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Political Disasters in U.S. Housing — The Lessons of History by Alex Pollock & Ed Pinto

Political Disasters in U.S. Housing — The Lessons of History by Alex Pollock & Ed Pinto

October 2, 2021

My long-time friends, Alex Pollock and Ed Pinto, have devoted their careers to promoting and supporting sound and affordable housing for our nation. Unfortunately, their wisdom and advice have too often fallen on the deaf ears of politicians seeking expedient ways to lure campaign contributions, power and votes. I urge you to take some time to read their latest article below. These issues are enormously important to our nation. By Bill Isaac

As the philosopher George Santayana said, those who cannot remember the past are condemned to repeat it. The U.S. has a history of catastrophic housing finance blunders to remember, but will we? There have been three dramatic failures of government policy in four decades – hardly an enviable track record! The issue is now whether we wish to risk another one by again reducing credit quality through Fannie Mae and Freddie Mac. Unfortunately, it looks like this will probably happen.

Fannie and Freddie remain the dominant companies in American housing finance, in spite of having little capital and being hyper-leveraged. Their assets to equity ratio is 116:1. They are regulated by the U.S. Federal Housing Finance Agency (FHFA), which is also their Conservator and has great power over them.

In June 2021, the U.S. Supreme Court ruled that the FHFA was unconstitutionally structured because its director could only be removed from office for cause. The Court held that the director must be able to be removed from office at any time by the President.

Upon the Court’s decision, President Biden immediately fired the FHFA director, Mark Calabria. This was a pretty clear example of how political U.S. housing finance is.

Calabria had been following a policy of increasing the capital of the GSEs in preparation for privatizing them, and of reducing their risk to the taxpayers; his acting replacement forthwith reversed this course. We are already seeing a sharp change in the regulatory marching orders for Fannie and Freddie – from a future as privatized companies to a future of being used to accumulate the risk of the government’s housing policies, from reducing to increasing the risk to the taxpayers who are on the hook for Fannie and Freddie’s losses.

Following the Supreme Court decision, any U.S. President now has direct political control over most of the mortgage finance system, including the nearly $7 trillion in mortgage risk held in the Fannie and Freddie balance sheets.

Although we agree that the Supreme Court’s decision about the FHFA is correct on its constitutional merits, it does aggravate the fundamental problem: that the U.S. has a heavily nationalized and socialized housing finance system.

We turn to the history of the travails and enormously costly mistakes this system has made.

The first time began in 1968. The Department of Housing and Urban Development (HUD) presented a “10-year housing program to eliminate all substandard housing,” but since there were then, like now, very large budget deficits, this program was implemented off-budget.

This was done through the 1968 Housing and Urban Development Act, which had the government insuring subsidized single- and multifamily loans through the Federal Housing Administration and then Fannie Mae funding them. Fannie had been up to then a government agency with its debt on-budget, but to hide it, the 1968 Act converted it to an off-budget entity.

The off-budget Fannie funded the largest expansion of subsidized housing in the nation’s history with up to 40-year fixed rate loans. Just like the savings and loans of the time, it lent very long and borrowed short on a leveraged balance sheet, but its lending at fixed rates for 40 years as it headed into years of sharply rising funding costs eclipsed even the savings and loans’ 30-year fixed rate loans.

By the 1970s, HUD’s program turned into a disaster for cities and their residents, as described in the book Cities Destroyed for Cash: The FHA Scandal at HUD (1973). Detroit, Chicago, Cleveland and many other cities long suffered from the effects of HUD’s scheme. And by the early 1980s Fannie’s loans had accumulated such huge interest rate risk losses that it was effectively insolvent. It was only able to continue in business given its backing by the Treasury.

The second time is the spectacular failure of the savings and loan industry, with a $150 billion taxpayer bailout in 1989. This collapse reflected massive losses from both interest rate risk and credit risk, but the savings and loan industry was in its heyday a darling of American politicians. Its trade association, the U.S. League for Savings, now long gone, was a power in Washington DC. The savings and loans benefitted from many special advantages and from a political regulator, the Federal Home Loan Bank Board (FHLBB), which acted as a cheerleader for the industry and maintained close ties to the housing industry. The FHLBB was abolished in 1989, but the current FHFA is its third-generation successor.

The third time began in 1992. Over the following years, the government forced Fannie and Freddie to reduce their credit standards so as to acquire hundreds of billions of dollars in risky loans under the rubric of affordable housing. The first of many “trillion-dollar commitments” was announced by James Johnson, Fannie’s very politically connected CEO, in March 1994. He vowed to “transform the housing finance system.” He did, but not in the way he intended.

In 1994, HUD trumpeted its National Homeownership Strategy,’ about which President Clinton claimed: “Our home ownership strategy will not cost the taxpayers one extra cent.” A poor prediction indeed! The bailout of Fannie and Freddie alone took $190 billion.

This government policy was pursued until 2008 through HUD’s authority to impose what were called “Affordable Housing Goals” on the GSEs. To meet ever more aggressive HUD goals, Fannie and Freddie had to continually reduce their mortgage credit standards, especially with respect to loan-to value and debt-to-income ratios. Instead of HUD’s strategy advancing homeownership,
The full extent of the catastrophic credit risk expansion that took place has now been documented in a detailed analysis researchers at FHFA and AEI released in May 2021. This is the first “comprehensive account of the changes in mortgage risk that produced the worst foreclosure wave since the Great Depression.” By analyzing over 200 million mortgage originations from 1990 onward, they showed “that mortgage risk had already risen in the 1990s, planting seeds of the financial crisis.” In 2008 Fannie and Freddie were bailed out by the taxpayers and put into conservatorship.

