Jeb Mason, the Treasury’s liaison to businesses. [NYT]
Earlier: Treasury Porn
Treasury
Hidden in the middle of a Wall Street Journal article on vulture investors is a small observation that suggests, perhaps unwittingly, that the Treasury might be on the eve of complicity in one of the largest cases of accounting fraud in recent memory.
Other opportunistic investors, though, say they likely will stick to the sidelines for now. They are skeptical that the government’s purchase of distressed assets will accurately establish what they are worth. So far, there have been few transactions, despite the desperation of banks to sell, because of disagreements over pricing. (Emphasis ours).
If the Treasury buys assets at inflated prices and that permits banks to mark-to-the-Treasury-model, well… you get the idea.
Vulture Funds Plan to Buy Assets Ahead of Bailout
The plan to bolster Fannie Mae and Freddie Mac by talking up the Treasury’s ability to bailout their debt while talking down the possibility that the two government sponsored mortgage companies could nationalized seems to be working.
Reuters reported early this morning that the Treasury Department believes that the two companies should remain “shareholder-owned,” something that Merrill was reportedly telling clients on Friday. We reported earlier that regulators have recently become concerned that wiping out the shareholders of the companies could damage the balance sheets of regional banks and insurers, who hold vast amounts of the preferred shares of these companies.
This morning Freddie Mac easily placed $2 billion of debt with investors, which will also be taken as a sign that the companies can continue to fund their ongoing operations without a government takeover or bailout. Of course, the ease of debt sale already reflects the “bazooka bailout” that occurred when the Treasury was granted powers last month to extend credit lines to Fannie and Freddie and buy their debt and equity.
The term bazooka bailout, of course, comes from Treasury Secretary Hank Paulson’s description of his unlimited power to bailout Fannie and Freddie. “If you have a bazooka in your pocket and people know it, you probably won’t have to take it out,” Paulson told lawmakers when asking for the bailout powers.
The supporters of the current structure of Fannie Mae and Freddie Mac appear to be winning the debate at Treasury. “Merrill Lynch is telling its that a source within Treasury says they want to keep the GSEs in their current form, as in shareholder owned. That implies no ‘takeover’ any time soon, ” finance blogger Accrued Interest tells us.
As investors continue to dump shares of Fannie Mae and Freddie Mac, the debate over a possibly government bailout of the two mortgage giants is raging inside the Beltway. One camp of free market oriented Fed officials is arguing that any rescue plan must wipe-out shareholders and include severe regulatory restrictions on future activity while others, who are viewed as long-time supporters of the GSEs, are arguing that the government should act now to shore up the banks and save regulatory restrictions for a legislative debate later.
We’re told that the debate has become heated, with the two sides scrambling to build alliances and strong pressure from powerful lawmakers and lobbyists seeking to influence the outcome. The free-marketeers at Treasury fear that if they do not reign in the mortgage giants now, while they are at their weakest, Fannie and Freddie will continue to distort markets and put taxpayers at risk once the credit crisis has passed. The supporters of the current structure at Fannie and Freddie more or less agree, believing that if they are able to weather this storm they can emerge newly strengthened.
CNBC’s Jim Cramer yesterday claimed that the stocks of both companies were being pushed down by people with inside information. He called for the SEC to halt all trading in the companies, basically freezing current holders in place. “This is an outrage,” Cramer said shortly after the market closed yesterday. “It’s very clear that someone knows what’s happening.”
Cramer’s call, however, seems misconceived. The situation in Washington DC is still fluid, so it’s not clear that any could know what’s happening. There’s nothing to know beyond the range of possibilities and the widely known fact that the two companies are in trouble.
Cramer expressed outrage that someone apparently leaked to Barron’s earlier this week but leaking information to a newspaper is not insider trading. In fact, it’s closer to the opposite of insider trading, making formerly secret information available to the public. Would investors be better off if they were surprised by moves coming out of DC? Surprise regulatory moves seem unlikely to bolster investor confidence.
Today the Federal Reserve and the SEC signed the memorandum of understanding that would expand their information-sharing and cooperation along the lines of Henry Paulson’s “Blueprint” for regulatory reform. The agreement is designed to bridge the gaps currently in the oversight structure, notably by allowing Bernanke to see the positions and leverage of financial firms.
In exchange, he gives Cox’s SEC information on commercial banks’ health as it impacts their operations in capital markets as well as general assessments of market stability to give the SEC better idea of whether there is trouble ahead.
Normally the Fed only has remit over commercial banks, although it gained a supervisory role over the firms for the duration that the Fed’s window is open to them. With the MOU signed, Bernanke will have permanent access to information about all financial firms. This marks a significant step towards implementing Paulson’s Blueprint, which gives the Fed primary oversight over financial firms. Sources familiar with the negotiations say that the agreement is probably the furthest reform possible without a new legislative mandate. The SEC seems to be very passive about the Fed moving in on its regulatory territory.
Hank Paulson appears quite happy about the final form of the MOU, declaring it “consistent with the long-term vision of Treasury’s Blueprint for a Modernized Regulatory Structure.” He comments that it “should help inform future decisions” about modernizing the labyrinthine regulatory structure. Despite the political impossibility of passing the Blueprint through Congress during his tenure, it looks as if Paulson has ensured its implementation anyway.
-senior Kremlinologist Andrew
We’re going to have a lot to say about the costs of Treasury Secretary Hank Paulson’s Blueprint for a Modernized Financial Regulatory Structure. Before that, however, it’s worth noting that there is little to admire about our current financial regulatory structure. Largely a product of the financial crises of the past, the structure was unwieldy, arguably created a bureaucratic structure at odds with the constitutional framework of our Republic and tended to serve the interest of the very financial institutions it sought to regulate at the expense of individual investors and the broader public. The array of regulatory bodies we live with were largely “captured” by the securities and banking industry, although “capture” is probably the wrong term because it implies that they were independent at some point. Many were built to serve the interests of Wall Street, so no capture was necessary.
The best that can be said about the current system is that we have years of experience with it. We understand how it operates, how it fails and what its strengths are. This is a conservative point but one that needs to be made: regulatory innovation inevitably leads to “unintended consequences” and unanticipated costs. At the very minimum, the costs of adjusting to a new regulatory structure need to be taken into account. We may not be risking our lives and sacred honor by declaring the need to dissolve the longstanding financial regulatory bonds, but we may be risking our fortunes.
That said, we’re headed deep into the details of this bold new world Paulson has proposed. The Treasury has released a cheat sheet here. But if you are really ambitious, follow us into the 212 page blueprint. We welcome your insight, of course, in the comments below or via email to tips@dealbreaker.com.
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