IUHF: the world watches Washington

October 7, 2008 | Capital markets, Conferences, Global news, IUHF, Subprime, US News

“Yawning is contagious,” I told the International Union of Housing Finance (IUHF) audience.  “Sneezing is contagious.  As we saw last night at the boma dinner, dancing is contagious.”  Small chuckles.  Drinking is contagious.”  Larger chuckles.  “Risk-taking is very contagious.  And for a decade or so, the world has been drunk with risk-taking, and become de-sensitized to it.” 




“For most people, the critical number in buying a house isn’t the price, it’s the monthly payment.  I can pay this much – how much house can I buy?  That, in turn, depends on interest rates.  When the market becomes inured to risk, spreads compress, so interest rates get low, so the same payment by me buys more notional value of a house.  That’s where your bubble came from, and it hit housing mainly because housing is the world’s largest asset class and the one that everybody’s familiar with.”



In worrisome times, should you really stage your event with lurid blood-orange background?


The IUHF’s 27th world congress took place in Sun City, South Africa, over precisely the interval in which the US House of Representatives rejected the troubled Asset Recovery Program (TARP), so the panel I was on – the global financial crisis equivalent of Sister Mary Elizabeth Explains It All For You – was well attended.


I had only fourteen minutes, so I had to hit the highlights (readers can click the links for the original posts on these concepts. 


“There will be reform, because there has been catastrophe.”




“What’s instructive is that each time there’s a catastrophe, the radius of regulation expands to encompass the new actors whose rise to prominence coincided with the runup in asset prices.  Insider trading leads to momentum buying and selling on Wall Street, and the 1929 crash?  Require full and complete disclosure of all new issues (1933 Act) and resales of public stock (1934 Act).  The S&Ls had a license to print money (FDIC deposit insurance), credulous appraisers gamed the system, and a bailout ensued (1989)?”




“Bring them under state certification (FIRREA).  Directors being too-cute with off-balance-sheet risk buckets (Enron)?  Put them at risk of jail (Sarbanes-Oxley).  Bet on it, more comprehensive legislation is coming – everybody’s a bank, and the only safe bank is the Bank of Glass.”




I briefly summarized the Paulson doctrines:




[Postscript: both WaMu’s collapse and Wachovia’s purchase by Citi (with Treasury backstopping of deposits) adhere to the Paulson doctrines, particularly “do as little as possible.” 



You’re trying to get me to save another bank, aren’t you?


Treasury, via the FDIC, is already obligated to protect depositors, so its commitments in WaMu and Wachovia are more than likely what was already on the books. WaMu was allowed to fail because a stronger bank – Barclay’s – was in a position to buy the asset pool.  Citi’s purchase price of Wachovia makes a large allowance for subprime losses, and the Treasury backstopping is only against the depositor base.]



Now you don’t have WaMu to make fun of any more



Or Barclay’s will


“Everybody’s a bank now – the last two independent holdouts, Goldman Sachs and Morgan Stanley, have become bank holding companies and at least small-scale deposit-takers – and everybody’s going to be regulated.” 




Any unrationed resource is always over-used, I said – whether deposit insurance (the 1986 S&Ls) or credit subsidy (the GSEs’ implicit-but-not-explicit Federal guarantee, 2008).  Yet any resource can be managed, via outsourcing, if you have a proper capital-cost allocation approach, you make the originator take first loss, and you require originators to maintain sufficient liquid capital.


“In America we have the Fairness Doctrine, where after the station’s editorial they give equal time to ‘opposing views from responsible spokesmen.’  Here on a panel with Alex Pollock and Bert Ely, both long-time critics of the GSEs, I feel the necessity for defending them, at least in part.”


They can be leashed, I said, and their proven innovative capacities – DUS and DUI are extremely well-designed programs – channeled into ongoing affordability-frontier activities.  [I’ll have much more to say about the GSEs’ future in a forthcoming post – Ed.]


Two evenings earlier, the House had – unexpectedly – voted to reject the Troubled Asset Relief Program (TARP) legislation, even after its committee review and improvement.  This had plunged the delegates, who had been dining in Sun City‘s unbelievably garish (it makes Vegas look high-class) Hall of Treasures, into gloom that seemed only to worsen with Congress out of session for Rosh Hashanah and global stock markets gyrating. 



This is the high-class part of Sun City — honest


Various of us thought it all but certain that, by hook or by crook, the Coalition of the Rational would find a way to get it through – but as we delivered our presentations, nobody knew.  The moderator, Alex Pollock of the American Enterprise Institute, had noted that two Congressmen he spoke with – most likely solid small-c conservative Republicans – reported their mail running 60-to-1 against.  So he had the bright idea to poll the panel – assume cloture, no amendments possible, a straight up-or-down vote.  On TARP, Yea or Nay?



Two hands, two positions!


Bert Ely voted present. 


I voted “Yes, and expect to lose my next election.” 


Of the seven of us – three Americans, one Canadian, one Belgian, one Mexican, and one French-expatriate-resident-in Washington – six voted Yes.  “But wait!” I said.  “Let’s poll the audience!”



“Here’s a revolutionary idea – let’s ask the citizens.”


By our unofficial hand count, about 85% voted Yes.


At the break, I was approached by “Dick, from Australia.  Do you think it’ll pass?”

I considered.  Yes.”

“Will it work?”

Again I considered.  Yes.”

He nodded.  “Good.  Australia really needs it.” 



Here’s to helping Oz!