Friday, June 5, 2015

Henry Paulson- Goldman Sachs and Treasury Secretary, The Great Conductor of slight of hand?

Goldman Sachs and Treasury Secretary, The Great Conductor
All these out-takes are from Henry Paulson himself during and around the time of the takeover of Fannie Mae and Freddie Mac. Jan 2008-Jan 2009.

Henry Paulson 1/7/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp757.aspx

After years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary. That correction is underway. Over the next two years, we also face an unprecedented wave of 1.8 million subprime mortgage resets, raising the potential of a market failure.
Unsustainable home price appreciation in the past few years caused a large supply response, and it will take time for demand to catch-up. Housing starts have fallen by nearly half since their peak in early 2006, and new home sales are down just as sharply. House prices are falling in many parts of the country, and elevated housing inventories suggest that the price adjustment is not yet complete.

In this environment, buyers will be reluctant to commit to new purchases. Moreover, until investors have confidence that prices have stabilized, they will remain cautious about funding new mortgages. This is particularly true for new subprime mortgages, which are not currently being securitized by Fannie Mae or Freddie Mac, and for jumbo mortgages which do not qualify for Government Sponsored Enterprise (GSE) securitization. In these markets, securitization volume has fallen off significantly.

NOTE: GSE's only buy conforming 20% down loans, they do not buy subprime or jumbo loans. The trouble is in subprime and jumbo

The reduced availability of non-conforming mortgages clearly has impacted the ability of some to buy or refinance a home. I heard this concern repeatedly as I traveled throughout the country last month. We have urged Congress to move quickly to address this issue by passing the FHA modernization bill to provide financing for approximately 250,000 borrowers and, as part of GSE reform legislation, to temporarily raise the loan limit to allow the GSEs to securitize jumbo mortgages.

At the same time, despite the housing downturn, credit market disruption and higher energy prices, we experienced nearly 5 percent GDP growth in the third quarter of last year. Consumer and business spending remained solid through the fall, and a strong global economy is boosting U.S. exports. Moreover, core inflation remains contained and historically high tax receipts have reduced the federal deficit. While growth looks to have slowed considerably in the last part of 2007, our economy remains resilient and I expect it to continue to grow.

Henry Paulson 1/30/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp790.aspx

The U.S. economy is undergoing a significant housing correction. That, combined with high energy prices and capital market turmoil caused economic growth to slow rather markedly at the end of 2007, as reflected in the GDP numbers released this morning. I am confident our economy will continue to grow, although not as rapidly as we have seen in recent years.
Since August, financial institutions have written off over $153 billion of assets. Numerous issuers and structures have been downgraded and over $136 billion in off-balance sheet assets have been consolidated.

As we work to better understand the causes of the distress in the housing and mortgage markets and the capital market turmoil, some lessons are very clear. For instance, an abundant supply of easy credit and a decline in lending standards were major contributors. Complex and opaque financial instruments and structures, such as the use of conduits and SIVs contributed, as did investor practices and rating agency issues.

NOTE: Very clear he states. Easy credit and decline in lending standards by banks and rating agencies, along with bond investor practices. 


Henry Paulson 5/16/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp981.aspx

Second, there is no silver bullet to undo the lax underwriting practices of recent years. Because of these past excesses, foreclosures will remain elevated even if we avoid every single preventable foreclosure.

Market liquidity and investor confidence are gradually improving, not across the board, but in several sectors including corporate bonds, leveraged loans and high yield debt. Credit default swap, or CDS, spreads on major bank, brokerage firm, and Fannie Mae and Freddie Mac debt have declined appreciably since March. Broader CDS indexes of investment grade and high yield bonds have fallen as well, and while spreads generally are still elevated and significant parts of the market, including securitized credit and interbank lending, are not functioning as normal, the trends indicate on-going improvement. Likewise, we are seeing issuance gradually grow in certain credit sectors.

The mission of Fannie and Freddie, the two largest public companies on the Post 200 list, is more critical now than ever. Together, they touch 80 percent of current mortgage originations, and a regulator on par with other financial regulators will bring confidence to all mortgage market participants.

I will elaborate on these points and start by putting the American housing market and the size of the problem in perspective. Although I am going to talk numbers and statistics, I know that beneath these numbers are many who are struggling and their situation is both real and difficult. As of the end of 2007, there were 55 million mortgages outstanding and 92 percent were being paid on time, every month. About 6 percent had missed one or more payments and the remaining 2 percent, about 1 million, were in the foreclosure process.

There were 1.5 million foreclosures started in all of 2007. Between 2001 and 2005, a time of solid U.S. economic growth and high home price appreciation, about 650,000 foreclosure starts occurred, likely due to financial setbacks and unforeseen life events. In this correction, we see additional foreclosures because some people bought more home than they could ever hope to afford. Many of these people are becoming renters again. Foreclosures are also up due to an increased number of speculators who bought homes on the assumption that housing prices would endlessly appreciate.

