Last week, I offered to wager a friend that, “In the next three years, Fannie Mae will be engaged in a variety of business activities which are market sensitive. …”
Old Doom friend Bill Maloni often has unique insight, but this time he’s brought us something special. He’s making a strong case for Fannie Mae working through FHFA conservatorship and reemerging as an independent Enterprise in about four years. I think this issue is of more than routine importance, and I make my case for this below, after the re-post that Bill has again graciously given us permission to do.
But now let’s see what Bill thinks is in store for Fannie over the next while. Doom’s done quite a bit of editing on this one, so readers might also like to check the original.
I remember my homeroom teacher in High School. Mrs. Elizabeth Bush was about 92 (honest!) and taught girls’ sewing, which was appropriate when I attended in the 1960’s since the Pittsburgh public school curriculum was designed in the 1930s and 1940s.
I was in her room only in the morning, to kibitz with friends, and then went through my seven daily academic classes. But that limited interaction didn’t stop Mrs. Bush from writing on this indifferent student’s final 12th grade report card “1966?” … by which she meant, "Whatever will happen to you in four years, you poor uneducated dolt, when all of your friends are graduating from college?"
If she only knew, that little wig she wore would be spinning on her head. I definitely am going to look Mrs. Bush up when I get to heaven!
What happened to me (very nice things) isn’t important, but I thought about this dire forecast again when I was thinking about Fannie Mae and Freddie Mac last week, just after David Moffett walked away from Freddie Mac’s top job, for which the outgoing Bush Administration had chosen him only late last year.
Moffett offered the predictable complaints about ineffective federal government bureaucracy and decisions, which took weeks and months when the business needed answers in minutes or hours. But many observers still were forced to ask whether Moffett was up to the job.
So if some home room teacher were to write "2013?" on Fannie’s and Freddie’s current report card, what might an answer look like?
Too many people say “Fannie and Freddie,” as if the two were identical twins. They are not, never were run that way, had different corporate strategies, almost contrasting cultures, operating systems, and differing volumes and qualities of crummy assets.
Freddie seems to be producing negative surprises, making me wonder just how bad things are in McLean. Not that Fannie’s red ink is any Day at Rehoboth, either.
However, there still is some form of twisted “parity” at work inside the Beltway, which could cause Congress or the Obama Administration treat them alike.
(So, who is spreading all of those Fannie/Freddie “merger” rumors out there?)
Last week, I offered to wager a friend that, “In the next three years, Fannie Mae will be engaged in a variety of business activities which are market sensitive.” That’s as far as I would go.
For a couple of reasons, I believe that Fannie could enjoy a revival which could return it into some semblance of its former self, i.e. shareholder owned, albeit not with the full range of investment powers they once enjoyed.
I believe this because the Obama Administration slowly seems to be awakening to the reality that it owns two companies with copious talent and resources, which can be employed to help the federal government get through it’s latest “new assignment,” i.e. to acquire, manage, and then sell hundreds of billions of dollars of whole mortgage loans and mortgage backed securities of varying qualities and values.
Perhaps it’s the New York Fed’s water supply which makes their presidents say and do weird things, even when they move on and become Secretary of the Treasury.
In his very first official speech [1] as NY Federal Reserve Bank President, William Dudley, who succeeded Tim Geithner, groaned that …
[r]epeatedly over the past 18 months we have heard—from the GSEs, from the investment banks, from the commercial banks—now is not a good time to raise capital.
… because —- he analyzed -— they didn’t want to dilute shareholders’ values.
Um, uh, Mr. Dudley, Fannie Mae raised over $7 Billion in fresh capital in May of 2008—which was less than 12 months ago–and still got trucked by Henry Paulson and the Bush Administration.
At least get your facts straight, Mr. Dudley, if you are going to pontificate and lead the Fed’s paramount bank. Or are you auditioning for a bigger Washington job?
