We received this e-mail from David Min on February 11 about our post titled, “Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs.” That piece took a dim view of a GSE “reform” proposal from the Center for American Progress, which we pointed out is “THE mainstream Democratic think tank for Congress and the administration”.
We must note that this message mischaracterizes some aspects of our post (for instance, we discussed at length in the our post why we thought the catastrophic risk fund would come up short, and this e-mail does not address our argument). Nevertheless, we thought readers would be interested in his message. From Min:
Let me introduce myself. I’ve been managing the Mortgage Finance Working Group that produced the proposal you’ve been very critical of.
I don’t suspect I’ll change your mind. That being said, I would be eager to have the chance to try. The key question, obviously, is whether a government guarantee/public option is necessary to ensure broad liquidity and consumer-friendly products (including the 30 yr FRM). I think the answer is no, and I think the evidence supports our view (including both the pre-New Deal era, the 2000s era when PLS took a 38% market share, and commercial real estate, all of which indicate to me private capital’s strong proclivity towards providing mortgage finance to the wealthy, in the form of products with terms that are highly beneficial to lenders/investors and highly onerous to consumers).
Regardless, I would ask that you make a couple of corrections in how you portray our proposal, in the interests of an honest debate.
I think there are two major mischaracterizations in how our proposal is described:
1) You state that our CMIs would be guaranteed by the government. In fact, the CMIs would explicitly not be guaranteed (and we have sloughed off most of the GSEs’ roles, so that CMIs only do a credit guarantee function, so we think that limitation on the guarantee is pretty credible); the government guarantee (and the Catastrophic Risk Insurance Fund we propose) would go directly to MBS investors, similar to the FDIC’s Deposit Insurance Fund.
2) You state that our insurance fund would not cover catastrophic risk. Again, that is not correct, as is clear from the name of the fund, the Catastrophic Risk Insurance Fund. CMI capital requirements (which would be 5-9x greater than current GSE requirements) would stand against non-catastrophic losses. Along with resolution authority, and the ability to issue “ex post facto” assessments if the Fund is running low, we strongly believe (although clearly one can never predict anything with 100% accuracy) that the taxpayer is fully protected.
I also think there’s a point you’re missing, in characterizing our proposal as “benefitting the banks”. The financial services lobby isn’t monolithic on housing finance reform. The Mortgage Bankers Association, for example, is primarily dominated by originating banks, who are primarily looking for conduits to sell their originated loans to: they don’t care if it’s GSEs, CMIs, MCGEs, or whatever, so long as they can resell their loans and keep their current business model (originate and re-sell) viable. On the other hand, the big investment banks (who do private-label securitization) and hedge funds/REITs (who would likely do a lot more lending activity if we privatized the whole thing) would, I think, stand to benefit far more from the privatization model. They’d take the vast majority of the $10+ trillion mortgage market, in the absence of a “public option” offering more affordable products. And arguably, they’d enjoy a public backing anyways (unless you think the government was prepared to let the mortgage market fail in a catastrophic event), just one that was unpaid for, implicit, vaguely defined, and at the institutional level (rather than limited to MBS).
As I said, I doubt I’m going to convince you, but would appreciate the opportunity to try, either to you or to your readers, presenting what I think is a large amount of evidence in favor of my view. Regardless, I’d appreciate the above corrections.
One final thing: our membership contains no financial institutions members, and while we have some affordable housing advocates, they by no means dominate our group, which consists of a number of leading academics among others. While I recognize that there are legitimate criticisms of our proposal, I don’t know that there’s a better option, and I certainly don’t think it’s a privatization model, as I think that would lead to a huge bonanza for Wall Street, a major negative setback for American households (essentially undoing the New Deal housing finance regime that I believe served this country very well for many decades), and much greater volatility and moral hazard to boot.
We will provide our response in a separate post.
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The whole thing is one massive exercise in question-begging, just like all other corporatist wonkery. The real question, of course, is why should we have financialization at all, since it’s proven to do nothing but steal and destroy.
