Hello, and welcome to the Votes and Verdicts podcast, hosted by the litigation and policy team at Bloomberg Intelligence, the investment research platform of Bloomberg LP. Bloomberg Intelligence has five hundred analysts and strategists working across the globe and focused on all major markets. Our coverage includes over two thousand equities and credits, and we have outlooks on more than ninety industries and one hundred market indices, currencies and commodities.
This podcast series examines the intersection of business policy and law. I'm Elliott Stein and analysts with Bloomberg Intelligence covering financials litigation, and I'm.
Ben Elliott I'm an analyst with Bloomberg Intelligence covering consumer finance.
So our guest today is Mark Calabria, Senior Advisor to the Cato Institute, where he provides strategic input and direction on the federal economic policy making process. Mark previously served as Director of Financial Regulation at the Cato Institute, where he co founded cato's Center for Monetary and Financial Alternatives.
Mark is also the former director of the Federal Housing Finance Agency, better known as the FAHFA, which regulates and supervises Fannie May, Freddie Mack and the Federal Home Loan Banks, and prior to heading the FAHFA, Mark served as chief economist to Vice President Mike Pence, and before that, Mark served as a senior aide to the US Senate Committee on Banking, Housing, and Urban Affairs under chairs Richard Shelby
and Phil Graham. During his Senate service, Mark acted as the primary drafter of the Housing and Economic Recovery Act of two thousand and eight, better known as HARA, which established a regululatory framework for the government sponsored housing enterprises. Mark recently released a book called Shelter from the Storm How COVID Mortgage Meltdown Was Averted, which covers how the government responded to the COVID nineteen crisis without bailing out
Wall Street. It's a very informative read and I highly recommend it to our listeners. And I also enjoyed that the book title is sort of homage to Bob Dylan. So with all that, Mark, Welcome to the Votes on Verdicts podcast.
Elliott Bennet, It's such a pleasure.
To be here, So Mark, the first question we always ask our guests is to sort of walk us through their career history. Their career path. You know, I just mentioned the highlights of your official bio. It's obviously very impressive, but you know, we'd love to know how you got to where you are, what took you into government service and in particular housing and financial regulation.
Well, you know, the out of the in some way, because in respect it all seems to have made sense, but it certainly certainly didn't feel like a clear path at the time. But you know, I'll go back to college where. You know, when I came out of undergrad was that post savings and loan crisis era or early nineties, you know, when we first really started using the term
jobless recovery. The reason I went to grad school and got my PhD a number of reasons, but in part it was because of the job market and because again we were in this aftermath of a real estate boom and bust, and I also wanted to try to make sense of it, you know, I mean again, you see the recession, you see the stress, and I think economics is a natural thing to try to turn to to
try to make sense of those things. So when I was in grad school, you know, Fidisia, Fyria, these things were past, and there was included the ninety two Act in terms of Feni and Freddy, So that really was something that was kind of on my mind at the time, Like anybody who gets to phdx economics. My professors had impressed upon me that the only thing of value to
do with my life would be to teach. But I didn't really like the offers I was getting, and you know, ended up working at trade associations first at the National Social Homebuilders naturalis of Realtors, had done a fellowship with Harvard Joint Center for Housing Studies, so really early in my career had started learning mortgage finance, housing issues from
day one out of grad school. And I should say this on the side, you know, my graduate work was really kind of anti trust and dust organization market structure. So it's always the way I've really thought about financial services is kind of a market structure perspective rather than say a macroeconomic perspective. Let's see, I was, i think at the Realtors when I got a phone call from a friend on the banking committee and asked me if I was interested in coming up and taking a job.
And I've been very fortunate and a number of people have reached out to me and asked me if I was willing to do the job in question. And as you mentioned, spent eight years on the Banking Committee, helped create the regulator for Feanning and Freddie. Also it led the committee's response to Katrina, worked on a not had my fair share disasters, unfortunately. I feel like you know,
it's also on the whole of nine to eleven. So you talk about so and you know, again having seen a lot of lens, and let me end with this and saying you know it. When I was on the committee and we would have new staff join, I would always give them a stack of like Savings Alone Crisis reading list and point to it and say, this stuff happens, we need to think about it, we need to be
prepared for it. And really kind of a lot of the lens of my career is just looking back at how badly the Savings Alone crisis went and trying to essentially avoid similar outcomes.
