Affordable Housing Institute : US

Last week, to the market’s surprise, Freddie Mac CEO David Moffett resigned:

 

“Why did you resign?”  “That – would be telling.”

 

As the Washington Post reported it (in red text; text from a contemporaneous Wall Street Journal article is in dark blue):

 

The government-appointed chief executive of Freddie Mac announced yesterday that he is stepping down just six months into the job because, associates said, he was frustrated with the intense scrutiny by federal regulators and the short leash they keep the company on.

 

Feeling hobbled?

 

His resignation is effective Friday the Thirteenth:

 

Moffett will step down by March 13.

 

Have a nice rest of your conservatorship

 

Now Mr. Moffett has reversed the short leash, giving the board a very short window to find his successor:

 

The board expects to name an interim chief executive by then. People familiar with the situation said Chairman John A. Koskinen or another board member is likely to fill in temporarily. Freddie Mac has had a temporary chief financial officer since September.

 

Who should the Board choose?  There’s no shortage of plausible role models:

 

Dangerous job, Kemo Sabe

 

Rob from the rich and give to the delinquent?

Here I am, to fund your loans!

 

Your hobe: gib it do me

 

“How can anyone solve this recapitalization mystery, Holmes?”

“Elementary, my dear Watson”

 

While there’s no shortage of fictional candidates, in the world of real this will be a tough position to fill.

 

The resignation signals the challenges the Obama administration will face in finding highly experienced bankers to head financial institutions and do the government’s bidding without huge pay packages.

 

For whom are we looking?

 

Here’s my list, and the reasons why:

 

Where is “able to work miracles’ on the list?

 

A.        Experience and curriculum vitae

 

Say what you will about past leadership of Fannie Mae and Freddie Mac – and we have – there is no question both enterprises are enormously large, complex mission entrepreneurial entities that are integral to the US housing financial ecosystem.   This is not a job for amateurs.

 

You need a professional

The first scan, therefore, must be for experience and sectoral knowledge, which manifests itself in six attributes:

 

A1.       Strategist but with a deep knowledge of housing finance

 

This is not the job for a neophyte or a generalist.  Affordable housing program design is hard, the market is in turmoil little short of tumult, credit is scarce, and the GSEs pumping of liquidity is as akin to a beating heat in the body financial.

 

Keep that liquidity flowing

 

Fixing the GSEs is heart surgery and brain surgery combined.  Get the best, get the surgeon.

 

            A2.       Impeccable policy credentials

 

From the Wall Street Journal article, Mr. Moffett was, if not sandbagged, at least unpleasantly surprised by his new employer:

 

In mid-August of last year, Mr. Moffett received a phone call at his home on Amelia Island, Fla., from a senior U.S. Treasury official asking him whether he might be interested in running a major financial institution that was about to be taken over by regulators.

 

 He thought they meant ‘bank,’ a job for which Mr. Moffett, as the former CEO of US Bank, was well qualified.

 

Mr. Moffett said in a recent interview that he didn’t know he would be running Freddie until a day or two before that was announced in early September.

 

Mr. Moffett was not prepared to run an entity that had the dual mission of a GSE, which has always been a Mission Entrepreneurial Entity, defined as:

 

 

They became so successful, particularly in the Jim Johnson era – an interval that coincided with a decade-plus-long benign environment where every risk was rewarded, every shortcut unpunished – that they deluded themselves into believing there were neither hard choices nor systemic risks in their business model. Seduced by easy profits, they took foolish risks, and lost their way.

It all began with a crash, didn’t it?

 

Fannie Mae’s past leadership has been especially reviled – and with considerable reason – although Freddie Mac’s has not escaped criticism. 

 

A person briefed on the decision said Mr. Moffett saw conflicts between government policy mandates and his efforts to turn around the company. In his prior banking career, Mr. Moffett dealt with shareholders, community representatives and rating firms, as well as regulators, but he found the Freddie job “one-dimensional: It’s just policy,” this person said. Another person close to the situation said Mr. Moffett’s decision was partly due to frustration with a job offering little freedom to maneuver. “He’s a private-sector guy,” this person said.

 

 To rebuild that trust in both the private and public sectors, we have to bring in a CEO whose integrity and commitment to affordable housing are unquestioned.

 

I’ll take my oath you’re not the right fellow: Angelo Mozilo

 

            A3.       Demonstrated ability to straddle economics and policy

 

Whatever their future end state may be – for discussion, see Part B below – Freddie Mac and Fannie Mae will continue to have a dual role of both fiscal soundness and maximizing affordability. 

 

When Moffett considered adjusting prices on certain types of mortgages to reflect the declining economy, Lockhart intervened and urged the firm to keep mortgages as cheap as possible, people familiar with the matter said.

 

 The double bottom line isn’t a flaw in their design, it’s an intrinsic element; the design flaw, if flaw there was, is in how you put in place governance to manage the inherent tension.

 

One foot on each shore

The McLean, Va., company gave no explanation for the resignation, effective March 13, but said Mr. Moffett “indicated that he wants to return to a role in the financial-services sector.”

 

 An appalling statement, that – if Mr. Moffett thinks that Freddie Mac isn’t in the financial-services sector, then he had no business staying.

When reconstituted – and even Hank Paulson’s swan song reluctantly acknowledges that they will be reconstituted as some form of ongoing enterprise – the enterprises will continue to straddle the twin objectives of policy and economics, so their emergent leader must be someone who’s demonstrated he can balance both, bestriding the ongoing tension.

 

Tension?  What tension?   Sam Zell

 

            A4.       Has run a large organization with very smart people at its apex

 

 Just as a person cannot escape the imperatives of his or her body, an organization’s character is strongly influenced by its size – how many people, how far-flung – and its product sophistication – the average intellectual input required at each stage of the company’s value chain.  Big organizations are not run like small ones – it’s a different tempo and style of direction, a different mix of skills.

 

Though Mr. Moffett’s title is CEO, his job is more like that of a chief operating officer. The FHFA runs Freddie under a legal procedure known as conservatorship, under which the regulator assumes the powers of the board and shareholders and seeks to restore the company to financial health. Freddie’s main rival, Fannie Mae, also is under conservatorship.

 

For many reasons, Jack Welch is the wrong man for this job, but someone who’s had the pedigree of leadership in large organizations.

 

And we could call it, The Manhattan Project, couldn’t we?

 

A5.       Not political; either bipartisan or apolitical

 

Freddie Mac, like Fannie Mae, is intended to be a national utility, so its CEO’s position is not an advocacy or partisan slot.  Partisanship will kill it.

 

Remember, it’s the bipartisanship, stupid

 

A6.       Not recently associated with a failed or even questionably risky venture

 

 If the leader is to command respect, he or she needs to be someone not recently associated with horrible failure or foolish dismissal of risks.  Unfortunately for us, virtually every major bank around the world has had its share of problems.

 

Available but associated with a recently-struggling institution: Bob Rubin

 

So much for experience and the CV.  What about attributes, abilities, and character?

 

 [Continued tomorrow in Part 2.]

 

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