But a corporate outfit like the CAP is paid to pretend the finance tyranny is a law of nature rather than a purely artificial political choice which the people can change at will by making a different political choice.
This part’s adorable:
You state that our insurance fund would not cover catastrophic risk. Again, that is not correct, as is clear from the name of the fund, the Catastrophic Risk Insurance Fund.
Look at the name we put on it! Now that’s real accomplishment!
(It seems characteristic of liberal pathology to think speeches, mere words, and names on things, where one had the power to do far more but didn’t, constitute real actions.)
We who are familiar with disaster capitalism know that under its nefarious regime, a name on something is more likely to be a counter-indication, an Orwellian clue.
Thus in this case for “Catastrophic Risk Insurance Fund” we should read:
The banksters will get to use taxpayer money to gamble on this. They’ll be fully “insured” against the catastrophic risks they generate. Instead, these catastrophic risks will be socialized onto the people.
That’s the case with each and every aspect of the Bailout, and so it’s intended to be with this proposed Bailout policy.
actually, if you had read further down that same sentence, you’d have seen my description of why I think the Catastrophic Risk Insurance Fund protects against catastrophic risk: very high capital requirements (against non-catastrophic risk) and a robustly funded insurance fund (10bps, which to put it another way is about half of the guarantee revenue the GSEs make), which like the FDIC fund, would have resolution authority and the ability to issue assessments on an ex post facto basis.
Yes, but your chosen phrasing is still quite mockable. You say, “It is not correct, that is clear from the name…” When the name has nothing to do with the correctness. And indeed, why should the preferred business model of the MBA’s members (originate and sell) be protected? That very business model was a key part of the breakdown of the system. When the banks, in “the old days,” had serious loan underwriting and kept the bulk of the loans on their own books, the mortgage market remained pretty stable for some decades.
Sorry, I know all about the “resolution authority” scam. We saw what happened with the PCA law, and we know what’ll happen with all sham “reforms”.
“(It seems characteristic of liberal pathology to think speeches, mere words, and names on things, where one had the power to do far more but didn’t, constitute real actions.)”
My thoughts exactly. I especially liked this part:
“They’d take the vast majority of the $10+ trillion mortgage market, in the absence of a “public option” offering more affordable products.”
I guess they’re going to be calling everything a “public option” now.
“presenting what I think is a large amount of evidence in favor of my view.”
There’s NO “evidence” never mind “a large amount.”
I was going to say I really hope CAP didn’t read the comments to Yves’ original post, because commenters here can be “insensitive” at times. Sure enough, the first line of the first comment, by a guy named Russ, is actually a bit mean :-)
“A cesspool like the CAP isn’t just “nominally liberal”, it’s the essence of liberalism.”
Not very “civil”, I guess. See how the banksters have corrupted me? I used to be a nice guy.
The only real solution is to nationalize the banks, investment banks, and brokerages and to seize their assets. It is no different than seizing the drug lords’, given how much money the banksters and brokesters have stolen from the American people.
To be clear, that was not intended to be my response, but rather an email pointing out some of the ways in which I think Ms. Smith’s first analysis of our proposal misrepresented key aspects of it. I am happy to write a lengthier response to the key claims, and to why I think a government guarantee is necessary.
Also to be clear, that email, which I didn’t expect to be posted, represents my own views and not those of either the Center for American Progress or the Mortgage Finance Working Group it has convened.
Mr. Min:
If your such a proponent of markets why do you insist on having any mechanism to backstop MBS bond holders? If you’ve had any classical economics training your well aware you can’t excise the loss mechanism from a “market system” without creating moral hazard and fostering the conditions of catastrophic loss.
The fact that your likely prodigiously educated can lead one to the conclusion that your goal isn’t the protection of the housing market but the securitization market. Even allowing origination to be separable from holding the debt isn’t sound economics, it’s simply profitably for the right constituency.
