Childishness and the Housing Bubble

December 23, 2008

It’s not often that the front page of the New York Times reminds me of Alice Miller, the German phychiatrist who wrote “Prisoners of Childhood,” the book that Al Gore decided was a precise description of his upbringing. The English translation has become a classic as “The Drama of the Gifted Child.” Apparently, Gore used to hand the book out to everyone he could find, in an odd “if you want to understand me, read this” sort of gesture. Read it, and you’ll understand why his campaign peeps suggested he tone it down a bit. But, I digress.

Anyhow, on Sunday, the NYT ran a front-page piece which lacerates the Bush Administration for its role in inflating the housing bubble. Among other things, the author accuses the President and his staff of intellectual incuriosity, political boosterism, truth-twisting, and Andover cronyism. In other words, nothing terribly novel.

Nonetheless, Administration spokesperson Dana Perino saw much about which to be aggrieved. She issued a harsh, 500-word statement that accused the Times of everything short of anti-Santa Clausery, including the commission of the ultimate journalistic offense that has lost all its meaning due to overuse: gross negligence.

It seems appropriate that the three metaphors which come to mind all are firmly rooted in childhood: the birthday pinata; the boy who cried Wolf; and the game of pin-the-tail-on-the-donkey.

First the pinata. Rather than churning out flimsy, connect-the-dots journalism of this sort, perhaps the Times should issue a blanket statement that, if it didn’t have to do with AIDS relief work in Africa, the Bush Administration stunk it up. Period. Case closed. No more candy in that pinata, so go take swings at something else.

As for the Administration and its flaks, surely they now understand that when outrage is your default condition, the public ignores you even when the umbrage you take might actually be justified. The proceedings long ago acquired the feel of a macabre call-and-response: “you screwed up,” “NO WE DID NOT AND HOW DARE YOU QUESTION HOW MUCH WE LOVE OUR COUNTRY/MOTHER/KING CHARLES SPANIEL.” Nobody is listening, Dana; least of all the readers of the NYT. And unlike the Palin/McCain campaign, the base of voters who despise the vile and corrupt mainstream media has already deserted you. Read the scorecard: Nixon 26, Bush 29, Carter 33. That pretty much says it all.

And finally, since we must blame someone for the housing bubble, where do we pin the tail? Whereas the Times piece doesn’t say anything which is on its face outrageous or inaccurate, it misses a much larger point. While the Bush Administration was plenty eager extoll the virtues of an “ownerhsip society,” their enthusiasm wasn’t exactly novel. ”Affordable homeownership” long ago became an archetype of the most dangerous political nostra of all: one upon which everyone agrees.

A far more intellectually satisfying-if hopelessly politically incorrect-analysis of the roots of the housing bubble can be found in the work of Stan Liebowitz, a professor at the University of Texas at Dallas and a fellow of the Independent Institute, which I know nothing about but suspect doesn’t trade inside jokes with Brookings. His “Anatomy of a Train Wreck,” which was brought to my attention by my friend Rob Snyder, traces the inflation of the bubble to the 70s. It also reminds us that when the words “innovation” and “financial” are used in proximity, it almost always means buying more of something with money that is not the buyer’s; and that in the context of housing, “expansion of opportunity” almost always means loaning money to people who have a pretty fair chance of defaulting.

I highly recommend it Prof. Liebowitz’s article.


Don’t Blame Canada

December 23, 2008

Unless we believe the South Park refrain that “it’s not a real country anywaaaaay,” wouldn’t it be prudent to ask why Canada has almost exactly the same homeownership rate as the U.S.? Without Fannie, Freddie, or the FHA; and with down payment requirements that are usually much more onerous?


The Next Treasury Secretary

September 23, 2008

Over the weekend, Barron’s stated with some confidence that the the Secretary of the Treasury in an Obama administration would likely be Eugene Ludwig, the former Comptroller of the Currency in the Clinton administration. Have to admit that I’d never heard of him.

Barrons’ more interesting and confident prediction is that McCain would choose Peter Wallison, a banking lawyer who taught himself economics. I never would have heard of Wallison, either, had I not developed my mild summer obsession with the GSEs. But as it turns out, Wallison was by far one of the earliest, most prolific, and most accurate prophets of the fate that would ultimately befall Mae and Mac. I don’t know what kind of Secretary he would make, but he’s obviously a smart guy and a very fine writer. I spent much of the summer in and out of his two books, Serving Two Masters and Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. He certainly convinced me that he knows his way around financial markets.


