Arezou

The Wall Street Journal last week described Bill Pulte’s recent mortgage-fraud allegations as ill-advised “political lawfare.”  Thus it is, but it’s also an unfortunate distraction from a high-priority decision within Mr. Pulte’s legal remit:  ending the GSEs’ conservatorship.  If FHFA and the Administration do not tread carefully, they will do a lot of damage not just to the mortgage market, but also to the President’s mid-term hopes and long-term legacy.

The GSEs matter this much not just because a liquid, affordable mortgage market matters so much.  It’s also because the GSEs issue $7.7 trillion in debt obligations, or almost a third of Treasury’s $29 trillion.  The type of federal backstop afforded to the GSEs or assumed by markets determines how much Fannie and Freddie must pay to attract investors.  How much the agencies pay also affects how much Treasury must pay to do the same.  Because Treasury obligations float the U.S. Government’s boat, the cost of agency debt matters even more.

As we noted in a FedFin report last week, the GSEs federal guarantee comes in four flavors:  explicit, “effective,” implicit, and none to speak of.  Privateers refer the last flavor, but markets will assume the GSEs still enjoy an implicit guarantee no matter what anyone says, so the real flavors on offer are only the first three.

Because the GSEs are in conservatorship, they now have what FHFA has long called the “effective” guarantee – i.e., they are almost as good as full-faith-and-credit USG obligations, but not quite that …

Following a talk last week, FedFin managing partner Karen Petrou was asked her thoughts about how different conservatorship-exit options affect the Treasury market and thereby the dollar’s reserve-currency status. This issue has yet to surface in public debate, but it is top-of-mind for Treasury and thus will govern what Pulte and the President are likely to do….

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As we recently noted, bipartisan senators are readying an amendment authorizing almost-unlimited FDIC coverage for noninterest-bearing transaction accounts as long as the bank accepting them is smaller than $250 billion. Pressing for this, Sen. Warren said the new FDIC backing should only be available to smaller IDIs because, “The giant banks don’t need another subsidy.” Maybe, but this still leaves open a critical question: why should larger banks pay the premiums that back FDIC-insurance subsidies for their competitors? If this makes sense for FDIC insurance, then why stop here? Let’s have the biggest banks also pick up the tab for small-bank modernization, branch expansion, and maybe nicer signs.

If big banks need to nurse small ones along, then the small-bank business model needs a reboot, not de facto nationalization for smaller banks that can’t find their way. Many do. In fact, smaller banks with marketing acumen have long been able to attract deposits by paying a bit more for them. Further, it’s not as if smaller banks can’t get added coverage if they want more deposits. All that’s different is that smaller banks must pay for this themselves instead of sending the tab over to the rest of the industry and, down the road, to depositors and taxpayers.

As a recent note from the Federal Reserve Bank of Dallas pointed out, reciprocal deposits meet the needs of banks that want more FDIC coverage. All it takes is paying a fee for this privilege, and the $500-$600 million total annual cost …

Senate Banking GOP leadership has introduced legislation grandfathering existing merchant-banking holdings into a new, fifteen-year maximum tenor. Merchant-banking activities have not been widely discussed in many years, but are likely to gain renewed interest now that nonbanks may gain expanded banking powers under pending cryptoasset legislation. Banks have also long suffered under real-estate development and other activity limits they may seek to remove if this legislation advances….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

About 8 weeks ago, FedFin found that a four-figure check had gone astray like so many others have for other people. We thank the USPS inspector who brought to our attention that the name of the depositor wasn’t even close to that of the payee, something one likes to think banks notice, even though none did. Given this initial goof, perhaps I shouldn’t have been surprised by how hard it is not only to remedy the loss but also to strengthen our firm’s payment practices. We agreed with the bank that they needed modernization, but three weeks after gaining the audience necessary to file the claim and ask for help, our administrators are still mired in paperwork, not enjoying the enhanced protection for which we agreed to pay for on the spot. And our lost money? Don’t even ask.

At a time of soaring fraud at ever-higher cost to banks, one might have thought ours would have been eager to facilitate our update. After all, we lose use of stolen funds, but the bank is obliged to repay us and take the loss. Which bank is on the hook is of course a battle between banks, but the payer-facing bank is the one that needs to keep the customer. I am sure the bank at every managerial level knows this, but bank culture is often so immutably mired in rigid processes and procedures that critical jobs never get done. Why is it so hard not just to get fraud remediation …

Pursuant to the President’s executive order, the President’s Working Group on Digital Asset Markets (PWG) yesterday released a detailed report outlining specific policies the Administration will now follow or pursue. As we noted yesterday, the report is unreservedly pro‑crypto, emphasizing the benefits of these assets to the United States while also reaffirming the Administration’s strong opposition to a CBDC.  The recommendations for banking agencies are most specific when it comes to new capital standards, with the report detailing how it believes cryptoassets should be treated in new standards the agencies are to issue as quickly as possible…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…