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







Matt Hill said...

Another metaphor for all of this:
It's like Geithner, Paulson, Demarco, Wallison, Carney and now Stegman are all running an insurance scam. They staged a car crash and are now expecting the whole world to believe their story. They think everyone in the world besides them are stupid. The whole crash was caught on a dash-cam for the world to see, but they still insist they are innocent and in the right and are looking out for the taxpayer. It's like they have actually convinced themselves somehow that they are the victims. Even though it was Geithner who pulled one of those jump on the hood tricks and crumple to the ground with arms flailing deals. The whole thing is really unbelievable and it's embarrassing for our country that this whole act continues.

Bill Maloni said...

Matt--You're correct but the only "camera" which matters, currently, is the one Judges hearing the cases have with their respective decisions.


Matt Hill said...

Yep, that's the camera that matters.

Here's my rub on everything. I don't think that anything whatsoever needs to be proven in court to stop the sweep. A decision was made by somebody of "authority" to pay the pedestrian every cent of the car drivers income for current and future medical bills. However, the pedestrian is now a millionaire with these payments and he is back to playing pickup basketball 3 days a week.

Do we have to prove the pedestrian was fraudulent, or can we just go ahead and allow the driver to keep his income now that the pedestrian is a millionaire and back on his feet?

Bill Maloni said...

Matt--If it isn't decided by the courts, where will it be thrashed out?

I've discussed why it's not going to happen in Congress until, likely, 2017, if then. So it has it be the courts, unless the Admin concedes and seeks a "deal."

So, my advice for you is "keep driving."

Matt Hill said...

That's fine by me Bill. I found the video. Here's what Boles, Olson and Cooper are up against: