Monday, July 8, 2019

Only the GSEs face historic regulatory abuse; will they still?

Post July 4, GSE Cats and Dogs

OK, it’s lay off the POTUS week, since he did enough to himself with his “Fourth of Trump” show.
God decided to show her displeasure with his administration/him by soaking the Mall; then the Prez—on his own, with the tanks watching and the jets overhead—waxed ineloquently about airports subdued by brave US warrior forces in the late 1700’s.
Hey, I believe him. That was the teleprompter’s fault, not DJT's lack of knowledge or memory of US history. 
One of these days we will see a decision from the Fifth Circuit Court which, either, blesses the abuse the Bush and Obama teams imposed on Fannie and Freddie or the judges strike a blow for logic and rationality and rule Treasury secretaries cannot aggrandize the profits of the two in perpetuity, i.e. see 2008 GSE Conservatorship and resulting sweep. 
The offending actions—which generated multiple federal lawsuits--occurred when various government officials and courts ignored the 2008 Housing and Economic Recovery Act (HERA) mandate requiring US officials to preserve and protect the GSE assets and return them to public ownership and private management control. 
BS, BS Everywhere 
I still am mesmerized by those who care deeply about this issue (I’m part of that group) doing their best to guess legal timetables and implications of a future court decision backing the investor plaintiffs or one which says, “Nope, you’re wrong shareholders and you lose again.”
We all still guess but we know nothing about the true event schedules or possible judicial results.
I don’t know which is more frustrating, reading about the fantasy financial multiples these folks see as future GSE stock prices--- based on their unique formula and belief of what stock values could be--or how they fashion their certainty about when the Fifth Circuit will speak, employing historic guidelines, phases of the moon, the entrails of goats, all of which are useless when the money and political play is so weighty. Wishing doesn't make it so.
I often write about why—in DC—it’s never over until the Fat Lady sings. Mainly because the Hill and the White House always have innumerable deflating options in responding to offensive or defensive events, including a Fifth Circuit ruling for the plaintiffs. 
And, I still have trouble seeing any Court award numbers in the tens of billions ($100 Billion?) to anyone over anything involving the GSEs.
That doesn’t mean plaintiffs won’t win this case, it’s just that a win may not produce the windfall so many pro-GSE people are predicting/expecting. 
OFHEO, FHFA, the Fed and the Home Loan Bank Board 
As some readers know, before joining Fannie Mae, I worked at two federal financial regulatory agencies, the now gone Federal Home Loan Bank Board (FHLBB), which oversaw thrift institutions, and the Federal Reserve Board, which still  exists and is as powerful as ever. 
I was at Fannie--working assiduously with a wonderful team of in-house lobbyists and lawyers--to cooperate with the Congress to enact the seminal Federal Housing Enterprises Financial Safety and Soundness Act of 1992--creating the first non-HUD GSE regulator, the Office of Financial Housing Enterprise Oversight (OFHEO), and also introducing statutory affordable housing goals for the two secondary mortgage market giants. 
Much of my following commentary—especially the contrast--is based on those experiences and the first dozen years of OFHEO, which in 2008 (four years after I retired) evolved into the Federal Housing Finance Agency (FHFA). 
I mention this history only for what I write, now, about the GSE regulatory scene and why it has and still remains today, different than other financial institutions regulation, mainly in how the nation’s big banks are treated by their federal overseers.
It’s germane now because the ball is in the FHFA’s court--with Mark Calabria, its new Director--as it seeks to finally fulfill a 10-year-old outstanding objective to publish a GSE capital plan, as well as helping shape President Trump’s recent request for a method to end the conservatorship of Fannie and Freddie, a major component of which will be the FHFA GSE capital requirements. 
Let me establish my premise upfront. 
Bank regulators—the Fed, the Comptroller of the Currency, and the FDIC--coddle their regulated institutions, despite industry claims to the contrary. While OFHEO/FHFA has been hostile.
History has shown both OFHEO and FHFA guilty of badgering, pestering, and actively harassing the GSEs and their execs (see OFHEO early 2000’s), and establishing unprofessional behavior, some of which remains ingrained. (A former OFHEO/FHFA Inspector General once wanted to arm her lawyers when they interacted with GSE personnel.)
For me, it begs the question of what “tone” Mark Calabria will establish and what regulatory oversight mantra he will project?
Is he a new broom, with new assistants, seeking a fresh approach? Or will he succumb to the old style and listen to the “old OFHEO/FHFA hands,” who have been around for years and who perpetuated the GSE antipathy, while earning their varsity letters in “screwing over Fannie and Freddie?” 

Can he embrace his tabula rasa opportunity, or will he reject being a fresh voice, but instead become another oppressor, not championing the GSEs and their mission?
I hinted last week odds are that he will be yesterday’s tyrant, but wear a different suit and tie.
I have to keep pointing to the REGULATORY CAPITAL issue because his first major test will be the capital standards the FHFA Director seeks. 
For the consuming public, i.e. those who need a mortgage to start the wealth-generating cycle of homeownershiphigher  Fannie/Freddie capital is bad because it increases their monthly costs. 
Big bank GSE opponents will offer any excuse for more capital because it hamstrings the GSEs (which their regulator should not want)! 

See a pattern here?

Maloni, 7-8-2019