Katrina vanden Heuvel 

Opinion Writer 

Original here

 

The man blocking America’s recovery

By Katrina vanden Heuvel, Published: March 19 | Updated: Tuesday, March 20, 4:00 AM

He is the most powerful federal employee you’ve never heard of. Edward DeMarco has slowed the economic recovery with the stroke of a pen. His actions are costing taxpayers tens of billions of dollars, forcing millions of homeowners to lose their homes, and contributing to the falling housing prices that are a brake on the recovery.

Not bad for an obscure “acting director” who should have departed his position long ago.

Edward DeMarco heads the Federal Housing Finance Agency (FHFA). He’s a temp, in office only because — no surprise — Senate Republicans, led by Richard Shelby (Ala.), refused even to allow a vote on the man President Obama nominated for the post.

And DeMarco is philosophically opposed to the common-sense solutions needed to deal with the housing crisis.

When Fannie Mae and Freddie Mac — holders or guarantors of about 60 percent of housing mortgages — were bailed out, the FHFA was tasked with supervising their activities, with a mandate to minimize taxpayer losses. That gives DeMarco extraordinary power.

As the Federal Reserve has detailed, falling housing prices are a continuing drag on the recovery. Homeowners have lost a staggering $7 trillion in the value of their homes since early 2006 as home prices fell an average of about 33 percent. Homes are the prime investment of middle-class families, and when home values fall, families begin to cut back on purchases. This slows the entire economy.

With foreclosure, the effects are even worse. Foreclosure is a tragedy for those who lose their home and an economic calamity for their neighbors, who watch their houses plummet in value. It is costly to creditors, for the loss on foreclosed properties often exceeds what might be gained through renegotiating the mortgage. And foreclosures in large numbers impede a recovery, driving housing prices into a death spiral.

The Federal Reserve concludes that is what we face now. Millions have lost their homes already, and millions more are on the verge. A stunning 12 million homeowners — one in five with mortgages — are “under water,” meaning their homes are worth less than their mortgage.

Some of these victims had taken former Fed chair Alan Greenspan’s advice and took out a subprime or variable-interest loan with a small down payment to buy a house, on the assumption that values would continue to rise. When prices fell, these buyers not only lost their down payment, they couldn’t refinance their loans when their variable rates kicked up.

More of these underwater homeowners, however, are simply bystanders — collateral damage — to the banking folly. They hold prime mortgages, put down 20 percent and now find themselves unable to refinance or to sell. Their investment is gone.

So a growing chorus of voices — from Obama to Fed Chairman Ben Bernanke — have called for programs that would refinance underwater loans, particularly by reducing the principal owed so homeowners can stay in their homes.

Small-scale experiments have shown this approach can save creditors money. But the banks want to avoid putting a real price on the mortgages they own for as long as possible, while loan servicers are set up to manage loans, and often have neither the staffing nor the incentive to deal with homeowners in trouble.  One aim of the multibillion-dollar settlement just inked by attorneys general of several states and five big banks was to require the setup of procedures to facilitate refinancing and principal reduction.

Fannie and Freddie hold over 20 percent of underwater mortgages, so Bernanke, President Obama and leading senators and legislators have called on DeMarco to let Fannie and Freddie move on principal reduction. The Treasury Department even offered to provide 63 cents for every dollar of principal reduction to subsidize the process.

According to the FHFA’s own reports, done carefully, this might save taxpayers $28 billion, compared to the cost of foreclosures. But Edward DeMarco says no. He even shut down a test program in principal reduction before it got started.

“He’s acting as if he was head of two private companies called Fannie and Freddie and not taking into account the impact this has on the economy, and I think he should be more cooperative with efforts to reduce foreclosures,” argues Rep. Barney Frank (D-Mass.).

