Bad Barron's
Barron's is certainly an odd beast until you think about it a bit. There is a lot of the old lean-Republican trope in its editorial pages, but there is also a good amount of fair coverage of corporate misdeeds. And the latter is particularly useful to lefties, even those the typical Barron's readers simply want to avoid getting fleeced any more than they have to.
Anyway, here is an exemplar of the bad Barron's, from Thomas Donlan's editorial two weeks ago:
Where are the Congressional hearings to put Rep. Barney Frank (D-Mass.), in the hot seat? He should be grilled about his judgment and integrity, along with hundreds of other legislators of both parties who indulged and subsidized home buyers, house builders and mortgage lenders, and started the country down the road to nationalized banking.
Where is the eagerness to make Frank—chairman of the House Financial Services Committee—eat his most intemperate words? In 2003, he said: "I want to roll the dice a little bit more in this situation toward subsidized housing." He also said then that Fannie Mae and Freddie Mac, the dice-rollers, were "fundamentally sound."
Actually reading the actual hearing text provides, as one might expect, a bit of context. At the time, Frank was the ranking minority member of the House Financial Services Committee; Republican Michael Oxley was chairman. In fact, even if Barney Frank could get every Democrat to act with him on anything, he would need Republican support just to get a bill through the House, let alone keep it from getting vetoed.
Indeed, what was clear to the members of the committee was that regulation in 2003 was inadequate and that the government needed something better. Remember, this is chairman Michael Oxley speaking:
There is a broad agreement that the current regulatory structure for the GSEs is not operating as effectively as it should. The Office of Federal Housing Enterprise Oversight is underfunded, understaffed and unable to fully oversee the operations of these sophisticated enterprises.
This was reflected in the surprise management reorganization by Freddie Mac and by Wall Street reports stating that GSE oversight is viewed with skepticism because OFHEO is largely seen as a weak regulator.
A strengthened regulator will send a signal to the markets that these entities have solid management and are engaging in safe and sound activities. Confidence will be restored in the GSEs and they will be able to get back to their important work of expanding home
ownership opportunities without the distractions that have been plaguing them over the past several months.
I should point out that Donlan's criticism is reasonable in one respect, in that it is not clear that Frank ought to have proclaimed Freddie Mac and Fannie Mae to have been fundamentally sound in 2003—on the other hand, the combined market capitalization for the two companies at the time exceeded $100 billion at the time.
The bigger problem here is that Donlan is conflating subprime lending with subsidized housing. If he bothered to read the hearing transcript, he would find that the members of the committee and a number of witnesses discussed (1) housing subsidized under the federal low-income housing tax credit (Fannie Mae and Freddie Mac have been longstanding leaders in tax credit investing); (2) the Affordable Housing Program of the Federal Home Loan Banks and whether it could inspire similar programs; and (3) the need to have housing subsides for older rural and urban housing stock that was about to age out of existing programs. (In the interest of full disclosure, I worked with one of the witnesses, Terri Montague, when we were both with a previous employer.)
Indeed, when Frank makes his "roll the dice" comment, he was discussing the need for Fannie Mae and Freddie Mac to continue to have a commitment for low-income housing and not just the weak provisions that banks fulfill under the Community Reinvestment Act.
The problems that sank Fannie Mae and Freddie Mac had almost nothing to do with their commitments to low-income housing; rather, they got too clever with leverage. A good version of Barron's would feature columnists who knew how to read the original versions of the sources they quote.
Labels: bad Barron's, Barney Frank. Thomas Donlan, Barron's, Fannie Mae, Freddie Mac, Stupid reporting tricks
The Joys of the Ownership Society
Now it seems that the 40-year American experiment of having government-sponsored enterprises swim in the waters of the stock markets is over, at least for now. (Fannie Mae was an arm of the federal government from 1938 until 1968, when the Johnson administration privatized it to get its debt off the government's books; Freddie Mac was formed in 1970 in essentially its current form.)
The impetus for an administration so proud of the free market and so enamored of small government to effectively privatize the two mortgage giants? It had little choice.
The government's planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.
The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies' debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.
The details of the deal have not fully emerged, but it appears that investors who own the companies' common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, may also wind up with little. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.
But what were company officials saying about the situation at Freddie and Fannie? Barron's has an answer: in its issue out on newsstands today, a letter in the Mailbag section from Anthony Piszel, the Executive Vice President and Chief Financial Officer of Freddie Mac, tells a very different story:
To the Editor: The arguments made in "The Endgame Nears for Fannie and Freddie" (Cover Story, Aug. 18) miss the mark.
All financial institutions in the mortgage business are taking losses. Freddie Mac is no exception. But Freddie Mac is weathering the storm better than many. The default and credit charge-off rates on mortgages we own are a fraction of industry averages. We hold capital well in excess of regulatory requirements. Our liquidity position remains strong, and we have reported strong revenue growth in our mortgage-investment and guarantee businesses.
I hate to be a spoilsport, but Barron's was right to mention the word endgame. And if you were an investor who took Freddie Mac or Fannie Mae officials at their word that the companies were well and truly strong, welcome to the real world of finance, where it is hard to tell the difference between an outright lie and rampant self-delusion.
Labels: Fannie Mae, Freddie Mac, stock market, stupid mailbag tricks
Fanning the Flames
Conservatives generally hate Freddie Mac and Fannie Mae, the huge quasi-governmental agencies in the United States that backstop a good chunk of the residential mortgage market. After all, markets never prove wrong about anything as simple as mortgages, so the government should just butt out.
Markets, of course, fail often enough that even Americans believe that the government should step in—hence, the lack of outrage when the recent housing bill essentially backstopped Fannie and Freddie's debt.
What is a good conservative to do now? Make something up. Take this letter to Barron's:
One thing that really bugs me about Fannie and Freddie (Editorial Commentary, July 21), is that they do not pay federal or state income taxes, so the taxpayer is already subsidizing them. Who knows what they would have paid in taxes if taxed as an ordinary company?
Alas for the readers of Barron's, whoever edits the Mailbag column could not be bothered to check the assertions in the letter. While Fannie Mae and Freddie Mac are exempt from state and local income taxes, they are indeed subject to federal income taxes. While both have low effective tax rates, they have used federal tax credits for affordable housing and historic rehabilitation—the same tax credits that other companies can and do use—to get that way.
(What a pleasant world it would be if letter writers were equally up in arms when companies avoid state income taxes by paying royalties for intellectual property use to shell companies in Delaware or Montana.)
Labels: Barron's, Fannie Mae, Freddie Mac, stupid mailbag tricks
Perfect Information
If you want an exemplar of the difference between theory and practice and the financial markets, consider what Alan Abelson writes in his Barron's column (behind the paywall) this week:
[T]he roof fell in on housing and the curtain began to come down on the jolly times for Freddie and Fannie. Today, they own or guarantee 45% of all U.S. mortgages, or a cool, $4.8 trillion worth. Looking at their balance sheets, Porter [Stansberry] points out, you find mortgages
with a face value of $1.7 trillion, supported by assets of about $70 billion in core capital. On a combined basis, they're leveraged 24-to-1, but when you toss in their off-balance sheet guarantees, that figure balloons to 68-to-1.
Since the stock market is a perfect-information market, every buyer and seller of FRE and FNM knew not only that the leverage ratio was 24-to-1, but also knew the footnotes to the annual reports well enough to understand the 68-to-1 ratios including the guarantees. And they knew that if, say, those mortgages were worth 95% of their stated value that Fannie and Freddie would have no equity left, even if their guarantees were never called.
Labels: Fannie Mae, Freddie Mac, Perfect information, stupid financial tricks