One of the quotes that you used to say when you were lenon goth HFA, which I always appreciate, it was you know, the time to fix your roof is when when the sun is shining or not, not when it's raining, which I appreciate.
Which I believe JFK or some speech writer JFK came up with. But yeah, and you know, and that's kind of also been a theme of my career, which is to try and to nudge people in Washington to perhaps have a longer time horizon than two weeks and to think about you know, housing market, macroeconomy. I mean, these things in my opinion, running cycles, housing markets, boom and bust. I see zero reason to believe that that that's not
the future for us. And how do you, you know, build a foundation, how do you build a financial system that's that's robust to that? And I think that's the fundamental problem. We've got a financial system, We've got a mortgage finance system that's works great as long as everything keeps going up. That's does it work great? If you think that there's the possibility of downturns?
Yeah, Mark, this is bringing me back to to your time and at the FHFA and bringing me right back to those sort of heavy days of the onset of the of the of the pandemic and your response to that crisis. And I guess, you know, I guess we can start with kind of the headline issue, which I know a lot of our clients will be sort of
most interested in. And we went back and we found an interesting, interesting tweet from you in March, you know, said there are a number of issues that still need to be addressed at both the GSS and FHFA before a Conservative ship exit, but those can be done within
two to three years and without Congress. So maybe just kind of give us a little background of where you left off when you left f HFA and and maybe what some of these issues are that could be in the first two to three years of you know, everyone is the situation is, if there's a Trump second administration, can they come out of the gate focused on this? Will they and what sort of policy steps might they take?
Absolutely, let's try to untangle some of that. And let me preface with this. This was mentioned. I worked on the statute creating FHFA. I worked on the provisions for conservatorship, receivership these things, and it's certainly my very strong view that you know, the current administration has a legal obligation
to fix them and get them out. I don't believe they will, but that is the legal obligation, you know, and it's I and I'm certainly the view that regulators should do what Congress has told them to do, whether they like it or not. But with that said, yes, absolutely the regulator FHVA has all the tools it needs and the mandate to fix them without Congress doing anything. Now we'll get into it. I'm sure at a second you know why some people want Congress to get involved now.
First and foremost is a reminder. When I walked in the door at FHFA in April twenty nineteen, Fannie and Freddie were leveraged one thousand to one. That's fair to say. Nobody survives to long in that kind of situation. And in fact, one of the reasons I wrote the book, I wanted to impress upon people how close Fanning and
Freddie were to family during COVID. You know, their losses from COVID, which you know we knowingly took to keep people in their homes, came very close to wiping out all of their capital and so getting them in a situation where they could be a support for the market. It's like when you're on the airplane and they tell you to put your oxygen mask on first. We really were trying to strengthen Faning Freddy so that Fana and Freddie could be, you know, a foundation for the rest
of the market. So first and foremost you needed to raise capital, and a significant amount of capital has been raised. I think at the time in twenty nineteen twenty twenty, we expected that there'd have to be an external raise of some sort. Fortunately, we were able to reprice much of the book during COVID because of the refive boom, so Fan and Freddie are arguably in the best cash
flow position they've ever been in. I would still say that to get them out, you know, by say twenty twenty seven, I think it's advantageous to do an external race. It will just have to be a lot smaller than we thought it would have to be. And you also want to try to get the government out of its position. So I'm of the view that you don't want to be a decade after they're out and have the Treasury
still be the largest shareholder. So having an excess strategy for the government's investment is incredibly important, and we had worked on that. So again let me emphasize capital. As I mentioned, you know, we were looking at what would have been pre COVID the largest equity offerings ever. They're probably a bit smaller now. But let me kind of put it this way as a reminder, before two thousand and eight, Fienni and Freddie were not under the thirty
four Security Exchange Act. They were not under starvanz Oxley where they were starting two thousand and eight. And I would simply say, from my own perspective, and I'm sure you could find people at the companies to disagree with this, I did not feel like when we were looking to go to market that they would have met my definition
of Sarven's octually compliant for instance. So if you're going to go out and do large public offerings, you know, you need to meet the letter spirit of the securities laws. A lot of progress has been made on that now. The plus with that is it's really only a matter of hiring enough accountants and analysts and being focused on actually fixing the problem. And there were some cultural aspects.
