Monday, June 22, 2015

A July Approaches.....



Judge Wheeler’s Decision


“Third Amendment” plaintiffs. their lawyers, advocates, F&F fans, and others—who find some joy in Judge Thomas Wheeler’s decision claiming government “takings” but granting no financial damages to AIG plaintiffs—going forward need to establish the case that neither Fannie nor Freddie were bankrupt or unable to access the market for working capital, in 2008 when taken over by Treasury.

And I believe they can, but will any federal judge agree?

It’s a subjective call that will be argued vehemently both ways.

In Fannie’s case, I’ve always thought that that Treasury Secretary  Hank Paulson----torn between ideology and pragmatism--ignored Fannie’s $47 Billion in capital and near unilaterally decided the company was penniless, without market hope, and couldn’t function. But, he was mindful to use the public’s and the Congress’s distraction over financial woes to implement a long time GOP agenda against the GSEs and, possibly, try to enrich some of his wealthy friends who were alerted early to his plans. 

I believe Paulson steamrolled and intimidated both GSE boards, and implicitly threatening to include them in his mix of “guilty parties,” if any refused to cooperate with his conservatorship takeover plans

There were few “Profiles in Courage” candidates on those boards, but no idiots either!! 

However, instead of rushing to grab the two, had the Treasury and Fed just stepped back and extended their continued oral support (not the full faith and credit equivalent they ultimately assumed), who would have objected? 

F&F likely could have managed themselves out of the mess, albeit paying a little more for debt. 

Of course, then Tim Geithner wouldn’t have had the chance to siphon F&F revenue and enrich the US Treasury, either. 

Some will say, “But, you’re wrong. It’s not that simple.

My response is, “Yes it is, since the government went ass over teacups to go in the opposite direction with less justification." 

That’s what I believe and that’s what the remaining GSE lawsuits all are about. Expect them to be amplified now that Wheeler has established one half of what GSE plaintiffs have claimed. 

Bruce Berkowoitz, Fairholme CEO  and major GSE investor, said it best, when he was quoted in a Financial Times article about the recent AIG decision,  discussing Treasury’s bipartisan fabricated stories backing conservatorship and total profit sweeps.

“Any notion of a ‘death spiral’ was fiction,” said Mr. Berkowitz of Fairholme. “Fannie Mae and Freddie Mac performed as promised, had mountains of cash and generated cash during the financial crisis. Reported losses were the result of decisions by a handful of government officials to reflect a doomsday scenario that did not and could not occur.” (Story link below.)


Will Any Federal Court Agree???


Here again is where we get into federal judges deciding “How many angels can dance on the head of a pin,” or more precisely, could F&F have survived without conservatorship. Could they borrow in the debt markets?

The courts will continue to hear from lawyers saying F&F easily could have raised market funds and continued operations, especially with FHFA toughening up their operating rules. 

The US government, Paulson, Geithner, and Bernanke, plus others—when/if they get called as witnesses, as they did with the AIG case—will argue the opposite. 

Kicking the can down the road—or higher up the judiciary chain—is not solely the province of  Congress. 

Judge Wheeler—operating under a different statute-- found the Fed engaged in “takings,” but who at Treasury is going to admit 2012 “sweep” actions grew from wanting to get at the GSE revenues which someone had to realize were about to turn favorable. 

Or has some Administration official already admitted that in depositions? 

As I’ve written, I still am waiting for anyone in Washington—including the courts—to offer a substantive decision benefiting Fannie Mae and Freddie Mac (or their investors) as dominant mortgage market participants. 

Can two institutions consistently be in the wrong, even when the government is running them?

Lew and Royce Play Patty-Cake

At a HBC hearing last week, Rep. Ed Royce (R-Cal) continued in his “the GSEs” haven’t paid anything back” and his badminton partner witness Treasury Secretary Jack Lew—fresh form being booed in Israel-- who reiterated how serious the 2008 debacle was. No surprises in either statement and said he was for mortgage reform.