As housing prices decline some homeowners find they have negative equity in their homes. Negative equity is not a trigger for foreclosure and it doesn't alter your monthly payment. When you are in your home for the long run, to raise a family and be part of a community, prices will fluctuate throughout the years.

NOTE:  no silver bullet to undo the lax underwriting practices of recent years

Henry Paulson 7/8/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp1070.aspx

Two institutions in particular – Fannie Mae and Freddie Mac – have an important role to play. They can be a constructive force in this period of stress in the housing market. I have been strongly encouraging all financial institutions to raise capital so they can continue to finance consumer and business activity that supports our economy. In particular, I am pleased that this spring both GSEs committed to raise more capital. Fannie Mae has raised $7.4 billion in capital in the last several months, and Freddie Mac has committed to raise additional capital. Fannie Mae and Freddie Mac today touch 70 percent of all new mortgages. Fresh capital will strengthen their balance sheets and allow them to provide additional mortgage capital, as they balance their responsibilities to their mission and to their shareholders during this period of housing market adjustment.
Given the very important role being played by the GSEs today, we are particularly focused on completing work to create a world-class regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. A strengthened regulator for Fannie and Freddie will increase investor confidence in these enterprises and will be a substantial tool to ease the housing downturn and increase the availability of affordable mortgages for Americans who want to buy a new home or refinance their current one. Creating a strong independent regulator will help ensure that the GSEs achieve their mission while operating safely and soundly.

That said, working through this correction is made more challenging by the virtual disappearance of the subprime lending market. In response to excesses, that market has probably changed unalterably – as it must. Clearly, some who took out subprime mortgages never should have been approved for a mortgage in the first place. Practices, such as low or no doc loans, minimal or no down payments and other lax credit practices, are likely, as they should be, a thing of the past. At the same time, we cannot lose sight of the fact that subprime lending gave millions of responsible Americans a chance to borrow, despite a less-than-perfect credit history. We must not lose the benefits of the subprime market as we eliminate its flaws. Your discussions today will be instructive as to what products and standards can reinvigorate this important sector of the market, as we know that subprime lending is vital to bring the dream and economic good of homeownership to millions of Americans. The subprime market will evolve as markets always do, to find better ways to evaluate and manage credit risk.
NOTE: Clearly, some who took out subprime mortgages never should have been approved for a mortgage in the first place. Practices, such as low or no doc loans, minimal or no down payments and other lax credit. Fannie Mae and Freddie Mac could not buy subprime loans.

Henry Paulson 7/15/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp1080.aspx

Fannie Mae and Freddie Mac, two of the government-sponsored enterprises (GSEs), are also working through this challenging period. Fannie and Freddie play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their role in the housing market is particularly important as we work through the current housing correction. The GSEs now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market. The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction.
In addition, debt and other securities issued by the GSEs are held by financial institutions around the world. Continued confidence in the GSEs is important to maintaining financial system and market stability.
Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac. OFHEO has reaffirmed that both GSEs remain adequately capitalized.

Let me stress that there are no immediate plans to access either the proposed liquidity or the proposed capital backstop. If either of these authorities is used, it would be done so only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the GSE.
Third, to help protect the financial system from future systemic risk, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by providing the Federal Reserve authority to access information and perform a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. Let me be clear, the Federal Reserve would not be the primary regulator. As I have said for some time, the Fed already plays the role of de-facto market stability regulator and we must give it the authorities to carry out that role. This role for the Federal Reserve with respect to the GSEs is consistent with the recommendation made in Treasury's Blueprint for a Modernized Financial Regulatory Structure. Clearly, given the scope of the GSEs' operations in world financial markets, a market stability regulator must have some line of sight into their operations.

NOTE: must continue to do so in their current form as shareholder-owned companies. OFHEO has reaffirmed that both GSEs remain adequately capitalized.

Henry Paulson 9/7/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp1129.aspx

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

NOTE: 6 weeks later, Henry decides thanks to HERA passage not to fund the GSE's. I concluded.
Although 6 weeks earlier OFHEO regulator of GSE's state they are adequately capitalized. 

I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.
The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs' business outlook.
let me make clear what today's actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.
At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a "time out" where we have stabilized the GSEs while we decide their future role and structure.
Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don't use this time out to permanently address the structural issues presented by the GSEs.

Henry Paulson 9/23/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp1153.aspx

The events leading us here began many years ago, starting with bad lending practices by banks and financial institutions, and by borrowers taking out mortgages they couldn't afford. We've seen the results on homeowners – higher foreclosure rates affecting individuals and neighborhoods. And now we are seeing the impact on financial institutions. These bad loans have created a chain reaction and last week our credit markets froze – even some Main Street non-financial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy.