The Congress elected in the wake of the crisis adopted the Dodd-Frank Act of 2010, which reflected the view that insufficient regulation caused the crisis. But the key culprits, Fannie and Freddie, were untouched by the legislation, left with no capital, but still functioning. It had become entirely clear that the US government is effectively the 100 percent guarantor of Fannie and Freddie, with the taxpayers fully on the hook, so the financial markets provide unlimited funds for their operations. Fannie and Freddie continue to operate profitably in their government conservatorship by using the U.S. Treasury’s global credit card. In addition, the Federal Reserve owns more than $2 trillion of their mortgage-backed securities and is still buying them for the central bank balance sheet.

Now the “American Jobs Plan” proposes spending $318 billion to construct and modernize more than two million houses. It is almost certain that the government will use its heightened control over Fannie and Freddie to once again make them the central elements of its housing plans by another weakening of credit standards. Thus, we face the prospect of combining some of the features of HUD’s 1968 subsidized housing debacle, with the housing subsidies of the savings and loan system, with Fannie and Freddie’s disastrous foray into high credit risk lending. It looks like we are once again heading for trouble.

However, the government does not have to follow the flawed policies of previous administrations. If instead, the following four principles were followed, the United States would have robust, successful housing finance system it needs without nationalized mortgage risk:

1. The housing finance market can and should function principally as a private market, not a government-dominated one.

2. We can create a robust housing finance market without depending on a government guarantee by ensuring mortgage credit quality and fostering the accumulation of adequate capital behind housing risk.

3. The federal government should use on-budget, transparent and sustainable programs if it wants to subsidize low-and moderate-income home buyers effectively. Fannie and Freddie have no role here, as the only way they can participate is through reducing their credit standards with the real cost hidden in the form of expanding risk.

4. Fannie and Freddie should be truly privatized, with their hidden subsidies and government-sponsored privileges eliminated over time.

It is certain that none of this will happen in the near term, and indeed the opposite of these principles will probably be followed by the current administration. Nonetheless, the principles define the housing finance strategy that a future, market-oriented Congress and administration should take. In the meantime, all mortgage actors will need to protect themselves against the increased credit risk that Fannie and Freddie, under orders from the FHFA, will be generating.

Fannie Mae and Freddie Mac – What Happened, Why it Happened, and How to Fix It. A simple solution: the Truth. Declare Victory, by Gary E. Hindes. Published by the Delaware Bay Company

Fannie Mae and Freddie Mac – What Happened, Why it Happened, and How to Fix It. A simple solution: the Truth. Declare Victory, by Gary E. Hindes. Published by the Delaware Bay Company

September 1, 2021

Gary Hindes, Chairman & Managing Member of the Delaware Company, LLC and a significant investor in Fannie Mae and Freddie Mac, wrote a deep and important piece on the conservatorships forced on the housing mortgage giants by the Bush Administration in 2008, and they remain in conservatorship all these years later. Once Britney Spears is released, as expected, from her court-imposed conservatorship, Fannie Mae and Freddie Mac will hold the new record for the longest conservatorships ever. Whether or not there was merit to the Fannie & Freddie conservatorships in the beginning (Hindes believes there was none), it is impossible to argue with a straight face that the government, including the courts, should not have restored them to the marketplace long ago. Please take the time to read Hindes’ paper, as it is a must read.

Bush’s final words were “we have to make clear that (conservatorship) is transitory, because otherwise it looks like nationalization.”
— President Bush to Treasury Secretary Paulson, Thursday, September 4, 2008, in the Oval Office.

In just a week, the conservatorships of Fannie Mae and Freddie Mac will enter their 14th year. The two government-sponsored entities (“GSEs”) are currently tied with Britney Spears for the title of being among the longest known conservatorships in history. But even though they have been, for the past decade, two of the most profitable companies in the world – and even though the government has been repaid over $100 billion more than it advanced during the 2008 financial crisis – it appears Ms. Spears might soon be released from her conservatorship, ceding the dubious title to the GSEs. At this point, her plaintive query to the judge overseeing her case is especially relevant: “I mean, Your Honor, how much longer is this supposed to go on?

The Trump Administration having dropped the ball on the one-yard line, the Biden Administration now must decide what to do about Fannie and Freddie. Should it continue down the recap-and-release path promoted by former FHFA director Mark Calabria? Can it/should it use the two companies to promote its affordable housing goals? Should it do nothing and leave the never-ending conservatorships for a fifth Administration to deal with?

Tim Howard, Fannie Mae’s former vice-chairman and chief financial officer, has a rather bold yet simple solution: “Admit that the de-facto nationalization of Fannie and Freddie in 2008 was unjustified and a mistake, then undo it”.

A bit of history.

During the final months of the Bush Administration, Treasury Secretary Henry Paulson forced Fannie and Freddie into conservatorship. With the private-label mortgage securities market having collapsed, and banks cutting back drastically on lending because of soaring mortgage delinquency rates, the housing market froze up and then saw the worst decline in home values since the Great Depression. The Too-Big-To-Fail banks having basically gone AWOL from the home mortgage market, Paulson was unwilling to leave Fannie and Freddie as “the only game in town” as the financial crisis was unfolding. He also saw in the crisis an opportunity to get control of two companies Treasury had historically opposed and replace them with a “free market” alternative. Perhaps most important, if the government could obtain control, it could use Fannie and Freddie to douse the conflagration then raging in the mortgage markets.1 So after seizing the companies and firing their directors and management, FHFA ordered them to book over $320 billion in temporary or estimated non-cash expenses. These dubious accounting entries were intended to make the companies appear to be insolvent and forced them to draw $187 billion in non-repayable senior preferred stock from Treasury (which carried a 10 percent after-tax annual dividend, thus creating a crushing payment burden of $18.7 billion per year – more than the companies’ combined profits in any year in their histories). It was, indeed, the classic “concrete life preserver”, intended to keep them in conservatorship until Congress could pass legislation replacing them. (Only that never happened.)

