Nearly a year ago, I had the opportunity to have breakfast with Senate Banking Committee Ranking Minority Member, Sen. Bob Corker [R-TN]. OK . . . the imperative of full disclosure requires that I admit that I was merely one of about 150 people attending an industry group event in Nashville. Sen. Corker, home for the August recess, was making a number of appearances across the state of Tennessee and the event to which I was invited was merely the first of three stops he made that day.
He spoke on a number of topics, but the one to which he devoted the most attention was the conceptual legislation he and Virginia's Democratic Senator, Mark Warner, were proposing in order to "reform" Fannie Mae and Freddie Mac. Sen. Corker explained his concept of replacing the two government-sponsored entities that facilitate the bulk of mortgage lending in America, with a single new government agency that would function somewhat like the FDIC. As he described it, this new mortgage insurance company would "protect the taxpayers" by having a layer of private capital that would account for the first 10% of the entities' total capital, and would be the first layer exposed to the risk of default. The federal mortgage "insurance" would not kick in until this private equity layer was exhausted.
When he opened the floor to Q&A, I happened to be the first person called on. I was curious about this Corker-Warner legislation. In particular, I wanted to know whether it would respect the property rights of investors, many of whom are Sen. Corker's constituents, like for example the Tennessee State Employees Retirement System, which holds a position in Fannie Mae and Freddie Mac preferred shares valued in the tens of millions of dollars. Sen. Corker had a very quick answer: "No," he said, "I'm going to protect the tax-payers not the investors." Again, he explained how private capital was going to be the first dollars at risk for covering defaults on bad mortgages. This prompted me to ask a follow-up:
I pointed out that since 2012 the Treasury Department has been sweeping every dollar of earnings out of Fannie and Freddie. And although the GSE's have made enough money to fully redeem the federal government's super preferred shares, the Treasury has unilaterally refused to credit the money it has siphoned out of Fannie and Freddie against this obligation. "What confidence", I asked Sen. Corker, "do you have that private capital will be invested in your new mortgage insurance entity, when the investors' experience with Fannie and Freddie shows that doing business with the federal government is like having Tony Soprano as a silent partner?"
After first claiming that private capital would not be needed for the 10% equity layer contemplated by Corker-Warner, Sen. Corker brushed off my question with the blanket assertion that "private investors are lining up" to put their capital into the yet-to-be-created mortgage insurance entity envisioned by his legislation. He then dismissed the option for further follow-up with the classic dodge that other guests had questions they wanted to ask.
It has now been almost a year, and I have yet to read or hear a substantive answer to my question from Sen. Corker. In the July 7, 2014 edition of The Wall Street Journal, however, my question was answered; not by Corker, but by William Isaac, former Chairman of the FDIC in the Reagan Administration.
He succinctly lays out the relevant history behind the federal government's unilateral confiscation of private property from preferred shareholders, and the Treasury Department's unprecedented redefinition of the role and responsibility of a conservator over the GSEs. He then posits the same question I raised with Sen. Corker:
"Given the government's dereliction in its duty to conserve value in Fannie and Freddie, an obvious question arises pertaining to any 'reform' of housing lending proposed by the administration and enacted by Congress. If the administration plans to wind down Fannie and Freddie with no recourse for investors, or to nationalize them in creating a new federal housing entity, as a Senate housing reform bill would do, where will the capital come from to finance the new system? What investor would put capital into something so uncertain and so unprotected by law as Fannie and Freddie have proved to be?"
He then provides the answer that Sen. Corker refused to give: "Capital follows the rule of law," he writes, "and if investors can't count on that in the U.S. and in the housing markets, they will put their money elsewhere." It seems to me that Mr. Isaac has it exactly right.
In the legislative process, perhaps law makers, like Bob Corker and Mark Warner, and their colleagues Mike Crapo [R. Idaho] and Tim Johnson [D. S.D.], should draw on the expertise of people like Chairman Isaac, who was responsible for cleaning up the wreckage from failed banks, rather than the likes of former Countrywide Financial trader, Michael Bright http://nlpc.org/stories/2014/04/10/former-countrywide-trader-behind-fanniefreddie-reform-bill who before becoming an influential Senate staffer, worked for a company that helped create the sub-prime mortgage crisis.
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