But, why did the “Ed and Jack Show: fail to mention the  $2.7 Trillion in poorly underwritten and falsely rated private mortgage backed securities which the non-F&F issuers poured on the market, racking up three times the losses that F&F did?

One reason is that both guys see the same exact players—which pulled PLS, 2008’s biggest rip off-- being the logical inheritors of the primary and secondary mortgage markets, if/when they succeed in disabling the GSEs.

But, what Royce and other R’s don’t seem to understand is—without Uncle in the market, somewhere—you are not going to get all of that “new private capital” flowing into mortgage lending. 

Lew and Capuano exchange

Rep. Mike Capuano (D-Mass) did his latest public service, by quizzing Lew and having the Treasury Secretary put on the record that F&F have repaid all that was infused in them, plus  nearly $40 Billion more and growing. (Did anyone else listening to this feel Capuano was channeling a little Barney Frank? Must be the geography!



What Others Are Saying

Wayne Olson in Capital Alpha values GSE common and preferred stocks.


The Financial Times looks at GSE court cases, after Wheeler decision.


What are a few sanctions between banks???


Josh Rosner scores again on “MBA mission creep” while offering prudent advice to the smaller lenders.

(I thought I had a link to Rosner’s latest report, but I couldn’t get it synched. I’ll work to add it, even after I put up the blog.)

Mr. Fiddlesticks comes through; here is Rosner 's report. Thanks, Mr. F.


He said the Shelby bill could be a honey trap. Rosner nailed the hypocritical trade association’s position for wanting to get banks into the GSE common securitization process (CSP) and the single GSE security development.

It wasn’t too many years ago, albeit before David Stevens MBA time, that the same trade group was complaining that F&F were trying to get into the mortgage bankers market position and remove them as participants.

The MBA advocated then for a “bright line,” to show a/the demarcation between primary and secondary market roles.

Just like today, 10 years ago, the MBA was shoveling a line, more BS than “bright”--but still a line, since it defied the logic of an independent “secondary mortgage market.”


Fannie (and I am sure Freddie) had no desire to disrupt an ideal situation for them, which featured a legion of primary market mortgage supplying lenders-- banks, thrifts, mortgage companies, credit unions, and others—contractually wedded to delivering business to them—but with none of the overhead costs, i.e. bricks and mortar, office and personnel, all laboring to underwrite borrowers (using GSE standards).


Most of the mortgage bankers loans made were sold or securitized with Fannie or Freddie, anyway. So why would those two ever desire to supplant the primary market???

Crossing the MBA specious “bright line” to own the whole mortgage shebang would have been a lousy and expensive business model, which F&F didn’t need or want—and certainly something Congress would nip quickly—and with great aggression and dispatch--if anyone at F&F ever coveted the lenders. 

About the $$$$


But, the MBA’s real objection was not F&F becoming direct lenders—again a really dumb business model—what truly ruffled those mortgage bankers was that F&F’s operational efficiency made the mortgage application and approval process work better for consumers because it rung excess mortgagor costs from the loan process, which really ticked off the MBA and its members who benefited from that fat.


They often told Fannie that behind closed doors, but for public consumption, the MBA created a fictitious “bright line” make believe scenario to disguise its real agenda. (Link, from “The Hill” in 2005.)

Some current MBA officials should play closer attention to history.

Rosner both called out the MBA but also appropriately warned the ICBA that blessing the Shelby legislation, which makes the big bankers bigger, just hastens the ICBA’s demise—sooner rather than later--as large bank acquisition targets or neutered non-competitors. 

Again, there is a solid reason why the little banks also showed concerns over rules easing the life of the larger institutions. 

Big fish eat minnows. 

Forget that lesson and perish!!

Rosner on a Twitter roll, calls out WSJ and Reporter John Carney. (And he still is seeking a debate forum with D. Stevens.) 

@WSJ Don't you have a pub affairs editor. Given @carney's inaccuracies & clear biases re GSEs, & ties to AEI shouldn't that be investigated? 



“The Hill” asks if Shelby’s bank regulatory relief bill is losing momentum.



Maloni, 6-22-2015


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