Tim Howard on the Phillips interview:
jtimothyhoward
MAY 28, 2021 AT 11:47 AM
I listened to this interview, and thought it was excellent. I commend it to all readers. A good part of the time was spent on issues related to Fannie and Freddie (more on that in a minute), but I also was interested in the segments where Phillips talked about his approach to government service after a career in the private sector, and his work at Treasury overall, particularly the four papers he produced on financial system regulatory reform–banks and credit unions; capital markets; asset managers and insurance companies, and nonbank financials (“fintech”)–which was his much more reasoned way to respond to the generic, blunt and unhelpful policy imperative to his administration to “repeal Dodd-Frank.” Well done by Phillips.
On Fannie and Freddie, people should listen and draw their own conclusions, but I was struck by two things. One was Phillips’ discussion of what happened to derail Mnuchin’s stated goal before he even had been confirmed to get Fannie and Freddie out of conservatorship “reasonably fast” (which Phillips says he shared). Phillips said Mnuchin’s and his plan was to stop the net worth sweep “on day one,” but that when it came time to produce the President’s first budget there was a “horrific” reaction from several in the administration (Phillips didn’t say this, but I know who one of them was–Larry Kudlow) that doing so would increase the deficit, and that you couldn’t release Fannie and Freddie before they were “reformed.” This second reason was what I had detected early on–the Financial Establishment marshaling its forces to block any move to undo the nationalization they had engineered at the end of the Bush administration. Phillips next recounts a series of “competing priorities”–many of them totally legitimate, like tax reform, bank regulatory reform, and the pandemic–that kept Mnuchin (and Phillips, until he left in 2019) from making the removal of the companies from conservatorship a top priority. One of these was waiting for Mel Watt to be replaced by President Trump’s own person. I inferred from what Phillips said about Watt–that he thought Watt also wanted to get Fannie and Freddie out of conservatorship, and would have done whatever Mnuchin and he, Phillips, asked of him–that Phillips was not among those who wished to defer reform until Calabria was on board. Phillips left soon after that, and (this is my recounting, not what Phillips said) the lead on getting Fannie and Freddie out of conservatorship shifted to Calabria, who did want to do it, but on his terms. Phillips made one final comment about why nothing happened after the election, and before Mnuchin left Treasury. Phillips said that Mnuchin was being told by friends and colleagues that “you can’t make big moves like this at the end of your term,” and Phillips thinks Mnuchin felt “conflicted” by his past relationships with many of those who were pushing him do that, and couldn’t bring himself to. (Score another one for the Financial Establishment: does the phrase “giveaway to hedge funds” ring a bell?)
The second aspect of the interview that struck me was the way Phillips talked about his view of Fannie and Freddie compared with Calabria’s. Phillips said he thought that Fannie and Freddie already had been reformed–none of the bad practices at the companies prior to the crisis (which he didn’t specify) existed any more, they had the best technology and excellent management, with good ethics and strong principles–and what they needed now is capital. He contrasted his view with those (unnamed) people who, he said, “thought they were evil, and had too much influence on the Hill,” and blamed them for the 2008 crisis. Phillips never said that he thought Calabria was one of those people, but from his statements it’s easy to conclude that he did. He did describe Calabria’s views as thinking that the government’s role in housing was too large, as was Fannie and Freddie’s share of the market. And it was telling that when Phillips was asked about Calabria’s initiatives to reduce innovation at Fannie and Freddie–because doing that helps “level the playing field”–he responded that he didn’t agree because “no one else is doing that innovation, and innovation helps homeowners get lower rates.” Maybe I’m hearing what I want to hear, but I took this part of the interview as confirmation that Calabria was the obstacle to getting Fannie and Freddie out of conservatorship during the last two years of the Trump administration: he wanted to get them out, but as grossly overcapitalized and overregulated entities who, by being much less efficient than they otherwise could be, would be less competitive with the “private sources of capital” he favors. But it’s not easy to raise the huge amounts of capital required to bring them out on that basis, particularly with a regulator who does not want them to be successful. And that’s where we are now.
