A Risk-Sharing Postscript

This Wednesday, five respected housing policy experts—Jim Parrott, Lew Ranieri, Gene Sperling, Mark Zandi and Barry Zigas—together released a paper titled “A More Promising Road to GSE Reform.” In it, they propose to “merge Fannie and Freddie to form a single government corporation, which would handle all of the operations that those two institutions perform today, providing an explicit federal guarantee on mortgage-backed securities while syndicating all noncatastrophic risk into the private market.”

I will have more to say about the overall “Promising Road” proposal later, but since my previous post was highly critical of Fannie Mae’s Connecticut Avenue Securities transactions, and programmatic securitized risk-sharing forms the core of the secondary market system put forth in this paper, I wanted to briefly comment on that aspect of it.

We just now are crawling out from under the ruins of our last experiment with securitized risk sharing—the collateralized debt obligations (CDOs) that were supposed to be the answer for how to finance the riskier tranches of private-label securities (PLS)—and already we see a proposal to give a variation on that theme another try.

I’m generally not one to take shots, but I also can’t resist irony. The “Promising Road” paper was put up on a website hosted by Moody’s—the same agency that, along with Standard & Poor’s, told us that the risk on individual low-rated tranches of PLS was not correlated but independent, so that you could put a pool consisting of nothing but these low-rated tranches together in a CDO and safely rate 80 percent of the new security Aaa. That worked terrifically well for as long as the market was spiraling upwards—then suddenly it didn’t work at all.

If past experience weren’t enough, there are warning signs everywhere about the new risk sharing deals Fannie and Freddie have been doing. The most prominent one is the makeup of the investor base. The vast majority of investors in risk-sharing securities are leveraged—mainly hedge funds, but also commercial banks. The “private capital” they bring to the table isn’t equity; it’s debt. Take the hedge funds. When they think credit risks are low, they view risk-sharing transactions as an opportunity to borrow at “LIBOR plus a little” and invest at “LIBOR plus a lot,” with little chance that credit losses will erode enough of their spread to prevent them from earning double-digit returns for their investors and “two and twenty” fees for themselves. The minute they think credit losses might spoil this trade they’ll stop doing it, and if they think credit losses are about to spike they’ll sell the deals they own, roiling the market for credit risk at exactly the wrong time in the housing cycle. And if they can come up with a way to short these deals—as with synthetic CDOs the last time around—they’ll do that, too.

The daunting problem to overcome with securitized risk sharing is that there is a limited universe of investors with an appetite for these transactions, and their appetite varies greatly depending on where we are in the cycle. Few of those investors know much about mortgage credit risk themselves, and many—as was the case with the buyers of CDOs—know next to nothing. Investors correctly assume that the institutions packaging and selling mortgage credit risk know more about it than they, the investors, do, so they require a significant premium to accept it, even in good times. And in bad times they want nothing to do with it.

There is no getting around the fact that for capital markets investors, credit risk-taking isn’t a business; it’s a trade. It always has been, and it always will be. That’s the compelling argument for having specialized institutions like Fannie and Freddie, and the mortgage insurers, grade, price, hold and manage mortgage credit risk. These institutions know the risks, and are able to diversify them across product type, loan characteristic, geography, and time. They’re closely regulated—unlike capital markets investors, whose activities in the credit risk market aren’t regulated at all—and they can and should be required to hold capital adequate to their risks. They don’t get surprised when the cycle turns on them, and, more importantly, don’t cut and run when that happens. Credit risk management is their primary business, and they’re in it for the long haul. The financial system benefits from that.

The authors of “Promising Road” greatly underplay the dangers of making a $10 trillion market crucial to the functioning of the U.S. economy dependent upon the mercurial attitudes and preferences of leveraged investors like hedge funds. They confidently state, “Mortgage rates in the proposed system would be no higher on average through the business cycle than those in the current system (see Box 1).” Although Box 1 might tell us that, the markets and our experience tell us something very different. If we truly do go from our last securitized risk-sharing disaster to another one, we’ll have no one to blame but ourselves. We’ve seen this movie before.

I’ll have my own proposal for mortgage reform on this site by the end of next week.

96 thoughts on “A Risk-Sharing Postscript

  1. Tim,

    What is your understanding of the end result for shareholders (jr. preferred and common) under the Millstein proposal? An IPO for shares of the new companies are proposed to payoff creditors, sr. preferred, warrants, juniors, commons, etc. and it looks as if he calls for the eventual liquidation of the GSE portfolios. It is my impression that junior and commons could potentially get nothing with the added insult of having no shares left in any company. Am I misreading his proposal? Thank you for your blog, time, and expertise.


    1. I haven’t studied Millstein’s proposal, but on my initial couple of readings I think it’s a serious and credible effort at dealing with the practical and political complexities of mortgage reform. I would call it “deliberately complex,” in that it permits different decisions to be made at different points in the process, depending on what is politically doable, including in areas like the degree of government involvement.

      Partly because it is so complex–and admits to different possible permutations before getting to the point of liquidating the existing Fannie and Freddie–it’s very hard to assess what it would mean for either common or preferred shareholders of those companies. And importantly, whatever is done for, with or to their shareholders will take a very long time, if for no other reason than it will take many years for the “NEWCOs” to become adequately capitalized, which has to happen before anything can be done with the existing companies. And by that time, we almost certainly will have results from the at least some of the lawsuits. I’ve always believed that rulings on the lawsuits will “reshuffle the deck” and (to mix metaphors) take some ideas off the table and make others more plausible. We’re still in the early innings (third metaphor) on this, as much as we may wish it were otherwise.