After convincing a judge to put 11,000 documents connected with the takeovers under seal (allowing anyone to read them, it argues to this day, would threaten ‘national security’), Treasury and its allies rewrote history to falsely blame Fannie and Freddie for the financial crisis, labeling the $187 billion ($151 billion in book losses plus $36 billion in accumulated dividends paid on the draws from those losses) as a real cost of their “rescue”. In fact, the ‘book’ losses that Paulson imposed upon the companies fully reversed themselves in just 18 months.3 Yet just after they returned to profitability, Treasury and FHFA changed the dividend on Treasury’s senior preferred stock from 10 percent per year to a “net worth sweep” of 100 percent of the companies’ net income in perpetuity. There was never a housing-related business reason for this action. To the contrary, the new-and-improved concrete life preserver prevented Fannie and Freddie from recapitalizing and allowed Treasury to collect $124 billion more than it would have been owed under the original 10 percent dividend obligation. A top White House official admitted contemporaneously that the real purpose of the net worth sweep was to keep the companies from “escaping” conservatorship and to ensure that shareholders would never see a dime of their companies’ profits.

The Howard solution: the truth.

As Mr. Howard puts it, “the Biden administration can fix the widespread misconception that Fannie and Freddie caused the financial crisis and are terribly risky . . . by publicly reversing the misguided and ideologically motivated takeovers of Fannie and Freddie by the Bush administration. It has the facts to back this up. Fannie and Freddie were not the worst sources of mortgage finance going into the crisis; they were by far the best. Readily available data show that going into, during and after the crisis their delinquency and default rates were one-third those of banks, and one-tenth those of subprime lenders and the loans in private-label securities. Nor do the companies need reform; they have been reformed. Compared with before the crisis, they no longer are in the portfolio investment business, and no longer give price discounts to larger lenders (both long-time complaints of their critics). Moreover, because of Dodd-Frank and other reforms, Fannie and Freddie no longer finance the “toxic” products and risk combinations that resulted in half their credit losses during and after the crisis, and today their average charged guaranty fee is more than double what it was in 2007. With half the riskiness and double the guaranty fees, Fannie and Freddie are far more resistant to a stress environment than they were pre-crisis.

Another falsehood put out by the anti-Fannie-and-Freddie crowd (and which the government’s attorneys continue to repeat in court) is that the companies were frozen out of the capital markets and on the verge of collapse during the financial crisis; hence, there was no choice but to step in and save them. Really? How to explain that just three days prior to their seizure, they had managed to sell $5 billion of unsecured debt (rated AA+/AAA-) through an underwriting group led by Wall Street’s top investment banks.7 (Actually, the deal was oversubscribed so it was upped at the last minute to $6 billion.) Were the underwriters, rating services, and buyers all fools? Did none of these people get the memo?8 And what about the fact that just two weeks earlier, FHFA issued a letter confirming that both companies were in full compliance with their capital requirements? How did that happen? (Actually, there’s a story behind it – which I will leave for another day.)


There is a reason Congress has not been able to replace Fannie and Freddie for going on 14 years: There Is No Alternative. The Biden administration needs to embrace this reality. It would start by admitting what everyone else knows: Fannie and Freddie have paid back the $187 billion they were forced to draw during the crisis, with 10 percent interest (double what the banks which accepted TARP money were charged).10 The administration should deem Treasury’s senior preferred stock to have been repaid in full and should cancel Treasury’s liquidation preference. That the government continues to argue that not only has it not been repaid, but that the GSEs still owe $187 billion is utterly immoral.

Quoting Mr. Howard: “Once Treasury’s senior preferred has been deemed repaid and its liquidation preference cancelled, settling the remaining lawsuits should not be difficult. Then, a true risk-based capital standard should enable Fannie and Freddie to raise the capital necessary for their release from conservatorship fairly quickly, since the amount of new equity issued under this standard will be more reasonable, and investors will be more eager to buy it if they believe that as a matter of public policy the Biden administration (actually) wants the companies to succeed.

Déjà vu.

During the savings-and-loan crisis of the 1990s, the government faced dozens of lawsuits for illegally seizing various banks and S&Ls. Known as the Winstar cases, they were presided over by Loren Smith, chief judge of the U. S. Court of Federal Claims. At one point, Judge Smith called all the parties into his courtroom and told them: “It is the obligation of the United States to do right. Every free government can be judged by the degree to which it respects the life, liberty, and property of its citizens. The United States stands tall among the nations because it is a just nation. In the instant cases (however), the United States has not acted in a manner worthy of the great (and) just nation (that) it is. Because the dollars at stake appear to be so large, the government has raised legal and factual arguments that have little or no basis in law, fact or logic.

