Patrick McHenryChairman

Three leaders of the Financial Services Committee are asking HUD Secretary Shaun Donovan for detailed information about delayed housing projects and the agency’s oversight of its HOME program, which provides $2 billion a year to local housing agencies to build and renovate homes across the country.

Committee Chairman Spencer Bachus, Oversight and Investigations Subcommittee Chairman Randy Neugebauer and Insurance, Housing and Community Opportunity Subcommittee Chairman Judy Biggert wrote Secretary Donovan after a year-long investigation by the Washington Post turned up numerous examples of mismanagement and abuse among HOME grant recipients.

“HUD must ensure that every dollar dedicated to affordable housing is used responsibly and that funds that have been misused or misappropriated are promptly repaid,” the three Committee leaders write in their letter.

Click here to view a copy of the letter.

In recent interviews two Democrat officials warned about some of the unintended consequences of the Dodd-Frank Act. These quotes are of particular interest as the Financial Services Committee will consider common-sense legislation next week to promote a functioning derivatives market by giving regulators more time to write the rules and ensure coordination among regulators. H.R. 1573 provides regulators with 18 months to write and vet the rules. With this additional time regulators will be able to conduct cost-benefit analysis that has been lacking in the rule making process, as recently reported by the Inspector General of the CFTC.

H.R. 1573 also realigns the US with the G20 agreement to move to reporting and central clearing by December 2012, reducing the likelihood of divergence in international regulatory regimes and mitigating negative consequences to the competitive position of U.S. markets and market participants.

During a Bloomberg TV interview on May 9, 2011, Phil Angelides, Chairman of the Financial Crisis Inquiry Commission and former California State Treasurer, cautioned:

“They [the international community] are now grappling with the derivatives industry . . .  I think one of the most important issues is to make sure we are in sync so that financial institutions can’t pit the US against the EU so we don’t have regulatory shopping like we had before the crisis.”

Former Democratic SEC Commissioner Annette Nazareth also warned of the unintended consequences of rushed rules under Dodd-Frank:

The Dodd-Frank implementation timetables are “wildly aggressive . . . These agencies were dealt a very bad hand . . . These deadlines could actually be systematic-risk raising.”

-       American Banker, May 3, 2011

That’s the conclusion of Michael Cembalest, the Chief Investment Officer of JP Morgan Chase.  In a May 3 “Eye on the Market” report, he revised his 2009 account of what caused the financial crisis.  Under the general heading of “Retractions,” Cembalest writes:

“In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector…However, over the last 2 years, analysts have dissected the housing crisis in greater detail.  What emerges from new research is something quite different:  government agencies

now look to have guaranteed, originated or underwritten 60% of all ‘non-traditional’ mortgages, which totaled $4.6 trillion in June 2008.  What’s more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards.  To be sure, private sector banks and investors are responsible for taking the bait, and made terrible mistakes.  Overall, what emerges is an object lesson in well-meaning public policy gone spectacularly wrong.”

Cembalest concludes:  “As regulators and politicians consider a wide range of actions designed to stabilize the global financial system, some reflection on the role that policy itself played in the collapse would seem like a critical part of the process. It’s not clear that it is.”

Today at The Bottom Line we welcome a guest blogger, Phillip Swagel. Phillip is a Professor of International Economic Policy at the University of Maryland and a former Assistant Secretary for Economic Policy at the Treasury Department.  His blog post is on the importance of Treasury continuing to require Fannie Mae and Freddie Mac to make dividend payments to taxpayers.

A reduction in the dividend payments that Fannie Mae and Freddie Mac make to the federal government would serve no policy purpose and amount to a gift from taxpayers to the investors who owned Fannie and Freddie when the firms required a $150 billion taxpayer bailout.  It is important to return Fannie and Freddie back to private hands in the future and have market participants rather than the government as the main provider of housing finance.  But there are ways to do this that do not involve a windfall for the old shareholders, who were appropriately wiped out when the two firms went bust.

The federal government now stands behind the financial obligations of Fannie Mae and Freddie Mac, the two government-sponsored enterprises involved with housing finance that were placed into conservatorship in September 2008. Taxpayers are on the hook for their losses, with some $150 billion committed so far to make good on the government backstop.