      1. Tim,

        You have correctly highlighted legal dimensions.

        Conservator’s interpretation of HERA makes every other financial crime look like misdemeanor.
        When compared to Conservator treatment of conservatees and FnF investors, every other financial fraudster looks like honorable citizen.

        These WS/WDC elite experts are pipe dreamers without slightest understanding of future legal consequences of unlawful decisions and violations by the proxy conservator.

        These experts think, all the FnF legal problems can be solved through congressional laws and also legalize all unlawful decisions and frauds committed by conservator against conservatees and FnF investors.


      1. @tim

        fwiw here are some of my thoughts.

        mr. meyer has tried to offer a serious analysis, and in many respects he has done well. however, he does not really address the capital raising burden that the GSEs must face. in fact, at p.7 he seems to imply that the GSEs will obtain substantial capital from the exercise of Treasury’s warrants. this is wrong as the warrants have a very small exercise price. otherwise it is an admirable attempt to offer a solution.

        as for mr. millstein, he doesn’t address why it is necessary to liquidate the GSEs at the same time the business is being continued by the newcos. what is this supposed to accomplish? i think millstein is a little newco-crazy; one remebers that he advised on the GM bankruptcy where GM sold all assets to a newco and left unsecured creditors, including defenseless personal injury plaintiffs, sucking wind.


  2. Tim,

    I trust any plan you’d put forth would respect the boundaries of rule of law. I see too many plans already that can only be implemented through steeling private companies. Those who offer such plans compromise personal conviction. Looking forward to reading yours though.


    1. “I trust any plan you’d put forth would respect the boundaries of rule of law. I see too many plans already that can only be implemented through steeling private companies. Those who offer such plans compromise personal conviction.”

      nailed it, Ron.


  3. Tim, We know that you are coming out with an article on what should be done to reform FNF and housing mortgage system. Following is a quote on article re reforms
    ” FHFA should promulgate new regulations to fix the structural flaws that the crisis revealed in Fannie and Freddie’s corporate governance. There are three areas in which regulations need to be developed for the mortgage guaranty businesses: a new risk-based capital regime for different mortgage products, limits on leverage and on permitted equity rates of return, and business activity limitations”.
    Would those 3 areas included in your paper?
    Looking forward to your paper.


    1. This quote is from Jim Millstein’s paper, which is the first in a series of mortgage reform-related essays that have been solicited by the Urban Institute to be put up on their website as part of their “Housing Finance Reform Incubator” project. My essay is scheduled to be on their site on Thursday, and I will put it up on my site at the same time.

      To your question,”would those 3 areas be included in your paper,” the answer is “yes.”

      Liked by 1 person

      1. Tim,
        Will your ideas and the others include continuation and support of something fundamental that exists today and highly preferred by home buyers, namely, 30 year fixed rate mortgages with no prepayment penalties or any additional loaded fees or interest rate premiums to cover risks. Thank you.


  4. Tim. Someone suggested that Treasury might not be able to afford releasing GSEs currently. They said Treasury has over $100 billion, on paper, that is supposed to be available for draws for GSEs. They also said Treasury is still distributing TARP through GSEs. They suggested that Treasury would have to adjust their books by over $500 billion if they release GSEs because funds that may not exist would be lost. Treasury has been less then forthcoming when it comes to TARP distributions and which monies have been paid back and which are still outstanding and it was suggested the GSEs are the last cover hiding who actually ate up the money and the sweep is being used to reduce massive losses to other institutions. They said as it stands now, very simplified, that Treasury has a lot of money tied up in this they may have to cover with actual cash when GSEs are released. I am by no means a financial guy but it seemed to make sense. Congress approved a lot of money for bailout and TARP and when those programs end the Treasury would have to account for any short comings and assign loses. Does this sound legit to you or have I been drawn into a nonsensical, yet poetic, understanding of things? Is their any merit to this or does it rely on mine and others lack of understanding to make sense? Thanks in advance.


    1. There is a huge amount of speculative commentary out there, and the “someone” you cite seems to fall into that category. Treasury is NOT “still distributing TARP through the GSE,” and I have no idea what the potential loss of $500 billion refers to. I would dismiss this.

      Were the net worth sweep to be declared illegal or invalid– with no changes made to the original PSPA– Treasury would not owe Fannie and Freddie any cash. If the PSPA itself is successfully challenged, however, it would.


  5. I think we all saw the other day when Obama called on the press to hold candidates accountable. 😉
    That makes this that much more ridiculous. Chew on the absurdity of this. “Why Clinton won’t talk GSE reform”


    My favorite is this, “and if they can’t even get the White House to pay attention to housing reform, why would it get any traction in the campaign?” Apparently Obama has been ignoring his advisors on reform. Maybe Watt is actually running the show and reforming for release and the reason WH has 0 interest in others plans is that they are already reforming for release after sweep is removed?

    This is pure insanity. Stegman, Parrott, Watt, and any number of advisors and officials regularly attend talks with TBTF groups but the Candidates for the Presidency can’t share their ideas with the public? This is the ;largest one part of the economy that is one issue and the press are giving them a pass? Is anyone surprised that David Stevens of the MBA has chimed in defending this as totally reasonable? Crazy days people.