As we've worked through this period of market turmoil, we have acted on a case-by-case basis --- addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. We have also taken a number of powerful tactical steps to increase confidence in the system, including a temporary guaranty program for the U.S. money market mutual fund industry. These steps have been necessary but not sufficient.

We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.

The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system.

NOTE: starting with bad lending practices by banks and financial institutions, and by borrowers taking out mortgages they couldn't afford.

Henry Paulson 11/12/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp1265.aspx

Most significantly, we acted earlier this year to prevent the failure of Fannie Mae and Freddie Mac, the housing GSEs that now touch over 70 percent of mortgage originations. I clearly stated at that time three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Fortunately we acted, citing concerns about both the quality and quantity of GSE capital. Unfortunately, our actions proved all too necessary. The GSEs were failing, and if they did fail, it would have materially exacerbated the recent market turmoil and more profoundly impacted household wealth: from family budgets, to home values, to savings for college and retirement.

Earlier this week, Fannie Mae reported a record loss, including write-downs of its deferred tax assets that make up a significant portion of its capital. We monitor closely the performance of both Fannie Mae and Freddie Mac, and both are performing within the range of our expectations. The magnitude of the losses at Fannie Mae were within the range of what we expected, and further confirms the need for our strong actions.

NOTE: Fannie Mae reported a record loss, including write-downs of its deferred tax assets that make up a significant portion of its capital. FHFA forced write-downs on GSE capital to make them insolvent to show the world the conservatorship was needed. Those write downs are the DTA's that were reversed in 2013 and the reason for the sweep in 2012! Again even here in 11/2008 Treasury is acknowledging the DTA and its ability to recapitalize Fannie and Freddie.

Of course, before that time, the only instances in which Treasury had taken equity positions was in rescuing a failing institution. Both the preferred stock purchase agreement for Fannie Mae and Freddie Mac, and the Federal Reserve's secured lending facility for AIG came with significant taxpayer protections and conditions.

NOTE: Fannie mae, Freddie Mac and AIG were the United States mortgage insurers. If any of these three failed to pay out to the big banks or the bond holders, ALL the big banks would fail! It must be noted that the banks sold the bad mortgages to these insurers, and the US government by takeover made sure they got paid out 100% for these bad loans, as not to put these losses on the banks. If the banks had to take the true losses for the mortgages they sold they would of all went bankrupt and our economy would have gone with it. Banks started this mess as Fannie, Freddie and AIG do not originate mortgages. ONLY banks and mortgage brokers do that. Since 2013 the list of fraudulent loans and HUGE settlements has only grown well into the billions of dollars range.  

In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.
We announced a plan on October 14th to purchase up to $250 billion in preferred stock in federally regulated banks and thrifts. By October 26th we had $115 billion out the door to eight large institutions. In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions.

NOTE: Henry fixed the system by taking over the insurers and injecting money onto the balance sheets of banks so they would not go bankrupt. He quickly sent $115 billion to 8 large BANKS, and added Goldman Sachs and Morgan Stanley to the approved institutions. Henry Paulson was the former CEO of Goldman Sachs. Convenient?

Henry Paulson 11/18/2008
http://www.treasury.gov/press-center/press-releases/Pages/hp1279.aspx

But we were focused on the credit markets because they provide our basic economic fuel – borrowing and lending capital – that supports and creates jobs. The confidence in banks and of banks continued to diminish, as did the flow of funds between them. Interbank lending rates relative to policy rates were at the highest level this decade, indicating banks' lack of confidence in one another and in the financial system.


And the problems extended well beyond the banks. Corporate bond spreads continued to increase, as did corporate credit default spreads and overall market volatility. Industrial company access to all aspects of the bond market was dramatically curtailed. For example, blue chip industrial companies were frequently unable to issue commercial paper with maturities greater than a few days as the commercial paper market became severely impaired. We received reports of small and medium-sized companies, with no direct connection to the financial sector, losing access to the normal credit needed to meet payrolls, pay suppliers and buy inventory.

More capital enables banks to take losses as they write down or sell troubled assets.

Let me summarize what the U.S. financial system has had to digest in just a few months' time. We have not in our lifetime dealt with a financial crisis of this severity and unpredictability. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac Bank, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac, and AIG – institutions with a collective $4.7 trillion in assets when this year began. Each of these failures would be tremendously consequential in their own right under normal market conditions – but our economy and our financial system faced them in succession while at the same time the economy was weakening. Other large financial institutions were under significant pressure and market participants around the world were speculating about which institution would be next to fall.

