike every bank recipient of Treasury “Troubled Asset Relief Program” (TARP) which was loaned taxpayers funds to support their balance sheets, Treasury’s Grassley  letter claimed it’s $187 Billion infused in F&F was an “investment”—reflecting Treasury’s great risk and need for reward—and therefore F&F’s financial  obligation was ongoing and without end. 

In the years following TARP, banks were permitted to pay off their borrowings—while charged only half the rate that F&F (5% versus10%) initially were charged—but like the Energizer Bunny, F&F just has to pay and pay and pay.

(I guess even the New York Times’ very competent Gretchen Morgenson misinterpreted the financial quid pro quo, when she wrote in her widely read, quoted, and touted, April 7, column—discussing the GSE’s original payments with 10% interest that morphed into the total vacuuming of their profits--“Initially, Fannie and Freddie paid interest on the taxpayer loan.”) 

The GSEs already have repaid the taxpayers more than $40 Billion over the government’s “investment” of a $187 Billion. 

Whether it matters in court or not, the letter exposed some truly head shaking Treasury thinking and highly suspect timing. 

There has been about almost two years’ worth of media coverage noting in some way, shape or form, that the GSEs’ have repaid more than they were loaned, with that number now growing to $40 Billion with more on the way when the two announced their next quarter’s earnings. 

But, when you are Treasury and make/change the rules (as they go?), you can call it whatever you want, especially if it helps covers significant political errors. 

The other element I find funny—curious, not ha-ha--Treasury made its 2012 “sweep” investment decision to gobble up all earnings (and subsequently draw about 20 lawsuits—owing to its fear of the GSEs could be possibly “borrowing from Treasury to pay borrowings from Treasury” (isn’t that lending terminology?)—but this fear/justification about a penniless Fannie and Freddie occurred just as both companies were about to revenue ripen and burst into significant profitability.

How could Treasury have missed this pending turnabout in 2012, unless its scheming was based on something else?? 

Since both companies took advantage of the existing tax laws (which Treasury oversees and administers), plus regularly reported to their regulator their monthly revenue streams, is the Treasury claiming that it had no inkling about those hopeful financial possibilities--or maybe it overlooked the GSEs additional fresh revenue from traditional business--when it chose to cop all of the companies’ revenues just when F&F were about to become cash cows? 

How can any open-minded Judge not miss the active Treasury participation in this GSE ham stringing—neutering FHFA’s authority--in view of this provision of law and not be judicially horrified?

(Section of HERA)

 [When acting as conservator or receiver, the Agency (referring to FHFA) shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of the Agency.] 

Psst, your honor that means Treasury’s should not have been even in the “conservatorship-implementation” neighborhood.

Good thing we had Paul Revere near Concord that night and not the US Treasury, we still might be waiting to hear which way the Redcoats were coming and now all be speaking “Cockney.”



Stegman Says Revive “Private Label” MBS,
Why Mike, the Last Time It was an Ugly Bust  

There is a Viagra joke here somewhere when Mike Stegman, Counselor to the Treasury Secretary spoke to a group of financial execs and asked them and their peers to re-enter and revive the private mortgage backed securities (PLS) market, where banks and investments banks hope to sell their own (not Fannie’s and Freddie’s) mortgage backed bonds to institutional investors. These players construct their bonds with their own corporate guarantee and compete against Fannie and Freddie, which also securitize mortgage securities and guarantee investor payments. 

History suggests the banks and others may have killed their own market 7 or so years ago, when—without Stegman’s urging, they entered the private label market, big time, and issued some $2.7 Trillion in PLS—totally avoiding Fannie and Freddie operations—only to see their financial creations bonds fail --three times as great as the F&F MBS suffered--when the banks poorly underwritten and fictionally rated bonds quickly failed, when the US real estate market softened. 

History Too Fresh in Principals’ Minds 

Mike’s speech gives a lot of suggestions to the financial guys, but what he can’t do is erase investors’ memories of that bad experience with PLS. Nothing, unless he gives private MBS issuers government protection against losses and he’s already tried to do that and lost.

David Fiderer extensively has written why the PLS market may be history (Google him and his writings) because of structural flaws/shortcomings and investor alienation. 