  6. About Gag order on FnF.

    Party’s over for Fannie and Freddie
    By Jeanne Cummings and Chris Frates
    09/09/08 04:56 AM EDT

    In the wake of the government takeover of the two beleaguered mortgage giants, Fannie Mae and Freddie Mac, compensation for their newly recruited CEOs “will be significantly lower than the outgoing CEOs,” said Lockhart.

    “All political activities — including all lobbying — will be halted immediately. We will review the charitable activities,” he added.


    1. I always wondered if not allowing Lobbying isn’t a Freedom of Speech issue. Since HERA limited Lobbying by GSEs the Supreme Court has ruled money is free speech. Guess it doesn’t matter since we would need a Board who gave a damn to fight it. Unless we could file for them since their freedom of speech is actually an extension of ours as the rightful owners? Any thoughts on this topic Tim?


      1. Alen–two personal comments on your many posts.

        If Gene Sperling is advising Hilllary on GSEs, you don’t want to hear her comments on the topic during the election campaign. He is not a “Fannie-friend,” quiet the opposite.

        Second, Fannie and Freddie were/are the two entities financially supported during the post 2008 era which have had their corporate First Amendment rights atken from them.

        Yes, it likely is a constitutional violation, but you–once again–you need a federal judge somewhere to agree with you (or plaintiffs).

        It shows you the disdain many in the federal government have for the GSEs.


  7. Tim,

    Since FnF are Delaware and Virginia State corporations, can these State Gov file law suits to protect integrity of their state laws and protect the investors in their state corporations?

    State AG/DAs would not be keeping quiet if these were to happen under private conservartorship.

    What does it take to make the States start their own actions against conservator?


    1. Since FnF are listed in Stock exchanges located in New York State ,
      can NY State Gov also start their own actions against conservator?

      Since conservator has been committing fraud against conservatees and FnF investors, irrespective who is the beneficiary, no federal or state laws can be used to provide immunity to conservator.


    2. As I’ve noted in response to previous comments or questions on technical legal issues, I’m not the best person to respond to these. My expertise is in mortgage finance (and Fannie Mae), not the law.


  8. Hi Tim
    I have been watching the stocks for over three years. I noticed that commons and preferred are very correlated going up or down. I read a lot of opinions about what is better to hold commons or preferred .
    What is your opinion?


    1. Eric: I don’t give opinions about the value of Fannie Mae (or Freddie Mac) common or preferred stock. I recognize that many people are following this site because they’ve made investments in the companies’ securities–indeed, that may be their only reason for looking at it–but they’ll need to go elsewhere to get valuation analysis or advice.

      I obviously believe that both Fannie and Freddie should be brought out of conservatorship and preserved as shareholder-owned companies. There are, however, different ways to do this that have different implications for the values of their preferred versus common stock. My recommendations will be blind to this, and be based solely on what I think is best for future homebuyers and the financial system. Consequently, not all investors may like what I recommend.


      1. Thank you Tim. I actually thought that you may not be giving opinions in value. Yes, I agree what is better for homebuyers and the financial system may not be the best for investors, but as far as they remain shareholder owned will be fair and positive for America


  9. If you read over the parts of HERA, can’t recall off top of my head, one would conclude the Board was left in place to maintain Corporate structure and continue to work in its capacity as representatives of the share holders. Sadly the first thing FHFA did as Conservator was abuse its power and fire the entire Board.

    We know they abused their power because their are defined reasons for firing Board members that none of the Board members fit at the time of their termination, braking law for instance. There is also a 30 or 45 day period in which the Board Members could challenge their removal which also indicates they still had the ability to stand up to FHFA. I can only imagine what they were told would happen if they did in order to keep all of them from taking any recourse?

    Another indication that HERA intended to leave corporate structure in place to serve GSE interests was the removal of the Presidential appointments to the Board. I have to assume that this was because Congress didn’t like the idea of the Executive Branch having anymore influence on the GSEs through appointment of Board members while the Conservator was in place. Clearly they cut that power in order to keep an extraordinary, and undo, influence on the GSEs operations from complete Govt control.

    The fact that FHFA/Treasury acted so fast to remove the corporate structure that HERA intentionally left in place shows they had agenda that was in no way in line with HERA, IMO. As Tim has mentioned Paulson was overly confident in his actions and likely did not take the time to cover up his tracks very well. I have to assume the Boards self proclaimed inability to defy the FHFA will be just one more lose thread in all of this that unravels the Govt attempt to kill the GSEs and steal from the share holders.

    Liked by 1 person

  10. Since the subject has come up about the government needing to compensate owners if they want to take an asset

    Is it possible that because the taking occurred in 2012 a judge simply looks at the 25 cent share price at that time and allows the government to take the companies at an extremely low price given the value of the asset at the time that the taking occurred ? I’m not sure if there are any precedents about this issue? if that is a possible outcome then this whole crazy net worth sweep could make sense as the government gives themselves an option of paying very little if the court cases move against them and zero if the courts rule in their favour


    1. Joe: I think that outcome is highly unlikely. At the time the net worth sweep occurred, the companies had returned to profitability, and– as was subsequently proven by their financial results over the next dozen or so quarters–were on the threshold of recapturing most of the non-cash losses recorded on their books (by their conservator, acting at Treasury’s behest) during the prior three and a half years. The proper remedy for Treasury’s taking is to require them to give back that taking– i.e., the proceeds of the net worth sweep in excess of the quarterly senior preferred stock dividends– and that’s what a judge will require if he or she rules in the plaintiffs favor.

