Thursday, July 17, 2008

Will The Mortgage Crisis Create The First Trillionaires?

In yesterday's Washington Post, Franklin D. Raines, chairman and chief executive of Fannie Mae from 1999 to 2004 charged that

...ideologues in the Bush administration and commercial competitors of Fannie and Freddie have skillfully manipulated the markets to undermine Fannie and Freddie for more than six years. The result has been a weakening of the two linchpins of the housing finance system just when they are needed most...
Raines is no saint. It appears he manipulated Fannie Mae's books to insure a larger pay out to himself to the tune of tens of millions, and Fannie Mae is certainly a vulgar monstrosity from the FDR era. But he may have something with the charges that Fannie Mae and Freddie Mac were being undermined.

Indeed, certain parts of this mortgage crisis appear to be setting some people up to get very, very rich.

Back in the Spring of 2007, I attended the Michael Milken Conference in Beverly Hills, California. Among the attendees at the conference were Robert Toll, Chairman and CEO, Toll Brothers Inc.,and Angelo Mozilo, Chairman and CEO, Countrywide Financial. It was early in the the crisis. At one point Toll got up to speak and he rattled of a few areas of the country where trouble in the housing markets appeared to be developing. Then Mozilo got up to speak and one of his off the cuff remarks was that there were a "couple of minor regulatory changes" that made it more difficult for some to get mortgages. Hmmm. I made a note to myself. When you have a roaring bull market, like you did up to the early part of 2007, you need more and more new buyers, not even a tiny few less because of a "couple of minor regulatory changes".

These minor regulatory changes were I believe the snowball that started the mortgage crisis avalanche.

So when former-Fannie Mae chairman Raines talks about skillful manipulations attempting to take down Fannie Mae, it has a ring of truth to it. Tiny changes in regulations can make a big difference when you know where to make the changes.

And, clearly, the Treasury has been out to smash Freddie Mac and Fannie Mae for sometime.

Here are remarks from Randal Quarles two years ago on July 19, 2006 at the Reuters Panel Discussion on Government Sponsored Enterprises. Quarles was then Under Secretary for Domestic Finance, U.S. Department of the Treasury. He said, in part, at the conference:

Secretary Paulson has made it clear to me that he believes there is systemic risk associated with the GSE's retained portfolios. While he shares the view that a legislative outcome is preferable, he has instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority should that become necessary. If a legislation solution is not achieved, Treasury will have no choice but to consider additional action.
It's obvious that Treasury has been after Fannie Mae and Freddie Mac for years. They are using the current crisis to put a nail in the coffin. This would not be a bad thing if it was just a case of disassembling Fannie and Freddie, and ultimately leaving the mortgage business up to the free markets. After all, Fannie Mae is a throwback to the FDR era of government make work programs and other monstrosities that should be put to sleep.

But that is not what appears to be going on. What appears to be going on is a Russian oligarch style takeover of major parts of the financial sector. Randal Quarles, who spoke for the Treasury warning that changes would have to be made at Freddie and Fannie, is gone from the Treasury and is now at the Carlyle group. I attended a luncheon in Washington D.C. where he spoke in April. My report on that luncheon is here.

At the luncheon, I learned that Quarles is aggressively pushing to get rules changed so that private equity firms, such as Carlyle Group, can aggressively buy bank stocks. Now, word has leaked that Carlyle, presumably Quarles, has been having "on going dialogue" with the Fed.

Quarles also, along with Oliver Sarkozy (half brother of French President Nicolas Sarkozy), recently wrote an Op-Ed piece for WSJ calling for restrictions to be removed from private equity firms that make it difficult, if not impossible, for them to take more than a 10% positon in a bank.

Say what? People are lining up outside banks trying to get their money out and Quarles is writing Op-Ed pieces so that Carlyle Group can buy huge chunks of bank stocks? What's going on here? Back in April, at the luncheon I attended, he said there would be more bank failures and at the same time he said that private equity was in the best position to invest in these banks.

So what we have here is a huge, I MEAN HUGE MONEY GRAB, Quarles' former boss Paulson continues to make statements that scare bank shareholders. While Quarles gets ready to scoop up bank stocks.

We are at the scare the public stage, and they sure have that running well. Next, when fear is everywhere, they will start the scooping up of the bank stocks. Keep in mind that Fannie Mae and Freddie Mac, alone, have $5 trillion in mortgages or guarantees on their books. With the housing market down by about 20%, the value of their mortgages and guarantees has probably shrunk by about 20% or $1 trillion. Thus, a current valuation on Fannie and Freddie will knock more than $1 trillion off old estimates, perhaps $2 trillion--if you consider the current fear in the markets. And, this doesn't apply just to Fannie and Freddie but also most other bank stocks. So who knows which banks Carlyle and other private equity firms will buy up. But this is a multi-trillion dollar play. And once the stocks are all bought up, Paulson (or his successor)will put the call into Bernanke, who appears to be Paulson's new lap dog, and tell Bernanke to start the money printing presses so all those losses on the banks books will be erased and become gains. Trillions of dollars in gains, and the United States will have the world's first trillionaires. And America will also have their first Russian-style oligarchs.

Pass the caviar, please.


  1. As always, great insight Robert. Two questions:
    1. When ever do you sleep? lol I have the bad habit of reading the time at which you post your articles and it amazes me... you are quite literally posting at all hours of the day.
    2. On a more serious note, what becomes of share holders of banks who don't sell their stock when the private capital groups start massive buys?
    I would be interested in reading your thoughts on the topic.

  2. I don't think private equity in most cases will be buying out current shareholders, for the most part, they will be diluted down to very insignificant positions.

  3. Are you kidding, George Soros and The Penny King were already trillionaires before the 2004 it and weep!