He told me, “Investors aren't dumb. They learned that their legal protections for RMBS are paltry, and that banks and rating agencies can't be trusted. Stegman's private label RMBS revival plan ignores the moral hazard problem and the math problem. Investors still have paltry legal protections pertaining to banks and rating agencies they can't trust.” 

One of our nation’s most facile financial minds and a mortgage securities authority, to whom I promised anonymity because of his day job, sent me his thoughts on the Stegman antics.

“Gee, Stegman touting private MBS at a Fitch conference.  What a surprise.  

“It takes a special type of zealotry to continue to promote a flawed financial structure or idea in the wake of a disastrous performance stemming directly and unambiguously from that structure or idea (see, for example, "supply-side economics.")   

“Private-label securitization has three structural impediments that make it less economic than entity-based guarantees, such as Fannie's and Freddie's: (a) each pool has to stand on its own, which requires much higher levels of subordination (or capital) to achieve a given level of safety for the investor, (b) the interests of the rating agencies that grade the risks of the pools conflict with those of investors who purchase the riskier tranches, and (c) servicers of loans in PLS face competing demands from holders of the different classes of securities that do not exist in single-class Fannie or Freddie MBS.  

“You can talk about "private market incentives" and "Deal Agents" all you want, but until the Treasury people figure out how to overcome these three impediments (and also the fact that in times of stress the PLS market dries up, whereas credit guaranty companies stay in the game, because that's their only business) PLS will not be a reliable foundation for secondary market finance for the $10 trillion U.S. home mortgage sector.”      


Sophisticated mortgage market people seem to understand  what the Treasury and Stegman don’t. 


What Others Are Saying? 

Anyone see/read anything in this 2008 Hank Paulson interview that is sketchy or has now been made bogus???



Freddie hedges its hedges….from Bloomberg’s Jody Shenn 

Riddle me this, why would the FHFA IG issue a report which suggests, because of the temporary loss on derivatives, F&F might have to borrow again from Uncle? 

(Will FHFA issue another "report" tomorrow saying, "Nope, our bad, we were wrong."?) 

Is it just to be inflammatory or to bolster/inflate its image as all knowing?? 

Why say anything negative about your regulated institutions, especially since their stock (common and preferred) doesn't move as a reflection of traditional indices?



“Hello, Senator Warren’s office. I wish to report…….”

(Some tongue in –cheek from the Onion.) 



Motley Fool, why Congress might leave F&F alone


Bad boy bank, bad boy bank! 

First read this story of another fine levied against a top international bank, for a transgression which has legs into the US, too.

And then read this Atlantic Magazine treatise on institutional and financial cultural issues driving aberrant bank behavior. (Thanks, Gwenn Hibbs.) 

And these are the guys to which Obama, Lew, and Stegman want to hand the nation’s mortgage markets?

Shame, shame, shame on the Admin.

Jon Stewart gets it though. (Thanks Bryndon Fisher!)  

Bruce Outs Himself……as a Republican






Monday, April 20, 2015

In this corner, from Iowa, weighing….




April 20, 2015, “Sword of Damocles?”
Or Just a “Damn Senate Sword?” 

Countless hearts soared a few weeks ago, when Senator Chuck Grassley (R-Iowa), Chairman of the Senate Judiciary Committee, burst onto the GSE scene when sending two very tough letters to Treasury and the Department of Justice, challenging the lack of openness and transparency in how the Obama Administration was responding to the “Third Amendment” discovery challenges, in Judge Margaret Sweeney’s order. It was a position first taken in a well-regarded column by New York Times financial columnist Gretchen Morgenson.



Cue the breathtaking music…—Monday April 20--is the day that Chairman Grassley, in writing, asked the Admin to provide answers to his questions. 

Will Grassley get stiff armed and receive nothing more than an extension request, get hit with some other delaying tactic, or receive merely a mishmash or generic answers citing nothing more than the Admin’s right to hold back documents, if it so chooses.

(I am kind of hoping for the latter because that will piss off somebody on the Hill and, possibly, give Grassley more ammunition to shine a bright light on this travesty and try and force some long overdue honest dealing on the WH to provide plaintiffs lawyers with the information those attorneys are seeking.)