      Liked by 2 people

      1. Can there legally be such a class of shares as senior preferred stock? Preferred stock is preferred stock, I find the term senior preferred stocks to be invalid. I have never heard that term used before and it sounds like a class of ownership that supersedes preferred stock but falls below bonds in the claims process. What’s next senior common stock?


        1. That’s what the suit in the District Court of Delaware is about: that the senior preferred stock is not permitted by Delaware state law (which applies to Fannie Mae as it is incorporated in Delaware) or by Virginia state law (which governs Freddie Mac). The Delaware suit, filed by former Delaware supreme court justice Myron Steele, asserts that the senior preferred stock is “void ab initio” (void from the beginning), and should be reversed.

          Liked by 2 people

      2. Does the Treasury get a do over if sweep is deemed illegal? If the sweep is deemed illegal do they get to go back in time and implement the 10% dividend they removed to put the sweep in? I ask because I assume the removal of the 10% dividend was not illegal and I was just wondering if it becomes, by default, Govt position or would Treasury simply lose out since they gave up 10% dividend in favor of illegal action? I agree with you Tim that what you say is most likely outcome but I have always wondered if Treasury and others are assuming old dividend is retroactively re implemented if they lose on sweep. We are challenging the sweep in court and since the 10% dividend was given up by Treasury willingly in 2012 can they now go back in time and retroactively implement it since the SPSA does not have it as an option from 2012 until today? On what grounds could Treasury argue they are entitled to dividend since they intentionally did away with it?


        1. Sorry, let me rephrase. Since Board must agree to all dividends can they approve the 10% dividend in todays fiscal quarter to be given retroactively if according to SPSA that dividend was surrendered during that quarter? I ask because the 10% dividend was never even assured the Treasury as a “right” it was the board that was required to decide to pay it. Just seems like the Treasury might have to take some legal action to try to get dividend and that it would not instantly revert to them.


          1. I am finding that the more I learn about the senior preferred stock agreements, the less confident I am that I know what is and is not permissible under them. It certainly does seems as if the boards of directors of the companies must formally declare dividends on the stock. So far those boards have claimed that they have no power to act independently of FHFA, but there may soon be a suit filed challenging that position. If the boards do refuse to declare dividends–perhaps in conjunction with a reversal of the net worth sweep–things could get very interesting. And, yes, Treasury likely would have to file suit to receive the cumulative 10 percent dividends pending from the time of the sweep.

            Liked by 1 person

  11. Friends,
    Allow me to share something I found when I was browsing the Internet a week ago. That was the case United States vs. Lee which has to do with the expropriation of the scared land we call the Arlington National Cemetery. Please find the details at https://en.wikipedia.org/wiki/United_States_v._Lee that tells you the high degree of jurisprudence and integrity of the Supreme Court of the Civil War era. Keep in mind Lee was a Confederate, the executive was President Lincoln initially and sided with the Union congress with the expropriation but the Supreme Court said ‘no’ to the expropriation. Please read and draw your own parallels and conclusions with regard to the GSE cases. (We can all be proud to be citizen of our country with that kind of a tradition).


  12. I own Common. I bought it because I felt warrants would be killed after Treasury was paid back. I think AIG/Starr ruling solidified this. Any Govt action on warrants heading forward would be decidedly, by court, as illegal, after Govt paid off. Govt action prior to Starr ruling on warrants can be excused as heat of the moment. Any actions Govt now takes on GSE warrants is premeditatedly against the law.

    Now that it has been ruled an excessive taking I doubt the Govt can again exercise warrants. They would have to reclaim dumb again and ignore why exercising warrants in AIG/Starr case was deemed illegal.


    1. Everyone should understand GSE warrants are unexercised. That means they can not now throw up same defense if the try to exercise. Warrants were killed for GSEs because they were deemed illegal in Starr.

      Liked by 1 person

  13. Hey Tim, I know they barred your review of Discovery as advisor in Sweeney Court. I was wondering if you couldn’t find loop hole somehow? Possibly file own lawsuit and represent self and hire outside legal aide to handle legal forms so that you could gain access to Discovery. Don’t know if this could work but I know in Criminal Court one can represent self. If you were your own legal council wouldn’t you be granted same access to Discovery all the other Legal Council is granted?


    1. Also passing the bar is more required then any amount of Legal Degree in some States. I bet you could pass the bar with a tutor in fairly short order. I imagine you have discussed any number of legal issues concerning various lawsuits in depth. With about 6 months, or less, of help you could become an actual lawyer and pass bar, IMO.


      The link shows it is achievable. The standard is an “Apprenticeship” relationship but I assume that since you actually supervised legal Department as head of FNMA that might be seen as exceeding requirement.

      Who knows, just throwing that out for you to chew on and contemplate. You might even be able to get law degree in another Country and file lawsuit in order to view Discovery. The world is full of possibilities 🙂 Thanks for your Blog and all that you are doing.


    2. I don’t think it’s that important that I have access to the materials produced during discovery. Most of them will be straightforward, and won’t require a high degree of expertise to evaluate. And it’s certainly not worth my trying to get a law degree!


      1. I would think you would add an invaluable level of expertise no other lawyer could add. You could skim documents for information were as other legal teams would have to read every word and offer amateur opinions as to importance to financial analysis. You would be entirely unique in our perspective and expertise which is why Govt did not want you to review Discovery. You could find the needle in the hey stack faster then any lawyer could.

