Bank stocks are up since Trump's election, and bankers and bank investors are streaming to Washington to urge laws they think will profit them.
"Right now Congress will focus on tax reform," says Chris Martin, CEO of not-quite-$10 billion-asset, New Jersey-based Provident Bank, which has been making more business loans in the Philadelphia area and seeks to open an office in the city as it adds customers.
A little later, with friendly Sen. Mike Crapo (R-Idaho) running the Senate Banking Committee, "there'll be conversations" about lifting the loan limits and onerous capital and testing requirements from the 2010 Dodd-Frank Act, designed to stop banks from wrecking themselves in America's periodic credit bubbles, Martin expects.
Farther off is Fannie Mae-Freddie Mac reform. "They shouldn't have to report to Congress," as some critics in both parties have urged, Martin argues. "It's hard enough to do home loans now," with lenders feeling obliged to require 20 percent down to meet investor guidelines, and fewer young families qualifying for loans.
In fact, Trump's victory seems to have ended pressure in both parties for fundamental changes in home-loan finance.
That makes it more likely Fannie and Freddie will come out from government control and resume their old status as private companies -- while also giving back billions of dollars in profits that Fannie-Freddie investors like hedge fund managers Gary Hindes of Delaware Bay Co., Bruce Berkowitz of Fairholme Capital Management and Bill Ackman of Pershing Square Capital Management contend were wrongfully pocketed by the government, and should be returned by taxpayers to investors like them.
J. Timothy Howard, a former Fannie Mae CFO who later advised Fannie shareholders including investor Berkowitz in an ongoing lawsuit against Treasury, posted a hopeful blueprint for non-reform titled Economics Trumping Politics on his Web page yesterday.
To many of us middle-American mortgage holders, Howard, as a former top officer of the largest of the private but government-backed mortgage-finance giants that make possible America's unique 30-year fixed-rate mortgages, might seem a consummate financial insider.
But in his piece, Howard rails against what he calls the true "Financial Establishment—large banks and Wall Street firms, and their advocates and alumni at Treasury and elsewhere" -- who Howard says have long "been engaged in a well-designed, carefully scripted and highly orchestrated political campaign to convince Congress to replace Fannie Mae and Freddie Mac with a mechanism more financially beneficial to themselves."
Enter Trump: "Seemingly out of nowhere, five weeks ago Treasury Secretary-designate Steven Mnuchin announced his intention to 'get Fannie and Freddie out of government control reasonably fast'," Howard cheers.
"The odds immediately flipped to favor the prospect that the fates of Fannie and Freddie will be determined, not by a misinformation-based political process likely to benefit banks, but by a fact-based economic process likely to benefit borrowers." And investors, like Howard's lawsuit clients.
Howard traces Fannie's and Freddie's problems to the 1990s, when units of General Electric Co., Wells Fargo & Co., PNC Bank, JPMorgan Chase & Co., and the big mortgage insurers formed a lobby -- FM Watch -- to persuade Congress to restrict Fannie and Freddie from setting lending restrictions, guaranty fees and mortgage-bond yields.
When Congress balked -- in Howard's telling -- the bankers got Treasury to seize Fannie and Freddie and blame it for the 2008 financial crisis.
Bankers used "fake facts" and "ignored the obvious evidence -- including the disastrous credit performance of loans financed with (banks' own private mortgage bonds) and the vastly lower delinquency numbers put out by (banks' rivals at) Fannie and Freddie."
Instead they blamed the mortgage-finance twins and their supposed "flawed business model" for the banks' bad loans, Howard added.
"The Financial Establishment also had a proposed remedy: the companies must be 'wound down and replaced,'" advocates in both parties argued, with some new, more easily bank-controlled mortgage-finance mechanism that would "justify giving control over the availability, terms and pricing of $10 trillion in mortgages to the large banks and investment firms" -- in part by forcing the new mortgage-finance entity to hold more capital than they really need to safely make loans.
Given the long and costly history of American financial institutions cheerfully blowing themselves and their shareholders and customers up through over-optimistic lending, can important lenders like Fannie and Freddie really have way too much capital?
That's what Howard argues. High capital forces lenders to boost fees and "significantly overcharge" customers, he argues. "Borrowers would be badly hurt by those pricing distortions, while banks and Wall Street firms would profit from them."
If the "Financial Establishment" really has all that power, why did the Obama administration allow Fannie and Freddie to dangle on, under federal control, for eight years, instead of reforming them already?
Because the banks and loan insurers failed "to come up with a workable alternative to the two companies it so desperately wants to replace." Secretary Mnuchin, he adds, seems poised to kill the bankers' scheme by returning Fannie and Freddie to full private control, removing "misinformed" Congress and putting "a small number of informed finance professionals with economic incentives to get it right" (presumably they aren't part of the "Financial Establishment") back in charge where they belong.
Mnuchin will resolve Fannie and Freddie in court and administrative proceedings, "where the focus is on facts," he adds.
Not in Congress, which is plagued by "deceptions, inventions and faleshoods."
"Far from rescuing Fannie and Freddie, Treasury planned and carried out their takeovers for ideological and policy reasons, then lied to both the public and the courts about what it had done and why," Howard writes, citing documents presented as part of the litigation against Treasury.
“Mnuchin’s plan to “get [the companies] out of government control” requires settling the lawsuits. He figures Trump officials will quickly chose borrower and investor interests over bankers, and use their knowledge to settle "what the post-settlement secondary market system should look like, and how it should function."
Which is a lot like the old system: "Fannie and Freddie were not the causes of the financial crisis... They didn’t need to be rescued by the government... Their secondary-market business model works better than any other... Recapitalizing Fannie and Freddie post-conservatorship is eminently achievable."
Surely, he adds, Mnuchin will end up agreeing with investors like Berkowitz and Ackman. "The Trump administration will have at least two reasons to support them:
"First, it will understand" from investors' lawsuits "that a secondary mortgage market built around Fannie and Freddie is far better for consumers and the economy than the bank-centric proposals supported by the Financial Establishment, and will know it will be held accountable for the negative consequences of choosing the latter.
"Second, the Trump Treasury will inherit the warrants for 79.9 percent of Fannie and Freddie’s common shares created by the Bush Treasury, which will become worthless if the companies are wound down."
That gives the new administration and the investors common cause against the bankers: "Trump Treasury will share the plaintiffs’ goal of setting Fannie and Freddie up to operate as cost-effectively and efficiently as possible, benefitting borrowers as well as shareholders.
"It also will have strong incentives to alter the terms of the warrants—their strike price, percentage amount or both—and to manage the timing of conversions so as to maximize the value of all three categories of stock the companies will have as going concerns: existing shares, converted warrants, and the new issues of equity required for recapitalization."
Everyone's happy! Except the old Financial Establishment -- those lenders, who make mortgages in the first place, and disliked Fannie and Freddie for cramping their lending style.
But "they have no realistic legislative alternative to offer, and because Republicans in the executive branch will know the facts about Fannie, Freddie and the financial crisis from discovery in the court cases, Republicans in Congress will not be able to sustain their myths about them.
"There never has been any economic case against reforming, releasing and recapitalizing the companies, and without the myths the political case falls apart.
“It is by no means a certainty that the Trump administration will arrive at the right solution on mortgage reform. But because it has made the issue a 'top 10' priority, and the path to a successful outcome is so obvious and wide open, for the first time in quite a while there is great cause for optimism.”