If It Ain't Broke, Don't Fix It

As loyal readers of this column may have noticed by now, I've been pretty supportive of the Trump Administration. However, I do part ways with it when it comes to financial regulation and the dismantling of the Consumer Financial Protection Bureau.

Some of the reforms enacted by the Obama Administration after the global financial crisis, namely the Dodd-Frank Act, may have overdone it a bit in terms of increased bank regulation. And certainly, the CFPB under its former director, Richard Cordray, grossly overreached in how it regulates and punishes lenders, often unfairly. Still, that doesn't mean we need to go back to the days before the financial crisis and plant the seeds for another one in the future.

Senator Elizabeth Warren, despite her recklessly pandering and unworkable ideas like wealth taxes and Medicare for All has been right on reining in the banks. While Dodd-Frank did impose some needed restrictions on what banks do, it clearly hasn't done enough in some areas – like curbing criminal behavior – and the rollbacks enacted by the Trump Administration go in the wrong direction. Besides, the banks have managed to make plenty of money under these restrictions.

Right now, two banks, JP Morgan Chase and Bank of America have well over $2 trillion in assets, while two others, Wells Fargo and Citigroup, are just below that mark. Wells Fargo would have gone over that level except for the fact that it is restrained from growing its assets by an unprecedented Federal Reserve order due to its many scandals over the past several years. Those are pretty dangerous levels if you ask me – certainly Too Big to Fail dangerous.

But one of the worst ideas the Trump Administration is pushing now is returning Fannie Mae and Freddie Mac to the private sector. Essentially, it would re-establish the status quo ante the 2008 financial crisis.

The behavior and subsequent failure of those two semi-public, semi-private companies was one of the main reasons behind the housing finance crisis and the resulting global meltdown. Returning them to the private sector just sets up another one.

If you remember, one of the reasons why Fannie and Freddie failed 10 years ago is that little thing called the “implied” federal guarantee on their debt. As quasi-public agencies – chartered by the government but owned by stockholders – investors believed that at the end of the day, the federal government would step in and guarantee their debt, even though there was no explicit guarantee that that would happen. Not surprisingly, then, Fannie and Freddie recklessly bought up all kinds of poorly underwritten mortgages from lenders – indeed, they pressured lenders to make them – knowing full well that investors would buy them because of that implied guarantee.

Now the Trump Administration wants to return Fannie and Freddie to the private market, possibly without that guarantee in order to shield taxpayers from another debacle. Nice idea, maybe, but that will never fly – investors and mortgage lenders would never except that. This means some kind of guarantee will be necessary, which will simply keep the two agencies under some kind of federal control.

Which is why I don't understand why the administration doesn't just leave well enough alone and leave the agencies exactly as they are. Homeownership has always been viewed as an important aspect of American society, the so-called American Dream, but that can’t happen without government insurance backing the whole thing.

The fact is Fannie and Freddie not only perform an important public service, namely helping people get 30-year mortgages at a reasonable cost, but they also do it at a profit to the taxpayers. Since the two companies were taken over by the government in the wake of the financial crisis, they have returned billions of dollars to the federal Treasury in profits, well above the cost of the bailout. Not many government agencies can claim something even close to that, performing an important public service while also making a profit for taxpayers. Imagine if the Social Security Administration was a profit center rather than a cost center. Yet the Trump Administration wants to undo all that. It doesn't make much sense.

Ever since the two companies were taken over, various analysts and experts in government and Wall Street have been racking their brains over how to eventually get the two out of government control and return them to the private sector, or at least some plan that reduces their potential liability to the taxpayers. Unfortunately, every plan anyone has ever come up with is unworkable.

Quite clearly, Congress has been unable – or unwilling – to move forward on a Fannie-Freddie fix for more than 10 years for the simple reason that the status quo is working. Yet no one has been willing to come out and say that. It must be that human inclination that if something is working well, let’s find a way to screw it up.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.