NOTE: Failures, of Bear Stearns, IndyMac Bank, Lehman Brothers, Washington Mutual, Wachovia.
1.All banks were dropping IndyMac Bank, Lehman Brothers, Washington Mutual, Wachovia.
2.Investment firms in Private MBS were dropping Bear Stearns, Lehman Brothers
3.Federal TAKING of insurance companies was the fix to stop the banks from failing. Fannie Mae, Freddie Mac, and AIG

Henry Paulson 1/7/2009

http://www.treasury.gov/press-center/press-releases/Pages/hp1345.aspx
Even as Washington debated GSE oversight, there was little debate over the extent to which government should subsidize homeownership, and whether such government support was contributing to a housing bubble. The U.S. government has many policies that subsidize homeownership – it would be oversimplifying and wrong to blame Fannie and Freddie for the bubble, but they clearly are part of the public policy bias that contributed to it.
However, as the extraordinary housing correction deepened, weaknesses in these entities became apparent. In July 2008, investors lost confidence as they became increasingly uncertain about Fannie and Freddie's capital position. The GSEs' already depressed stock prices plummeted further. Shareholder losses did not pose a public policy concern, but the share price drop further weakened confidence among the holders of the $5.4 trillion of GSE debt and MBS. Investors at home and abroad were reducing purchases and even selling from their holdings of GSE debt. The consequences of either GSE failing would be catastrophic. We couldn't wait for a failure; we had to act preemptively to shore up confidence in these enterprises.

In July, I requested that Congress quickly complete work on long-sought GSE regulatory reform and also provide Treasury with expanded authority to support Fannie, Freddie and the Federal Home Loan Banks. Congress did so – giving us enormous temporary authorities to inject capital if the GSEs asked for it, and to create a back up liquidity facility for GSE debt.

Immediately after passage of the legislation, in coordination with the Federal Reserve, the newly-constituted GSE regulator, FHFA, and our advisor Morgan Stanley, we began a comprehensive financial review of the GSEs. At the same time, mortgage market conditions continued to deteriorate. Negative earnings announcements by Fannie and Freddie in August reflected those worsening conditions, and further roiled markets. Neither company appeared to have any reasonable prospect of raising private capital to allay those concerns in the foreseeable future, and our examination found capital to be inadequate – in terms of both the quality of capital and the embedded losses stemming from worsening mortgage market conditions.

Confidence in the GSE model was largely shattered. It was clear to me that simply injecting even a great deal of equity into their business model would not create the market confidence necessary to fund these enterprises going forward and to bolster confidence in the $5.4 trillion of extant GSE obligations, which posed the greatest systemic risk. Market fragility and the GSEs' deteriorating balance sheets required that we take responsibility for the GSE structural ambiguities that U.S. policymakers had let fester for decades. If we had asked Congress for, and received, the power to explicitly guarantee the GSEs' obligations, we would have done so. But without that authority, we had to be creative and find a way to effectively guarantee the GSEs' obligations.

We had to stabilize the situation immediately. We knew that markets were exceptionally fragile and would be further threatened in September when we expected that a number of large financial institutions, including Lehman Brothers, would post disappointing earnings. Chairman Bernanke, FHFA Director Lockhart and I met almost daily, over a 10 day period, to work toward a comprehensive action plan. As I made clear at the time, we sought a temporary solution that would achieve three goals: (1) stabilize markets, (2) promote mortgage availability, and (3) protect the taxpayer.

In comprehensive action taken on September 7th, FHFA placed Fannie and Freddie into conservatorship, enabling Treasury to take creative steps to support their obligations. We moved quickly to do what was necessary. Our actions would have been impossible to implement were it not for the GSE reform legislation that gave FHFA the expanded power to make qualitative and quantitative judgments about capital and also gave Treasury the financial authorities necessary to make conservatorship a stabilizing, as opposed to a destabilizing, event. We devised Preferred Stock Purchase Agreements to effectively guarantee the GSEs' obligations by ensuring Fannie and Freddie would maintain a positive net worth. This commitment ensures that they can fulfill their financial obligations, even after the temporary authorities expire in December 2009. Additionally, Treasury established a new secured lending credit facility intended to serve as an ultimate liquidity backstop. To further support the availability of mortgage financing, Treasury initiated a program to purchase GSE MBS and has purchased over $50 billion thus far.

We took these actions first, to avert the financial market meltdown that would ensue from the collapse of these institutions and, second, to allow the GSEs to continue, in the midst of overall market stress, to perform their essential role of providing mortgage finance. This conservatorship, with the explicit backing of the federal government, is temporary and must be resolved for the long-term. In the meantime, the GSEs must serve the taxpayers' interest by assisting in turning the corner on the housing correction, which is critical to return normalcy to the capital markets and resume U.S. economic growth. The GSEs can facilitate progress through the housing correction by keeping mortgage rates low and by mitigating foreclosures.
Immediately after passage of the legislation, in coordination with the Federal Reserve, the newly-constituted GSE regulator, FHFA, and our advisor Morgan Stanley, we began a comprehensive financial review of the GSEs.

