jtimothyhoward
SEPTEMBER 1, 2021 AT 1:43 PM
Yes, I had read the Layton piece (which came out yesterday).
The results of the 2020 and 2021 Dodd-Frank stress tests run on Fannie and Freddie were released earlier this month, and have received almost no publicity. I find that surprising, since they reveal that the tests run this year (on year-end 2020 data) showed that neither Fannie nor Freddie needed ANY capital to pass them, and Fannie also was able to pass the 2020 test (run on year-end 2019 data) with no capital.
In his piece, Layton points out that FHFA did not publish the results of the 2020 test–which should have come out a year ago–until this month, when it released the results of both the 2020 and 2021 tests together. He speculates that Director Calabria may have withheld the 2020 results, using Covid as a (weak) pretext, because they did not conform with the capital standard he was proposing, which had a “risk-based” requirement of more than 4.0 percent. I find it hard to argue with this interpretation, which Layton says “appear to show politics and ideology unduly distorting proper regulation.”
The timing of both the release of the FHFA Dodd-Frank stress tests for Fannie and Freddie and Layton’s analysis of it are helpful for the piece on Fannie and Freddie’s capital that I will be putting up next week. The companies now are locked into an essentially endless conservatorship by a series of actions based on a provably fictitious view of their past and present risks. In next week’s piece I will give actual data on Fannie’s historical and current credit risk–which are publicly available–and note that if you plug today’s data into the companies’ Great Financial Crisis experience they would need NO initial capital to survive it. I’ll also discuss how Calabria came up with his requirement that Fannie had to have 4.55 percent capital for its June 30, 2020 book to be considered “adequately capitalized.” (Preview: his 4.0 percent minimum is imposed arbitrarily, and his “risk-based” requirement is full of assumptions, exclusions, and cushions engineered to produce a result that exceeds that minimum.)
To get Fannie and Freddie out of conservatorship and back to being able to price the one product they are allowed to offer–credit guarantees on residential mortgages–on an economic basis, all the Biden administration has to do is abandon the fictions and embrace the (readily available) facts about them. It is in its best interest to do so.
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ruleoflawguy
SEPTEMBER 1, 2021 AT 2:42 PM
Agencies such as the FHFA cannot be arbitrary or capricious, under the APA. if they are, under the APA, anyone aggrieved by an arbitrary or capricious agency action has a right of action to void the agency action (and seek damages).
if FHFA refused to take into account the (very favorable) results from the 2019 stress test that it had implemented when promulgating the “Calabria capital rule”, and indeed kept these stress results unpublicized so as to insulate the Calabria capital rule from proper formulation and public commentary, then I believe that there is a claim to void the Calabria capital rule.
Any such action would have the salutary effect of publicizing the inappropriateness of the Calabria capital rule, which may benefit the GSEs going forward, whether or not it ultimately voids the rule.
who would have standing to bring this action? the GSEs certainly, but I would believe any GSE shareholder should be able to prove that the Calabria capital rule adversely affects that shareholder’s interests (and all other shareholders…hence a class action), insofar as it has been unreasonably promulgated and has resulted in an unreasonable agency action.
rolg
