Tick, Tick…Boom?

BLOG VIEW: I don't shock very easily, but I was taken aback with comments made last week by John P. Hussman, president of Hussman Investment Trust, on his company's blog. Quite simply, Hussman wrote out a reality check and put it out for anyone to deposit it.

‘Let's put two and two together here,’ wrote Hussman. ‘Fannie Mae and Freddie Mac are already insolvent, and face 'significant negative impact' on their net worth resulting from the required consolidation of 'off balance sheet' loans into their financial reporting, which will take effect in financial statements for periods beginning Jan. 1, 2010. Over 60 percent of the U.S. foreclosure market now falls under the umbrella of these two entities.’

Hussman went on to note pessimistic comments from the one man who knows the government-sponsored enterprises too well. ‘On Bloomberg television last week,’ he continued, ‘James B. Lockhart III, the former head of the Federal Housing Finance Agency (Fannie and Freddie's regulator) commented on the bailout funds already provided to Fannie and Freddie, saying, 'Most of that money will never be seen again. They were just allowed to leverage themselves so dramatically.'’

Hussman, of course, is not saying anything that people don't already know about the government-sponsored enterprises (GSEs). But he is saying things that people don't want to acknowledge out loud – especially in an election year, where the twin subjects of unpopular bailouts and a stagnant economy continue to dominate the domestic agenda.

The Obama administration, to date, has not offered a clue on how it plans to extract Fannie Mae and Freddie Mac from their conservatorship; its initial plans to offer a solution in the fiscal year 2011 budget were scrapped without an in-depth explanation. Over on Capitol Hill, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has a plan – one that involves a wrecking ball.

‘The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,’ said Frank last month, during a news conference. ‘That's the approach, rather than a piecemeal one.’

In the past couple of weeks, another idea was put forth by former Treasury Secretary Henry Paulson. As part of the promotional campaign surrounding his new book on his tumultuous days at the Treasury, Paulson has been advocating transforming Fannie and Freddie into the mortgage banking equivalent of utilities: privately owned entities that have to answer to a public commission.

On the surface, there are obvious problems with both approaches. The Frank approach operates under the belief that the committee can quickly turn around a complex problem with speed and efficiency. Washington, however, is not known for quick turnarounds, let alone speed and efficiency – think about the headache-inducing struggle over healthcare reform.

Plus, the partisan rancor that has stalled any meaningful reforms in other areas of the financial services world is showing no signs of abating. If anything, the presence in the Capitol's parking lot of the pickup truck belonging to Massachusetts' new Republican senator, Scott Brown, has resulted in bipartisan cooperation being towed away. Today, it is more expedient for Washington's political elite to point fingers instead of shake hands.

As for the Paulson approach, he has written that his idea ‘would address the inherent conflicts between private ownership and public purpose that are unresolved in the current GSE structure.’ Yet strangely, that approach raises all of the problems inherent in the pre-conservatorship GSEs – especially with these new entities wielding political power in Washington – while inventing a new monopolistic playing field that will ultimately hamper the resurrection of the genuine private-label market. And if the example of Sallie Mae is any indication, turning a GSE into a profitable corporation is easier said than done.

But at least Frank and Paulson are offering ideas, even if they are seriously imperfect. Like Hussman, they are willing to talk about a thorny subject that is not going to heal on its own.

This is in stark contrast to the stalling technique from the White House. At this point, the administration cannot keep putting GSE reform on hold. Taxpayer funds are propping up the secondary markets, and ultimately, this scenario is not winning support with the general public.

Sooner or later, this ticking clock is going to erupt into either an alarm bell to wake everyone up or an explosion that will push the recovery back to the proverbial square one. In this case, time is not the industry's ally. More people need to start talking about GSE reform and floating ideas on where the secondary market will go in the near future.

– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]

[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]


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