NOTE: Morgan Stanley helped the treasury on the review of the GSE's. This is Morgan Stanley:
Morgan Stanley agrees $2.6 billion settlement
http://money.cnn.com/2015/02/26/investing/morgan-stanley-settlement-mortgages/
According to CNN:
Morgan Stanley has agreed to pay $2.6 billion to settle claims linked to the housing bubble that triggered the 2008 financial crisis.
Now that is interesting to say the least.
This too:
FHFA Announces $1.25 Billion Settlement With Morgan Stanley
http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-$1-25-Billion-Settlement-With-Morgan-Stanley.aspx
The Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, today announced it has reached a settlement with Morgan Stanley, related companies and specifically named individuals for $1.25 billion

At the same time, mortgage market conditions continued to deteriorate. Negative earnings announcements by Fannie and Freddie in August reflected those worsening conditions, and further roiled markets. Neither company appeared to have any reasonable prospect of raising private capital to allay those concerns in the foreseeable future, and our examination found capital to be inadequate – in terms of both the quality of capital and the embedded losses stemming from worsening mortgage market conditions.

Confidence in the GSE model was largely shattered. It was clear to me that simply injecting even a great deal of equity into their business model would not create the market confidence necessary to fund these enterprises going forward and to bolster confidence in the $5.4 trillion of extant GSE obligations, which posed the greatest systemic risk. Market fragility and the GSEs' deteriorating balance sheets required that we take responsibility for the GSE structural ambiguities that U.S. policymakers had let fester for decades. If we had asked Congress for, and received, the power to explicitly guarantee the GSEs' obligations, we would have done so. But without that authority, we had to be creative and find a way to effectively guarantee the GSEs' obligations.

We had to stabilize the situation immediately. We knew that markets were exceptionally fragile and would be further threatened in September when we expected that a number of large financial institutions, including Lehman Brothers, would post disappointing earnings. Chairman Bernanke, FHFA Director Lockhart and I met almost daily, over a 10 day period, to work toward a comprehensive action plan. As I made clear at the time, we sought a temporary solution that would achieve three goals: (1) stabilize markets, (2) promote mortgage availability, and (3) protect the taxpayer.

In comprehensive action taken on September 7th, FHFA placed Fannie and Freddie into conservatorship, enabling Treasury to take creative steps to support their obligations. We moved quickly to do what was necessary. Our actions would have been impossible to implement were it not for the GSE reform legislation that gave FHFA the expanded power to make qualitative and quantitative judgments about capital and also gave Treasury the financial authorities necessary to make conservatorship a stabilizing, as opposed to a destabilizing, event. We devised Preferred Stock Purchase Agreements to effectively guarantee the GSEs' obligations by ensuring Fannie and Freddie would maintain a positive net worth. This commitment ensures that they can fulfill their financial obligations, even after the temporary authorities expire in December 2009. Additionally, Treasury established a new secured lending credit facility intended to serve as an ultimate liquidity backstop. To further support the availability of mortgage financing, Treasury initiated a program to purchase GSE MBS and has purchased over $50 billion thus far.

We took these actions first, to avert the financial market meltdown that would ensue from the collapse of these institutions and, second, to allow the GSEs to continue, in the midst of overall market stress, to perform their essential role of providing mortgage finance. This conservatorship, with the explicit backing of the federal government, is temporary and must be resolved for the long-term. In the meantime, the GSEs must serve the taxpayers' interest by assisting in turning the corner on the housing correction, which is critical to return normalcy to the capital markets and resume U.S. economic growth. The GSEs can facilitate progress through the housing correction by keeping mortgage rates low and by mitigating foreclosures.

Long-Term Policy Recommendations

The GSEs are playing a necessary role supporting the mortgage availability which is essential to eventually turning the corner on the housing correction, reducing the stress in our capital markets and returning to growth in our economy. This must continue to be our first priority. But we will make a grave error if we don't use this period to decide what role government in general, and these entities in particular, should play in the housing market.

The public debate over the long-term structure of the GSEs is dramatically changed today – no one any longer doubts the systemic risk these entities posed. It is clear to all conservatorship is a temporary form, and that returning the GSEs to their pre-conservatorship form is not an option.

The debate about the future of Fannie and Freddie requires answering the much larger and more important question of the federal government's role in the mortgage market and in housing policy, generally. Given the bubble we have experienced, policymakers must ask what amount of homeownership subsidies are appropriate. Numerous long-standing indirect subsidies already exist, including the mortgage interest deduction, subsidized FHA mortgages, and the variety of other HUD programs that expand homeownership opportunities.

Is that enough? Or should government also reduce mortgage rates for a larger group of homebuyers? Policymakers must decide if the GSE subsidy is a public policy priority. If the GSEs are to play a role, then, the debate is clearly framed: Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. Any middle ground is a recipe for another crisis. Although there are strong differences of opinion over the government's role in supporting housing, under any course policymakers choose, there are structures and choices that can resolve the long-term conflict of purposes issues.

