Coming up in the next edition of Secondary Marketing Executive is an overview of the launch of a U.S. covered bond market. That proposal was fueled by Treasury Secretary Henry Paulson as a vehicle to revitalize the secondary markets.
On the surface, it seems like a win-win situation. Covered bonds are not an experimental vehicle – they've been around for years in Europe – and they would serve to fill the gap left by the evaporation of the U.S. private label market. But the coming of a covered bond market will probably not be seen as win-win for the executives at the troubled government-sponsored enterprises (GSEs). Indeed, several of the industry experts interviewed for the upcoming Secondary Marketing Executive coverage specifically pointed out how covered bonds will eat away at the GSEs' influence.
‘Anything to get away from Fannie Mae and Freddie Mac is a good thing,’ says Christopher Dannen, incoming president of the Connecticut Mortgage Bankers Association and vice president and residential sales manager for People's United Bank in Bridgeport, Conn.
‘It is a good idea,’ says Don Romano, vice president of the UpFront Mortgage Brokers Association. ‘Being limited to Fannie Mae, Freddie Mac and the Federal Housing Adminstration is not helpful. This is a good first step in bringing confidence back to the secondary market.’
‘It offers a way to build further growth and provide an opportunity for shrinkage in the importance of Fannie Mae and Freddie Mac,’ says Peter J. Wallison, an Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute in Washington, D.C.
Paulson, of course, has not advocated the marginalizing of Fannie Mae and Freddie Mac. Yet an increasing number of prominent voices are questioning the GSE status quo.
Former Federal Reserve Chairman Alan Greenspan and former St. Louis Fed President William Poole have separately called for the nationalizing of the GSEs. Greenspan went further by suggesting the GSEs should be divided into ‘five to 10 companies and auctioned off.’ Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, recently told Fox Business Network that the next Congress will ‘have to talk about whether it makes sense’ to retain Fannie Mae and Freddie Mac at their GSE status.
The fact that such talk is circulating before the Housing and Economic Recovery Act of 2008 has even gone into effect is curious, as if the legislation's lack of viability is already a foregone conclusion. Nobody wants to see Fannie and Freddie go down, of course, but at the same time, nobody is effusively insisting they are poised for a new ascension to greater heights.
And the newest nail in the coffin came last Friday when Warren Buffett, in a CNBC interview, calmly predicted government intervention to pump up the GSEs. ‘The game is over,’ said Buffett. Ouch!
Needless to say, the GSEs will not go gentle into that good night. The Housing and Economic Recovery Act did not rein in their legendary lobbying prowess, and any legislative attempt to nationalize the GSEs – let alone slice-and-dice them in the Greenspan recipe – will be met with volley by Fannie and Freddie's K Street support squad.
But, ultimately, the onus will be on the Fannie and Freddie leadership to ensure the GSEs will not sink further to the point that federal bailout funds are required. If that happens, there will be relatively few voices in Washington and the industry calling for their preservation.
The multitude of voices talking about a very different future for the GSEs should be a clear signal that this is shape-up-or-ship-out time for Fannie and Freddie.
– Phil Hall, editor, Secondary Marketing Executive.
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