We had actually started a number of initiatives on corporate culture that to me, if we had not done that, these companies would have absolutely been, you know, some class action security suit waiting to happen. So there are things we needed to fix there is as importantly, you are probably both aware that there was established the uniform mortgage backed security, So there's a kind of co mingled security
out there in the mortgage market. Well it may become as a surprise to many people, but Feed and Freddie are actually not exempt from the anti trust loss. So so we have a co mingled duopoly joint venture that is almost certain to fold. I mean, I guess I just put it this way. My understanding is the expectation of my predecessors had been that Congress was going to come in, you know, and essentially merge Fanny and Freddie and you'd have this single platform with one GSE. Well
none of that happened. So you have a number of options in front of you. But one of the things that needs to be fixed is the single platform needs to be made legal. For lack of a better term, we were constructed in such a way that other market participants would be able to use it, but you know, you need to fix the UMBs. It's almost certainly not
legal under our antitrust laws as is. You know, if there's a theme that you should take away both from my book and my experience at FAHFA, a tremendous amount of our mortgage finance system, which is a multi trillion dollar market, is held together by the legal equivalent of paper clips and bubblegum.
It's so, do you think that there's any sort of an inherent kind of conflict between wanting to or being legally obligated to get the companies out of conservatorship and also raising capital requirements to the point where it seems like it could take many years for the companies to retain enough capital.
Yeah, that was, obviously, you know, a tension, and of course the statute creates a number of tensions that one has to resolve. So first and foremost my view was a it did not make sense to put them out of conservatorships simply to see them come back in, you know. And again this goes back to my earlier point about you know, twenty nineteen, twenty twenty, we had been over a decade since the sort of last inflection point in
the housing market. In where we looked at when we were doing the capital rule was it would take maybe a decade of every time earnings, which is why we felt you needed to do an external raise. I felt very strongly that the odds of us making it another decade without a downturn in the housing market were slim, and so, for instance, there was a capital rule that had been proposed before I got there by my predecessor,
Director Watt. Under Watt's capital rule, had you hit another two thousand and eight scenario, the GSS would have failed. And of course, the entire purpose of HERA, the construction of FHFA was that Fading and Freddie should be able to survive a two thousand and eight scenario. Because it's also important to keep in mind that these entities are unique and interesting in the sense that while depositories are inherently pro cyclical, the gcs are supposed to be countercyclical.
I Congress, in my opinion, and I think is very clear from the statute, created an obligation for capital rules to make sure that in a stressed environment they had
positive going concern value. So a lot of the commentary around the capital rule was, you know, implied that you should set capital with the objective of hitting zero, which I thought was kind of nutty, to be frank about it, because if your entire purpose of being for these entities is to be a floor at a time of stress, then you buy necessity have to be strong at a time of stress and not hit zero. So again there
was some criticism out there the rule being onerous. Again, in my opinion, the rule was too weak if anything, you know, the notion that you shouldn't want Fan and Freddy to be well capitalized so that they can support the market. Again, to me, a lot of the criticism really was just people who were focused on Roe and didn't necessarily appreciate that the entire reason these companies exist is to be a counter cyclical balance to the market.
If it's not for that, then there's no reason to have them.
Yeah, I suppose what you know, what what sort of investors say when they when they speak to us, is that you know, there need there There seems to need to be some sort of compromise, right maybe say there has been.
