I couldn’t help but be amused by the seemingly throwaway statement in the article by Charles Duhigg and Vikas Bajaj in today’s NYT:
Treasury has been asking for management changes at Freddie Mac, according to people briefed on the discussions.
Actually, at first I was anything but amused. My first reaction was that a major part of the American financial system is being lorded over by a hybrid of the ‘69 Mets and the Jamaican bobsled team. Leaping Liquidation, Batman! if Treasury really wanted to make a management change, it could have made it a condition to its approval of the recently enacted housing legislation which, among other things, created the FHFA. Or, as a member of the new board–which now has oversight on GSE executive compensation–Paulson could simply tell CEOs Syron and Mudd that he was going to take George Will’s suggestion and recommend that they be paid like civil servants. Clearly, if Hammerin’ Hank really wanted those clowns gone, the FHFA back door wouldn’t so much as graze them on their way out.
But just then, the extent of Paulson’s passive-agressive genius hit me like a bolt from the blue. The Secretary doesn’t want the market to perceive that he might actually demand competent management at the GSEs. He also wants to insure that signals coming from the FHFA are as opaque and non-sensical as possible, as was their statement that they really didn’t know when they’d get the whole question of regulatory capital administration ironed out. Unmentioned is the fact that the FHFA has been in the planning stages for 18 months and still doesn’t have a web site. And the little detail that a pronouncement on regulatory capital is a necessary precedent to any private investment in the GSEs is apparently less important than the public comment period FHFA says it needs before it speaks. Certainly, in seeking opacity and nonsense, Paulson already has his man in FHFA Director James Lockhart.
There’s a great New Yorker cartoon which shows a guy making a presentation, presumaby to a board of directors from an easel. On the floor is a pile of charts which he has already presented. Finally, he has come to the one which says simply, “WE’RE BROKE.”
Secretary Paulson never wants to have to show the final slide in in the deck. His goal is to make it as obvious as possible that the GSE common is worthless, without having to declare it explicitly. That way, he can wait until there are simply no more buyers for the stocks, rather than being said to have “wiped out” the common. If Treasury forces the common to zero before it intervenes simply by shining a light on the hopeless, Keystone Cops nature of the situation, the “wipeout” will be a market-induced fait accompli. Bureausclerosis uber alles!!
Monday, look for an announcement that Fannie CEO Richard Syron has locked his keys in his car while it is running, and that Freddie’s Daniel Mudd has broken an ankle while attempting to walk and chew gum.
When will Treasury finally intervene? Not until Cindy McCain could buy all the outstanding GSE common with the proceeds of a single house sale. Pretty smart on Paulson’s part. Maybe that’s why he is the bazillionare Secretary of the U.S. Treasury, and I’m sitting here with this 5-year-old Dell notebook burning a hole in my lap.