DeMarco argues that he has no authority to allow principal reduction because his mandate is to minimize taxpayers’ losses. But Reps. Elijah Cummings (D-Md.) and John Tierney (D-Mass.), both members of the House Committee on Oversight and Government Reforms, noted that the FHFA’s own figures show a sensible program could save taxpayers billions — to say nothing of the benefits of buoying housing prices, keeping other homeowners above water, and helping the economy get going.

“If DeMarco were fire chief and your house became engulfed in flames, you could forget about calling 911,” argues the Huffington Post’s Peter Goodman. “He would not run up the municipal water bill by saving your block.”

Clearly DeMarco should go. Without Shelby’s obstruction, he’d already have been gone. Now the pressure is building. Liberal groups — MoveOn, the Campaign for America’s Future, Rebuild the Dream and the New Bottom Line, among others — have joined in petitions calling on the president to fire DeMarco and make a recess appointment to replace him. Last week, demonstrators marched outside regional Fannie and Freddie offices, calling on DeMarco to go. The Congressional Progressive Caucus has signed a letter telling DeMarco to act or to leave.

A recess appointment would trigger a partisan brawl with Republican senators that the White House has little appetite for. But to save taxpayers billions, to help families keep their homes and to give a boost to the economy, getting rid of the most destructive man we’ve never heard of is a small price to pay.

THE NEXT FINANCIAL MELTDOWN MAY HAVE ALREADY BEGUN ...THANKS TO THESE KLEPTOCRAT BANKSTERS

Getty Images                                Daniel Mudd, CEO Fannie Mae, fired: Sept. 7, 2008

Getty Images                              Richard Syron, CEO Freddie Mac, fired: Sept. 7, 2008

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Fannie's Scandalized, Freddie's Dead - And The Next Financial Meltdown May Have Already Started

By Richard (RJ) Eskow

February 9, 2011 - 3:43am ET 

Here's an idea: Let's give hundreds of billions of dollars in government-backed guarantees to private banks so they can make a fortune writing mortgages without any risk to themselves. Hey, what could go wrong?

The FCIC's recent report illustrated an important lesson from the economic meltdown: Privatization, not big government, ruined Fannie Mae and Freddie Mac. Running a government program like a private corporation leads to the worst excesses of executive self-indulgence. Fannie and Freddie didn't bring down the economy, as some have claimed, but they were destroyed by the same privatize-and-deregulate philosophy that led to the crisis.

Now we're learning that Washington may be preparing to take that destructive philosophy even further. Proposals to "reform" Fannie and Freddie by privatizing them even more aren't just bad, dangerous ideas. Worse, they suggest that we're returning to the blind and mistaken ideologies of the past. If that's true, then it's only a matter of time until the next meltdown comes.

Doomsday

Mark your calendars. This may be remembered as the week our next financial crisis began, the moment when the Greenspan Republicans and Rubin Democrats who ruined the economy the last time around regained control ... and the cycle began all over again. Only two short years after Wall Street's fraud and greed brought down the world's economy, a Beltway think tank is proposing to put taxpayers on the hook for mortgages written and administered by the same corporate miscreants.

And that's the Democratic proposal. The Republicans want to double down on a failed strategy of "privatizing" government mortgage financing, while at the same time cutting back on regulation and oversight. It all boils down to the same thing: bringing back the same sybaritic, taxpayer-backed greedfest that 's already shattered the economy more than once.

Fannie and Freddie are "government-sponsored enterprises," or "GSEs." But ideologues have learned exactly the wrong lesson from the Great Recession. It was the "E" part of these companies, not the "G" part, that caused the problem. The real lesson is that it's a mistake to mix government programs with private-sector-style get-rich-quick incentives. The GSEs failed because they treated their Federal mandate as if it was the key to Fort Knox.

SmokingFinancialGun.com

If the Financial Crisis Inquiry Commission wants to publicize its work more, maybe it should set up a tabloid website like The Smoking Gun, or pitch a TV tell-all scandal show about badly-behaved executives ("VH1: Behind the Mortgage"). Their first episode could feature Daniel Mudd, the former Fannie Mae CEO who bragged that he wrote his own rules with regulators and boasted that "we always won, we took no prisoners." Regulators later concluded that Mudd ran a company with an "arrogant and unethical corporate culture, where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives."