I've been about four percent at most capital. I mean, you know, it's interesting. So you know, PIMCO submitted a comment letter during the They're in the capital rule where they claimed they never showed their math, but they claimed you would need twelve percent capital to create an equivalent of the of an explicit guarantee. Now, of course, Congress is not given an explicit guarantee for the g s S. Whatever guarantee may or may not be in the in
the share agreements are quite limited. So to me, if we're trying to create an objective where you're having a foundation where these companies can survive a stress period, then you know, to me, four percent is on the low end. And and that's kind of my concern. Now people can argue, certainly, the perspective that Fanning and Freddie was that they felt,
you know, entitled to a certain ROE. And again, I you know, whether they should be a twelve percent ROE or an eight percent I mean, they're functionally utilities for the financial market, so g and I should note while my predecessor in the current administration give the agencies give the companies RO targets, I did not. I didn't think it was my job to tell you what you RO should be. It was my job, first and foremost to
make sure they fail. And my pushback with some of the argument, I mean, again, you know, we don't need to go full Medigliani Miller, but we should keep in mind that the higher amount of leverage at these companies should would raise funding costs because at the end of the day, the objective of here was to get rid
of any expectation of a government guarantee. And if you want stability in the mortgage market, higher leverage means higher funding costs for homeowners, which again is the entire purpose to be here. So to some extent, you wanted to make sure there was efficient capital to keep the MBS
market going. So to me, again, at risk return trade off, I mean, if if we had been if we had gone with say a two and a half, which what some people wanted, I mean, you're almost certain as a shareholder to get wiped out in the future because there's just simply no way those companies would survive over long periods of time with only two and a half percent equity.
So all that said, you know, we went through the arguments, actually walk through the entire chapter of my book on capital if people want to know why we ended up where it was. But first and foremost, you know, and a certainly very strong theme of my book is I wasn't pursuing my own agenda. I was pursuing the agenda that Congress placed upon me. And an agenda that Congress placed upon me was that the risk based capital standards should make sure that the companies have a positive going
concern value during a stressed environment. And that's what we did. And if people don't like that, they can take it up with Congress.
You know, I don't, so I don't want to imply that people don't like it. People don't like it. But but so I think that when I say compromise that I don't mean necessarily in them in the absolute value of or level of the leverage component of the cop requirement. I think people are they sort of understand the need to get to that larger number. I think what they are trying to square is, as you know that I'm sure, as you're extremely well, where the company is disclose a
short fall to their adjusted total copper requirement. So if you look at it just nominally, it appears to be several hundred billion dollars both enterprises. And then if you look at their earnings, which are you know, ten to twenty billion, just depending on how far out in the future you look, that just seems like a huge shortfall
to overcome in any sort of reasonable time frame. And yet, you know, unless we sort of adjust the profitability side of the equation, change the ROE, which is obviously not. And and let me just take a step back here and say I enjoyed your book. I got to read most of it before this recording. I really liked how you said that housing finance is sort of the upside down world in Washington now. And a big problem for me is the clients call me up and say, you know,
what are Democrats believe in? What are Republicans believe in now? In housing finance? And it's it's seems challenging to say, it seems to sort of shift over time.
That's Wort's fair, that's I mean again, my perspective was always because you know, as I say in the book, and I've got a long history of writings, you know, my views on what I would do, and you know if I was you know Czar or Congress are very different from what does as a regulator. The second I took the oath, whatever views or preferences of my own went out the window. We did so. For instance, I'm not a fan as I have made explicit of the Housing Trust fun or the housing goals, but we did them.
And I entered the agency with a commitment of we will do everything Congress has told us to do. That is our job. Our job is not to think whether we think it's good or bad policy. It's Congress's prerogative to pass stupid policy. It's not the prerogative of regulators to question whether the policy is stupid or not. The
regulators just do it. That's the That's that's at least my perspective, and I wish that was the wider perspective because it would shift the broader debates back to where they should be, which is Congress, our elected representatives.
Yeah, and that you know, it makes total sense. Well, we seem to be stuck in this situation where Congress either doesn't want to or can't do anything about this. I mean that if they seem to have done most of what they should and can do at least, you know, while you while you were there, and now the challenge seems to be mostly political, So I guess the I mean, the real question is, you know, what, what does a
deal look like? Is treasure the obstacle? Will Treasury ever feel the need to sort of get off their hands and get to a final deal?
