Will The Circle Be Unbroken?

Written by Phil Hall
on February 08, 2010 No Comments
Categories : Blog View

BLOG VIEW: Everyone knows that the U.S. flag has 50 stars, with each corresponding to a state in the union. In view of the news out of Washington, I might propose adding an additional star – to symbolize the state of confusion.

Last week, the Obama administration unveiled its fiscal-year 2011 budget. The most striking aspect of the budget is not what was proposed, but what was missing: there was no mention of the fate of the government-sponsored enterprises (GSEs).

The administration had been promising for some time to spell out its proposed future for the GSEs in the budget. However, it appears that Shaun Donovan, secretary of the Department of Housing and Urban Development, was given the sad task of reducing public expectations when he told the press that the administration actually meant that the GSE reform proposals were going to be announced ‘around the time of the budget’ and not necessarily ‘in the budget.’

By itself, this development is bad news. To make matters worse, there doesn't appear to be any degree of seriousness in getting the problem of the GSEs solved. This was confirmed in a daffy speech by Comptroller of the Currency John C. Dugan before the American Securitization Forum.

‘Asset securitization played a significant role in the crisis, and nobody should think that we can just wait for the market to stabilize and then go back to business as before,’ he said. ‘But I hope we also recognize just how important securitization is to our economy. Done correctly, securitization helps consumers and businesses by increasing the availability of credit on terms that might otherwise be unavailable.’

That all sounds peachy, except that Dugan never got around to addressing the state of today's secondary markets. The private-label sector is a pale shadow of its former self, and no one seriously expects it to be back in health anytime soon.

Meanwhile, Fannie Mae and Freddie Mac are operating as money-bleeding government agencies. I agree that securitization is important to a free-market economy, but you cannot have a genuine free-market economy when a vitally important aspect of its financial operations is propped up with taxpayer-funded crutches.

Dugan's speech called for regulatory reforms to underwriting standards. That's fine, but it is not a genuine priority in regard to the overall health of the securitization market. If Dugan has any idea on how to fix the GSEs, he hasn't shared it with the public.

Running simultaneous to this mess is the separate news that American International Group Inc. (AIG) is planning to dish out $100 million in bonuses to the employees of its financial products division. You may remember that division's employees – they were the ones whose unique concept of risk management rushed the nation into the economic equivalent of a massive heart attack that was treated with $182.3 billion in taxpayer-financed CPR.

Remarkably, the AIG executives point out that the bonuses are actually lower than previously promised – most of the division's members agreed to a $20 million cut in bonus pay. But before we pat AIG on the head for being good corporate citizens, let's remember that the company is on target to shell out more bonus millions next month to former division employees who did not agree to any deductions.

Wall Street is further setting up an us-versus-them environment with Main Street by shifting its financial contributions to the Republicans' fundraising efforts. According to a New York Times article, this is being done in response to criticism from the president about Wall Street's behavior – an opinion that mirrors the public's concern about how the bailout funds are being spent.

Parallel to this, I would like to throw in news about the financial regulatory reform legislation that has been gestating for months in Congress. However, there is no news report. The legislation is still there, and there is no word on when (or if) it will ever come to pass.

We are more than one year into the Obama administration and, sadly, it appears that time has stood still. With no answers on what to do with the GSEs, with no ideas on how to revive the private-label securitization market, with continued outrageous antics by the executives of the bailed-out financial services giants and with nothing resembling serious financial regulatory reform on Capitol Hill, it appears that Washington has, in the course of the past 12 months, gone full circle and accomplished very little to help our industry or the economy as a whole.

– Phil Hall, editor, Secondary Marketing Executive

(Please address all comments regarding this opinion column to hallp@sme-online.com.)

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