“While the court can appreciate the concerns of the government’s attorneys to protect the public treasury, and they are honorable people, it must severely criticize the tactics and approach of the government . . . if the arguments put forth here are the strongest the United States can muster against liability, then the government has a moral obligation to seek a fair and equitable settlement from the parties whose contracts were breached. If this cannot be achieved, then the court is here to resolve these cases. However, the court is a tool of last resort. Where the government has violated rights, it should first attempt to do justice without judicial prompting.

The rating services.

In the meantime, where are Fitch, Moody’s and Standard and Poor’s? For going on 14 years, they have gone along with the charade that the GSEs haven’t been nationalized, thus allowing Uncle Sam to keep their $6-trillion-plus of debt off the government’s books. But at some point, they will have to face the reality that we are in what appears to be a never-ending conservatorship. In addition to risking a credit downgrade, adding $6-plus trillion to our national debt will, at the very least, make Congressional negotiations over extending the debt ceiling limit quite interesting.

An appeal to reason.

Our government was never intended to own private, profit-making, companies, nor should it be allowed to do so under the guise of a never-ending conservatorship. If it can step in and take all the equity and profits of a company without any compensation to its shareholders – here, essentially, the two largest expropriations of private property in history – then, as one observer put it a few years ago, we are living “in a Stalinist state”. I do not believe that it can – nor that we are.

The total amount of publicly owned preferred stock in Fannie and Freddie is $33 billion. The combined companies earn that much in a little over a year. The companies have been highly profitable for the past decade and the future looks quite favorable. Yet for the past 13 years, shareholders haven’t seen a penny in dividends, while the value of their shares has been decimated. Meanwhile, having already booked over $115 billion in profit (with another $100+ billion possible from monetizing the government’s warrants to buy 79.9 percent of their common equity for just under $73,000, Fannie and Freddie have turned out to be the best deal for the taxpayer since the Louisiana Purchase.12 Admitting the government has been fully repaid would immediately open the door for capital infusions from the private sector which would allow Fannie and Freddie to operate at little, if any, risk to the taxpayer.

President Biden has pledged to get us out of what he (and many others) call America’s “never-ending wars”. What about “never-ending conservatorships”? Isn’t over $100 billion of profit, 14 years, and three administrations enough?

It’s time for the President to declare victory and finally put an end to this last bit of unfinished business from the 2008 financial crisis.

Gary E. Hindes
September 1, 2021

It’s time for a new, secure internet by Thomas P. Vartanian published by The Hill

It’s time for a new, secure internet by Thomas P. Vartanian published by The Hill

May 19, 2021

My friend Tom Vartanian, formerly a bank regulator at two different agencies and then a private practitioner for four decades wrote a compelling piece on an extremely timely and important topic about the urgent need to greatly enhance the security of the internet, a subject the US government has ignored for far too long. I urge you to read the article and get involved politically in this issue.

The Solar Winds and Colonial Pipeline hacks are just the tip of the digital doomsday that is brewing. While technology has super-charged the quality and potential of our individual and commercial lives, an increasingly ominous stream of hacks has taken advantage of vulnerable software, applications, systems and networks.

Technology is a lifestyle, but it is first and foremost a business, one in which the breadth of innovation and the speed of getting to market is rewarded more than the insecurity of a product is punished. Because of that, products may be brought to market that are not secure, and then become more vulnerable as technology advances or they are subsequently modified by commercial users seeking competitive advantages. Today, nearly every ounce of data and form of money is stored, invested and transmitted on and through these internet applications, systems and networks. How secure should they be?

Unless the public and private sectors begin to put digital security on an equal footing with digital innovation, we will continue to see increasing damage to critical infrastructures and the quality of our lives. What is the solution? Unfortunately, we are decades down the path of a way of life that is insecure, which will not be easy to rehabilitate. We could mandate government or a private-sector software validation, or institute the use of technologies such as artificial intelligence to police software, networks and systems. But those changes would raise complex physical and political issues, including the role of government and the balance between security and privacy.

Perhaps the answer lies in the development of a new, permissioned secure internet – I2. Access to I2 would be licensed and be subject to a clear set of standards and enforcement mechanisms. Everyone would know how belligerent actions would be classified and what the violators, their country of origin, networks and the pipelines that they use to carry their data should expect to suffer as a response. Little of that exists today, often making a calculable risk-reward ratio for such actions on the internet a non-issue.

Instead, the world has been playing cybersecurity whack-a-mole. In the United States, President Biden’s recent executive order in response to the Colonial Pipeline hack is remarkably similar to the many pronouncements made by Presidents Clinton, Bush, Obama and Trump. Its directive that the government launch a pilot program to effectively provide a “Good Housekeeping Seal of Approval” for securely developed software could be a valuable step forward and requires immediate consideration and implementation, though it does raise the issues noted above.

Cybersecurity awareness was memorialized in President Clinton’s 1996 Executive Order 13010, which identified nine critical national infrastructures. That was followed in 1999 by Presidential Decision Directive 63, which sought to put reliable, interconnected and secure information system infrastructures in place by 2003. That’s right, 2003! Finally, in January 2000, the Clinton White House, which was remarkably prescient about cyber threats, released a 199-page plan for information systems protection warning that the next target would be America’s infrastructure.

Thirty-five days after 9/11, President George W. Bush issued Executive Order 13231 requiring federal agencies responsible for defense and security to protect critical infrastructures. The Bush administration then issued a 76-page report in 2003 creating new bureaucracies to implement some 50 recommendations to prevent cyberattacks against America’s critical infrastructures. Presidential Directives 38 and 54 followed in July 2004 and January 2008, directing federal agencies to secure federal networks and supply chains.