Taxpayers effectively own these two companies.  As part of the agreement with the firms when they were put into conservatorship, the U.S. government gained control of 79.9 percent of the common stock, and received preferred shares with a 10 percent dividend payment in exchange for capital injections to maintain a positive net worth for the two firms.  With $150 billion of taxpayer capital injected already, the 10 percent rate means that Fannie and Freddie make huge dividend payments each year. 

The 79.9 percent figure for the common stock component was chosen because an 80 percent stake would have triggered government accounting rules that put the firms’ assets and liabilities onto the public balance sheet.  This is mainly a symbolic distinction, since the terms of the so-called “keepwell” agreements made between the firms and the Treasury mean that the government covers the firms’ net gains and losses even if their assets and liabilities are not formally on the public balance sheet.  Still, a concern in the fall of 2008 was that market participants and rating agencies might not understand the situation and respond poorly to $5 trillion of GSE obligations coming onto the federal balance sheet—even those these obligations were matched by nearly an equivalent value of assets and taxpayers had committed to cover the difference between assets and liabilities regardless of whether these were formally on the federal balance sheet.

In recent quarters, the large dividend payments on the government-owned preferred shares have given rise to the seemingly unusual situation in which Fannie and Freddie are now profitable in their operations but usually still make net losses because of the payments to the government.  As a result, the two firms take more government capital in order to turn around and pay some of the money back to the Treasury as dividends.  As discussed by Daniel Indiviglio of The Atlantic [LINK = http://www.theatlantic.com/business/archive/2011/05/fannie-needs-another-85-billion-from-taxpayers-but-freddies-okay/238618/], Freddie actually reported a profit in the first quarter even including its $1.6 billion quarterly payment to the Treasury, but the firm notes that this profit situation is not likely to continue into the future.  Fannie needed another $8.5 billion from the Treasury, including money to cover its $2.2 billion quarterly payment.  The dividend payments appear to be crushing the firms and preventing their return to profitability.

This is by design.  The steep payments on the dividends make it so that the remaining 20.1 percent of GSE common shares and the pre-conservatorship preferred shares have no value because the GSEs will never earn high enough profits to redeem the government’s preferred shares.  This is both intentional and appropriate.  Fannie and Freddie were deeply insolvent in September 2008 when they required a bailout.  With the housing market weak and credit markets strained in the fall of 2008, Treasury did not want to put the two firms into receivership and wind them at that moment, but it also wanted to make sure that the equity holders of the firms received nothing.  The preferred shares accomplish this while not crossing the accounting threshold.  Fannie and Freddie shareholders have not been abused—they got exactly what happens to shareholders of insolvent firms:  a loss of their investment.

Some people want to reduce these payments or take other steps to the advantage of the owners of the common shares.  In an April 11 letter to Committee Chairman Bachus and others [LINK = http://nader.org/uploads/gse.pdf], for example, Ralph Nader decries the treatment of common shareholders, including the delisting of the firms’ shares.   Others note that a lower dividend rate would allow Fannie and Freddie to build up retained earnings rather than relying on additional government capital to keep them solvent.

But reducing the dividend would simply transfer value from the government to pre-conservatorship shareholders.  This would be a pure gift from taxpayers to investors, without a public policy rationale.

There are better ways to restore Fannie and Freddie to private hands in the future that recoup as much of the bailout as possible without providing a windfall to investors.  One approach would be to split the firm into two companies each.  So-called “good companies” would have clean balance sheets with the valuable assets of Fannie and Freddie’s computer systems and networks through which to acquire mortgages from originators throughout the United States.  These would be profitable firms and perform the socially valuable tasks of securitizing and guaranteeing conforming mortgages.  The legacy mortgage-backed securities (MBS), guarantees, and debt would remain with the two “bad companies,” which would continue to have their net worth kept positive by the Treasury while their assets and liabilities run off.  The 79.9 percent share of common stock and the $150 billion of senior preferred shares held by the Treasury would likewise remain with the bad firms, which in turn would own the two new good firms.

The separation of Fannie and Freddie into "good" and "bad" firms would in effect leave the government providing a ring-fence around the legacy assets and liabilities.  The two good firms could then be sold back to private investors as profitable companies with clean balance sheets and functioning business systems.  Taxpayers would realize all of the proceeds of these two IPO’s, because these funds would go to the bad firms and thus to the government as dividends on the Treasury preferred shares as the old Fannie and Freddie are wound down.  Even so, it is unlikely that the proceeds of the public offerings of the two good firms would recoup all of the $150 billion in taxpayer money paid out to stabilize Fannie and Freddie.  The remaining net loss after the initial public offering and including any additional future capital needed to stabilize the firms would constitute the overall cost of the GSE bailout. 

