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Interview with a skeptical Washington finance wonk (I've never heard of him before). He talks about the recent history of the Government Sponsored Entities at the core of our housing finance system: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
These next 2 quotes jump around a bit in the interview text to bring together some themes.
Feinberg: GSEs dominate the fat, low risk portion of the housing market, leaving the subprime scraps for the private lenders. We may never again see private, entrepreneurial firms like a CFC or BSC arise to challenge the GSEs and the largest banks.
Interviewer: And remember that no private bank can compete with a GSE.
Feinberg:Yes, thus private banks, large and small, are trying to squeeze out an abnormal profit from the riskier parts of a commodity business, a business where the safest assets are monopolized by GSEs, and thus the banks have to take more and more risk. There is a certain inevitability about where we are today. It comes from banks trying to do the impossible. And by recapitalizing the banks via extreme interest rate swings and a steep yield curve, the Fed is going to set up the next round of asset inflation. It is a great formula for destruction of value, for shareholders and the nation as a whole.
Interviewer: So you don't see the impending insolvency of the GSEs as a practical opportunity to get rid of them?
Feinberg: Should have been done 20 years ago. Bailing out FNM and FRE is the path of least resistance. All of the GSEs, including the Federal Home Loan Banks, are going to be looked to for help in re-floating the mortgage market, both with portfolio expansion and guarantees.
Interviewer: That assumes that the markets will tolerate such action. Our take on this is that the credulity of the global investor may have reached its natural limit. If the markets see the footings of the GSEs increasing, spreads are going to blow out implicit guarantee or no. These organizations cannot survive if their funding spreads trade at junk levels.
Interviewer: And remember that no private bank can compete with a GSE.
Feinberg:Yes, thus private banks, large and small, are trying to squeeze out an abnormal profit from the riskier parts of a commodity business, a business where the safest assets are monopolized by GSEs, and thus the banks have to take more and more risk. There is a certain inevitability about where we are today. It comes from banks trying to do the impossible. And by recapitalizing the banks via extreme interest rate swings and a steep yield curve, the Fed is going to set up the next round of asset inflation. It is a great formula for destruction of value, for shareholders and the nation as a whole.
Interviewer: So you don't see the impending insolvency of the GSEs as a practical opportunity to get rid of them?
Feinberg: Should have been done 20 years ago. Bailing out FNM and FRE is the path of least resistance. All of the GSEs, including the Federal Home Loan Banks, are going to be looked to for help in re-floating the mortgage market, both with portfolio expansion and guarantees.
Interviewer: That assumes that the markets will tolerate such action. Our take on this is that the credulity of the global investor may have reached its natural limit. If the markets see the footings of the GSEs increasing, spreads are going to blow out implicit guarantee or no. These organizations cannot survive if their funding spreads trade at junk levels.
Feinberg: Unfortunately, we probably passed the point of no return on the GSEs. The trouble is that they won't get the BSC treatment, which is going to be resolved on severe private market terms despite the loan from the Fed. The trouble is that even if the GSEs fail and the private shareholders are wiped out, they will be reconstituted as some sort of development bank. They will be getting infusions on a regular basis sort of like the IFC and World Bank because they have this mission which continually gets expanded by the Congress. For example, when Katrina came along both GSEs immediately said that they were the answer to the crisis, thereby endearing them to members from the affected states. They said they would set up a fund to assist hurricane victims and administer same. Likewise the GSEs now are offering to help ameliorate the subprime crisis, but people forget the role that both GSEs played in making the subprime crisis possible. Now they are being portrayed as saviors of subprime.
Feinberg: One of the characteristics that make us a banana republic is that we don't really have GAAP to the extent that CEOs think they can put accounting principles into play. . . . What I and many others got right was telling the story that FNM and FRE had no accounting or internal controls, and that this fact would become meaningful in time. These entities were flying totally blind without those basic elements in place, yet FNM CEO Frank Raines was going around telling people that they had the best controls and most transparent accounting and that it should be emulated as the envy of the world and so forth. We subsequently discovered that FNM management was monkeying around with journal entries to get them the biggest bonus. When you have CEOs lobbying against accounting and internal controls, they are not the ones anyone should be listening to. . . . Public policy has been replaced by public relations in this country. Our leaders don't get told what they don't want to hear because the spin machine let's them pick up the Wall Street Journal and read what they want to read because it was placed by the PR firm hired by the banks or the GSEs for that purpose.
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