ValueWalk’s Raul Panganiban interviews Tim Pagliara, Founder, Chairman and CIO of CapWealth group and Grant Stark, CFA, director of research at CapWealth Group. In this part, Tim and Grant discuss the difference between the 2008 crisis and the current crisis, the Fed buying mortgage backed securities and why mortgage rates are so high.
Raul Panganiban: All right. Yeah, if we can just quickly just begin with your backgrounds.
Tim Pagliara: Well CapWealth is a registered investment advisory firm we work with individual investors, in helping them solve their goals and objectives. We currently managed a little over a billion dollars on a discretionary basis. I've been in the industry 38 years. My background is in legal and financial. I'm an attorney with some, you know, significant amount of financial training. And I started the firm over 20 years ago. And Grant, Grant to give them your background, you've got a really unique set of qualifications also to speak to this audience this morning.
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Grant Stark: Yes. So, you know, I think what the focus on the GSEs today, I will start there, I worked at Fairholme capital for a little over 9 years. And we certainly had taken the lead and Fairholme still does on a significant portion of the preferred and common stock of the GSEs. I was heavily involved in the process from the beginning of sort of sourcing that idea and going through litigation between the Treasury department and also crafting some policy that we had proposed in 2013, 2014 timeframe to purchase the GSEs with a consortium of other investors. So my background is a generalist analysts to begin with.
I also spent a few years in private equity more recently building up a business in New York, which is still operating. And I've taken a passive ownership interest in that now and this opportunity to work with Tim more closely on both his investments and the GSEs is absolutely a no brainer. And it's a perfect fit for both of us. So that's what brought me to cap wealth this year.
Raul Panganiban: All right. Yeah. The topic of conversation will be the GSE. But before we do that, I just wanted to get your general thoughts on the current environment and what has been going on. And there's a interview with Ben Bernanke. He said something interesting last night this past Wednesday. When he said he was asked if it was similar to the financial crisis back then in '09, and he said that was when the financial system collapse and causing damages to the real economy versus now where the virus is shutting down the economy causing a strain on the financial system. So just wondering your general thoughts first on Mortgage Backed Securities and the current environment.
Tim Pagliara: Well, that's a really good way to start. Because I think what distinguishes this from 2008 was about credit and this is about liquidity. Every financial system and that's what we have in this country. We've created a financial system over the last hundred years that it relies on credit. And the banking system relies on credit and, and and leverage. And what distinguishes this is that, you know, credit is essentially fine Right now it will deteriorate a little bit with the shutdown of businesses.
But it's, it's the liquidity and the, our system functions very, very well except in these times of crisis, we have a very pro cyclical model, meaning that in a time of crisis when people need cash, and they deleverage, there's got to be somebody out there to buy these assets. And whether it's mortgage backed securities or municipal debt or corporate bonds, or whatever what you have seen in the last couple of weeks, that's the largest, counter cyclical moment in the nation's financial history that comes as a response to the history that we have with crisis and how we deal with them.
And so the Federal Reserve, for example, is buying billions of dollars of mortgage backed securities, they're buying billions of dollars of other assets. Assets in the debt markets on a daily basis to help provide that liquidity that everybody needs right now, in this crisis and only the federal government has the liquidity capability. They have the balance sheet necessary to handle this. I remember it was in an earlier interview that I had with Michelle. This is why Fannie Mae was created, it was created to provide a counter cyclical balance to the pro cyclical nature of the design of our financial system.
Fannie Mae and Freddie Mac have provided that liquidity they buy mortgages. They, they they bought mortgages in the, in the economic downturn of the 20s and, and 30s and, and provided a source of liquidity for the banks at the same time. The 30 year mortgage was created and that's how People kept staying in their homes. Right now we've got we've got problems with that some things that have happened that are counterintuitive. Counterintuitive, as you and I kind of talked before we started this interview.
Grant Stark: Well, I would just add, if I would just add to what Tim said, if you if you look at this crisis and on your on your comment with the former Chairman Bernanke ease comments the other day, I think what, you know, for the listeners, what we should be reminded is this is a very different sort of downturn than we saw in 2008, for many reasons, and I think he mentioned that this that came more from human problems right with with the credit markets, this is a viral problem.
And, you know, we have the opportunity as humans in this case, to ensure that there's liquidity in the market and correct this issue quicker than it otherwise would be. And we have those tools and I think so. The listeners today, I think we'll get the sense that the Jesse's tie much more closely into this than they may, may have originally thought and and I think that will be a powerful tool in the arsenal of the government to be able to help us through this.
Raul Panganiban: Yeah. And so if we can, if you can tell me why mortgage rates are so high right now?
Tim Pagliara: Yeah. And that that's what I meant when I said, a lot of what has happened is counterintuitive. You've seen the Federal Reserve take interest rates down to zero, they've lowered virtually every rate that they have any control over, you see the 30 year Treasury, you know, somewhere around 1.3 1.4%, the 10 year treasuries that eight tenths of 1% and the 30 year mortgages at 3.8%. It's actually down a little bit, but it's still way too high. And why is that? Well, because, again, we're in this liquidity crisis. And the Fed is buying, I believe as much as $30 billion a day in mortgage backed securities.
So the answer, part of the answer to this is to allow Fannie Mae and Freddie Mac to go back to their original mission. And their original mission was to help provide liquidity in these in the in a crisis like this, where they can buy mortgages and put them back on their balance sheet and hold them and and if you get them fully functional in addition to the Fed, then we will bring mortgage rates down that will be a source of additional capital and relief for the average homeowner they can refinance their homes, they can enter into agreements where they where makes sense for them to get the additional cash that they need. We've got to get them functioning.
They've been operating for 12 years without capital and conservatorship, and there's some very easy steps that they can take at this point. To get them fully functional in the environment that we're in right now.
Mortgage Backed Securities, GSE reform and more, continues at ValueWalkPremium