December 12, 2016
What We’re Reading This Week
Fannie Mae and Freddie Mac
During his campaign, the president-elect signaled that he would like to remove the mortgage finance companies from government control and into the hands of private shareholders. New shareholders via an IPO or old shareholders that lost a ton of money? Who knows? I don’t hate talking about this as much as I hate talking about Wells Fargo but it’s close. I’ve written about this before and at the time I only had to read about this debate once or twice a month. But now, with Mr. Trump taking a vocal stance, I have to read about this every other day. Steven Mnuchin added fuel to the fire when he brought it up again. This is maybe the stupidest debate in finance right now. According to Mnuchin, “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.” YES IT DOES. Here is how it works (simply). The mortgage lenders needed help during the financial crisis and the government gave it to them in exchange for control. The companies began generating profits in 2012-ish and the government began to reap said profits. This pool of profits has grown to $60 billion more than the original bailout. Again, the government essentially bought these companies and has since profited to the tune of $60 billion – this was a great move for the government. However, now that they are profitable there are two arguments for why these companies should be returned to private ownership – both are pretty dumb. But since there is money involved you get two kinds of supporters: morons and people that will pretend to be a moron because they could make money. Former Freddie and Fannie shareholders want the companies returned to the public sector and their original investors. These are people that lost money when the government bailed the firms out and now they want their money back because the companies are profitable. I mean, I understand that most people that lose money want it back but the investment failed – you can’t get your money back. If the government didn’t intervene Fannie Mae and Freddie Mac wouldn’t be in a substantially better position now. You don’t deserve more money. Technically, taxpayers invested in those companies and now taxpayers are benefiting from the investment (the way I view the transaction is that the more money Fannie and Freddie generate for the government the less I need to pay in taxes…it’s not perfect). Anyway, the second argument is that these companies could fail again and as wholly owned subsidiaries of the Federal government taxpayers would be liable for the loss. No. No, no, no. The government collected around $130 billion from Freddie and Fannie since the bailout. If they need some of that money back…it’s not another bailout. It’s really not. They would be merely giving back profits. The argument that we need to return some of these profits, one day, is not a justification to give up all future profits now.
I guess it’s only fitting for me to rant Fannie and Freddie the same week I rant about Wells Fargo (some more). The Times ran a story about the bank avoiding litigation over the fake account scandal by routing customer suits through the arbitration process. When most people sign a contract with a financial institution there is a clause that states they waive their ability to sue in civil court and such complaints will be handled in an arbitration hearing. Gainplan has such a clause in our documents and many times an arbitration hearing is more affordable than going to court for an individual. Things change a little when you are dealing with a very large institution – arbitration kills the ability for large groups of clients to sue in a class action suit, forcing them to cover their legal costs individually. It seems Wells Fargo has been quite adept at navigating the arbitration process. Case in point: in 2009 many banks were under legal pressure regarding the way they processed overdraft fees. Most of these institutions settled and paid around $1.2 billion to affected customers. Wells Fargo first fought the suit in civil court for a year and then invoked its right to arbitrate. They have been making appeals ever since and the case remains open. This is not great. The Senate Banking Committee (among other groups) has been asking hard questions about the bank’s use of arbitration over the years. In the light of the scandal, special scrutiny is being given to cases that have previously flown under the radar. I understand how the bank can push disputes towards arbitration, there is a clause right there in their contracts after all. However, many of these suits are related to accounts people never intended to open. How can you force an arbitration clause on a person that wasn’t aware of the agreement in the first place? Wells Fargo says that these customers had other contracts with the bank that they were aware of and these account agreements apply to any suit with the bank, even if the customer was unaware of one or more of their accounts. Some judges have agreed, others have not. The bottom line is that it’s a really terrible time to be a Wells Fargo employee. If you work at Wells Fargo, my advice this holiday season is to avoid the inevitable onslaught of hatred at your next family gathering and tell everyone you run a dog fighting ring or something less controversial.
Hey, as long as I’m ripping on banks let’s talk JP Morgan. The bank recently settled with the SEC, the DOJ, and the Federal Reserve regarding its illegal practice of hiring the children of Chinese government officials. The total settlement will be $264 million. Have I written about this before? I don’t know, at this point it’s hard to keep my bank scandals straight; I feel like most bank scandal headlines should read like this: “(Bank Name) did something illegal…obviously.” Matt Levine at Bloomberg has a great write up on it, replete with incriminating emails. My love for dumb emails from employees unearthed after an investigation has been well documented and this case is a treasure trove of stupidity. Perhaps my favorite excerpt is: “Blink blink nod nod, can we find a place for his son (they have only approached us in this regard)?” Ummm, ok, so I think they were going for, “Wink, wink, nudge, nudge,” which at least indicates some kind of subterfuge. What does, “Blink blink nod nod,” mean? I’ve tried doing this around the office for a few weeks and most people just thought I was having a stroke. Also, the whole point is that it’s a secret code, you aren’t supposed to put it in writing. Matt does a great job of talking about how quid pro quo is supposed to work in investment banking and the article is an interesting read from that perspective. What fascinated me the most is why the bank was fined. You see, JP Morgan wasn’t fined for giving jobs to the children of potential clients, it was fined for giving jobs to the children of Chinese officials! The Foreign Corrupt Policies Act prohibits bribing government officials and giving their children jobs is a form of bribe. JP Morgan had a corporate initiative called the “Sons and Daughters” program (seriously) and (so far) has only gotten into hot water as it relates to the children of individuals associated with the government. Of course, many corporations in China are owned by the Chinese government so it makes the problem a little worse, in China anyway. Anyone in business understands that sometimes you do favors for people that do business with you. This is often based on the deep, personal relationships you develop with your clients. It is a perpetual favor machine based on good will. Company A spends time with client B to win their business. During that time, company A finds out that client B needs X to make their life better. Company A helps and later client B helps company A. This is the law of reciprocity and people use it to their advantage all over the world, even (especially) in business. Chase went astray because they blatantly asked people what they would do in return for these favors, then kept intricate spreadsheets to track how much each favor was worth. This is really how you decide if something is a favor or something is a bribe. If I help someone move (don’t ever ask me to help you move) it may be because they helped me move once and I would feel guilty about not helping them (reciprocity). If I helped someone move then kept a detailed record of what I got in return, I’m, well, a creep.
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