Mudd ran the company with so much materialistic self-absorption that he might have been starring in an 80's hair-metal video (presumably without Tawny Kitaen on the hood of a Jaguar, but who knows?) His tenure at Fannie was marked by lying, cheating, bullying, and the reckless pursuit of a fast buck. But then, why wouldn't it be? He was compensated like a private-sector executive, but backed by government authority and coddled with taxpayer guarantees. It was all upside, baby, and Mudd liked his upside.

Regulators found that Mudd and his colleagues "manipulated accounting" so that they could keep paying themselves huge bonuses, even as they ran what one observer called "the worst-run financial institution" he had seen in thirty years as a regulator. It worked, too. Mudd made $65 million between 2000 and 2008. (Hmm ... "manipulated accounting" ... is that legal?)

Conservatives should be just as outraged as progressives. Executives like Mudd didn't build their businesses. They didn't even manage them competently. They took a free ride with government backing, yet paid themselves as if they were captains of industry. How did this perverse situation develop?

Freddie's Dead (Fannie, too)

Fannie Mae and Freddie Mac are going to die, at least in their present form, as victims of over-indulgence. But they didn't start that way. Fannie Mae was created in 1938 and functioned smoothly for thirty years, all through the postwar housing boom. It was turned into a separate government-sponsored enterprise in 1968 in order to take its large debts off the Federal balance sheet, and Freddie Mac was created shortly afterward (to create "competition"). They're creatures of privatization, and they were encouraged to bring "free market" aggression to their mission.

And man, did they. As FCIC testimony revealed, "The "Fannie and Freddie political machine resisted any meaningful regulation using highly improper tactics ... OFHEO (their regulatory overseer) was constantly subjected to malicious political attacks and efforts of intimidation."

The companies faced a turning point in 2005, when the greed-addled private market was rushing into subprime mortgages and other high-risk loans. A government-sponsored corporation that was true to its mission wouldn't have followed the lemmings, but privatization fever had taken hold. As a Fannie Mae executive told his colleagues back then: "We face two stark choices: stay the course [or] meet the market where the market is." Ill-advised by architects of calamity like Citibank, they jumped in with both feet despite dire warnings from people inside the organization.

Risk and Reward

Alan Greenspan and Robert Rubin both told the FCIC that better corporate risk management will help prevent the next financial crisis. The Fannie Mae story proves how naive that belief is. Like many financial executives, Mudd's short-term wealth depended on writing more business, whatever the risk. So he humiliated, abused, and ignored Chief Risk Officer Enrico Dallevecchia when Dallevechia warned him of the dangers of writing substandard business. The frustrated Risk Officer finally wrote a memo to Mudd which said that Fannie had "one of the weakest control processes" he had "ever witnessed in his career," and that he was "upset" that he hadn't even known the company was taking on more risk until he saw the announcement. A bellicose Mudd told Dellavecchia to "address it (to him) man to man" and "face to face," rather than by email.

CFO Robert Levin bullied the company's chief analyst in a similar way when he was told that the company wasn't charging enough for its Alt-A mortgages. That's called "buying business," and it should never happen at a government-sponsored enterprise. It means that an enterprise created to complement the private sector is competing with it instead. Mudd and Levin did what many executives would do in a similar situation: They lowered their underwriting standards, wrote a lot of bad mortgages, and walked away as rich men. Mudd now lives comfortably in Connecticut with $80 million in earnings, thanks to the American taxpayer, and is a director for an investment fund (Fortress Investment Group - a name we're providing as a public service to unwary investors).