        You would spot anomalies and oddities immediately because it was your job to view these types of Documents. I am sure lawyers are doing their best but you could sift through the crap faster then Govt could produce it. I think we lost a great deal when Sweeney barred you. One of her few mistakes to date.


      2. PS, Your ability to assume redaction would be unparalleled. You would know from first hand experience what would be in place of redactions. I think this was their biggest fear concerning you.


        1. Alen: I don’t disagree with what you’re saying, but I also think that 90 percent (or more) of what will be discovered won’t be hard to decipher. As is evidenced by Paulson’s book, other than pretending that it was “rescuing” the companies, Treasury really wasn’t trying to cover its tracks in its actions with Fannie and Freddie. Even without further documents from discovery, the facts line up squarely on the side of the plaintiffs–and I think Treasury now knows that. The cases will turn on matters of law, and even there I don’t think the government is very confident, which is why it’s doing so much stalling.

          Liked by 1 person

          1. Thank you TIm. You just put it all in perspective for me. The Govt assumed we would be dead before sweep so they did a poor job of covering tracks because thy never dreamed this would all be reviewed. They thought GSEs would die long before they had chance to realize DTA’s. Thank you.


  14. Tim,
    Your expertise is unparalleled. I have a great deal of time and money (relatively speaking) wrapped up in this and greatly appreciate your guidance. I know you have a proposal coming out soon but I was wondering if you could take a quick minute to punch holes in mine? I want to push this to Jeb Hensarling and his staff. I call it the path of least resistance approach.

    Treasury: Settle out of court and agree to voiding warrents, opening a line of credit to FnF at market rate until they build 4% reserve, senior preferred stock paid in full and return 40% of overpayments (guessing about 40 billion for just Fannie)

    Congress: remove charters, pass legislation requiring all MBS have catastrophe insurance, require CSP be spun off (at cost) as a utility and heavily regulated by FHFA, amend Dodd -Frank to require FNF to maintain affordable housing funds from 25% of the Treasury settlement funds, grant FHFA the additional power to mandate FnF to maintain market liquidity in downturns (under pre-established conditions and protocols), regulate the new housing funds and to set the cost of catastrophe insurance which they collect.

    FHFA: after congressional action release FnF, require no more than 90% of the proceeds of the housing trusts be used annually and reinvesting the remaining +10%,

    It seems to me that this may be a good approach. Large private market that can risk share or not with a government “reinsurance” plus their own guarantee. Two large, well capitalized, heavily regulated entities trying to maintain 20% to 30% market share for market saftey sake. Then the government, that no matter the system is they will be the final backstop anyway, gets to at least collect insurance premiums and project perceived market risk through the price of the premiums. I think this three tiered system could be very sound, flexible, procyclical and would add just a fraction of cost to mortgages.

    The only sticking point is the Treasury settlement but if the courts start going our way (last time I looked this isn’t communist Russia) then they may be very open to saving face.

    Thanks for your time


    1. Drew: I’d like to hold off making comments on other proposals (including the “Promising Road,” with the obvious exception of its risk-sharing component) until I can put out my own proposal. Having that out– or at least as much of it as I can get in the 2000-word limit of the organization soliciting the essays–will make it easier for me to explain my thoughts about and reactions to other reform ideas. A general dialogue on these ideas, I think, could be quite useful.


      1. Tim….

        why all the secrecy about the organization requesting these proposals?
        why can’t you mention who the organization is?

        please tell me it’s not a part of the protective order in Sweeney’s court.


    2. Drew…

      i didn’t see anything in your proposal to compensate existing shareholders for turning a privately owned company in to a utility.


      1. Thought that could be part of the settlement. Spun off as a utility where the shareholders get the historical norm in benefits or “given” to FHFA to manage as yet another government agency. I think to come out of this thing with a better system and to appease the FnF attackers we will have to give a little.


        1. Drew….

          If shareholders had played a part in this fiasco, I would agree to “give a little”.
          But to your point, I’d give any potential profits (all of them) to see Paulson, Geithner, Bernanke and Obama in prison for a substantial period of time. That’s what *I* would “give”.

          Other than that, you’re setting a dangerous precedent with the government.


    1. Sue: I don’t track these cases as closely as some do. I believe the next action in the Court of Claims case (Sweeney) is a decision on plaintiffs’ motion to compel production of documents the government has withheld for privilege, but I don’t know if there is either an announced or an expected date for that ruling. Perhaps someone reading these comments does, and can give an answer.


  15. Tim,

    Thank you for the thoughtful response. Essentially my takeaway is that government officials might believe they’ll win if they also believe they have inalienable special privilege. What is striking to me is that all legal experts I’ve read who’ve thoughtfully weighed in on this matter side with the plaintiffs. It’s not even close.

    That Mr. Nicoliasen ruled that way is more than a bit passing strange. It’s unconscionable. That he would not defend his position is severely excessive. I’m sincerely sorry for the disregard for truth and justice you’ve had to suffer under. Being the target of such insufferable conceit must have been excruciating.

    Thank you for your service, Tim.




  16. “A More Promising Road to GSE Reform”.

    All these experts, officials, lawmakers are obsessed with flaws in private shareholders companies (FnF). But in the end it is all about how to benefit themselves at the cost FnF and FnF shareholders.

    When it comes to FnF, these people never talk about rule of law as founding principles on which reform needs to be started. These people use rhetorics for self serving purposes.