And it is clear that to protect against systemic risk in the future, the GSEs should be constituted with a portfolio no larger than what is minimally necessary for warehousing purposes. Without portfolios of significant size, the enterprises' management of interest rate risk would remain a vital function for the safety and soundness of the enterprises, but would no longer present the same potential systemic risk.

As a public policy tool to expand homeownership, the GSEs, like FHA-Ginnie Mae, reduce mortgage rates for borrowers by taking on the credit risk that mortgage investors would otherwise bear and guaranteeing that mortgage investors will be paid in full should the mortgage borrower default. As Congress considers the future role and structure of the GSEs, it must consider how much credit risk the Federal government should take.

Addressing Credit Risk

In today's stressed mortgage market, between FHA-Ginnie Mae, Fannie Mae, and Freddie Mac, almost all new mortgage market originations have federal government credit support. This is not sustainable over the long-run. It will lead to inefficiency, less innovation and higher costs. It also contradicts basic U.S. market principles. We must have some degree of private sector involvement in the evaluation of credit risk if we are going to have a mortgage market that allocates resources with efficiency.

In the mortgage market of the future, I clearly see a role for the FHA and Ginnie Mae for first-time and low income homebuyers. Beyond the explicit guarantee provided to FHA and Ginnie Mae policymakers must decide how much to further subsidize mortgage credit risk, if at all, and must decide the role of private capital in any subsidy plan. Depending on the degree of subsidy policymakers choose, there are a variety of options for structures to replace the GSEs, including:

(1) Expanded FHA/Ginnie Mae. Some advocate that beyond the current credit crisis the U.S. government's long-term policy should make the implicit, explicit. Explicitly guaranteeing Fannie and Freddie's obligations would essentially nationalize this significant portion of the U.S. housing finance market. Under this model, the GSEs could become a government entity, or their functions could be absorbed by FHA/Ginnie Mae . In either case, the GSEs would no longer have private shareholders. The size of the eligible population of homebuyers would determine how large a share of mortgage credit exposure the government would own.

Some advocate that beyond the current credit crisis the U.S. government's long-term policy should make the implicit, explicit. Explicitly guaranteeing Fannie and Freddie's obligations would essentially nationalize this significant portion of the U.S. housing finance market. Under this model, the GSEs could become a government entity, or their functions could be absorbed by FHA/Ginnie Mae . In either case, the GSEs would no longer have private shareholders. The size of the eligible population of homebuyers would determine how large a share of mortgage credit exposure the government would own.
I view the permanent nationalization of the GSEs, essentially expanding the role of FHA and Ginnie Mae, as a less-than optimal model. While it offers the perceived advantage of explicit government support, it eliminates the necessary private sector evaluations of credit risk and the private market stimulus to innovation.

(2) Partial Guarantee. A hybrid of this would be to create a Ginnie Mae-like entity for non-FHA mortgages, structured as a partial guarantee mechanism. The new entity could operate on a similar basis as Ginnie Mae, but provide only partial guarantees for MBS. Investors would then have a floor under potential MBS losses, but would still evaluate the credit risk associated with individual issuers. While such a hybrid program would clearly define the extent of the government's guarantee, developing risk sharing parameters compatible with profit incentives would be as problematic, and potentially as inefficient, as in the current GSE structure.

A hybrid of this would be to create a Ginnie Mae-like entity for non-FHA mortgages, structured as a partial guarantee mechanism. The new entity could operate on a similar basis as Ginnie Mae, but provide only partial guarantees for MBS. Investors would then have a floor under potential MBS losses, but would still evaluate the credit risk associated with individual issuers. While such a hybrid program would clearly define the extent of the government's guarantee, developing risk sharing parameters compatible with profit incentives would be as problematic, and potentially as inefficient, as in the current GSE structure.
(3) Privatization. A third alternative would be to remove all direct or indirect government support, completely privatizing these companies while breaking them up to minimize systemic risk. As appealing as this alternative sounds, it is difficult to envision a sound, practical, private sector mortgage insurance business of any significant size that does not require large amounts of capital, and consequently generates only a modest return on capital. The recent problems encountered by monoline insurers, which ventured into guaranteeing mortgage product as well as the experience of the GSEs, underscores this point. Moreover, a break up scenario does not look particularly promising, as reverse economies of scale would take hold. It is also worth noting that a regional mortgage insurer would lack diversity as a risk mitigant. Perhaps a consortium of banks would find it advantageous to own a national mortgage insurer to wrap their product, or some other good private sector business model may emerge. But I am skeptical that the "break it up and privatize it" option will prove to be a robust or even viable model of any substantial scale, without some sort of government support or protection. However, should policymakers choose to scale back public policy bias toward homeownership, we will eventually find out what business model the free market would support.

