We yesterday laid out our thinking on the overall construct of FHFA’s plan to create secondary-market entities (SMEs) from the GSEs’ ashes. Here, we turn to the details of the prudential rules FHFA proposed for these SMEs to build out our analysis on how challenging it would prove to make a viable private entity from the FHFA plan if its standards are upheld by the Congress. There are numerous structural obstacles to a clean-shot transformation of GSEs into SMEs, but we think subjecting these successor entities to the bank-like capital standards FHFA suggests are an insuperable barrier to near-term SMEs without a lot of taxpayer risk. On the other hand, SMEs established without meaningful regulatory capital are just GSE redux, and that didn’t work out all that well. As a result, meaningful capital continues to be a formidable obstacle to a significant role for private-capital substitutes for some form of taxpayer-backed institutions.
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