President Obama issued Presidential Policy Directive 20, Executive Order 13636 and Presidential Policy Directive 21 in 2012 and 2013 to facilitate the construction of better defense systems and strengthen the security and resilience of critical infrastructures. The job of securing 16 critical infrastructures was delegated to about two-dozen federal agencies. In 2017, President Trump issued Executive Order 13800, once again directing a gaggle of federal agencies to identify capabilities that agencies could employ to support the cybersecurity efforts of critical infrastructures.

There you have it. It has all been said and resaid many times, with the government deploying two-dozen agencies to share responsibility for lofty goals that have not sufficiently changed conditions on the ground. We find ourselves in 2021 faced with no option other than to use digital technologies that we understand may be hacked by persistent adversaries. And the problem only grows larger each day as systemic vulnerabilities are added faster than solutions can be developed. Averting our eyes will not deter the digital Armageddon that is out there.

We have not devoted enough resources to allow the experts to address what is the most severe problem we face as a country and a world. As a result, it is entirely possible that tomorrow morning, everyday events that we take for granted may be interrupted as power grids go dark, ATMs stop dispensing money, moving vehicles are hacked, financial markets disappear and water systems stop working. The problem will only be amplified by new technologies such as quantum computing.

The country and its digital systems and networks rely to a large extent on the neutralizing effects of mutually assured destruction. It worked with nuclear proliferation. But in cyberspace, it becomes more ineffective each day as technology gets faster, cheaper and more available to rogue nations, criminal cartels, terrorists and fanatics that are not a part of the family of nations. Anyone concerned about the future of cyberspace should carefully review the 182-page report and its 75 recommendations issued by the Cyberspace Solarium Commission in March 2020. It artfully and carefully illustrates the national security threat that cyberspace poses.

Today, we are left with the next best security alternative: ensuring that after a computer, network or system is destroyed, its functionality is rebuilt and restored as quickly as possible. This seems like a preemptive admission of defeat. Imagine if that were the approach used by the U.S. military.

– – – – – – –

Thomas P. Vartanian, formerly a bank regulator at two different federal agencies and then a private practitioner for four decades, is the executive director and professor of law at George Mason University’s Antonin Scalia Law School’s Program on Financial Regulation & Technology. He is the author of “200 Years of American Financial Panics.”

This article was originally published by The Hill

Will the real financial bubble please stand up? By Thomas P. Vartanian, published by The Hill

Will the real financial bubble please stand up? By Thomas P. Vartanian, published by The Hill

March 8, 2021

My longtime friend, Thomas P. Vartanian, formerly a bank regulator at two different federal agencies and then a private practitioner for four decades, is the executive director and professor of law at George Mason University’s Antonin Scalia Law School’s Program on Financial Regulation & Technology. He is the author of “200 Years of American Financial Panics,” which will be published in May 2021.

As Congress begins to reconcile the different versions of financial stimulus passed by the House and Senate to relieve the devastation of the COVID-19 pandemic, we can only hope that someone brings a rigorous sense of financial reality to the table. There is a lot at stake beyond the immediacy of the devastating effects of the pandemic. Congress may once again be paving the path to the next financial crisis.

Financial collapses typically follow the creation of economic bubbles, so it is useful to understand when bubbles are forming. Most bubbles are characterized by too much credit chasing overvalued assets. Many financial bubbles often masquerade for some time as strong economic growth, shedding their disguises only when it is too late to stop them from bursting. Just like the contestants in the popular 1960’s TV game show “To Tell the Truth,” which climaxed when the real baseball player or plumber was asked to stand up and surprise the audience, many bubbles are quite accomplished at fooling even the most sophisticated viewers.

While there are undoubtedly Americans in distress from the pandemic, a short-term fix should be made with full knowledge of the longer-term economic issues that the country faces. As the effects of the pandemic appear to be retreating, the firehose approach to economic assistance should be jettisoned and replaced with targeted assistance. The more pork and unnecessary subsidies that Congress includes, the closer we get to our next financial panic given the context we find ourselves in.

What is that context? Take the bubble that no one seems to ever worry about — the national debt. It sits today at $28 trillion and is growing by the minute. Over the last quarter century, it has continuously been nurtured by Congresses and White Houses that seem to believe that there are no restraints on the country’s borrowing and spending power. That has necessitated an endless series of governmental actions that have distorted markets, which then of course requires further attention and adjustment as markets evolve, leading to even further market distortions.

Since interest rates hit 21 percent in the early 1980s, the Federal Reserve has taken increasing control of the economy, managing it through ups and downs. During the panic of 2008, the Fed rescued a reeling economy by purchasing, among other things, Treasury notes and mortgage-backed securities, ballooning its balance sheet from a meager $870 billion in 2007 to an eye-popping $4.5 trillion in 2014.

Even before the Fed could shed itself of that portfolio and return markets to “normality,” the pandemic of 2020 and the relief efforts enacted by Congress compelled it to increase its portfolio to a whopping $7.6 trillion. It is not clear how long it will take the Fed to unwind its current holdings, if it happens at all. This combination of relentless spending and borrowing has maneuvered the economy into a position that requires constant realignment by the government to avoid new catastrophic economic events.

Exhibit A is how desperately the country needs low interest rates. It is not that it is stimulative to have low interest rates. The country needs rates to be low to avoid even greater financial distress. According to Jimmy Chang, the insightful chief investment officer at Rockefeller Capital Management, a 1 percent uptick in the general level of interest rates would increase America’s annual interest payments on its outstanding debt by about $280 billion, which is 54 percent higher than its interest outlays in 2020, more than 5 percent of the federal government’s total spending in a typical year (pre-pandemic levels) and 40 percent more than the Pentagon’s annual budget for the Navy. Consider what would happen to the U.S. economy if rates climbed to a 6-8 percent level, which traditionally would not have been considered abnormal.

