Monday, August 22, 2016

Howard, Rightfully, PO’d; Exposes Phony FHFA Tests

Fannie and Freddie Pass their Stress Test, FHFA Fails

Many domestic and a few overseas publications recently carried a story about the Fannie Mae/Freddie Mac (Government Sponsored Enterprises or GSEs) stress test conducted by their regulator, the Federal Housing Finance Agency (FHFA), an examination called for the GSEs and all major banks in the Dodd-Frank statute.

The Federal Reserve Board carried out those test for the banks, while the GSE regulator produced Fannie’s and Freddie’s.

Most publications carried the main theme of the FHFA studies, i.e. in an extreme financial debacle, the GSEs could need over $120 Billion cash infusion from the US Treasury.

But, I wonder if besides peddling the FHFA oppress theme any of the writers or the venues looked deeply at the tests and understood their components?

But, that finding is bogus, as is the structure of the FHFA study, an agency which—historically—has a somewhat antagonistic relationship with the GSEs and, institutionally, has little reason to show the two are strong and may not ever require help from the US Treasury or the FHFA.

(Note: Currently, there are some 30 law suits pending against the Treasury and the FHFA for various actions applied to the GSEs, since Fannie and Freddie were place into “conservatorship” in 2008 under then GOP Treasury Secretary Hank Paulson.)

Here is a counter to the FHFA work. Some enterprising journalist(s) should ask FHFA specific questions and push them if the agency suggests its actions were legitimate and accurate.

Tim Howard* knows stress test structures/operations and, importantly, shows where and how this latest FHFA examination was “gamed”—with more than $100 Billion in very questionable assumptions-- producing its distorted loss finding.

If you haven’t already, enjoy reading his August 19, 2016 blog.

In a few exchanges with me since Tim posted the blog above, he’s mentioned he thinks FHFA took every subjective number offered by the ST exercise and inflated and distorted it to produce a horrible outcome. Again, a determined questioner should ask FHFA why that was so.

I expect Howard will write more about FHFA’s misleading actions.

Publications and writers covering the original FHFA stress test story.

In addition to Bloomberg’s Joe Light and the Wall Street Journal’s John Carney, here are the names of individual writers or the publications which covered this story. (Some just had Twitter addresses. If you know any of them or can reach them, do so. They might want to read Tim’s views and engage FHFA or in a discussion.)

Name                              Publication            Title                                                         Contact

Andrea Riquier             MarketWatch        housing reporter                                         @ARiquier
Erika Morphy                Freelance             Journalist                                                    @EMorphy
Ben Lane                      Housing Wire       Senior Financial Reporter                     @BenLaneHW
Thornton McEnery        Dealbreaker         Editor                                             @ThorntonMcEnery
Wesley Coopersmith    Heritage Action    Grassroots Educational Coordinator     @WesleyCoop 
Ryan Rainey                 Morning Consult   Reporter                                                   @ryan_rainey 
Kendall Baer                 DS News              online editor                         
Phil Hall                         nmpmediacorp     Editor                           

Others, identified by Google, who/which covered the story.
Scott Morgan DSNews

FinReg Alert

Tennessee Real Estate Rama

Cornerstone Credit Union League

Historical note: *Tim Howard was Fannie Mae’s former CFO and--along with its Chairman Frank Raines and Treasurer LeAnne Spencer Garmon—was forced out of Fannie in 2004, by a specious regulatory charge of “securities fraud,” which later was thrown out court by a federal judge.

While at Fannie for more than 20 years, Howard initially designed Fannie Mae’s original stress test and risk-based capital system. Later, working with Paul Volcker--after the latter left the Federal Reserve Board in 1991—they refined that model and Congress adopted Howard’s plan in the 1992 statute which gave Fannie Mae and Freddie Mac those capital paradigms, a new regulator, and national housing goals.

Maloni, 8-22-2016


Unknown said...

Here's Carney's response. Typical.

Anonymous said...


I could come up with a stress tests that shows Disney insolvent and Apple needing billions of funding.

But what does it matter its all fun and games for the treasury and fhfa... they are less than honest. Wonder what their husbands think of them.

Bill Maloni said...

CJ--Carney suggesting Tim Howard doesn't understand and got it wrong. Hilarious.



IMO, FHFA had the option to play it straight and conduct the stress test much as the Fed did; but the agency chose not to and introduced enough subjective elements to insure the results would look scary, threatening, and raise the spectre of the GSEs needing major taxpayer assistance (which many of us think they didn't in 2008). Surprise, surprise, that result also suggests a bureaucrat's fantasy affirmation of the need for the agency's service.

Just think, if eight years ago, Treasury and the Fed said "the GSEs are fine and still have good businesses, but need some regulatory tightening"--which in effect was what happened but after fevered congressional action, based on shaky factual suppositions, and then federal F&F handcuffs.

Paulson saw the opportunity to carry out the GOP wet dream and throw the GSEs into "conservatorship," with a goal of destroying them and substituting something more to the big bank tastes.

But the markets and the banks didn't play along, since both still support heavily using the GSEs.

I think it is crucial for the nation to understand why a federal regulatory agency charged with sustaining two crucial institutions harbors such punitive feelings about F&F and acts accordingly.