It depends who. I mean. Manuchin and I were quite close to a deal, and I would go as far to say if it wasn't for the pandemic, the companies would be out today. And if it wasn't for you know, some small group of shareholders suing to remove me, the companies would be out today. There's a fair amount that FXVA can do younilaterally. Now that's a question of like leadership. I had connections obviously, as mentioned, I came from the
Vice President's office. You know, I had connections to the president vice president you know any c I mean I had my own channels to the White House and wasn't dependent on Treasury to get stuff done. So, for instance, you know, some people have made a question of well, boy, how did you guys end this sweep when a wimb
had it in the baseline. And it helps that when I first started on the Hill, we had a young man in our personal office named Russ Vote, who I've known for twenty years, who happened to be O and B director at that point. So I mean some of this, I guess I'm not knocking on current leadership. This administration chose leadership FORFHV did that did not have the political stature, in political connections to actually get anything done. That's a
choice they made. They decided they you know, when when something when when the White House sends somebody from the White House over to an agency, that is a signal to that agency that these issues are important and we're going to put the political capital behind and get them done. When a White House elevates somebody who's a longtime career person at an agency, that is a signal that we don't care about this issue and that we will uh, we won't spend a minute thinking about it. And that's
so that's the choice that was made. I find it frustrating because this administration has a legal obligation to do it and simply want not. But let's get to maybe the more why the political you know, so some of this is very much and again I want to emphasize that Mnuchin was was was there in terms of an exit. We did have to spend. I remember when I first came into FHFA and Minuchin was convinced we could get
Congress to create a limited, you know, targeted guarantee. And I was like, Steven, never going to happen, but I will go and I'll do meetings with you on the Hill and we'll we'll talk it up. And we did that, and it took him eight months to figure out Congress was going to do anything. I always say this because you know, I went through GSE reform in the two thousands to get heros, So I think I have a
fairly good sense of what Congress will. It will not too now for a very long time, certainly in the Obama administration, but this administration, there is this kind of game of chicken where asset managers who hold agency mbs believe that the conservatorship hardens the guarantee, and they believe that if there's an exit from the conservators ship that the odds of Congress coming in and giving them not only in explicit guarantee going forward, but also in their
current holdings is far less likely. And they are correct. One sits out of conservatorship, Congress will no longer be interested in the topic. So you kind of have this game of chicken. Wear it again. Keep in mind the asset managers who are large holders of mbs are also large holders of treasuries. That is who Treasury hears from every day, and what Treasury is hearing is, oh my god, if you let them out of conservatorship or you don't give it us an explicit guarantee everybody will be living
in caves again, obviously you have to. This is where if you start from the premise of it's not my job, the second guest Congress, it's my job to follow the law. We spend a tremendous amount of time in twenty nineteen on the Hill, and I regularly told members you will have more than sufficient time if you'd like to go a different direction to pass law and telling us to do that, and if you do that, we'll follow whatever
you pass. I'll note for the record, both sides of the aisle, of both sides of the hill, not a single person told me to stop. They were all, you know. I mean, certainly they were like, yep, you know, we'll criticize you if it because, but in fact they were largely happy for me to fix their problem. So I do think that the fundamental problem right now is an absolute lack of leadership in the administration and a lack of willingness to actually make hard choices.
I guess so we're mostly resigned to a change in administration for there to be any movement on this, I think correct.
I mean, you know, I think a wild card would be I mean, you're certainly not going to see any movement under a Secretary Yellen. So if she leaves in a second Biden term and you see a change a Treasury maybe, but that's what it would take.
And then maybe just as sort of to round out this topic, maybe you can explain. So. So one of the sort of signature achievements at the end of your time at fh Avay was to sort of put an end to the sweep and to allow the companies to start retaining capital. But on the other hand, there's sort of this accounting fiction where the senior preferred liquidation preference continues to grow, and everyone always asks me, how do I wrap my head around this? What does the federal
government want in exchange for forgiving this? Can they Maybe you can talk us through that a little bit.