But this is only the tip of the economic iceberg. The United States continues to borrow and print money at a furious rate. The money supply represented by checking deposits, cash and other financial figures is up an unprecedented 26 percent on a year-over-year basis. That means that about a quarter of all money in the U.S has been created in the last year.

This is not a sustainable course of action. The longer-term effects, which may include inflation, deflation, increases in interest rates, increased unemployment and devaluation of the dollar, will all trigger further governmental intervention and adjustments, which will lead to the need for yet further action. While I am not suggesting that the government should not be acting to avoid financial calamities, there is a limit to what it should do. It has acted to bail out markets in every financial crisis since the 1980s, conditioning them to expect soft landings. But not everyone has received a soft landing.

Notwithstanding these and other troubling trends, our leaders seem to be tone deaf to financial realities. Ten financial panics in the last two centuries are proof of that. There will be clear consequences, and perhaps none more likely than the U.S. economy and dollar being surpassed by China as its economy continues to grow and as it surpasses the rest of the world in investments in technology and rare earth metals.

Consider the recent canary in this cave. Some U.S. corporations seem to be hedging their bets against future collapses of the U.S. economy or dollar. Why else would companies such as Tesla and MicroStrategy move billions in Treasury funds into cryptocurrencies that have no intrinsic value? Is it the hype described by Chang as the “Tinker Bell Effect,” or is it that Bitcoin is becoming more trusted than the dollar?

As Congress decides how much to provide in additional relief to Americans, an estimated $1 trillion of the $4 trillion already appropriated has not been spent. But it is difficult to stop the music and actually identify what has been spoken for and what has not been spent.

Those who have been devastated by the impact of COVID-19 should be helped. But using a firehose to distribute that relief will result in more financial pain down the road.

Congress Must Ensure Election Integrity By Senator Rick Scott

Congress Must Ensure Election Integrity By Senator Rick Scott

January 24, 2021

[The horrid election season we just went through in America is by far the worst I have witnessed in my 50 plus years as a voter. Before I say another word, let me be clear about what I am not saying. I’m not saying that Joe Biden should not be President of the United States or that Donald Trump should be. And I’m not saying Democrats should not control the Senate and Republicans should. I am saying, as strongly as possible, that our electoral system is badly broken and our great democracy cannot continue to make our nation the envy of the world unless we come together very soon to make essential repairs so that we can believe that nearly all votes were honestly tendered and counted. I came across an article in Newsweek written by Senator Rick Scott on this very subject and want to pass it along to you.]

After the despicable acts of violence in our Capitol building, it is hard to imagine a worse moment to undermine hopes for political stability in our nation. Democrats, big tech and the media are doing exactly that, however, despite president-elect Biden’s call for unity. They are tarring the 74 million Americans who cast votes for Donald Trump as insurrectionists and silencing legitimate dissent. They are also pretending that Republicans who want to repair our broken election system incited the unforgivable violence in the people’s house on January 6th.

Unlike Democrats who justified the violence and rioting this summer by explaining that “a riot is the voice of the unheard,” Republicans in Washington and around the country expressed near-universal condemnation of the violence and mayhem at Capitol Hill—and they did so without hesitation. Several rioters and a police officer were killed. Dozens of law enforcement officers were beaten and injured. The lives of Democratic and Republican elected leaders were threatened. The shining symbol of American unity, the Capitol building where both parties come together to govern, was desecrated. It was a sad day for all Americans, not just those of us who work there.

Yet Democrats have decided to salt the ground on which they pledge to grow political stability. Though we should respect their resolve to prevent political violence, they are not stopping with that goal.

Big tech, the news media and the Democratic Party have come together to de-platform not just violent voices, but 10 million Parler users. They’ve kicked Republicans who called for stability out of the tech-monopolized public square, while providing a platform for Iran’s Ayatollah to spew anti-Semitism and hate. They’ve proposed adding two Republican U.S. senators to the no-fly list, as if they were terrorists. They are campaigning to get peaceful Americans who disagree with them fired. They propose to impeach the departing president—not to remove him from office, since he is already leaving, but to keep him around and in the news. They want America to stay divided. After all, Biden’s campaign was about Donald Trump, not the Democrats’ own agenda. They are even mobilizing corporate America to withdraw its support of Republicans who are working to stop socialism and ensure that our broken election process regains respect.

Partially due to the Covid-19 pandemic, much of our country rushed without preparation to universal mail-in voting last year. In the process, we blew away some long-standing laws, procedures and constitutional requirements that guarantee fair elections. The thrown-together process in Pennsylvania, for example, may have violated the state constitution. Since the 19th century, that constitution has required all votes to be cast in person, with narrowly defined exceptions. Nevertheless, for 2020, the Pennsylvania legislature voted to allow no-excuse mail-in ballots.

That same state extended election day voting deadlines, creating a two-tiered voting system where some citizens had opportunities to vote not enjoyed by others. The Democratic state auditor general concluded he was unable to confidently ensure that the system used to determine who could vote was secure. Democrats seem to have forgotten that the U.S. Supreme Court also said there was a “strong likelihood” that Pennsylvania’s actions violated the Constitution of the United States.