Paulson to Asst. Dep. Undersecretary for Acronyms: You’re Fired

September 23, 2008

Thanks to Eugene for pointing out this nifty piece on the ProPublica site. The punch line is that combined, the bailouts of Bear, Fannie/Freddie, AIG, and the $700 billion Paulson proposal come to just over $1 trillion, versus $300 billion for the s&l crisis of the 80s (all in 2008 dollars).

Frankly, I’m surprised that the relative size isn’t bigger, and it’s only fair to note that the $700 billion has been authorized, not spent. Of course, the most jaded skeptics will recall that the invasion of Iraq was similarly “authorized,” but never voted upon.

The chart is useful in another respect. Perhaps I just haven’t been paying attention, but for the first time I see that the official name for the Paulson Plan might be the Troubled Asset Relief Program, which I assume will become “TARP” in the popular lexicon. Tarp, as in what you throw over something unsightly in your yard, a mess you would clean up if outdoor bowling weren’t on tv.

For me, TARP will always be ”Teen Age Recreation Program.” It was a dance held on Thursday nights for junior high kids when I was one. That is, If you can call hormone-fired groping and spinning slowly in circles to Styx and the Commodores “dancing,” but I digress.

Say what you want about Paulson and the boys at Treasury: they don’t break the bank on their marketing budget.

I tried to think what I might have named it if I were in Paulson’s shoes. Something a little more, shall we say, evocative.

I know! How ’bout, Paulson’s Fannie/Freddie Freakout Trust:

PFFFT!


A Bad Day for Travel

September 23, 2008

The only thing more disspiriting than imagining Hank Paulson with a blank check is observing the sheer gracelessness with which members of Congress are pursuing their “oversight powers.” Yes, there probably should be some oversight; yes, various proposals for government equity ownership may make some sense; yes, there probably should be some compensation guidelines for the new entities).

But honestly. To think that Chris Dodd and Barney Frank, who were freaking *owned* by Fannie and Freddie, suddenly know what they are doing after years of ineptitude-doesn’t that strain credulity? To hear Steny Hoyer talking about who should be paid what? How on God’s earth would he (i.e., his staff) know?

The whole scene reminds me of a recent comment by one of my more mordant and reclusive friends, appropos of another situation in which elected officials were trying to tackle a complex issue. “You know what this is like?” said my friend. “It’s like going down the the bus station, rounding up all the bums, and saying ‘fellas, we need you to run air traffic control today.’”

One thing McCain has right: there actually should be some sort of very serious commission that will recommend new regulatory structures to the new Congress. Maybe, just maybe, having the draft of a framework come from outside the House would actually insulate it from the corrosive influence of the various financial services lobbies. This should happen in the first hundred days or so of the administration.

In the mean time, I say let Treasury have carte blanche. Nibbling at Paulson with rushed, arbitrary, or-far worse-lobby-driven additions and deletions will almost certainly run afoul of the Law of Unintended Consequences. Perhaps I’m belaboring the obvious, but a body of 535 politically ambitious human beings-every one of whom is playing to the folks back home-is not exactly optimized for crisis management.

Oh, and one further note to Congressional Democrats: Damn-the-torpedoes affordable housing was *your* baby. Fannie and Freddie were largely *your* whorehouse. It might not be the worst idea to keep your heads down.


What’s Next For Fannie and Freddie?

September 9, 2008

Steve Rattner’s piece in the Washington Post is as simple and clear-headed a prescription as I’ve seen. Clearly, if we as a society are committed to sustaining the government’s presence in mortgage finance, the idea of continuing to do so through a publicly traded company makes absolutely no sense. It actually never did, and never would have happened to begin with if LBJ weren’t looking for ways to pay for both guns and butter. Chris Dodd and Barney Frank are embarrassing themselves on this topic, and would be well served to realize that they are going to need to look for other sources to fill their campaign coffers.

With all that said, what reall needs to happen in the new administration is a dry-eyed, bottoms-up examination of the ongoing wisdom of the government guarantee. I have two issues. The first is the efficacy of the guarantee itself. The CBO has said in the past that at most, only 30% of the benefit actually reaches the mortgage holder. More tellingly, for all the political rhetoric about the “American dream,” homeownership in Canada is almost exactly as prevalent as it is in the U.S. It seems that the “Canadian dream” is alive and well, without government subsidy and in a system which typically requires down payment levels that seem quite old-fashioned by the standards of America’s “ownership society.”

Second, even if the government guarantee is shown to be effective, I’d like to know what it costs our society. If you believe as I do that the most urgent crisis facing the U.S. is education; and if you believe as many experts do that the biggest barrier to the successful education of kids is the disintegration of the American family, then we might make another choice. Rather than bear the burden of the GSE guarantee, we might choose to let homeowners fend for themselves and use the savings to fund more pre-K programs for at-risk kids.

