Last week we learned that the Treasury Department, shortly after receiving authority to help shore up Fannie Mae and Freddie Mac, hired Morgan Stanley to advise it on the rescue plan. While the Treasury is only paying Morgan Stanley a $94,000 fee for the transaction, Morgan's role here still raises serious questions. First and foremost: why was Morgan Stanley hired?
We hear that Treasury Department spoke with a variety of Wall Street firms to discuss the advisory role. Presumably, Morgan Stanley got the mandate because it was willing to give up certain market positions that would have created conflicts of interest with its advisory role. (Goldman, which thrives at the nexus of conflicted interest, probably wanted nothing to do with this.)
But the very idea of hiring a Wall Street firm to provide "market analysis and financial expertise" in connection with Fannie and Freddie is strange. No one on Wall Street has the requisite experience for reforming or rescuing government sponsored entities that are now explicitly backed by a bailout package. What's more, the small size of the advisory fee and its structure provides no incentives for Morgan Stanley to provide advice that will keep Fannie and Freddie out of trouble in the future. Indeed, their client relationships and ties to the securitization and mortgage market may well create incentives for them to push Fannie and Freddie right back into the mortgage bubble inflating business.
We're sure the people at Morgan Stanley, however, are bright enough and perhaps even honest enough to resist these incentives. But the first thing this deal obviously does is remove accountability for a future failure of Fannie or Freddie. Morgan Stanley's low fee means that they probably can't be penalized for giving bad advice. Politicians and regulators, the folks who ordinarily would be held accountable for the collapse of government sponsored entities, will be able to point to Morgan Stanley . In other words, everyone's ass is covered.
This looks, in short, like a way to free Fannie and Freddie from oversight rather than to provide it. Government guarantees already have freed the companies from market oversight--they simply cannot fail. Now outsourcing the reform has largely freed them from political oversight. Fannie and Freddie may be more autonomous after all this is done than they ever have been before. And once Hank Paulson and his crew--who are genuinely pro-market skeptics with an appetite for reigning in Fannie and Freddie--have passed from the scene, the checks on them may well be removed.
Posted by guest , Aug 13, 2008 1:56PM
Don't sneeze at $94,000. It takes a whole month for some of us to make that much.
Posted by arthurcutten , Aug 13, 2008 1:56PM
Excellent observations. The deal is very odd to say the least and I'm surprised more have not noted it.
http://tiny.cc/a1W7J
Posted by guest , Aug 13, 2008 2:37PM
I read that 95k was for expenses only and no fee was being charged.
See ap story linked
http://www.miamiherald.com/163/story/630288.html
For $95,000 to cover the company's expenses, Morgan Stanley will assess the state of the mortgage market and give the government a financial profile of the two firms. The two mortgage firms received a promise of support from the federal government as part of a sweeping housing rescue bill passed by Congress and signed into law by President Bush last week.
Posted by guest , Aug 13, 2008 2:50PM
The deal should have been $1 plus expenses.
Posted by guest , Aug 13, 2008 3:40PM
Well. JPM is out of the running because of the BSC deal. GS can not do it because of the Paulson tie. LEH is on life-support. C & MER are having a host of issues. So that leaves MS as the last/best choice.
Posted by Anal_yst , Aug 13, 2008 3:49PM
$94,000? Thats what, 1 vp an associate maybe 1 or 2 analysts for a few days?
On a more serious note, your assertion that no one on Wall Street has requisite experience isn't really correct. Theres plenty of former gov't/academic types, and also those with advisory experience for govt's that work on the street.
Posted by guest , Aug 13, 2008 4:46PM
Anyone watching Paulson on MTP in China last Sunday knows that he is GONE in 5 months (he seemed like he was counting the days).
The only way Freddie and Fannie are going survive is if they are nationalized. Paulson is not going to do that (if at all possible). So he is going to do everything he can to make sure the kitchen sink doesn't go down the drain. And then pass this whole pile of shit on to the next adminstration.
MS is probably doing this so that they will be the "go to IB" when the GSE's are restructured/nationalized.
Posted by guest , Aug 13, 2008 4:48PM
Does assuring Fannie and Freddy's survival (or any other company for that matter) still mean their equity can be zero or even negative? If so, how long can that go on for before the government has to stop assuring their survival?
Could be dumb questions, but then again, I'm a dumb person.
Posted by guest , Aug 13, 2008 5:00PM
I believe commenter #3 is correct. The 94k only covers expenses such as photocopies, deliveries, etc. Morgan Stanley is waiving the fee.
As one who is appalled by the state of FM/FM and who knows something about the process of government reform, I don't think it's a bad idea to have someone in the financial community with a fresh eye take a look at FM/FM and write up an analysis. It will be a benchmark to get a grip on future functioning. I've been convinced that we can't count on the internal people at FM/FM for an honest analysis.
In the future, Morgan Stanley will of course act according to its own self-interest. However, I don't think we should reject out of hand the concept that a Wall Street institution wants to perform some government service. There were some notable Wall Street people who loaned their expertise to the City of New York when it had its financial troubles in the 1970s, and significant, far-reaching, and long-lasting reform came out of it.
Posted by guest , Aug 13, 2008 7:43PM
there are a million consulting companies that could do this work. i'd be curious to see the finished work product though.
Posted by guest , Aug 13, 2008 10:07PM
MS now has the implicit govt guarantee. Look at relative performance since the announcement.
Posted by chernevik , Aug 13, 2008 10:38PM
Conspiracy theory #1:
MS is on retainer to price a Treasury equity investment, and write a fairness opinion thereof.
They'll offer an above market price, enabling a recap without wiping out the shareholders and helping the GSEs live to fight another day. Maybe they'll justify it by arguing that mortgage bond prices reflect an assumption of a GSE collapse, and will rise once it's clear the GSEs will continue to lend.
MS gets the gratitude of the GSEs, who issue a lot of debt and know how to play the long-term gratitude game. MS also gets in good with Chairman Barney Frank, who will be needing window dressing for the bailout of his GSE friends. (Won't hurt with Schumer, either.) Chairman Frank is going to swing a big bat on the coming regulatory overhaul, and in the oversight of workouts of subprime loans, and Lord only knows what else. So that channel could come in handy.
That's just what comes to mind first.
Posted by guest , Aug 16, 2008 7:13AM
OK, this is a no brainer folks! First, Treasury didn't hire MS for competence. Hell, Mack didn't see an $11 billion bogie on his own books until it hit him the face so he's no good at assessing anything!
Second, this is Mack's way of getting his foot in the door of Treasury. He and Lynch are plotting to jettison a destroyed (by them!) MS by getting the US Treasury Secretary role. He does them a favor and gets the nod by whoever ends up president. A disaster for Americans imho.
Third, forget about keeping Schumer happy. He'll be your little Senate Bitch for a couple hundred grand in PAC money, and MS already gave at the office.
Sad commentary on our country.....all imho of course...