If the Admin balks or otherwise delays, as one of my earthy friends bluntly put it, “If Grassley has a ---- -- (slang for male erection) for the Administration over this and/or other issues, the Chairman won’t accept the stalling—or a pack of non-answers—and will have cause to flay the White House.”

Here is a link to a Grassley Bloomberg Television interview last week, which I thought Bloomberg turned into a grand waste of the Senator’s time, asking little about the core issue of the Obama Administration slow walking court-ordered “discovery.” 

We’ll know later today if and how the White House chooses to respond to the Senate Judiciary Committee Chair.

(Update: As of Monday, 4-20, 8:30 PM EST, no response from DoJ or Treasury to Grassley's letters. This is not surprising as most all "deadlines" in Hill letter requests are missed, but--as suggested--going forward, we'll see how Grassley handles the slight, blowing it off or getting angry.)


Stegman Dashes My (Faint) Hopes

Mike Stegman chose to grace the Financial Services Roundtable (FSR) crowd with his presence last week and had the choice to deliver a fabulous speech or give big financial company reps the same tired crap about the flaws in the current system.

But, alas, poor Mike turtled at the end, crawled into (See link to particle transcript, below.)


The major cause of my disappointment is the following, which a close-to-the-WH source swore were the remarks Mike, originally, had made up his mind to deliver.

“Folks, I’ll be candid. You and I know you don’t want to take over the primary and secondary mortgage   markets unless the Congress votes you a major new (and additional) federal subsidy/benefit to protect you against your own mortgage securities losses.” 

“We in the Obama White House—having lost sight of financial services history and our own moral compass--are willing to give you that, because we like the big banks and we hope if we bribe you, frankly, you won’t, once again, hurt us.”

“Some in Congress are not willing to go along with our scheme because they believe it bestows too much on the Too Big To Fail institutions (or, if you pardon the gallows humor friends, “too big to jail”) and won’t do enough for low and moderate income families (Shh, also known as traditional and historic Democrat party supporters), who require some equitable mortgage finance assistance that doesn’t tilt toward you providers.”

“Those so-called independent congressional thinkers—all ten of them--say our approach rewards the wrong people, costs too much; turns upside down an operational home loan system that works; likely will add huge additional costs and uncertainty; and still would leave Uncle Sam on the hook.”

“Nonsense, we say. After all, look at our deft mortgage finance track record and our myriad other policy successes in sensitive bread and butter domestic areas (not to mention our foreign policy triumphs). Doesn’t that glorious record, politically, suggest we know better? Doesn’t it, really, honest doesn’t it; can I get an Amen from anyone?”

“Trust us and our plan. If I, and other Obama insiders, prattle enough and crap on the “unworkable” current mortgage finance model—which, despite our bumbling, continues to function smoothly, darn it,—maybe the Hill policy makers will lose their focus, buy our pig in a poke, and bequeath the TBTF institutions everything you guys want but don’t deserve, and likely would abuse—if their past practices are any evidence?”

“So, Hell, let’s hear it for indecision, confusion and chaos, guys and girls, the Obama way.”


Alas, Mike’s headlines would have been so much better had he given my—er, I mean—his original speech! 

Speaking of Shilling for the Big Banks… 

Rousing himself from solving the Iran nuclear agreement problem, Sen. Bob Corker (R-Tenn.) lead a cabal of likeminded solons in arguing the that Fannie and Freddie’s work on the common securitization platform (CSP) was not moving swiftly enough and needs some, in the form on non-GSE talents to aid them. (Senator Bob, do you want to add those the same bank experts who royally screwed the US mortgage market 7 years ago and then—more recently-- tried to hijack the London Interbank Borrowing Rate, LIBOR, index/apparatus to boost their earnings?) 

Excuse me while I barf. 

What is it that Corker and the other usual suspects don’t understand about “COMMON” securitization platform and its intended use??

This Obama plan is deigned to create a single platform for all security issuers—government and non-governmentand to give access to everyone wanting to be part of the system.

The estimated $300 million development costs have or will be borne only by the two GSEs—as they were compelled to agree with--when the FHFA forced them to create the exclusive special Delaware single purpose CSP corporate entity. 

