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Next Steps for Fannie and Freddie
December 23, 2009
The Financial Times today published a summary piece on what’s likely to happen next to Fannie Mae and Freddie Mac. The Obama Administration has committed to laying out options in its February, 2010 budget submission. But the folks responsible for producing them may rue this promise made earlier in 2009 when the rest of the Administration’s financial modernization package was unveiled.
The government’s unprecedented and aggressive support for the mortgage markets hinges almost entirely on the continued role the two companies play in the market. The private securitization market is dead. Recent research from JP Morgan suggests that it will remain that way from some time to come.
The Federal Reserve’s $1.25 trillion purchase program for Fannie and Freddie MBS is supposed to wind down in the first quarter of 2010. But many observers doubt they will be able to do so in the face of likely political opposition to moves that could raise interest rates for consumers, as phasing out the program might do.
The two companies also are playing a crucial role in administering the Administration’s “Making Home Affordable” mortgage modification program. Once restructured, it isn’t clear how that capacity could be easily replicated.
Perhaps because they were the first crippled financial patients to go under the knife in 2008, the terms of their government assistance are significantly more onerous than those that Bank of America and other major lenders had to agree to. The dividend on the preferred stock held by Treasury in return for its investments in the two companies—now totaling $112 billion—is 10 percent, for instance, higher than that imposed on other bailees. Neither company is likely to be able to pay back what they owe, in addition to their dividend payments, anytime soon.
It can be argued that the government has the two companies exactly where it wants them: firmly under government control, but not on the government’s balance sheet. They can be used to further public policy goals without interference from shareholders or private owners, at a time when the government has few similarly powerful direct levers to work in the economy.
So the question essentially should come down to this: what is the rush to alter the current structure? With many trillions of outstanding MBS under their guarantee, and a combined market share exceeding 70 percent now, a great deal of the housing market’s immediate and near future health seems likely to ride on the two companies and the market’s faith in their guarantees on the securities. And the only way to guarantee that for the moment, it seems, is through the continued support of the current system, however creaky it may be.
The Financial Times piece summarizes a series of potential paths the Administration could choose. Having spent many hours over the last year with colleagues in the progressive policy sector trying to develop a workable successor model, I’m skeptical of their chances for success in the short run. I look forward to working with them, and hope that something durable and workable can emerge. But mostly I’m anxious that politics and theory are not allowed to trump pragmatism when it comes to the question of timing. Rushing to a solution merely for the sake of having one is not the right path.
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Next Steps for Fannie and Freddie?
December 23, 2009
The Financial Times yesterday today published a summary piece on what’s likely to happen next to Fannie Mae and Freddie Mac. The Obama Administration has committed to laying out options in its February, 2010 budget submission. But the folks responsible for producing them may rue this promise made earlier in 2009 when the rest of the Administration’s financial modernization package was unveiled.
The government’s unprecedented and aggressive support for the the mortgage markets hinges almost entirely on the continued role the two companies play in the market. The private securitization market is dead. Recent research from JP Morgan suggests that it will remain that way from some time to come.
The Federal Reserve’s $1.25 trillion purchase program for Fannie and Freddie MBS is supposed to wind down in the first quarter of 2010. But many observers doubt they will be able to do so in the face of likely political opposition to moves that could raise interest rates for consumers, as phasing out the program might do.
The two companies also are playing a crucial role in administering the Administration’s Making Home Affordable” mortgage modification program. Once restructured, it isn’t clear how that capacity could be easily replicated.
Perhaps because they were the first crippled financial patients to go under the knife in 2008, the terms of their government assistance are significantly more onerous than those that Bank of America and other major lenders had to agree to. The dividend on the preferred stock held by Treasury in return for its investments in the two companies—now totaling $112 billion—is 10 percent, for instance, higher than that imposed on other bailees. Neither company is likely to be able to pay back what they owe, in addition to their divident payments, anytime soon.
It can be argued that the government has the two companies exactly where it wants them: firmly under government control, but not on the government’s balance sheet. They can be used to further public policy goals without interference from shareholders or private owners, at a time when the government has few similarly powerful direct levers to work in the economy.
So the question essentially should come down to this: what is the rush to alter the current structure? With many trillions of outstanding MBS under their guarantee, and a combined market share exceeding 70 percent now, a great deal of the housing market’s immediate and near future health seems likely to ride on the two companies and the market’s faith in their guarantees on the securities. And the only way to guarantee that for the moment, it seems, is through the continued support of the current system, however creaky it may be.
The Financial Times piece summarizes a series of potential paths the Administration could choose. Having spent many hours over the last year with colleagues in the progressive policy sector trying to develop a workable successor model, I’m skeptical of their chances for success in the short run. I look forward to working with them, and hope that something durable and workable can emerge. But mostly I’m anxious that politics and theory are not allowed to trump pragmatism when it comes to the question of timing. Rushing to a solution merely for the sake of having one is not the right path.
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$4 Billion in LIHTC Trade-Ins Funded
December 22, 2009
The Treasury Department announced on December 22, 2009 that since it has provided just over $4 billion to state and local housing finance agencies under the “tax credit exchange” program adopted as part of the 2008 economic recovery legislation. Under this program, state agencies that receive allocations of Low Income Housing Tax Credits (LIHTCs) can exchange up to 40 percent of their allocation and receive 85 percent of the value of the credit in cash. This program was designed to provide direct investment funding where lack of investor interest no longer made the LIHTC mechanism useful for raising equity to invest in affordable rental housing developments. The complete list of total awards by state can be found on the Treasury’s website.
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Are Business Schools Part of the Problem?
December 22, 2009
The New Republic recently published a provocative article exploring to what degree American business schools have fueled the flight of top managerial talent into finance and away from manufacturing. As the article points out, it’s not a trivial question. America’s ability to compete with innovators like Toyota certainly has been a key factor in the US automobile industry’s failure.
The article rings true to me. When I was at the Wharton School of Business’s Advanced Mangement Program in 1997, my class of 47 mostly overseas mid-career executives met twice with second year business school students. A couple of things really stood out for me. First, when asked what they were hoping to do when they left Wharton, every single student mentioned investment banking or consulting. Second, their responses to the question “what are you looking for in your next job” appalled me. Every one talked about the salary and perks they expected, the amount of travel, and the clear path to the top. Not one mentioned seeking a place where they could make a difference, or where they could learn a business from the ground up. Third, when the session broke up and our class processed the evening, I was amazed that every one of my colleagues—most but not all of whom were from manufacturing and operating companies—said they would never hire an MBA unless they’d sent the person there from their own managerial ranks. Why? Because their experience with MBA’s from US schools, at least, had been that they were entitled, disinterested in learning how their business operated, and unable to make substantive contributions to the “business of the business.” And some of these executives themselves had MBAs, one from Wharton.
It is unfair, of course, to characterize all business school students from this small sample. But this article takes a broader look at the same issues and draws some disturbing conclusions.