Since the government is not likely to recoup its investment in the firms, this means that pre-conservatorship common and preferred stockholders will realize no value from their holdings.  This is appropriate, since the two firms were deeply insolvent when they were put into conservatorship.   This differs from the situation with AIG, where AIG was illiquid but not insolvent and thus pre-crisis shareholders will come out with some value, even though for holders of common stock this value will be greatly diluted by the government stake acquired in the rescue of that company.  Again, this is an appropriate distinction to make between AIG on the one hand and Fannie and Freddie shareholders on the other.  The GSEs were insolvent while AIG was not.

It is vitally important to move forward with GSE reform to ensure that the U.S. housing market is supported by private capital rather and so that the securitization and guarantee functions performed by Fannie and Freddie benefit from private sector incentives and innovation.  While an eventual path for GSE reform is discussed, it is equally important to avoid taking steps that transfer value from taxpayers to private investors without appropriate compensation.  This would be the effect of proposals to reduce the dividend payments made by Fannie Mae and Freddie Mac on the capital invested in the two firms by the United States Treasury.

Phillip Swagel is a professor of international economic policy at the University of Maryland School of Public Policy.  He was formerly Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009. 

As a guest, his views do not necessarily reflect the views of Members of the Committee.  
 

WASHINGTON – Attacks from Democrats claiming a bipartisan commission to oversee the Consumer Financial Protection Bureau (CFPB) is somehow “anti-consumer” ring hollow in light of the record. 

Until recently, many of these same Democrats supported, proposed and voted for exactly such a commission. 

Below is a timeline showing the evolution of Democratic support for a commission to lead the CFPB.  This timeline shows that even Ranking Member Barney Frank introduced legislation less than two years ago to put the CFPB under the direction of a five-member commission.  This is perhaps the greatest political flip-flop since another famous Massachusetts Democrat claimed to be for something, before he was against it.

Evolution of Democratic Support for a Commission Structure at the CFPB

Sen Franken, Al [D-MN] - 8/4/2009
Sen Kennedy, Edward M. [D-MA] - 3/10/2009 
Sen Merkley, Jeff [D-OR] - 5/20/2009
Sen Sanders, Bernard [I-VT] - 5/4/2009
Sen Schumer, Charles E. [D-NY] - 3/10/2009 
Sen Whitehouse, Sheldon [D-RI] - 5/13/2009

Rep Blumenauer, Earl [D-OR-3] - 4/21/2009
Rep Brady, Robert A. [D-PA-1] - 5/4/2009
Rep Capuano, Michael E. [D-MA-8] - 5/14/2009
Rep Cohen, Steve [D-TN-9] - 6/26/2009
Rep Conyers, John, Jr. [D-MI-14] - 4/21/2009
Rep DeFazio, Peter A. [D-OR-4] - 6/24/2009
Rep Ellison, Keith [D-MN-5] - 3/31/2009
Rep Gutierrez, Luis V. [D-IL-4] - 6/3/2009
Rep Hinchey, Maurice D. [D-NY-22] - 6/18/2009
Rep Honda, Michael M. [D-CA-15] - 6/23/2009
Rep Lynch, Stephen F. [D-MA-9] - 6/17/2009
Rep Miller, Brad [D-NC-13] - 3/25/2009
Rep Miller, George [D-CA-7] - 3/31/2009
Rep Pastor, Ed [D-AZ-4] - 6/17/2009
Rep Peters, Gary C. [D-MI-9] - 6/17/2009
Rep Schakowsky, Janice D. [D-IL-9] - 3/31/2009
Rep Slaughter, Louise McIntosh [D-NY-28] - 6/3/2009
Rep Speier, Jackie [D-CA-12] - 4/21/2009
Rep Tierney, John F. [D-MA-6] - 3/31/2009
Rep Welch, Peter [D-VT] - 3/31/2009
Rep Wu, David [D-OR-1] - 5/4/2009

Earlier today, a coalition of liberals groups released a letter claiming a bill (H.R. 1121) putting a bipartisan commission in charge of the Consumer Financial Protection Bureau (CFPB) is bad for consumers.