    Can these experts mention one entity that comes without flaws ?
    These people very conveniently miss that FnF were not the cause of 2008 crisis and Gov used FnF as the solution to resolve 2008 crisis.

    We have to take closer look at all players involved in this, including the experts who are trying to reform the system.

    When some one analyzes the paper “A More Promising Road to GSE Reform.”, they need to answer following questions.

    1. On what false or true assumptions authors are relying to promote their recommendations
    2. What are the rhetorics
    3. What are the values or principles on which they are basing their arguments
    4. What are self interests and what are conflict of interests
    5. What ideologies they are promoting
    6, Who are going to get benefited by these recommendations
    7. Who are going to suffer or lose out
    8. Will their recommendation violate the laws and bill of rights
    9. Will these recommendations help the cause of greater good of nation and all citizens


  17. From your lips to the courts ears I hope Mr. Howard.

    @Eric – I’m not knocking you. I would like to suggest that rather than ask Mr. Howard to do the things you ask in your post, you become proactive yourself.

    I send my local representatives emails of items like the URL of this excellent blog, GSElinks website and other media that I feel those representatives and their staff probably do not check on or even know about that may assist them in understanding the issues.

    I make sure to check my outrage before hitting the “send” key. I offer to assist them in answering any questions they may have. I want them to contact me if they ever want feedback, not tag me as hostile.

    Not many have the knowledge and experience on this matter that Mr. Howard has. Maybe nobody does. But don’t underestimate what you can do either. Tell anyone who will listen.


    1. HaloHat
      Yes I have been emailing the links and promoting the ideas of Mr Howard. Once he comes with a proposal I will email it and mail it to my Congressman. Once he produces the short educational piece that we talk in comments below I will mail it , email it and post it wherever I can.


    1. Right now the odds don’t favor it. Obama’s economic and financial policy advisers have been solidly in the camp of “get rid of Fannie and Freddie and replace them with something else,” and until I detect either some movement there or some other outside influence being brought to bear I don’t see release happening, much I’d like it to be otherwise. A key decision in one of the court cases, however, could shake things loose. That’s probably our best bet for now, but the timing is anybody’s guess.

      Liked by 1 person

  18. Thanks for keep us informed.

    Question: if Common Securitization Solutions (CSS) is a company owned jointly by Fannie Mae and Freddie Mac, wouldn’t it be considered owned by shareholders of Fannie and Freddie?

    Can conservator spin off CSS without compensating shareholders?

    Much appreciate your time!

    Liked by 1 person

    1. It’s up to the courts. As of now, Treasury and FHFA are acting in a manner consistent with judge Lamberth’s ruling in the Perry Capital case: HERA gives the conservator full powers to do with and to Fannie and Freddie whatever it wishes, without taking into account the interests of (and certainly not having to compensate) the companies’ shareholders. Until the courts rule differently– and I am confident they will– that’s how it will be. How things change after a court ruling will depend on which court rules and what it says. That’s not a very satisfactory answer to your question, but it’s the reality we face at the moment.

      Liked by 2 people

      1. I would like to remind everyone that GSEs, what ever that actually is now, told FHFA they refused to sign over Master Servicing Rights for CSP. This was extremely interesting to me because to date it is the only time I had heard of that the GSEs told FHFA no on anything.

        In my opinion it indicates that FNMA and FMCC will retain ownership and refuse to simply hand over CSS, LLC., to outside interest for nothing.


        “The turf war has continued since then, with Fannie and Freddie most recently signaling to the FHFA that they wouldn’t give up master servicing rights for their loans — apparently a key step in the creation of the shared program.”


        1. Alen: Thank you for that information about Fannie and Freddie’s position on master servicing and the CSP. If the report from Asset-Backed Alert is accurate–and I have no reason to think it isn’t– it would be an encouraging sign. Fannie’s and Freddie’s managements have to know by now that much of what Treasury and FHFA are requiring them to do is not in the interests of the shareholders they still represent (irrespective of judge Lamberth’s opinion). They need to realize that if they don’t block or resist some of those actions, they can do irreparable harm to their companies and open themselves up to further legal action.


          1. Thank you for the response Tim. I have noticed how under reported this went and try to bring it to peoples attention whenever possible. Watt, through FHFA, has been doing many under reported things that lead me to believe FNMA and FMCC have been planning an existence outside of C-ship regardless of what is more widely promoted. Everything, minus sweep, stands to address reform issues of GSEs, not wind down. Watt is, by education, an Attorney and I imagine even he does not believe the FHFA can beat all the claims challenging the sweep and has been implementing reform for what he likely views as inevitable release.

            I imagine you have read over the SPSA many times before. I find 6.7 particularly interesting. http://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-9-26_SPSPA_FreddieMac_RestatedAgreement_508.pdf

            It works in tandem with 2 other sections and addresses the release. 6.7 is basically the release mechanism in the SPSA. The way I understand section 6.7 is if FHFA is effected in its capacity as Conservator, sweep removed, the entire SPSA, including warrants and preferred owned by Treasury, are voided.

            This may sound like a long shot theory but I think sweep was designed to repay Treasury and accumulate the recap all at once upon a loss by the sweep in court. I think neither Party wanted to stomach the politically unpopular notion of releasing GSEs so they intentionally designed a Judicial Branch release. If Dems or GOP pushed for release it would be a bumper sticker in elections but if Judicial releases both parties get to say, we tried to kill those evil GSEs but those damn courts wouldn’t let us.

