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April 23, 2009

When Congress Runs Banks

The saddest lines from the NY Times account of David Kellerman's suicide:

Mr. Kellermann’s boss and other top executives were ousted when the Treasury secretary seized Freddie Mac and its sibling company, Fannie Mae; others left on their own and were not replaced. Soon President Obama told the companies they were responsible for carrying out some of his programs to revive the economy, in addition to keeping the housing market afloat by buying and selling hundreds of thousands of mortgages a month.

Mr. Kellermann, 41, began working nonstop, sometimes returning home only to change clothes, colleagues say. He was losing weight and telling friends that it seemed impossible to appease everyone — regulators, lawmakers, investors and other executives — given their competing demands. Someone was always angry with him, he told one friend. And no matter how many hours everyone worked, it seemed as if the economy and homeowners were still slipping farther into the abyss.

Then early this month, Mr. Kellermann and other executives at Freddie Mac and Fannie Mae became the focus of intense scrutiny when lawmakers learned they would receive bonuses totaling $210 million. Mr. Kellermann was set to receive $850,000 over 16 months. Reporters and camera crews showed up at his home in Vienna, an affluent Virginia suburb of Washington. Fearing that someone might attack his house, his wife or their 5-year-old daughter, he asked the company for a security detail.

Early on Wednesday, Mr. Kellermann went to the basement of his brick home and hanged himself, according to people familiar with the situation who were not authorized to speak.

But here is where it really gets good:

Last month the company’s chief executive, David M. Moffett, resigned in part, he said, because federal regulators were using Freddie Mac to carry out economic policy at the expense of nursing the publicly held company back to financial health. The company has not had a president since 2007.

Freddie Mac and Fannie Mae, which together own or back more than half of the home mortgages in the country, have been hobbled by skyrocketing loan defaults and have received a total of $60 billion in federal aid since they were taken over last fall.

Mr. Kellermann was also working in a poisonous political atmosphere. In addition to taking criticism over the bonuses, he was recently involved in tense conversations with the company’s federal regulator over its routine financial disclosures, according to people close to those discussions who also spoke on condition of anonymity. Freddie Mac executives wanted to emphasize to investors that they believed the company was being run to benefit the government, rather than shareholders. The company’s regulator, the Federal Housing Finance Authority, had pushed to play down that language. Freddie Mac reported to the Securities and Exchange Commission that changes it had made in practices to help the government “have increased our expenses or caused us to forgo revenue opportunities.”

Let's just recall for a moment what Barney Frank and Chuck Schumer had to say about Republicans who tried to warn of the impending financial crisis in 2003:

I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury.

I must say we have an interesting example of self-fulfilling prophecy. Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation. And as I said, it is a self-fulfilling prophecy by some people.

Fannie Mae and Freddie Mac have played a very useful role in helping make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing, and that is what I am concerned about here. I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals. I worry frankly that there is a tension here.

The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn't bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.

In that brief statement, the Editorial Staff counted the following:

Times M. Frank stated "there is no crisis": 4
Times M. Frank stated "there is no threat to the Treasury": 1
Times M. Frank averred the government has no obligation to investors in GSEs: 4
Times M. Frank stated his overriding concern that GSEs provide "affordable housing": 4

M. Frank was joined in these sentiments by his colleague, Monsieur Schumer (D, Affordable Housing), who took vigorous exception to both the administration's attempts to regulate GSEs and to Chairman Greenspan's warnings:

As Congress began again to work on legislation to strengthen oversight of Fannie Mae and Freddie Mac, two of the nation's largest mortgage finance companies, Alan Greenspan, the Federal Reserve's chairman, urged lawmakers today to impose sharp limits on the $1.5 trillion holdings of the companies. Appearing before the Senate Banking Committee, Mr. Greenspan said the enormous portfolios of the companies - nearly a quarter of the home mortgage market - posed significant risks to the nation's financial system should either of the companies face extensive problems.

"We at the Federal Reserve remain concerned about the growth and magnitude of the mortgage portfolios of the government-sponsored enterprises, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks," Mr. Greenspan said. "To fend off possible future systemic difficulties, which we assess as likely if G.S.E. expansion continues unabated, preventive actions are required sooner rather than later."

Most of the assets in the portfolios are mortgage-backed securities that the companies find more profitable to hold than to sell in the secondary markets. Mr. Greenspan said those holdings did nothing to further the mission of the companies of providing market liquidity and lowering mortgage interest rates but was solely a method of increasing earnings.

In previous years, lawmakers have failed to approve legislation imposing stronger oversight of the companies and changing the way they do business. The two companies have been formidable lobbying forces and been able to block attempts made by lawmakers, often with the support of rival mortgage companies, to restrict them.

But some lawmakers say this year presents the best opportunity in a long time to adopt legislation as the two companies because both companies have struggled through accounting scandals.

Mr. Greenspan's testimony went beyond previous statements in which he has urged tighter scrutiny of the two companies. His approach towards the companies of heavier scrutiny and regulation stands in strong contrast to his overall deregulatory approach in other areas, like hedge funds, and that distinction was noted today by a handful of senators who questioned the need to force Fannie Mae and Freddie Mac to reduce their portfolios.

In several pointed lines of questioning, Senator Charles E. Schumer, Democrat of New York, criticized Mr. Greenspan's recommendation and called it both inconsistent with his other views on regulation and potentially damaging to the housing markets. Without identifying anyone in particular, he also suggested that some people who have advanced tougher regulation of the two housing finance companies are really pushing a broader agenda to eliminate the companies and their mission of providing affordable housing

But that was then. This is now:

Congress refused to act when the danger was outlined. They refused to repeal laws that forced banks to take on unacceptable risk in the name of "affordable housing". These organizations were presented with a Catch 22 scenario in which they were simultaneously tasked with making unprofitable and risky loans and delivering good returns on investments made by their stockholders.

