- The financial regulation bill passed last month had a glaring omission—what to do with mortgage giants Fannie Mae and Freddie Mac.
- Tuesday's conference on Fannie and Freddie was rumored to be a bombshell—perhaps proposing to restructure or even forgive agency-backed mortgages.
- But instead of a game-changing proposal—we got a tentative first step.
- The episode is illustrative of all the fearful but ultimately fruitless nail biting lately.
Weaker global economic data and a chillier outlook from the Fed roiled markets last week. And there was something else too—whispers running down Wall Street. The topic? What to do with housing giants Fannie and Freddie—a glaring omission in the couple thousand page financial reform bill passed last month.
Fannie and Freddie officially became the government's wards almost two years ago at the height of the financial panic. Since then, the feds are out $148 billion covering F&F's losses. Congress didn't have the votes to address the polarizing topic in the financial regulation bill. But F&F couldn't be left out entirely, so legislators mandated a study (one of the hundreds required by the bill).
Thus (studiously) the administration called a meeting of the nation's academic and private sector housing experts Tuesday. (Attendees included the co-inventor of mortgage-backed securities, Lewis Ranieri, and bond investor Bill Gross of PIMCO.) This conference—it was whispered—could turn out to be a huge game-changer. The administration may seek to restructure or even forgive F&F insured mortgages.
Why would they do that? Well, politically, it could prove popular—buy some votes from "Joe Six-Pack" struggling with his mortgage. Economically, it could be a different tack on stimulus. Lower mortgage payments and shallower housing holes to dig out of could theoretically pump up demand (which isn't really all that mired) by supporting "consumers." Depending on the details, the plan would dramatically affect mortgage investors, even monetary policy (the Fed's balance sheet is rich in F&F securities). Whisperers postulated the upcoming conference explained the Fed's decision to roll mortgage-related investment proceeds into Treasuries. (There were even rumors about the rumor. Was it a trial balloon floated by the administration itself to check the viability of the plan? Maybe. If so, it was notably rejected by public opinion.)
Tuesday dawned dim and foggy (in the Bay Area at least) as the much-anticipated conference got under way. But instead of an "August surprise," we got a tentative first step (probably not a bad outcome for markets, really) and little new or shocking.
Treasury Secretary Geithner's comments were general and mostly middle of the road. Geithner rehashed the now-common (if somewhat misguided) explanation of housing's role in the downturn and pledged to never let it happen again (of course not!). The task is the biggest, most complicated the administration has faced and requires a light touch, he said. In time, the Treasury sees a system where fewer US mortgages (but not none) are government guaranteed. No final proposal is due until next January. So what was the point of all this? Marketing, of course:
1. Hi there. It may look like we missed the boat on this
in the financial reform bill.
2. Housing reform is really difficult (unlike the rest!).
3. We realize these organizations are problematic.
4. We still have no idea what to do about them.
5. Eventually you might see a slimmed down replica of
what we've got now.
6. We are thinking about doing something. Promise.
The episode is illustrative of all the fearful but ultimately fruitless nail biting lately. After four straight down days and a flat Monday, US stocks were up +1.2% Tuesday.