            I also think that the DOJ attempt to consolidate cases my be their way of planning a future settlement to recap and release while getting as many parties to the table as possible so the settlement is more largely binding and kills future litigation. This is of course entirely speculative.

            Lastly the fact that 6.7 exists in the SPSA, a document crafted entirely by the FHFA and Treasury, indicates they don’t even believe the FHFA is actually above Judicial review as Conservator and once they exceed their capacity as Conservator the Contract they signed in that capacity is voided. Basically it is designed to keep FHFA in check by Judicial Branch and once the terms of the SPSA have been met the Judicial Branch is to determine that and release GSEs.


  19. Agreeing on a path forward is not a matter of education. It’s not even a matter of differing ideology. We’re dealing with unprecedented political partisanship. So much so that if a party were even to begin getting behind a vision, the other party will oppose it no sooner than having grasped its import in seed form. Until the courts rule, gridlock will prevail. It may even take the courts ruling to release the GSEs to pre c-ship status for our dysfunctional government to wake the hell up. We’re beyond the land of the silly.


    1. Ron–I just want to associate myself with your remarks and sentiment.

      I won’t spell them out, but each of the five “authors” here have political/intellectual agendas to not allow Fannie and Freddie to exist as active, privately owned, mortgage finance providers.

      It’s possible that things might change after the election. But, reliably, I can’t guess what a Trump Administration might do and Gene Sperling, Hillary’s top financial services expert guy, still is angry over events when he worked for Bill Clinton.

      So, as someone suggested, pray for the courts to issue a dynamic pro-plaintiffs action which would take much of the “survival” guesswork out of future discussions.


      1. Thank you, Bill. Yes, a pro-plaintiff ruling would set me up just fine. Something like “The Verdict” with Paul Newman would be perfect!


  20. “A More Promising Road to GSE Reform” looks like another self serving reform.

    Did these 5 schizophrenic housing policy experts from private sector, declare personal/sponsor’s self interest or conflict of interests?

    Any GSE Reform proposals without the addressing many contentious points would be another “Bridge to no where”

    One can not think of “A More Promising Road to GSE Reform” totally oblivious of 8 years of lawless conservatorship and pending countless court cases.

    Any average person can come up with ideal policy scenario if not constrained by the past.

    What is missing is, How these recommendations would be implemented in the current political and legal context?

    What will happen to current shareholders and MBS investors?

    Will current MBS investors get the same return with explicit Gov guarantees?

    What will happen in future crisis?


      1. Tim , please think of writing an educational short piece about this serious danger. I mean one that can be used repeatedly regardless the event or the audience. Something like a warning sign to be placed all over , mailed over and over to all stakeholders, civil organizations, media , Congress ,etc
        Everybody must be aware of it. At some point they should start naming it “The Tim Howard Warning”


        1. Eric: As I mentioned in a couple of comments attached to my previous post, there soon will be several policy papers published on the topic of housing finance reform (the “Promising Road” is the first of those), including one by me. Once a number of them are out, I think it will be fairly apparent where the main areas of disagreement lie, and at that point it WOULD be a good idea to start doing one- or two-pagers on the most important issues, for broader general distribution. Thanks for the suggestion.

          Liked by 2 people

          1. I am glad you think so. As an old advertising saying goes: ” put it in one place and it is same as nothing ” , to work it has to be everywhere all the time. The key is not to be original every time but to repeat the same thing every time and everywhere. Has to be easy to understand and most important easy to repeat. (People love to repeat things)
            If you warn massively about this issue it will avoid a catastrophe for the American people.


          2. “to put it in one place is to put it nowhere.”

            think about the story line “FnF broken business model caused the financial crisis…” it’s a lie! but if repeated over and over by those who control the discussion, pretty soon the masses accept it as fact.

            now that those Parroting buffoons (Paulson Geithner & Co) are out of office, several credible people need to carry the truth to media, every outlet possible and repeat it over and over…

            “PLSecurities, Wall Street TBTF Banks and their greedy Leveraged Credit Hedge Funds… blew up the world financial system. (they do it over and over, increasing frequency, w/their financial engineering) The actual/real losses at FnF were a fraction of TBTF Banks. FnF were actually “too big and profitable” to be allowed to succeed, because it would have meant failure for banks/funds. So, the “Wall Street Policy Partnership” stole FnF business to bail out Wall Street. Now they want to permanently turn over the entire housing finance system to those SAME folks who burn the house last time. It is literally the fox in the hen house. It is lunacy… and corrupt.


  21. tim

    great post.

    you will notice that with the exception of mr ranieri, there is not one investment banker with any knowledge of the capital markets who co-authored the “promising road” proposal. gentlemen like sperling and zandi may be experts at getting themselves on cnn, but not at understanding capital markets. as for mr. ranieri, who does know better, well let’s just surmise the consulting fees he might see from the private business “promising road” might generate has clouded his independent judgment.

    along the lines of what you say, among the two polar opposite universes of buyers of guaranteed mbs and providers of that guarantee, almost all institutional investors are buyers. see http://www.valuewalk.com/2014/04/imco-joins-chorus-against-fannie-mae-freddie-mac/
    (“In an essay published over the weekend in Barron’s, Douglas Hodge indicated that PIMCO has no “appetite for MBS that don’t have Fannie Mae and Freddie Mac guarantees, as the protections offered to investors in non-GSE backed MBS, known as ‘private label’ securities proved to have no teeth.”)

    with no appetite for buying non-GSE mbs, does anyone think pimco and its brethren will suddenly develop an appetite for providing the guarantee itself?

    looking forward to your “counterproposal”

    Liked by 1 person

  22. Do you believe any so called “reform” will happen within the next 9 months? I do not find it odd that the gse’s will have 0 capital in 2018, by design, treasury is unable to sell preferred stock until 2018 and this is all in the same year that the current conservators term will expire.


