On June 27, the Senate Banking Committee, chaired by Sen. Tim Johnson, D-S.D., held a long-awaited confirmation hearing for three significant financial regulatory appointees and two that are frankly not very significant at all.
The two least significant nominees are Jason Furman, to be a member and chairman of the Council of Economic Advisers (CEA), and Richard Metsger, to be a member of the National Credit Union Administration (NCUA).
The CEA was created under the Employment Act of 1946 to operate within the White House. Therefore, the very idea that it requires Senate confirmation is a marginal one. Regarding the NCUA appointee, the credit union industry is not too big to fail and does not pose a threat to the stability of the financial system. Therefore, these nominees can be put aside for the purpose of this article.
The star of the hearing was Rep. Mel Watt, D-N.C., the nominee to be director of the Federal Housing Finance Agency (FHFA). Watt is giving up his House seat after more than two decades of service from a Charlotte district that used to be ridiculed as being so gerrymandered that it resembled a bug bashed by a windshield. He has made a record as a liberal but also a member of the States Rights Caucus and a strong supporter of both the banking industry, with Bank of America headquartered in Charlotte, and the housing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac that he would be regulating if he is confirmed.
He would replace the long-serving career civil servant Edward DeMarco, who has been a marked man ever since he refused to cooperate with the administration's plan to offer reductions in principal to underwater homeowners threatened with foreclosure.
North Carolina has been a frontline state in the controversy over the excesses of the banking and mortgage banking industry in pushing toxic subprime mortgages upon minority homebuyers, many of whom could have qualified for prime loans. And many of these mortgages were ultimately purchased or securitized through the GSEs. Watt has juggled these conflicting interests successfully throughout his career and would be called upon to continue to do this in a new capacity.
Two other significant appointees, Kara Stein and Michael Piwowar, both staffers of the Senate Banking Committee, would replace retiring Securities and Exchange Commission (SEC) Commissioners Elisse Walter and Troy Paredes. It would be a very inside solution to the awkward circumstance that has tied up the SEC since last fall.
This is especially true since Stein served as staff director for the Senate Banking Committee's Securities, Insurance and Investment Subcommittee, a job that entails intimate contact with the industry. Once a full complement of commissioners is in place, along with the new Chairman Mary Jo White, perhaps they can all get on with the languishing agenda of regulations to be issued under the Dodd-Frank Act and the Jumpstart Our Business Startups (JOBS) Act.
By moving appointments of nominees from both parties (Stein being a Democrat and Piwowar being a Republican) simultaneously, with sound political ties, the risk of a partisan conflict is obviated. As Dana Carvey's character the Church Lady would exclaim, "How convenient!"
Watt appears to be doing well enough to pick up some Republican votes and gain confirmation. However, Sen. Bob Corker, R-Tenn., spoke of a "tough" session with Watt in his office that he proceeded to re-enact in an emotional colloquy in which Corker stated that he does not believe any politician should be appointed head of the FHFA.
Watt responded that throughout his life people have said he was unqualified for various reasons, but he has persevered.
Most significant is that Watt insisted that regardless of past positions, once he is confirmed, he would be representing the taxpayers and that he hopes to work himself out of a job by helping to achieve GSE reform. He also said he would review the issue of principal reductions based on the fact that the agency has ruled against this step, that he is inclined toward the states' rights position on eminent domain but will not put this interest ahead of that of the taxpayers and that he would balance any consideration of programs that would earn less than a market return against the fact that the GSEs are in conservatorship.
He acknowledged that the conservatorship does not provide for interest payments to be applied against the principal of the debt, because these charges are fees in return for the bailout.
If Watt wants to work his way out of a job, he's going to have to work very hard indeed. In my opinion, the biggest hurdle GSE reformers are going to face stems from the fact that the threshold question is how to define the objective.
From the hearings so far, it appears that most of the legislators, due to their close ties to the Housing Industrial Complex, define the problem as how to make sure that the 30-year, fixed-rate mortgage, with no penalty for prepayment, a popular product for the generation of fees to realtors, mortgage bankers, insurance agents and lawyers, remains available, this time backed by an explicit federal guarantee.
As long as this stands as a condition for any legislation, there will be no real reform. The most likely outcome is that Fannie Mae and Freddie Mac will remain in place, joined by Wells Fargo, as GSEs that are too big to fail.
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