To top it all off, after creating the problem Congress then proceeded to embark upon a witch hunt that blamed the very officers forced by Congress to take these stupid risks.

Is it any wonder this man felt trapped? And at every step along the way, our President, who supported Congress' "affordable housing" measures and who received more than any other candidate from these banks poured gasoline on the flames.

And yet, somehow, the CIA is supposed to be reassured by his promises that they won't be prosecuted for doing a difficult and dangerous job? Why on earth should they believe him? He has already gone back on his word once.

After all, just a few days ago he said he wasn't in favor of prosecuting government lawyers for doing their jobs. That promise only lasted until it became uncomfortable for Mr. Obama to hold to his stated intentions.

Does this man have a single principled bone in his body? Is this the New Transparency we were promised?

Both the Washington Post and Wall Street Journal are reporting that Freddie Mac's Chief Financial Officer, David Kellermann, who was found dead Wednesday in an apparent suicide, was involved in recent months in a heated dispute with Freddie's regulator over how to reflect costs of President Obama's anti-foreclosure program.

The Post said Kellermann and other Freddie officials "tussled" with the Federal Housing Finance Agency early last month as the company prepared to file a quarterly report with the Securities and Exchange Commission. Top executives, including Kellermann, were insistent that Freddie Mac inform shareholders of the cost to the company of helping carry out the Obama administration's housing recovery plan, the two newspapers reported. The Post, citing several unnamed sources, said the regulators "urged the company not to do so." An unnamed FHFA official who spoke to the Post disputed that, "saying the regulator did not oppose disclosure but how the information was portrayed in the filing."

In the end, FHFA reportedly retreated and Freddie formally disclosed that the Obama anti-foreclosure plan could force the firm, which is in a federal government conservatorship, to take a pre-tax charge of $30 billion.

Thirty billion here. Thirty billion there.

After a while, it starts to add up to real money.

Posted by Cassandra at April 23, 2009 07:51 AM

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Great post, Cassandra, and since you inspired me to write about it I'm taking you up on your offer to "trackback" via comment: First, do no harm

Posted by: Elise at April 23, 2009 12:44 PM

Based only upon what was written here I would say Kellermann had his priorities wrong.

He did not exist to appease or satisfy all those competing interests. So there was no reason to end his existence when that proved impossible.

But I have never met anyone who made only good decisions based on sound logic. Kellermann seems to have been a good person.

Posted by: K at April 23, 2009 02:02 PM

I thought the title was 'When Congress Runs Amok.'
Never mind.

Posted by: emily litella at April 23, 2009 09:15 PM

Somebody should lynch Barney Frank.

Posted by: camojack at April 24, 2009 01:06 AM

Does this man have a single principled bone in his body?

Perhaps, in context, it would have been better-phrased as, "Do these men -- Obama, Frank, Schumer, et. al. -- have a single principled bone in their bodies?"

The answer to which is, "Yes -- if you believe that weathervanes are principled."

Barney Frank should be re-incarnated as a statue in a world populated solely by pigeons.

Posted by: BillT at April 24, 2009 08:54 AM

Keeping in mind this quote from above:

Top executives, including Kellermann, were insistent that Freddie Mac inform shareholders of the cost to the company of helping carry out the Obama administration's housing recovery plan, the two newspapers reported. The Post, citing several unnamed sources, said the regulators "urged the company not to do so." An unnamed FHFA official who spoke to the Post disputed that, "saying the regulator did not oppose disclosure but how the information was portrayed in the filing."

Add Bank of America's Kenneth Lewis saying that he was told by Paulson back in December that if he didn't complete the merger with ML, that BOA's board would be replaced.

When I try to connect the dots, I get the government already running the financial institutions. They don't have to wait until they convert their preferred shares to common, or the results of the stress tests, or go on refusing to allow repayment of TARP funds. They're in charge now.

Posted by: Retread at April 24, 2009 09:20 AM

I get the government already running the financial institutions. They don't have to wait until they convert their preferred shares to common, or the results of the stress tests, or go on refusing to allow repayment of TARP funds. They're in charge now.

Somewhere - and I'm sorry I can't remember where - I recently read that so long as the government regulates an industry it always has the ability to strongly influence - and sometimes even control - it. This doesn't mean we shouldn't have bank regulation obviously but it does mean the potential for abuse always exists.

It kind of reminds me of those Law & Order episodes where the detectives want some businessman to provide info and tell him that if he doesn't he'll get visits from the health inspector, the fire code inspector, the OSHA inspector, and so on. Since no one ever is - ever can be - in perfect compliance with all the various regulations, this is very effective leverage. (If I remember correctly, Rand had something quite sharp to say about the deliberate structuring of regulations to be impossible to comply with and still stay in business.)

Posted by: Elise at April 24, 2009 11:06 AM

Its such a sad story.

My fear is that life only gets worse when our future Chinese overlords try to protect their investment.

Posted by: tomg51 at April 24, 2009 01:32 PM

I'm currently reading "The Ascent of Money" and the most eye-opening thing I've learned is that governments have always had their thumbs on the money supply.

Posted by: Donna B. at April 25, 2009 01:50 AM

Of course, they have -- remember the Golden Rule: "He who has the gold, makes the rules."

And the corollary: "He who makes the rules, has the gold."

Or, in this case, the printing press...

Posted by: BillT at April 25, 2009 06:35 AM

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