A public guarantee is an obligation to hold the taxpayer accountable for some catastrophic occurrence. As part of the total package, this guarantee provides the promise of consumer friendly, familiar mortgage products, such as the thirty year fixed rate conventional mortgage. This of course, is one of the core functions of the modern nation state, to provide a backstop to catastrophes, like, floods, hurricanes, crippling blizzards. The government is responsible for the social order as a whole, certainly the market rests within that order and does not supercede it.
Unfortunately, government’s role in being accountable for a catastrophe, is not empowered by the one authority it needs to make good on any state function, the ability to tax and collect taxes. Two thirds of all corporations pay no taxes. The recent Dodd-Frank Act which will curb merchant credit/debit fees to the banks has produced a complaint about profits being destroyed, and this over a few cents, not a few dollars per transaction. Do you honestly expect us to believe Jamie DImon and the Banking trades groups will not equally howl over being forced to pay into a fund to cover for these losses. There needs to be something given to the public of equal value to the titanic responsiblity for backstopping the entire residential mortgage market: ALLODIAL PROPERTY RIGHT, which would end the foreclosure process forever, and let people stay in their homes no matter who they owe what. People have to live somewhere, and not financial contract should ever abrogate real property. Real estate simply will not be allowed to be use as collateral by this right, and some other equitable system to repay loans, without turning people into refugees from their own communities and criminalizing them for owing money. It is a pointless proposition. If the entire property system along, which is the greater whole of which financing homes is a part, is not reformed as well to ensure peoples right to property is inviolate, I do not see why the banking industry should call upon the taxpayers in the form of the state to externalize the costs of their misdeeds, malfeascences, larcenies or just plain old fashioned honest mistakes, honest mistakes that just happen to bring the world wide conomy into a depression. Total bank failure for this year, eighteen in addition to one hundred and fifty seven for last year, with not end in sight. Do you really think you can get us to believe this is a reform which will make our lives any better without a major protection that property right reform will bring under the allodial system.
Unfortunately, the corporations who want this guarantee have had systemic failures in the last 5
David,
I am sorry if you are not happy that your message was posted. However, you sent it from an americanprogress.org e-mail address and also started by setting forth your role. I had no reason to regard it as anything other than a CAP communique.
What attempter said.
Yes, even the part about liberal pathology. Like, isn’t there something, ANYthing we can do to make it nicer for Mr. Charlie? Something impressive?
Lord, save me from my friends.
–
@Min
Interesting approach to your response. I can assure you, Yves is not a simpleton with a closed mind. That you start and conclude with that broadside is telling. In my opinion, your a minion for the fascist shills running this country.
This argument reeks of the development and finance industry proclivity for government subsidies to fund their growth developments at the local level and their skimming financial gains from every level of transaction. All the better to add another layer of subsidy and another layer of opacity.
The financial industry’s 40 percent share of S&P profits wasn’t enough? It was a Ponzi scheme then and this talk of more government guarantees and subsidies is more of the same.
There are savings institutions who still hold the mortgages they sell. The securitization process of mortgages has brought no good things to the US. I just hope the more conservative lending firms have not been put out of business trying to keep up with the scammers whose only business model is government subsidized securitization.
I’ve decided I don’t like the Big Bank’s originate and re-sell model (securitization) and that we should have “Savings and Loans” instead.
But I just re-read my sentence and realized how ridiculus it looks, so I probably shouldn’t be allowed to comment on this matter.
I think banks should only be allowed to originate and hold. If it’s such a great deal, why wouldn’t they want it?
The fact that they don’t want it should mark it as an obviously bad deal. But pension managers didn’t get that memo. So let’s save them from themselves and not allow them to buy MBS or CDOs.
I think you are both on to something. At least it should not be greasy, easy to sell mortgages as quickly as they are originated. They should be harder to sell and only after a specified length of time.
That’s my simpleton thinking. But of course I’m assuming we disappear the GSEs altogether so some our 6000-7000 banks can be in the S&L biz without going under.