It cannot escape notice that these same liberal groups endorsed proposals by Democrats and the Obama Administration in 2009 to put a bipartisan commission in charge of the CFPB.

THAT WAS THEN:  June 24, 2009: “Our organizations have strongly endorsed two complementary proposals regarding what should be the agency’s jurisdiction, responsibilities, rule-writing authority, enforcement powers and methods of funding. Earlier this year, Representatives Delahunt and Brad Miller proposed H.R. 1705, which would create a new Financial Product Safety Commission [emphasis added] with jurisdiction over credit, savings and payment products. (Senator Richard Durbin has offered the same proposal, S. 566.) Just last week, President Obama offered a very strong and detailed proposal to create a CFPA with a broad jurisdiction to include not only the above-mentioned products, but also existing fair lending and community reinvestment laws.”

-- Testimony before the House Financial Services Committee of Travis Plunkett, Consumer Federation of America, and Edmund Mierzwinski, U.S. PIRG, on behalf of : ACORN, Americans for Fairness in Lending, Center for Digital Democracy, Consumer Action, Consumers Union, Demos, National Association of Consumer Advocates, National Consumer Law Center (on behalf of its low-income clients), National Fair Housing Alliance, National People’s Action, Public Citizen

THIS IS NOW:  May 11, 2011: “Given all of the unprecedented limits on the CFPB’s ability to act to protect consumers described above, putting a commission in charge would be a debilitating blow to the agency’s ability to do anything in a timely manner.”

-- Letter to Members of Congress from groups including Consumer Federation of America, U.S. PIRG, Center for Digital Democracy, Consumer Action, Consumers Union, Demos, National Association of Consumer Advocates, National Consumer Law Center (on behalf of its low-income clients), National Fair Housing Alliance, National People’s Action,  Public Citizen and others

WHY THE FLIP-FLOP? Answer unknown at this time.

The Financial Institutions and Consumer Credit Subcommittee, chaired by Rep. Shelley Moore Capito, approved three bills to improve the Consumer Financial Protection Bureau (CFPB) on April 4^th. On Thursday of this week, the Financial Services Committee is scheduled to markup all three of these bills, which are:

The Responsible Consumer Financial Protection Regulations Act of 2011, sponsored by Committee Chairman Spencer Bachus

Consumer Financial Protection Safety and Soundness Improvement Act, sponsored by Representative Sean Duffy

The Bureau of Consumer Financial Protection Transfer Clarification Act, sponsored by Subcommittee Chairman Shelley Moore Capito

Some Democrats have attempted to paint these bills which bring greater accountability to the CFPB as “anti-consumer”.  Such claims are baseless.

For example, Chairman Bachus’s bill would modify the structure of bureau leadership so instead of being run by one individual, the CFPB becomes more like virtually every independent agency in the Federal government and becomes governed by a bipartisan, multi-member commission.  This is exactly what House Democrats voted for last year.  In fact the language in the Bachus bill is identical to Section 4103 of the regulatory reform bill passed by the House last year.  Every Democrat that voted against the Bachus bill voted for placing the CFPB under a commission a year ago.

Why all of a sudden do the Democrats think this is a terrible idea?

The other two bills are also common sense accountability measures. Congressman Duffy’s bill would clarify that the Financial Stability Oversight Council must set aside any CFPB regulation that would risk the safety and soundness of U.S. financial institutions.  It would also provide that a majority of the FSOC’s voting members, rather than a super-majority, can stay such proposed rules.  Subcommittee Chairman Capito’s bill would ensure a Senate-confirmed director of the CFPB is in place before the transfer of regulatory authority to the new bureau takes place.  If the CFPB does not have a Senate-confirmed director by July 21, her bill allows the CFPB to continue to operate under the Treasury Secretary’s authority.

Because the Dodd-Frank Act places so much authority – with such little accountability – in the hands of a CFPB Director, the law requires the director to be nominated by the President and confirmed by the Senate.

Watch video of Rep. Shelley Moore Capito, Chairman of the Financial Institutions and Consumer Credit Subcommittee, discuss legislation to bring greater accountability and oversight to the powerful Consumer Financial Protection Bureau

 http://video.cnbc.com/gallery/?video=3000020286