Or we might just decide to pay down our $9 trillion debt. Ha! Just kidding.


Anybody Got Brownie’s Cell Number?

September 7, 2008

Having failed to jawbone the price of the GSE’s common stocks to the asymptote, Hank Paulson is abandoning a key theme of this campaign season-hope-in favor of another: change. Out will go the boards and management of Fannie and Freddie, and presumably under will go the holders of their preferred and common securites. The precipitating event, we are told by the NYT, was the discovery by some Morgan Stanley green-eyeshade types that aggressive accounting at Freddie had masked the true depth of its woes.

This just in: the GSEs are cooking there books again, the sun came up this morning, and the swallows will return to Capistrano next March.

Good for Paulson. One can’t see how waiting any longer would help. But a piece of this whole puzzle which completely mystifies me is getting no discussion. To my utter disbelief, the chap who will stand astride the newly nationalized and combined GSE colossus will be none other than James Lockhart, the Director of the Federal Housing Finance Adminstration. The FHFA is the new and ostensibly more powerful regulator of the GSEs which succeeded the Office of Housing Enterprise Oversight as a part of the Housing and Economic Recovery Act of 2008 (also known as Paulson Uber-Alles.)

So who is James Lockhart? One would be tempted to cruise over to fhfa.gov to check out his official bio. Such temptation would not be rewarded, as THE FREAKING FHFA STILL DOESN’T HAVE A WEB SITE, even though as of today it will be in control of half the housing finance in America. Fortunately, OFHEO does have a web site, even though the agency itself no longer exists. Technically speaking. Follow?

On the non-existent OFHEO’s web site, I did get some clarity about why the FHFA may have been delayed in getting its act together in cyberspace. It seems that although the agency was created on July 30, it didn’t get around to sending its “Notice of Establishment” to the Federal Register until last Thursday. The FHFA celebrated that salutary act by issuing a press release, for which it likewise borrowed OFHEO’s web site. Also on the OFHEO website is the statement Lockhart made this morning, in which he declared himself Supreme Potentate of Mortgage Finance. Mercifully for the rest of us, he named two viceroys who look like real players (Herb Allison of Merrill and TIAA-CREF and David Moffet of U.S. Bancorp) to be the CEOs of Fannie and Freddie, respectively.

But back to the Lockhart question. His official bio is solid enough, if not exactly awe-inspiring: #2 official at Social Security, head of Pension Benefit Guranty Board under Bush 41, career in financial services.

But in his current role, he’s been a disaster. The title of a prior post, “Haplessness, Thy Name is OFHEO,” pretty much says it all. The guy commanded an agency with 232 people, on whom he spent an average of $267,000 per year. He did nothing but bitch and complain about how powerless he was, while writing this piece of self-congratulatory horse puckey in the OFHEO 2007 annual report:

This year, OFHEO set for itself eight annual performance goals to reach these strategic goals and four annual performance goals to support its resource management strategy. To measure results in achieving goals, there were 34 performance measures for fiscal year 2007, 97 percent of which were achieved or substantially achieved.
Then surely today’s news should be the last straw. Treasury had to hire Morgan Stanley to say, “looky here, this here Freddie fella may be a little undercapitalized!” Wonder what that smartly bound blue book cost, in addition to Lockhart’s $70 million budget, especially since Paulson couldn’t avail himself of his Goldman alumni discount. What did Morgan find that the 232 members of Lockhart’s team overlooked?
Having James Lockhart in this job is like promoting Mike “Heckuva Job, Brownie” Brown to head Homeland Security after Katrina. As long as we’re throwing the bums out, Lockhart should go, too. Since he probably won’t, let’s just hope that Allison and Moffet are really the team we’re backing, and that Lockhart is only there to polish Paulson’s noggin.

There You Have It

September 6, 2008

RIP Fannie, Freddie, and the shareholders.

Yuck.


The Method Behind Paulson’s Do-Nothing Madness

August 23, 2008

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.


Joe Nocera on FM2

August 23, 2008

Although a little late to the party, Joe Nocera is pitch perfect and comprehensive in today’s NYT column about the mission creep of Fannie and Freddie, which served no purpose other than the enrichment of the mangement (and lucky shareholders who were along for the ride). A particularly trenchant sample:

You want to know the truth about “the mission?” The country doesn’t even need Fannie and Freddie to help with affordable housing. Several laws mandate that banks reinvest in the communities in which they operate — and that mandate has come to be defined largely as making loans available for affordable housing. Several executives involved in community-based banking told me that Fannie and Freddie actually refused to buy those mortgages — they weren’t profitable enough.