    1. I don’t know. There definitely won’t be anything done in Congress; whether someone close to the president can convince him that fixing the problems in the mortgage market before he leaves office would be an important “win” for his legacy is hard to say. I certainly hope that happens.

      And I agree with you that the things you mention–plus the common securitization platform and Fannie and Freddie’s risk sharing deals– are being orchestrated to replace Fannie and Freddie with “private” sources of financing. But Congress or this or a future administration still will have to act to make that happen, and the court cases also will play into this before it’s over.

      Liked by 1 person

      1. “and the court cases also will play into this before it’s over.”

        you will notice footnote 4 to the “promising road” proposal states that the proposal ignores treatment of GSE shareholders. if the net worth sweep is invalidated, some $130B of excess sweep dividends will be recharacterized into shareholder value.

        do you think having the treasury have to pay out $130B to implement “promising road” may create some potholes on the “promising road”?

        Liked by 2 people

        1. quick edit to above comment. Some $20B of value will benefit public junior preferred. of remaining $110B, treasury itself benefits from 80% given its warrant position.

          so more accurate number would be about $42B that would have to be paid to public GSE shareholders, post-net worth sweep invalidation if the “promising road” is implemented.


          1. third time is the charm.

            $20B was for fnma junior preferred, but i omitted fmcc.

            adding $14B fmcc junior preferred, the total public shareholder cost to implement “promising road” would be $56B. and this values the GSE public stock only at the amount of the excess sweep dividends that will have to be returned to GSEs upon net worth sweep invalidation.


        2. My sense (perhaps incorrect) is that the “Promising Road” authors are assuming that the government will prevail in all of the court cases, and if that happens, FHFA as conservator will be able to do whatever it wants with the companies, including giving all their assets to this new government corporation. If the court cases go against the government, it’s a scramble. Were the courts to rule, for example, that a conservator actually has to conserve, not only do the net worth sweep proceeds get returned, but the process for turning the companies over to the government gets much more complicated. Congress can’t just pass a law giving the assets of, say, General Motors, to the federal government. There needs to be just compensation. The “Promising Road” authors, as you point out, relegate all that to a footnote.

          Liked by 3 people

          1. “The “Promising Road” authors, as you point out, relegate all that to a footnote.”

            i would add, to a footnote that doesn’t even raise the issues that go to the core of whether the “promising road” ever can practically be built.

            again to my point, if a real investment banker looked at this proposal, read footnote 4 and said how much would this cost if net worth sweep invalidated, and got a collective shrug from the “analysts” who wrote this, you would see some moving boxes going out the front door pronto.


          2. Tim, I’m sorry but I don’t understand what you mean by a footnote. Are the authors saying that there will be some sort of compensation for shareholders? Thanks.


          3. No, the authors are silent on shareholder compensation. The footnote I referred to is number 4, which says in part, “There are quite a few issues that we have not addressed here that would need to be in converting this general model into legislation…[including]…how to address Fannie and Freddie’s shareholders…” That’s quite an omission. It’s like a scientist writing an article about colonizing Saturn, then noting in a footnote that one of the details left unaddressed is how to get up there.

            Liked by 1 person

          4. Tim,

            That they are assuming the government will win the court cases can be taken a couple different ways. They’re operating according to the potential prospect o winning or they actually believe they’ll win. I can wrap my mind around the former but not the latter. Thoughts on latter? On what basis, especially in light of ninth circuit?

            Thx. Delaware Ron


          5. Ron: I believe some of them do think they will win in court. It’s not crazy for them to think that way. For as long as I’ve been associated with Fannie Mae, different rules seem to apply to it and Freddie Mac than to all other companies in America. I have a long list of examples that I won’t bore people with, except for one, which affected me directly (and which I discuss in my book). When Fannie’s then-regulator, OFHEO, accused us of improperly accounting for the derivatives we used to manage our interest rate risk, we appealed to the SEC. I was sure we would win. The big issue was over documentation of hedges using what was called the “assumption of no ineffectiveness.” We were using that the way all other large institutions were. (As an aside, when we were drafting our submission to the SEC on the topic, we asked some of large banks if we could cite their accounting in our brief; their response–which turned out to be prescient–was, “PLEASE don’t drag us into your fight.”) Because we were doing what everyone else was doing, I was sure the SEC would side with us. Nope. The SEC’s chief accountant, Don Nicoliasen, ruled that we had improperly implemented the accounting for derivatives standard, FAS 133, and that we should restate our last three years worth of earnings to eliminate the use of hedge accounting. When we asked HOW we’d misapplied the standard, he wouldn’t say. He also wouldn’t tell our auditor, KMPG, where we, and they, had gotten it wrong. This was a ruling tailored uniquely to affect Fannie Mae, and it never occurred to me that an official of the SEC would do that.

            Do I think the courts might do something similar– i.e., make a ruling inconsistent with prior law or precedent, just because the case involves Fannie and Freddie? No, I don’t. Do I understand how others might think that could happen? Absolutely yes.


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