So you know, it really was something we had to accept to make Treasury happy. So start from the premise that the view of the Treasury lawyers who are still there and this guide's any Treasury secretary, is that you
can't give value away. And so the view of the Treasury lawyers was that they were entitled to the sweep because the sweep was in exchange for some sort of hardening of you know, the line of credit if you will, in the PSPA, and so for us to end the sweep, the Treasury lawyers said, we need to be held harmless, and the only way we could be held harmless is to have the liquidity preference. I didn't like it. I
don't like it now. My expectation at the time, in my expectation going forward is they'll have to be a cram down of the liability side of the balance sheets of these companies, and that will include a cram down of the liquidity preference. I think people have to keep in mind that administratively, Treasury does not believe they can
simply forgive. The treasury legal view is they haven't been all paid back, so you know, it's a nice interesting argument, but that's not what the lawyers say, and it's and you know, most Treasury secretaries are not lawyers, and they're
not going to fight with the lawyers. I thought the treasure lawyers got a number of things wrong in my opinion, But that said, the liquidity preference will have to be either crammed down or converted in some way, and there are on the emphasize we spend a lot of money on options, And I'll simply say, while a particular choice was not made, the number of choices and directions you'd have to go we're well explored and are on the shelf. And I explained them all to the current Treasury team
on way it went my way out the door. So one thing I would look for, you know, if there is a Trump return is you know, who goes to Treasury? Do you see people who have some who are either part of the conversation last time? You know, I think the real fear would be that you have to go through this relearning, you get new people who again want to go through the same cycle again. And obviously it would probably be six seven months before you get a new FHFA director in. You know, you have a new
Treasury secretary in pretty soon. But who do they bring in? Is staffing? You know? This is why I you know, when people ask me, it's like, you know, even in a Trump term, it's not a twenty twenty five exit, it's more like a twenty six at best, twenty seven more likely.
Do you feel like the twenty twenty eight warrants are any sort of meaningful deadline?
No?
And I get that question a lot The reason it's really not is because if you look at the total value PIE for Treasury, it's a rounding error. The value really is in the senior preferreds And so I don't think people I mean, it's nice, people will talk about it, you know, it'll be circled on the calendar, but in terms of you know, is Treasury giving up a lot of value by letting the warrants expire? No, they're not.
Yeah, it'll be interesting to watch on the senior preferred trade ahead of the election. I think they've already traded up a bit, so that'll be interesting. That's helpful, helpful contour on theasure.
Appreciate it absolutely, Yeah, super interesting, Mark, I want to shift topics just a little bit and talk a little
bit more about FAHFA and its independence. You sort of alluded to it in terms of the shareholder litigation, but I want to kick it off by talking about another recent tweet of yours, also from March, and this was in connection with f HFA reviving a pilot program to waive title insurance on some mortgage refinance scenes and you tweeted quote, Congress wanted an independent FAHFA to prevent this very thing a white house playing election in your games
with that wur housing market. Congress really needs to restore fahfa's independence. End quote. You know this this issue was obviously in terms of fahfa's independence, was obviously a critical issue in the Collins case that went up to the Supreme Court resulted in the ATHTF Ferry director becoming determinable at will by the president. But I'm curious, you know, what steps would you recommend that Congress takes to restore athletes as independence so to become a board something like that.
Yeah, and I'll note isn't a side that even though Collins case struck the you know, four cause removal requirements, hera still says that the conservatorship you know, doesn't report to any other agency or entity. So yes, the president could could fire the FAHAY director, but by law, the
president cannot direct the actions of the Conservatorship. And that's what really bothered, kind of disturbed me about the state of the Union commentary on Title and otherwise, because the only avenue there is no regulatory authority to do the title changes that I've protected. This is all being done via the conservatorship. And again the law still says that there's no authority for the president in terms of the conservatorship. So I just again concerned about the politicization of the agency.
So you know, we have to take the Supreme Court where it is. You know, this is the oddity of you know, I wrote the language, and you know, we had we had boards in certain certain versions the committee draft here, and those were some options we were looking at. We fundamentally thought having a single director would allow us
to recruit somebody of higher stature than a board. I mean that was really the trade off, and the oversight board at FHVA, which is Treasury hud SEC, was kind of a compromise of having you know, some external review. But at the end of the day, if what it takes to make this an independent agency is a board, then I think that that's something, you know, you could do, and you'd have to do it sort of like NCUA where the chair is appointed by the president. It could
be you know, the chairmanship could be moved. I think that's one way to thread the needle. I mean, certainly a broader case is you know, I think there are two three votes on the Court for striking down any independent agency is probably even including the FED. So you know how the question is, you know, in retrospect what we wrote in past in two thousand and eight, we was well within constitutional norms at the time, you know, but how do you think about how constitutional norms change
every time. But that said, I think a board would be an improvement. I wouldn't make it more than three you know people at this point. Uh, you know, I've always I've also talked about maybe you know, given that you've got at least two members of FDIC that are removable at will by the President O c C F CFPB, you know, I think it's time for Congress to perhaps rethink our financial regulatory structure. And I would probably take FDIC, OCC FHFA and roll them all into one and have
a three person board oversee that. And I think that would probably pass constitutional muster and would give a lot better alignment of interest within the regulatory structure.
