Saturday, March 27, 2010

Does George Soros Want to Get a Cut Out of the Entire U.S. Housing Mortgage Market?

George Soros is out with a new commentary on the housing market. Some of his observations are accurate:
The business model of Fannie Mae and Freddie Mac is fundamentally unsound. These public-private partnerships were supposed to serve the public interest and the interest of shareholders. But this was never properly defined and reconciled.

Management’s interests were more closely allied with those of shareholders. They had an incentive to lobby Congress — both to expand homeownership and to protect and use their government-sponsored duopoly status.

The GSEs extended their activities from insuring and securitizing mortgages to building highly leveraged portfolios of securities by taking advantage of their implicit government backstop. They profited from the growth without bearing the risk of collapse: Heads they win, tails you lose.

The GSEs already had a checkered history, riddled with accounting irregularities. Eventually, they blew up — at a huge loss to taxpayers that may exceed $400 billion
As I was reading this, though, the questions kept running through my head, "What's the angle?", "Why is Soros promoting this understanding?"

It didn't take me long to find out. Instead of recommending that the housing mortgage market be returned to the free market, Soros has a scheme that would micro-manage the mortgage market, the Danish model:
There is a proven mortgage financing system already up and running. The Danish model has been in use, continuously, since the aftermath of the Great Fire of Copenhagen in 1795. It has not prevented housing bubbles, but it has never broken down. And it proved its worth again in 2008.

In the Danish system, homeowners do not borrow from either a mortgage originator or a GSE. They borrow from the bond market, through a mortgage credit intermediary. Every mortgage is balanced by an equivalent amount of an identical, and openly traded, bond...Mortgage Credit Intermediaries operate the POB system. They help homeowners understand and navigate the process. Most important, MCIs bear the credit risk of the mortgages — they remain “on the hook” in the event of delinquency or default.
In other words, this one type of mortgage issuance method is one that might emerge in a free market. There is really nothing that makes this superior to the old fashioned bank that raises funds long term and them makes housing loans with the funds. So why is Soros promoting this one specific financing method? The answer doesn't come until the short bio at the end of Soros' article, but it is a whopper, and if you know Soros, it is not unexpected. It reads:
George Soros, philanthropist and financier, pioneered the introduction of the Danish mortgage finance system in Mexico with the support of then-Treasury Secretary Paul O’Neill. He now participates in a joint venture with the Danish financial system that helps countries use this approach.
He's in a damn joint venture running the Danish method. Which sounds to me like Soros has turned the Danish method into a way for money to be pumped into his pocket every time someone gets a mortgage using the Danish method. And now he wants that to include the entire U.S. housing mortgage market.

1 comment:

  1. Geithner talked "covered bonds" in his House hearing last week. Of course he left out the long line of sinners at Fannie and Freddie. Here are but two:

    1. Governing boards including Rahm Emanuel and Ken Duberstein.

    2. Randall Quarles as Treasury person responsible for the F siblings. Quarles landed a sweet spot with Carlyle Group.