In elections past, when Democrats have objected to the presidential electoral process, they’ve been lauded as heroes safeguarding the right to vote, not insurrectionists subverting it. My vote objecting to Pennsylvania’s process wasn’t about the 2020 election. It would not have changed the outcome. My vote was about elections to come, in 2022, 2024 and beyond, and seeing that they are conducted fairly. We have to repair the mess at the polls in 2020 if we are to restore Americans’ trust in our elections process. How can either the House or Senate fix our electoral problems unless we are willing to examine them?

That is why I introduced an important piece of legislation last September, the VOTER Act, which would address systemic problems in voting systems across the country and rebuild trust in our electoral process. Over the last few months, I’ve made some changes to the bill and will be re-filing it shortly. The VOTER Act mandates Voter ID in every state, institutes measures to ensure timely results, including allowing every state to begin processing absentee ballots before Election Day, and creates uniform national standards for voting by mail.

De-platforming Republicans, censoring dissent, intimidating GOP supporters and promoting the myth that Republicans supported the violence in the Capitol is corrosive and dishonest. Suppressing speech is fundamentally un-American. It undermines the institutions we need at this critical moment to lend stability to the Republican Party and our country. When the party that controls both the legislative and executive branches abuses its power, it is more than a destabilizing influence on our political system. It is authoritarianism masquerading as the force that will keep America safe.

What President-elect Biden can do to fix outdated financial system by Thomas P. Vartanian published by American Banker

What President-elect Biden can do to fix outdated financial system by Thomas P. Vartanian published by American Banker

November 23, 2020

[My friend, Tom Vartanian, who served in government during the Reagan Administration, wrote the article that follows to suggest steps the Biden Administration should consider taking to update and improve the regulation of financial services in the U.S. The article, published by the American Banker, is well worth reading.]

Dear President-Elect Biden:

Your administration stands at an unprecedented financial crossroads. The course you choose will impact the pocketbook of every American for decades to come.

Four years ago, I wrote a similar letter to President-Elect Trump, calling on him to address the exponential regulatory costs since the 2010 Dodd-Frank Act. But a lot has changed since, and your administration faces a whole new set of challenges.

Some will tell you that sound financial regulation is just a matter of rolling back the regulatory policies of the last four years, and writing more and harsher rules. Nothing could be farther from reality.

Financial services in America will only thrive if you appreciate that new delivery systems and new financial products require an overhaul of our obsolete concepts of oversight. Four critical economic and financial challenges lay before you.

Read Full Article >

BankThink Wall Street’s Cohn is wrong about community banks by Rebeca Romero Rainey published by American Banker

BankThink Wall Street’s Cohn is wrong about community banks by Rebeca Romero Rainey published by American Banker

November 2, 2020

[Rebeca Romero Rainey, President & CEO, of the Independent Community Bankers of America, wrote the following article for the American Banker in response to comments by Gary Cohen, formerly of Goldman Sachs, predicting at the American Bankers’ Association recent meeting the demise of community banking as we know it. I believe and certainly hope Rebeca has the better side of this argument.]

Former Goldman Sachs executive Gary Cohn’s recent assessment of the community banking industry proves that Wall Street has very little understanding of what’s actually happening on Main Street.

Contrary to Cohn’s hot take as a National Economic Council ex-official, these challenging times have elevated the role of community banks, which have paired technological prowess with relationship-based banking to serve as predominant lenders, particularly under the Paycheck Protection Program.

In fact, Small Business Administration data shows that community banks made nearly 2.8 million PPP loans — more than half of the program’s total loans — that helped save millions of jobs. With a national presence in every congressional district, community banks reached neighborhoods both with technology and in personal ways that big banks couldn’t.

Cohn’s remarks at an American Bankers Association event about technological evolution simply do not reflect the current state or the bright future of community banking.

Community banks have long had a history of being more nimble than mega banks. And it’s commonplace for community banks to partner with core providers and other third-party vendors to provide the latest technologies and services to their customers.

They are increasingly partnering with and investing in innovative fintech companies to transform the banking system. As a former community banker, I’ve seen firsthand how technology service contracts are scaled for the size of the bank, based on asset size or the number of transactions.

This means that a bank with $200 million in assets can afford the same technology and services for their customers as a $50 billion or more asset bank. For some reason, this isn’t common knowledge, but it is how bank service and software contracts are structured.

What should really concern industry pundits is the withdrawal of the largest banks from the local communities most in need of access to financial services.

Community banks added 628 new offices for the 12-month period that ended in June 2019, according to the Federal Deposit Insurance Corp.’s latest annual report. Noncommunity banks added only 498 offices and closed 2,387 offices over the same period.

Meanwhile, community banks also held more than 75% of deposits in roughly 1,200 U.S. counties, of which, more than 600 of those counties had a community bank provider as their only banking office option, the FDIC study said. Meaning, these communities would not have physical access to a federally insured depository institution if not for community banks.

Through the ups and the downs, community banks have continued to operate within the strenuous regulatory requirements often provoked by the misbehavior of the megabanks and the subsequent economic fallout like the 2008 financial crisis.

In fact, it was Cohn who testified before Congress on the role of Goldman Sachs during that crisis, so he should remember it well.

Wall Street representatives, and their supporting groups, should take another look in the mirror. With the continued scandals and fines levied against megabanks for wrongdoing harming consumers, it’s clear community banks are not the culprit.

The 5,000 community banks across the nation continue to get the job done without fail while serving as the backbone of local economies through nimble decision-making, personal relationships and yes, technological innovation.

