Sharing Risk with Risky Players Like Wells Fargo
- September 15, 2016
As a scandal at Wells Fargo renews concerns about the banking industry’s apparently unshakable penchant for shadiness and greed, Fannie Mae and Freddie Mac continue to report steady progress in making more of the credit risk in their portfolios of home loans available to private investors, such as mortgage insurers and, of course, banks. Once again, caution and scrutiny is warranted.
Yesterday Freddie Mac announced the latest tranche of its Structured Agency Credit Risk (STACR) debt notes, the mechanism by which Freddie has been transferring a significant portion of its mortgage credit risk on certain groups of loans to private investors. Freddie reports more than 200 unique investors, including insurers and reinsurers, have assumed a significant portion of credit risk on nearly $530 billion of unpaid balance principal on single-family mortgages. Freddie reported it is partnering with Bank of America Merrill Lynch and Goldman, Sachs & Co. in facilitating these transactions. Late last month, Fannie Mae announced it had transferred a portion of the credit risk on single-family mortgage loans worth $741.8 billion to private investors through its Connecticut Avenue Securities (CAS) transactions.
These figures suggest there is demand in the financial marketplace for Fannie and Freddie’s business. Indeed, Fannie and Freddie’s offerings might represent a good deal for some investors but it is important to ask, as we have before, whether or not they are a good deal for Fannie and Freddie. The GSEs are still trapped in a government-run conservatorship after eight years, so it is hard to evaluate if Fannie and Freddie would undertake these transactions were it not for the mandate to do so from the Federal Housing Finance Agency. We have also pointed out that risk sharing could end up hollowing out Fannie and Freddie, but not ultimately create a private-sector alternative to them. The reason is the lack of an adequate and reliable pool of capital for mortgages on a consistent basis.
The scandal at Wells Fargo highlights another important reason for policymakers to ask more questions as Fannie and Freddie are forced to transfer credit risk to the nation’s largest banks. The nature and scope of the scandal is jaw-dropping. This was no isolated caper by a handful of rogue employees. We now know that 5,300 Wells Fargo employees opened up as many as two million unauthorized accounts for its customers. Many accounts were apparently closed almost immediately after they were opened. Many of the bank’s customers might not have even been aware they were used to generate fees that helped employees rack up bonus pay. Carrie Tolstedt, the Wells Fargo executive in charge of the operation, is conveniently retiring from a job that reportedly provided $125 million in compensation.
Fortune reports that when Tolstedt’s retirement was announced, Wells Fargo’s CEO John Stumpf said she had been one of the bank’s most important leaders and “a standard-bearer of our culture” and “a champion for our customers.”
Eight years ago this month, the bursting of the housing bubble cascaded into a financial and economic crisis of historic proportions. Since then there has been a lot of finger pointing about who or what was to blame and what remedies were needed. The bitter irony is that the banks and other mortgage originators who were fined billions for peddling high-risk and fraudulent loans that were the source of the crisis are back in business, and as the Wells Fargo scandal demonstrates, at least some of them are back to their old tricks.
Congress seems willing to overlook this. Earlier this week, the House Financial Services Committee approved a bill that would scale back elements of the Dodd-Frank Act and repeal the Volcker Rule, which is aimed at stopping banks from making risky bets with their own money.
Meanwhile, Fannie and Freddie shareholders await economic justice. To be sure, the outsized role of Fannie and Freddie in mortgage finance needed to be addressed. By now, the GSEs should have been properly reformed and shareholders made whole, as required by the Housing and Economic Recovery Act. Instead, Congress and the Administration have been partners in their inaction in coming up with needed reforms that protect shareholder rights. Congress has raised hardly any objections to Treasury’s reckless and illegal Net Worth Sweep that has depleted the GSEs of capital, and lawmakers, for the most part, continue to look the other way as risk-sharing whittles away at Fannie and Freddie’s core business.