Do you think Congress would never do anything that?
Well, probably not. I mean it's I mean that the fact that Congress has shown no interest in dealing with any of the issues. I mean, it's been interesting, you know, because, as you perhaps recall, I mean, the original Elizabeth Warren planned for CFPB was a board and now that's you know, off limits. That's a radical right wing view. Apparently despite
that was the Kennedy, Durbin, Warren drafted bill. So you know, these parameters have obviously changed a lot over time, you know, perhaps, I mean, I think there is an odd let me put it this way. I think if Trump gets re elected Republicans, it's hard to imagine a situation where Trump gets re elected and Republicans don't pick up the Senate houses. A bit of a wild card, but you could see an alignment and you could see in attempt to do in financial reform. But I do think Republicans have largely
moved on to no more independent agencies. So it's just hard to see a world where the Democrats don't want boards and the Republicans don't want independent agencies. So where is the where's the overlap? Anymore? So I think we're stuck with a bit of lumbo, you know, forever, for indefinitely, until you know there's a change, perhaps you know, in the Overton window, if you will.
So Mark speaking about it gaps sort of in some of our regulatory oversight regular chapter on non bank servicing. First off, the math around forbearance very interesting in retrospect, do you think that non bank services are still a gap? And maybe also talk a little bit about whether SAPHI designation is or something like it is an appropriate tool.
So I think they are still a gap. I don't think saphies and partly because I can't think of any one servicer that's so large and so systemic that they
would be designated, you know. And obviously there was an f SoC report recently on non bank I find it really ironic in some ways because this administration made a big lot of noise about rejecting Manuchins activities based and wanting to move to an entity based, but their entire review on non bank services is a activities based so they sort of, you know, they're embracing what Mnuchin did
without calling it that in a way. And of course their approach has been to ask Congress for a liquidity facility, which I think is the absolute long approach and the reason why I think it's rong approach. You're obviously creating expectations to guarantees and in fact, to me, the very the very action of f SoC calling for Congress to create a liquidity facility reduces market discipline, which is completely counter to the statutory obligations for f SoC. So to me,
they've completely dropped the ball on their very job. The job at what f S BOCH is supposed to do is identify risks until delators to deal with them. If the core concerns about non bank servicers is what is the knockoff effect on the positories that provide warehouse funding to non banks or Vanny Freddie or Ginny May, then how then you should really be directing those entities, whether it's occ FED, FHFA HUD, to take actions to increase
counterparty management of those non banks. So, on one hand, I agree with a number of the risks that the report and FSOC have identified. I just very much disagree with they've thrown their hands up at at dealing having anybody, as an FSOC member, actually deal with it. I can't remember whether I say this is my book, but I've certainly said on many occasions f SoC is really good at identifying problems that none of its members can do anything about. So it's as a former f SOCC member,
it's a it's a frustrating process. But again I would use a reminder. In September twenty twenty, f SoC did a similar review of the secondary mortgage market and it directed FHFA to take a number of actions to strengthen it. That's actually how Congress intended have sought to work. So I'm very frustrated with the FSOC report on non banks.
It's complete punning of their responsibility to Congress and with authorities that they have to fix, and fundamentally they don't really get it the underlying problem of why have depositories
left mortgage servicing in a big way. You know, it's a sort of like, well, rather than try to fix the regulatory structure so that depositories who are more stable and are actually providing the warehouse funding to non bank services, rather than get them back into servicing, let's just ultimately regulate service non bank services like banks, rather than dealing with the first problem. So again, I think again, I'm sympathetic to the problems identified, and the report is a
worthwhile overview. I'm not sure it came up with anything new, but I'm very frustrated with its approach.