Creative and heavy use of Fannie and Freddie to help the Treasury and other federal agencies carry out that responsibility will save our government billions and also keep more families in their homes and paying down affordable mortgages. Some borrowers still might default, but that won’t happen as rapidly as it might have, once their mortgages are restructured by Fannie and Freddie and the government.
And if Fannie and Freddie are not overburdened by the Feds, their employees know how to do the job efficiently and effectively. Chalk one up for the Obama folks and for minimal interference.
Another reason to hope for Fannie (and Freddie), to get resurrected as “regulated utilities,” is because their function is missing from the residential mortgage market and hasn’t been replaced. It’s needed and it’s vital.
The nation’s mortgage finance system has become reliant on the long term fixed rate mortgage loans and commercial banks just can’t hold them on their books. We need a private dedicated mortgage market investor, with the capacity to fund and manage those longer maturity mortgages.
The alternative is a commercial bank based system with only will offer adjustable rate mortgage loans or fixed rate loans with huge pricing premiums.
Nothing has yet stepped up to replace Fannie and Freddie and if the government chooses to create something, why ignore and waste that which you have?
Now—and this is just me—another reason to think optimistically about Fannie and Freddie burst from a most unusual source last week.
Holman Jenkins, long time columnist and editorial writer for the Wall Street Journal–the most ideologically nasty of the anti-Fannie/Freddie publications–wrote that it was a mistake for the government to nationalize the GSEs.[2] He said that it sent a horrible signal to the market and took the life out of lots of financial institutions companies, including the WSJ’s darling big banks.
Take it as sour grapes if you want, but two respected fund managers, Edward Lampert and Bill Miller, both of whom were big shareholders in the mortgage giants, argue that Fannie and Freddie’s forcible takeover helped kick off the landslide that has nearly wiped out equity values in the financial sector.
(My thanks to my friend/colleague Gwenn Hibbs, for alerting me to the Jenkins column.)
Where were you last year, Mr. Jenkins, besides cheering on Mr. Paulson??
Not that Jenkins’ piece, suddenly, will cause the world to say mea culpa to Fannie and Freddie. It won’t, nor are they due it.
Both companies put hundreds of billions in Alt A and PLA subprime crap on their books in 2008 and 2007 (like those other companies which have been plowed under or are being kept alive on Treasury/Fed life support) and that, not their structure or affordable housing mission, brought them down.
However, the candid comments from Jenkins will breed similar reviews, and reconsideration from others, which could soften the terrain for federal policy makers and make it easier to identify the national market role that Fannie (and Freddie) still can play.
So, Mrs. Bush, my old homeroom teacher and likely celestial resident, that’s why I think the future is looking up for Fannie (and maybe even Freddie).
John M here again …
I am thinking that a Fannie revival would involve stabilizing FHFA’s "effective guarantee" at a cap not too much bigger than the present $200 billion of U.S. Treasury support. Doomers should not underestimate how crucial this issue is for the path America takes over the next few decades. A miracle like that would have to happen in order for bond investors to regain their faith in GSE Agency debt while at the same time agencies remained below treasuries in the debt structure of the United States. Without an explicit guarantee for agencies, America’s sovereign debt stays at a low enough level that maintaining the present imperial level of military committments remains feasible. If on the other hand the big, formerly quasi-private, GSEs are absorbed into the government like so many Ginnie Maes, the effective doubling of America’s debt burden would have the effect of fitting DoD with a pair of cement overshoes. In my opinion there’s a lot riding on what goes down in that funky building with the cupola, and Bill’s analysis of their prospects bears careful watching.
________________________
Notes and References
[1]: "Financial Market Turmoil: The Federal Reserve And The Challenges Ahead", speech by William Dudley, President, NY Fed, March 6, 2009.
[2]: "Rethinking the Fan and Fred Takeover", by Holman W. Jenkins, Jr., Wall Street Journal, March 4, 2009.
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