Wednesday, July 16, 2008

The Inside Game: Is Someone Trying to Takeout Fannie Mae and Freddie Mac

Early this morning I had a conversation with a market observer, NK. In the discussion, I remarked to NK that it very often is the case that you can't really know what is going with a change in regulation, as you need to be a real insider to understand what some small technical rule change will mean to various players in an industry.

I further stated that a shrewd insider will take advantage of the opportunity to shape obscure rules and regulations, so that he can shape winners and losers.

Curiously, today, the Washington Post published an op-ed by Franklin D. Raines, chairman and chief executive of Fannie Mae from 1999 to 2004, in it he hints that inside players have been shaping rules and regulations in such a manner that it would result in the takedown of Freddie Mac and Fannie Mae.

From the Raines commentary:

The Treasury proposals, curiously, substitute government capital for private capital...

[The White House needs]to abandon their multiyear effort to eliminate the companies by talking them down to the financial markets. Buyers of long-term debt are not interested in investing in entities that are opposed by their national government or are slated for extinction...

...the silence from the Fed and the White House on whether the companies have a future is deafening...

It has been confusing, at best, for equity investors to hear officials call for Freddie and Fannie to raise more capital while simultaneously restricting their ability to earn a profit on that capital. The government needs to remove impediments to the companies' investing in on-balance-sheet assets, creating new products within the secondary mortgage market and managing risks in the most cost-effective manner....

...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...

So who in the admnistration has been working on Fannie Mae and Freddie Mac regulations? Well according to the Carlyle Group it's none other than Randal Quarles. Quarles is a current managing director at Carlyle, prior to that according to Carlyle's bio of Quarles, he was Under Secretary of the Treasury where one of the roles he played was "regulatory reform of Fannie Mae and Freddie Mac."

We have a very interesting series of posts on Mr. Quarles, which begin here.

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