President Reagan signing Garn-St. Germain Depository Institution Amendment on October 15, 1982

President Reagan signing Garn-St. Germain Depository Institution Amendment on October 15, 1982

October 13, 2020
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Tom Vartanian, served as a lawyer at the Comptroller of the Currency in the late 1970s and then became General Counsel of the Federal Home Loan Bank Board in the newly elected Reagan Administration. We have remained friends to this day. Tom sent me a video from youtube of the ceremony in the Rose Garden in which President Reagan signed the Garn-St. Germain Act of 1982 marking beginning the official deregulation of insured depository institutions to enable these institutions and the government to better cope with sky high interest rates (21 1/2% prime rate) in a highly inflationary environment. It brought back great memories of an extremely challenging and rewarding time serving my country in an extraordinary financial crisis and much needed restructuring of our financial system.

BankThink OCC official: We want to be diversity role model for banks by Grovetta N. Gardineer, published by American Banker

BankThink OCC official: We want to be diversity role model for banks by Grovetta N. Gardineer, published by American Banker

October 6, 2020

Dear Grovetta,

I’m writing to thank and congratulate you for the wonderful article you wrote for the American Banker recently on the challenges you dealt with as a woman of color growing up in the North Carolina in the 1960s and 1970s, becoming a lawyer and devoting your career to bank supervision at the FDIC, the Office of Thrift Supervision and the OCC. I believe you arrived at the FDIC shortly after I left as Chairman, and your story makes me very proud.  “Carry yourself with dignity so you may earn respect” is a central lesson you learned from your mother, who was principal of your high school, and your father, who was a minister active in the Southern Christian Leadership Conference.

I enjoyed reading your article and plan to include it on my website.  My congratulations as well to Comptroller of the Currency Brian Brooks for supporting your efforts to improve bank supervision and the Community Reinvestment Act.

All the Best,

Carry yourself with dignity so that you may earn respect.

I learned that lesson growing up in rural North Carolina in the ’60s and ’70s from my mother, the principal of my high school, and my father, a minister who marched for civil rights as part of the Southern Christian Leadership Conference.

They were examples of what African American leadership and service meant, and they inspired me to a life of public service. They also prepared me for the reality that, as a woman of color, I would encounter bigotry and ignorance in the course of my life. Those life lessons proved valuable personally and professionally.

I chose to stay in North Carolina to pursue my dream of becoming a lawyer. I believed that path would allow me to address persistent racial and economic injustices.

As a student in the early ’80s at Wake Forest University, where African Americans were a tiny fraction of the population, I was told when seeking help from an instructor, to ask someone of “my own kind.” Those words shocked me, but I was undeterred.

I engaged that moment with dignity — although it was not met with respect. And I realized the truth of another childhood lesson: I would have to work twice as hard to get half as far.

Following Wake, I chose North Carolina Central University Law School, a historically Black school and my father’s alma mater. NCCU had a great pass rate for the bar. More importantly, the dean, the instructors and other students looked like me. I was supported, challenged and pushed — hard.

I carried myself with dignity, and there, it was met with respect. I became part of the moot court team where we had great success — not among small schools or just other historically Black colleges and universities but against the big-name schools and Ivies.

We were coached to argue without notes, a respected tradition of NCCU law with no safety net to catch us. Looking back, I recognize this was preparation for the relevant life lesson — twice as hard, half as far.

In my third year during a career fair, I discovered the Federal Deposit Insurance Corp. honors program and became the first African American admitted to the program. I joined the FDIC after earning my law degree with honors from NCCU in 1987 and began a 33-year (and counting) career regulating banks. I began at the FDIC, then at the Office of Thrift Supervision and now at the Office of the Comptroller of the Currency.

During this time, I have seen progress in our country, in banking and in federal service. Yet I still see too few people who look like me in board rooms, in senior leadership positions among federal agencies and among international bank supervision leaders.

In those settings, just as in the nearly all-white classrooms of Wake, I am still among the very few women, and almost always the only woman of color.

That fact bestows a huge responsibility on me to represent other women, particularly women of color with the dignity to garner the respect we deserve. I am proud and humbled to have the opportunity to be an envoy for my gender, race and nation, demonstrating that there is strength in diversity.

As the head of bank supervision policy at the OCC today, I work with many talented and diverse women and men to ensure that the federal banking system operates in a safe, sound and fair manner.

For me, fairness is not a sound bite. It is a rally cry that my heritage obligates me to work toward. Bank supervision offered me an opportunity to fight inequality in a system that is fundamental to the livelihoods of all Americans — aligning, unexpectedly, with my career goal when I went into law. Fair access is built into the mission of the agency I serve by statute. I take this charge to heart. Unfairness stings in visceral ways.

We have a purpose and responsibility to model the kind of people we hope others become, through our work and behavior. That is why I have dedicated my career to breaking down the structural barriers that prevent some from being afforded dignity and respect that accompanies full and fair participation in the financial system.

It is why I am proud to associate my parents’ name with modernizing the Community Reinvestment Act of 1977, to promote lending and investment in underserved communities. And also, supporting an OCC venture called Project Reach to tackle stubborn systemic issues that shut people out of a system that has bestowed wealth and benefits on others.

Few might have imagined that a Black preacher’s daughter from rural 1960s North Carolina would someday be responsible for shaping the standards for the largest banks in the world and community banks across our country.

At such a heady moment in our history, when social unrest continues as a consequence of too many people being excluded from or underserved by our financial system, I feel a special obligation to use this extraordinary opportunity to work toward making things fair for all.