A third alternative would be to remove all direct or indirect government support, completely privatizing these companies while breaking them up to minimize systemic risk. As appealing as this alternative sounds, it is difficult to envision a sound, practical, private sector mortgage insurance business of any significant size that does not require large amounts of capital, and consequently generates only a modest return on capital. The recent problems encountered by monoline insurers, which ventured into guaranteeing mortgage product as well as the experience of the GSEs, underscores this point. Moreover, a break up scenario does not look particularly promising, as reverse economies of scale would take hold. It is also worth noting that a regional mortgage insurer would lack diversity as a risk mitigant. Perhaps a consortium of banks would find it advantageous to own a national mortgage insurer to wrap their product, or some other good private sector business model may emerge. But I am skeptical that the "break it up and privatize it" option will prove to be a robust or even viable model of any substantial scale, without some sort of government support or protection. However, should policymakers choose to scale back public policy bias toward homeownership, we will eventually find out what business model the free market would support.
(4) Housing Utility. Finally, given traditional U.S. public policy support for marshalling private capital to expand homeownership, establishing a public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain. Under a utility model, Congress would replace Fannie Mae and Freddie Mac with one or two private sector entities. The entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios. These entities would be privately-owned, but governed by a rate setting commission that would establish a targeted rate of return, thereby addressing the inherent conflicts between private ownership and public purpose that are unresolved in the current GSE structure. This commission would also approve mortgage product and underwriting innovations to continually improve the availability of mortgage finance for a population to be defined by the Congress. In this model, continued safety and soundness regulation would be essential.

Finally, given traditional U.S. public policy support for marshalling private capital to expand homeownership, establishing a public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain. Under a utility model, Congress would replace Fannie Mae and Freddie Mac with one or two private sector entities. The entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios. These entities would be privately-owned, but governed by a rate setting commission that would establish a targeted rate of return, thereby addressing the inherent conflicts between private ownership and public purpose that are unresolved in the current GSE structure. This commission would also approve mortgage product and underwriting innovations to continually improve the availability of mortgage finance for a population to be defined by the Congress. In this model, continued safety and soundness regulation would be essential.

Need to Support Vibrant Private Market

Paulson goes on to describe the CSP, in jan 2009. 3 months after conservatorship.
(my addons to Paulsons Quote)
Finally, given traditional U.S. public policy support for marshalling private capital to expand homeownership, establishing a public utility-like mortgage credit guarantor (CSP!) could be the best way to resolve the inherent conflict between public purpose and private gain. Under a utility model, Congress would replace Fannie Mae and Freddie Mac with one or two private sector entities.(keep F&F) The entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios(FHFA has directed F&F to rid themselves of their investment portfolios) These entities would be privately-owned, but governed by a rate setting commission that would establish a targeted rate of return(just like conservator is directing F&F to do now), thereby addressing the inherent conflicts between private ownership and public purpose that are unresolved in the current GSE structure. This commission(FHFA) would also approve mortgage product and underwriting innovations to continually improve the availability of mortgage finance for a population to be defined by the Congress. In this model, continued safety and soundness regulation would be essential.(FHFA)
Need to Support Vibrant Private Market
If we are to maintain a private-sector secondary mortgage market – which I believe serves the taxpayer and the homebuyer equally well – then we must enhance the ability of depository institutions to fund mortgages, either as competitors to a newly-established government structure(CSP) or as a substitute for government funding. One way to do this is for the government to receive some compensation for its guarantee. (CSP FEE) The current GSE Preferred Stock Purchase Agreements take a small step in this direction, in that as of 2010 the GSEs must pay the government a fee for the taxpayer backstop on their guarantees(Treasury never acted on this YET). Of course, if this rate perfectly reflected the risk versus the cost of the guarantee, there would be no subsidy to mortgage availability. It is obviously inherently difficult to reach an exactly correct price, yet a long-term fee-like structure in exchange for explicit government backing would help to reduce advantages over private institutions. (CSP) Over time, another approach might be to offer other financial institutions the opportunity to pay a fee for government backing on securitized, conforming loans, a structural transformation that would lower entry barriers, and increase competition and innovation in housing finance.(use CSP)
Covered bonds are another private sector alternative worth exploring. The FDIC has made regulatory changes to support the emergence of covered bonds, which could provide enhanced opportunities for depository institutions to fund and manage mortgage credit risk. There is strong interest in developing a U.S. covered bond market( useless garbage, Denmark did this for 100 years, and crashed and burned in 2008 like the rest of the world), but we will have to work through the credit crisis before a new market is likely to take hold. Some have advocated dedicated covered bond legislation, which could be helpful to establishing this market, and should be considered in the context of broader housing finance reforms.

