Timothy Howard, who spent 23 years at Fannie Mae starting as chief economist in 1982 and ultimately becoming CFO, has outlined a plan for moving beyond the conservatorship of Fannie Mae and Freddie Mac in a recent essay. But for all of the good points that he raises, Howard displays the same basic weakness in other Fannie Mae long arguments: no in Washington is particularly interested in saving the GSEs.
Key differences in Fannie Mae, bank bailouts
Howard starts by detailing some of the important differences between the bank bailouts and the GSEs’ conservatorship during the financial crisis. The large banks were facing a liquidity crunch, and Treasury determined that if it could help them through the market crisis they would be able to recover because they were still solvent. The bailouts were meant to be relatively short-term (a couple of years or so) and not too punitive. Fannie Mae and Freddie Mac, however, were liquid and as late as August 2008 were deemed to be solvent by the FHFA. When they were deemed to be insolvent that September it was because Treasury and the FHFA insisted on accounting changes, notably a $70 billion increase in its loan loss reserve that were very conservative and have proven to be unnecessary in the years since the end of the crisis. Also, instead of cheap loans meant to be repaid, Treasury bought senior preferred shares from Fannie Mae and Freddie Mac that could never be paid back.
“No other regulator in the world, at any time or under any set of circumstances, ever had used non-repayable senior preferred stock, paid with after- tax dollars, as a vehicle for rescuing a financial institution in crisis (or for any other purpose),” Howard writes. “The goal of this instrument was not to aid the two companies, but to push them into insolvency and keep them there.”
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Howard has a solution, but it’s not to right problem
It’s important to remember what really happened during the financial crisis – there are plenty of people who would love to lay the whole thing at the feet of Fannie Mae and Freddie Mac, exonerating the big banks – but Howard doesn’t just want to get the history right, he wants the GSEs to be released from conservatorship.
“There is a simple solution that will break the impasse,” he writes. “Treasury should declare victory in their battle against the ‘old’ Fannie Mae and Freddie Mac. No one is arguing for the restoration of the companies’ on-balance sheet portfolio business, funded by agency debt, while their credit guaranty business helps banks originate fixed-rate mortgages without taking on unmanageable interest rate risk,” Howard writes.
But his solution won’t work because that’s not really the impasse. The dispute is between liberals, who want to replace the GSEs with a new government agency, conservatives who want the government to exit the secondary mortgage market entirely, and some people on both sides of the aisle who want a government-regulated securitization platform (the path we seem to be on). There’s still a big question mark over what will happen in the courts, but essentially no one in Congress or the administration is looking for a way to revive Fannie Mae and Freddie Mac.
See full PDF below.