Then geographical risk can be more of a risk in a smaller banks due to turndowns in a local economy which causes employment/housing liquidity problems. So I imagine the fledgling industry could become more countrywide in scope, and perhaps have names like “Home Federal S&L” so that investor-depositors knew they put their money in a sound FDIC insured institution with funds from the bank providing the FDIC insurance “capital”.
But there I go sounding ridiculous again.
My mortgage is still held by the lender. Between a 10 Trillion dollar mortgage market and 15 Trillion in US debt, where do you want your pension dollars invested?
For all the alleged fiducial duty and intelligence of the fund managers they sure have been gamed by the securitization process.
I have to say it is not the securitization itself that is at fault, it is the securitization as profit center that has corrupted not only our financial entities but our government as well.
It’s simple to fix too, as far as I understand. Lew Ranieri of Solomon Brothers invented securitization, from what I gather, and he got some key tax laws changed in order to make it more profitable than the old “loan and hold model”.
So find those pages of tax law, shred ’em, and we are home free.
And whenever banks did get into balance sheet trouble in the distant past, they did sell loan portfolios to each other to fix up the books. But obfuscation is much more difficult when they are dealing with another sophisticated bank.
..can this “discussion” be divorced from very extreme economic destabilization that accompanies it? It appears obvious “securitization” is intrinsic, but…
I can’t get past the involvement of unregulated derivatives-futures “markets”, as that is where we end up, having followed the $$$$..
sounds like everyone expresses similar fears, regarding completely out of control financial sector dominance..
Min burbles:
I thought the Magic Public Option Sparkle Pony was finally put to rest in the HCR debate, but I guess it’s a Zombie Magic Public Option Sparkle Pony.
Or maybe the very words “public option” close the sale in the career “progressive” community….
Love NK, but kind of shady to post his email without letting him know first.
ALF,
This may be more “take no prisoners” than you like, but he sent it from an americanprogress.org address (as in an official CAP address) and started out by mentioning his role. And he did not say anywhere that he was writing in a personal capacity.
I’m a journalist. If you don’t say it’s off the record or on background, it’s on the record. If he wanted to say he’d like to talk to me, he could have easily said that and have gone no further.
I was thinking the same as ALF, but that’s fair.
The problem with CAP’s proposal is that the various safeguards would be slowly but inexorably removed. Capital requirements would be reduced and public liability expanded either through riders on unrelated legislation or amidst claims that opponents do not understand modern economics, are endangering the financial system, are racists wanting to make it harder for minorities to buy a home, etc.
Fannie and Freddie were sold to the American people with the guarantee that they were self-supporting and would not be backstopped by the taxpayers. Their capital buffers were reduced over time and their politically connected management defied effective regulation. In the end, they require massive bailouts, bailouts whose size have been increased to help the banks:
http://www.businessweek.com/print/magazine/content/10_44/b4201076208349.htm
Wall Street likes to claim that we have a globalized economy and that its companies are not American companies, but companies that do business in America. If so, why place the American taxpayers on the hook? We should let Wall Street’s next “bailout” come from whatever banks or countries that can take them over during the next crash. Why not allow the Bank of China to take over Bank of America during the next crash at $1.00 a share? Or the State Bank of India to take over Goldman Sachs? In Thomas Friedman’s “flat world,” other countries should be allowed to pick up the pieces of a mortgage market crash and run Wall Street. This burden should not be placed on the American people, especially since they will never be allowed to run (or effectively regulate) Wall Street.
Any enterprise that is to replace the the GSE failures that has a government guarantee, implicit or explicit, is a failure the instant it is put into being.
Very simply, the fact of a government guarantee is defacto, the socialization of enterprise risk.
No No, Mr. Min, that dog won’t hunt. Now it may still come into being with the government guarantee, but that occurance will not be cause for jubilation.
What boggles my mind is the concept of there needing to be some form of guarantee, government or special insurance in the first place.
Socializing the losses of profligate lending is how we got to this juncture, enough already!