I"m using editor’s privilege and presenting just the back half of Bill Maloni’s newest post first. You can read his latest thoughts on election trends here at his Bill Maloni’s GSE Blog, and Doom expects to post these, plus at least one contrary opinion from another blogger real soon now (which means when this blogger digs himself out from under a pile of other work 
). Until then sit back and enjoy a new voice in her first exposure to Housing Doom.
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I first met Gwenn Hibbs 25 years ago, when I went to work at the old Federal Home Loan Bank Board, the savings and loan industry regulator, and she was a staff attorney. The Bank Board, under the late Jay Janis and his very able assistant Rita Fair, had a covey of super bright young lawyers, many of whom I’ve been fortunate enough to stay associated with over the years.
Gwenn was part of that group of smart financial regulatory lawyers who worked extremely hard in the nation’s last financial services crisis, when the thrift industry imploded. In addition to her technical legal skills, I remember that Gwenn once wrote every lyric for a dozen lawyer sung songs for a Bank Board holiday party.
When I first could, I hired Gwenn to work with me at Fannie Mae, as my legislative counsel.
I told people that Gwenn, as a lawyer, “could do more with two commas than most attorneys could do with 10 words.” She retired from Fannie before I did and, since, has worked with kids in need, taught music and instruments (she’s an accomplished musician), helped write a family book with her sister, trained many dogs, and can freeze you with one look, when you cross her.
Houston, we have a problem. Since July, the Hank Paulson Sleight-of-Hand Magic Show has swallowed the other branches of government. Working with the FHFA, and the enormous new powers of the TARP, he’s already started a process to disappear the GSE underpinnings of the housing sector. As a nice bonus, the same Wall Street companies who sold $1.5 trillion in subprime neutron bombs to investors will live to play another day, and their shareholders will be sleeping soundly for a long time to come.
September 7, Hank Speaks: The GSEs, albeit solvent and exceeding statutory capital requirements, will be “rescued” into conservatorship — supposedly to remove systemic risk, address moral hazard, and restore solvency and investor confidence. Hank also says that we must bury the “flawed” GSE business model of thin capital, mixing private profit incentives with a public purpose. Way too risky. No more shareholder dividends, no more lobbying and no more talking to anyone else in government without permission.
Also for the greater good – but clearly harming capital, solvency and investor confidence — Hank announced that the GSEs would shun turning a profit, increase support for housing, lower guarantee fees, and go on a starvation diet after the election. Translation: Shareholders lose their shirts and employees may lose their pensions; asset sales and reorganization could occur without any further congressional oversight; but America recaptures Free Market Discipline.
Fast forward to September 16: ”ginormous” Paradigm Shift alert.
The new rules: highly leveraged buccaneer firms on the verge of bankruptcy (well, except Lehman Brothers, don’t ask) are allowed to socialize their losses at taxpayer expense. Oh, and we don’t need to send another message on that whole "you need more capital/moral hazard" thing, do we?
September 16: AIG gulps down an initial loan of some $80 billion; it uses the bailout pot to lobby against stricter regulation and throw itself $400,000 parties.
October 3: Congress allots $700 billion to rescue every Tom, Dick and Harry Hedge Fund who ever made a bad subprime loan or underwrote toxic MBS. Mysteriously, Lockhart refuses to say if Fan and Fred will be allowed to sell assets through TARP
October 15: Hank announces a new, improved TARP plan never mentioned to Congress – inject equity in ailing banks, guarantee interbank loans, and guarantee all non-interest bearing deposits. Any firm that participates can continue to pay dividends, and overpay executives as they please. The common shareholders will live to see share values rise again in the near future. Pundits say the real all-in cost will be $2 trillion.
What we learned in school today: Our regulatory regime at every level failed to appreciate the risk of subprime securitization, and didn’t require enough capital from anyone. But if no one had enough capital to survive the Wild West of subprime profiteering, how come we’re only blaming Fannie Mae? Because what’s good for Wall Street is good for America. A GSE-free market means much higher profits for Wall Street with lower risk — say goodbye to 30-yr. FRMs and learn to love ARMs.
Maloni 10-19-2008
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John-
I agree 100% with Gwen’s criticism of Paulson and friends- they are robbing the American taxpayers to bailout their buddies, and I find it deplorable.
I disagree about the need for GSEs in the housing market though, and here’s why.
The building frenzy of the last few years produced enough housing to fill the demand of owner-occupiers, investors and speculators. The economy is cooling, and household formation is way down. Illegal aliens are leaving the country in droves. Even with homebuilders greatly reducing their housing starts, demand will be very soft for years.
Banks are now sitting with a boatload of foreclosures. Lending is tough because investors are wary of buying the mortgages. It looks like there’s only two solutions.
One is if banks hold their own paper- and loosen their standards. Remember that the housing stock was built to supply those with lousy credit as well- there aren’t enough people with good credit to fill all the houses.
The other is an RTC type solution. Again, without loser standards, the inventory of unsold homes isn’t going anywhere.
I don’t believe that lenders or government want a world where homes sit empty while there are people out there who might possibly make a payment. I think we could muddle by without the GSEs.
“how come we’re only blaming Fannie Mae?”
No serious student of the financial crisis is ONLY blaming FM. This article is simply garbage as is most of what Maloni writeS. If these are the geniuses who were guiding FM, it is no wonder the GSEs dropped the ball.
John, you seem enamored with Maloni + Company but they are a terrible respresentation of the weak thinking that permeated the GSE’s (and govt in general).
At least the private sector is self cleansing. Failures ultimately disappear. Govt failures just get more money.
You should read the Big Picture Blog by Barry Ritholtz for a much better understanding. What you presented here is unworthy of this blog IMO.
And speaking of TBP. Nice mention of your blog Twist.
http://bigpicture.typepad.com/comments/2008/10/sp-its-not-our.html#comments
Metro-
That was a nice mention for us. I like the company he’s got us in. : )