Right now, the banks and other non-GSE mortgage security issuers will get it when it is ready and likely free. 

I am not sure what the Senators think will change--with the  addition of a few bank foot draggers, looking out for their own industry interests—except more delay if two (or more) antagonizing stakeholders are put together? 

Are Corker and the other TBTF friends afraid that a new Administration headed by someone not named Bush, Rubio, Walker, Cruz, Graham, Walker, Paul, Christie or Palin (please, God, let her happen!) might decide the entire exercise is/was folly and just let the CSP’s two real owners deploy it to all mortgage finance system users, as they do now with their own technology and software?

Fiderer “Heat Seeker” Progress 

Is the necessary catalytic synergy coming together to ignite David Fiderer’s “heat seeking missile article?” 

In the last blog I mentioned that David was finishing a 10,000 word shocker, aimed at exposing the corrupt role former Treasury Secretary Hank Paulson carried out putting Fannie and Freddie into “conservatorship” and precipitating the bizarre following events.

DF’s document has drawn interest from one major source and interest from three others. I hope of them one chooses to sponsor his work and give it grand attention.

He and the subject deserve the best and boldest presentation.  (See Paulson reference, below.) 

What Others Are Saying 

Paulson: “Are Fannie and Freddie still around?”

(Maloni: “Yes, despite your best efforts, you arrogant Son of….!”)

Politico’s Jon Prior, quoting Hank Paulson (and a bunch of responding tweets):


Washington Post Accurately Nails Congress

The Washington Post, generated the best editorial line of the week commenting on this Congress, in a lead editorial asking how an anti-big campaign money Florida mailman, piloting a gyrocopter from a 60 miles away Gettysburg, Pa. airport, could elude all elaborate and expensive federal security protection and then land on the US Capitol lawn. (Hope ISIS, Al Queda, Korea, Iran, or the Russians don’t know about gyrocopters!) 

“Federal officials may offer some boilerplate explanation about no security regime being truly airtight, no matter its level of resources and funding. Maybe it is undeniable that the Capitol remains a magnet for the unhinged, the unbalanced and the unconventional — and not only for those elected to serve there.” 

All Hail Borowitz



WASHINGTON (The Borowitz Report) — Americans took to the streets in large numbers on Thursday to show their support for a fifteen-dollar-an-hour wage for members of Congress.



Lenders think GSEs still working pretty well, says Brandon Ivey, writing in Inside Mortgage Finance.

By Brandon Ivey

While policymakers continue to work on reform of the government-sponsored enterprises, lenders suggest that a change to the housing finance system isn’t urgent.

“From our vantage point as a lender in the system with the GSEs under conservatorship, it works pretty well,” Peter Carroll, executive vice president for mortgage policy and counterparty relations at Quicken Loans, said on Tuesday at a discussion hosted by the Financial Services Roundtable and CoreLogic.


Star Crossed? 

Last week I commented on apparent self-inflicted conflict wounds which MBA’s President David Stevens seems to incur. (A theme repeated below in this blog.) 

This week among others, he’s been doing battle with a group of pro F&F folks, who Stevens believes really are hedge fund stooges or a cabal funded by big money, and now has banned them from his Twitter world (whatever that drastic “tweeter” action means?)

That makes for good soap opera content, but the problem is, David, It’s not accurate. They’re just regular folks.

The one principal--who months ago revealed his ID to me as part of another GSE issue--is a working grunt and a long time F&F investor from the Midwest--retired but, from familial necessity, still hustles for a paycheck. 

This innocuous antagonist likes to use graphics and animation to make his mild didactic points. He has no financial or contractual connections to any hedge funds, although I am sure he wished one would adopt him.

Lighten up, Mr. MBA—just as sometimes a cigar is just a cigar--in those scary offshore mortgage waters, sometimes, “There not be monsters out there.”


Investors Unite--—It’s Beef with David Stevens 


Morgenson, in her column, Preaches Hoenig. (Is the congregation listening?) 

Call it out, Sister!



George Will in the Washington Post

Raisin “Takings” with the SCOTUS; hope for GSE lawsuits?  



Maloni, 4-20-2015