Meltdown II: The Sequel

Arguments over Fannie and Freddie are usually a proxy for ideological differences about the role of government. Conservatives who blame Fannie and Freddie for the meltdown (which they didn't cause but certainly made worse) want to prove that government intervention in the economy is a bad idea. But this isn't a battle between right and left as much as it is between what works and what doesn't. We've now seen what happens when American-style bankers are given government-backed guarantees and Goldman Sachs-style bonuses. Privatizing to Wall Street is like giving your car keys to a pickpocket.

Nevertheless, Capital Markets Subcommittee Chairman Scott Garrett is holding a hearing today on "reforming" Fannie and Freddie, and his witness list contains four names: someone from an anti-government, anti-regulation think tank that's funded by Citibank, the Koch Brothers, Chase, and American Express, along with a variety of oil refiners and pharmaceutical companies; someone from another anti-government group which has received funding from Bank of America, Lehman Brothers, PriceWaterHouseCoopers, and the California Realtors Association; someone from a conservative think tank funded by Prudential and American Express, among others; and a Democrat ...

... from the Center for American Progress (CAP), the group that wrote the Democratic "privatize Fannie and Freddie" proposal. In other words, the hearings have been stacked in the banks' favor. Meanwhile, the Administration's plan for reforming Fannie and Freddie is overdue, but the Center for American Progress is known to be close to the White House. If that means that its proposal is a preview of Administration thinking, we've got a big problem.

We're told that the White House plan will be released Friday and that it will include three options. One option would have the government withdraw entirely from the mortgage market, but that's likely to be politically infeasible. Neither party wants to explain to voters why they can't get home loans and the price of their house has plummeted. And while specifics weren't provided for the other two, the Wall Street Journal reports that the others would "create a way for the government to backstop part of the secondary mortgage market" like Fannie and Freddie, but gave no specifics.

The Journal also reports that "top administration officials have publicly discussed the merits of a limited but explicit federal guarantee of securities backed by certain types of mortgages," adding: "The housing and banking industries have advanced proposals arguing that such a guarantee is needed to maintain a healthy market, particularly for long-term, fixed-rate loans that remain a keystone of U.S. housing."
The short version: There will be one proposal that's politically impossible, and two others that give banking and real estate lobbyists what they want. Care to bet which one won't make it through Congress?

Yves Smith gave the CAP proposal the once-over, under the heading "Wall Street Co-Opting Nominally Liberal Think Tanks," but our one-sentence summary of their proposal is this: They want to dismantle Fannie and Freddie and let private banks administer their programs backed by by government guarantees. And don't worry, says CAP. Our "chartered mortgage institutions," though "fully private," will have to be "fully transparent" and follow government rules. (They would never, never "manipulate accounting," would they?)

The End

Proposals like CAP's would make Fannie and Freddie's private-sector successors a microcosm for the entire economy under the failed policies of Democrats like Clinton, Rubin, and Summers, as well as Republicans like Greenspan and ... well, all of them. Executives at these financial institutions would be motivated to cook the books and sell bad mortgages while taking advantage of taxpayer guarantees to consolidate their already too-big-to-fail institutions. And they'd be recruited from a Wall Street cohort with a documented record of deception and criminality. All of CAP's lofty and well-stated goals are undermined by the identify of the folks doing the lending. As for the Republicans, they don't even bother stating lofty goals.

The government has to work out a way to unwind itself from the mortgage market. The Administration has a proposal to lower the size of mortgages it will guarantee, and that's a good first step. But the previews of their overall proposals seem uninspired and weak, if not outright capitulation to Wall Street's whims and desires. And even capitulation is too mild for the Republicans, who appear to be setting the stage for fiscal anarchy and plunder.

The problem is much bigger than Fannie and Freddie. This real danger is that this could be a turning point, a return to the failed ways of the past. If we don't see stronger proposals than these in the coming months, this will be remembered as the week that the destructive policies of the Greenspan/Rubin crowd came back from the dead. It will be recalled as the beginning of the end, the moment when the next wave of privatization began and the way was paved for a collapse that may be even greater than the one we're in today.

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This post was produced as part of the Curbing Wall Street project.