Additionally, the President's Working Group on Financial Markets has recommended extensive reforms in the mortgage securitization process by investors, ratings agencies, underwriters and regulators, especially with respect to mortgage origination oversight. When these reforms are in place, we expect private label securitization to return with greater oversight and market discipline.

NOTE: Henry gives some good insight into the direction that OUR government is heading with the GSE's. Legal or not, there is a direction and Henry states it in Jan 2009. 

Goldman Said to Near U.S. Settlement Exceeding $2 Billion! Henry Paulson former CEO, later 2008 Treasury secretary

Goldman Said to Near U.S. Settlement Exceeding $2 Billion

June 4, 2015 — 7:59 PM CDT Updated on June 4, 2015 — 9:03 PM CDT
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Goldman Sachs Group Inc. is in talks to pay $2 billion to $3 billion to settle a probe into its sales of mortgage bonds leading up to the financial crisis, according to a person with direct knowledge of the situation.
The investment bank could reach a deal with the U.S. Justice Department within weeks, the person said, asking not to be identified because the negotiations aren’t public.
The accord is part of a broader push by the government to hold more Wall Street firms to account for the 2008 crisis after authorities pressed the three biggest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. -- to pay a total of more than $35 billion in cash and consumer relief. Morgan Stanley said in February it agreed to pay $2.6 billion to end probes into its creation and sale of mortgage-backed securities. The firm has yet to complete the deal.
Patrick Rodenbush, a Justice Department spokesman, and Tiffany Galvin at New York-based Goldman Sachs declined to comment on settlement talks.

http://www.bloomberg.com/news/articles/2015-06-05/goldman-said-near-mortgage-bond-settlement-exceeding-2-billion?cmpid=yhoo

The Wall Street Journal reported earlier Thursday that Goldman Sachs and Morgan Stanley are among banks nearing agreements, as investigators press more than a half-dozen other firms to settle probes for amounts ranging from a few hundred million dollars to a few billion dollars.
Talks with Morgan Stanley have been delayed by disagreements over how to describe the firm’s alleged misconduct in settlement documents, according to the person. A spokesman for the bank didn’t respond to a message seeking comment after normal business hours.
Banks and investors around the world suffered billions of dollars in losses as subprime home loans bundled into mortgage-backed securities defaulted, causing the bonds to plummet in value.
Goldman Sachs, like most other big banks, previously disclosed the U.S. inquiries and said it’s cooperating to resolve them. The firm said in February it got a letter from a U.S. Attorney in California, part of a national task force, warning that investigators had found it violated federal law in connection with sales of mortgage-backed securities. The bank said it was given an opportunity to respond.
The investigation is being led by U.S. Attorney Benjamin Wagner, whose office in Sacramento, California, put together the case against JPMorgan two years ago.

Wednesday, June 3, 2015

Fannie Mae and Freddie mac 2014 Wikipedia

http://en.wikipedia.org/wiki/Freddie_Mac
http://en.wikipedia.org/wiki/Fannie_Mae
http://en.wikipedia.org/wiki/Federal_Housing_Finance_Agency
Both can be found by googling either PRIVATE corps name.

2014
In 2014 it has become clear who the destructive people were in 2008 to Fannie and Freddie, as reported by WSJ.
Goldman Sachs Group Inc. settled a U.S. housing regulator's lawsuit for about $1.2 billion, resolving claims the Wall Street firm failed to disclose the risks on the mortgage bonds it sold before the financial crisis.
Goldman and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, on Friday said the New York firm had agreed to buy back mortgage securities that it sold to Fannie and Freddie for $3.15 billion.[22]
Whats interesting is Henry Paulson, 2008 secretary of Treasury was the Chief Operating Officer from December 1994 to June 1998 of Goldman Sachs. Was the Fox in the Hen house? His compensation package, according to reports, was $37 million in 2005, and $16.4 million projected for 2006.[12] His net worth has been estimated at over $700 million.[12] Paulson has personally built close relations with China during his career. In July 2008, The Daily Telegraph reported "Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country more than 70 times."[13] Before becoming Treasury Secretary, he was required to liquidate all of his stock holdings in Goldman Sachs, valued at over $600 million in 2006, in order to comply with conflict-of-interest regulations.[14][23]
The Man leading the Conservatorship sold out of Goldman in 2006, but yet in 2014 Goldman settled with FHFA for misleading Fannie and Freddie in 2008![24]
The list of wrongdoers in 2008 goes on, none of them is Fannie Mae or Freddie mac, yet the conservatorship goes on.
Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis.[25]
Oct. 20,2013 (Bloomberg) -- JPMorgan Chase & Co.’s record $13 billion deal to end U.S. probes of its mortgage-bond sales would free the nation’s largest bank from mounting civil disputes with the government while leaving a criminal inquiry unresolved. [26]
Using google to search, it is clear the TBTF banks had a large roll in the 2008 MBS crisis.