TH today on MC's flawed gses are international commercial banks analogy: "The “living will” requirement comes from Section 165(d) of the Dodd-Frank Act, requiring that “bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) for supervision by the Federal Reserve periodically submit resolution plans to the Federal Reserve and the Federal Deposit Insurance Corporation.” HERA does not make any reference to living wills, let alone authorize FHFA to require them of Fannie and Freddie.
The living wills are another clear example of FHFA Director Calabria imposing rules and regulations designed for large multinational banks on Fannie and Freddie. The former CEO of Freddie Mac, Don Layton, wrote a scathing critique of the FHFA living will proposal this past February, titled “The FHFA’s Proposed GSE ‘Living Will’ Rule,” with the subheading of “Fatally Flawed and Unusually Vague.” In this piece, Layton correctly pointed out that (a) the structures of Fannie and Freddie are “ultra simple” compared with large multinational banks, (b) over 90 percent of companies’ assets are financed as MBS, which are not subject to illiquidity risks, and (c) receivership would not be the policy choice in the highly unlikely event that either Fannie or Freddie were to experience financial difficulty, given the existence of the Treasury senior preferred stock agreements. Indeed, this last point is one of the two “fatal flaws” Layton identifies in the FHFA exercise: “The denial that the government support agreement for the GSEs exists and can be relied upon.” (The second fatal flaw is “the requirement that the GSEs plan to continue operations in receivership without that support, despite its being necessary and integral to their business model.”) Layton concludes from his analysis that the FHFA living will proposal “seems to be more a policy document than a technical one, reflecting FHFA Director Mark Calabria’s well-known policy objective of shrinking the GSEs’ footprint.”
I agree with that conclusion. Calabria has made no secret of his intent to use bank-like capital and regulation to effectively eliminate the advantages of Fannie and Freddie’s federal charters, and thus their abilities to continue to provide the type of secondary mortgage market support for low- moderate- and middle-income homebuyers they had been so successful at doing prior to their conservatorships. (This also is the reason for the caps placed on various types of higher-risk business in the January letter agreement with Treasury: Calabria wishes to convey the sense that until Fannie and Freddie can attain the capital levels he is requiring of them, allowing them to do more than the capped amounts of these business types presents too much risk risk to the taxpayer, which is preposterous.) Calabria is not going to change his approach to regulation or capitalization, so the only way to meet the objectives of all of the companies’ stakeholders–homebuyers, mortgage lenders, investors and employees–is for the Biden administration to change its FHFA director, which it should do at its earliest opportunity."
