Watt Stands Up for Taxpayers and Stands Up to Bob Corker at Senate Banking Committee Hearing
- May 11, 2017
Federal Housing Finance Agency Director Mel Watt today told the Senate Finance Committee he thinks it would be better to use his authority as Fannie Mae and Freddie Mac’s conservator to suspend quarterly dividend payments to Treasury than to have the companies’ depleted capital buffers set the stage for a draw on taxpayer funds to meet shortfalls.
Using the analogy of operating a car subject to a safety recall with his family in it, Watt acknowledged the risk of great harm might be low but it is a risk he would not take. Watt should be commended for taking his role as conservator of Fannie and Freddie seriously, and for trying to mitigate risks with taxpayers’ money and housing finance marketplace stability.
“You gave us the car and told us to keep it safe and sound,” he said, referring to the authority conferred on Federal Housing Finance Agency (FHFA) with the Housing and Economic Recovery Act of 2008 (HERA).
Senator Bob Corker, R-TN, displaying a scary level of comfort of living with leveraged risk as a high rolling entrepreneur before being elected to the Senate, scoffed at Watt’s caution.
Corker asserted that the GSEs have a $258-billion credit line to Treasury and openly dared Watt to draw $10 billion right now from the Treasury (aka the taxpayers), just to see what would happen. Corker said he was sure it would barely make a ripple. Watt pushed back that such a step is unnecessary at this time. However, entertaining Corker’s hypothetical, he assured he would never play so fast and loose with public money. He said a draw could precipitate market volatility, unsettle investors and drive interest rates up.
Corker, undeterred, persisted by calling Watt’s regard for the taxpayers’ protection “one of the most baseless arguments I’ve ever heard” and goaded Watt “just do it anyway” before moving on from the subject, and eventually storming out of the hearing.
While Watt declined Corker’s challenge to gamble, he acknowledged he might be forced to use his authority under HERA to retain the GSEs’ earnings in the remaining quarters of this year to avoid the need to tap the credit line to address possible shortfalls when the GSEs’ capital buffers dry up completely on January 1, 2018
Committee Chairman Mike Crapo, R-ID, discouraged Watt from exercising that authority. “Suspending dividend payments will lead some to believe that reform is not urgent,” Crapo cautioned. “I would encourage you to work with this committee to make sure this does not occur.”
Lawmakers’ sense of irony seems to be vanishing as rapidly as the GSEs’ capital reserves. Despite Crapo’s claims of GSE reform being “urgent,” for the past eight years, Congress has been unable to act on GSE reform. Even the built-in deadline created by a three-year whittling away of the GSEs’ capital reserves was not enough to catalyze action by Congress, and only reinforces that many of these lawmakers, especially Senator Corker, haven’t learned anything from the 2008 financial crisis.