Yeah, so that actually brings us to another question. Your Twitter feed is rich with potential count.
And I'm sure that. My next confirmation here in if.
Yeah, you said the buzzle end game is a mess and should be reproposed. I know you don't like the term gold plating, and yet it does seem as though regulators increasingly try to make mortgage servicing less attractive for depositories and push it towards banks. Give me thoughts on maybe what they should do to sort of finalize the endgame here.
Yeah, I mean, you know, I would repropose it. I know that that's not what bar and others others want to do. Let me say, you know, I come from the perspective that I think I think both the regulators and the banks are wrong, but in different ways obviously. So let's start out with I think our banking system is still under capitalized in my view, and I think the actual cost in terms of lending from increases in capital are not as large anywhere is near the bank's claim.
And we went through and did fairly extensive lit reviews, and we were doing Fanning Freddie and there's a lot of empirical work on this, and so to me, I think the kind of sky is fallowing arguments from the banks is a bit exaggerated. That said, I don't think
that Basil endgaming. Again, there are elements of it I'm not unsympathetic about, such as operational risk, But to me, I think the whole risk weighting regime I mean to mean, you're not addressing why Silicon Valley Bank failed, And in fact, one of the reasons Silicon Valley Bank failed was because Basil itself encourages banks to load up on treasuries and agencies, and you're not really kind of getting away from that in a way that I think is dealing with fundamental
problems in the system. So you know, if I had a blank piece of paper and it didn't matter where we are starting from, I would rip up Basle altogether and go to things much much simpler. And I'm also a fan of having fairly robust leverage ratios, and I recognize is that that has its own distortions. I mean, if you start with you know, there's no good way
to do this, you know, there's only trade offs. I would have a simpler regime, and I would have a regime that was a lot less favorable to holding agencies and treasuries, and it would be a lot less complicated than what we have today. But I just don't see it going that direction. I think the bang for the buck with Boslin game just isn't worth it. So to me, you know, reproposed try to get a consensus. I mean my worry, of course, is that you know, endgame that
nobody wants to come back. I really would love to see somebody. I think our bank capital system, capital regulatory system is deeply flawed and somebody needs to come up and fix it. But I don't see that happening.
I want I want to shift topics. I go back to the Collins case from before. Unless you had anything more to say, that absolutely okay, you know I thought there the chapter in your book on the Collins case was super interesting. I was particularly heartened to see that, you know, even the FAHFA director, just like the rest of us, has to, you know, continually refresh the Supame Court's website to see if the decision came out. Those
were fun times. But you know what struck me in that chapter was it seems like your view was and you know, you were one of the drafters of hair of so you were no better than anybody, but your view was that the FAHFA exceeded its authority when it implemented this sweep in twenty twelve. But that's not really what the government's position was in the litigation, of course, and the Supreme Court wound up agreeing with the government's position.
So I'm sort of curious how you reconcile, you know, those different views between your own personal view and what the government argued.
So let me first, you know, reiterate that my own personal view is that it was an overreach. She was inconsistent with what you should be doing as a conservator, and I think the government was wrong. But so let's dig into the what does it mean by the government now. You know, I kind of found this particularly frustrating. Now, you would normally think that when an agency is sued and DJ represents the agency, that DJ is kind of the lawyer and the agency is the client, and the
client should be able to drive. Like here's where I think it was right or wrong. That's not actually how it works. I mean, DJ makes its own decisions on what he thinks the law is. So, to be frank
about it, I think DJ got it wrong. One of my frustrations, and you know, maybe I would have done this differently in retrospect, you know, we had asked, for instance, the Solicitor General to give FHFA like ten minutes during the Comins case, and they wouldn't, and you know, we couldn't get time in front of the court, you know. So I again, I think the DOJ positions, certainly on the structure were wrong, and I think the DOJ position on the striep was wrong. And again, you know, DJ
Solictener Generali quickly tell you, oh, we're the government. So it's just a very frustrating that, you know, you're the client and the lawyer is making arguments that are contrary to what you think the law is.
So sorry to cut you off. What argument do you think of f HFA should have made that would have been different than DOJSON on that issue on whether the sweep exceeded the statutory authority, I.
Think we should have acceded to it. I again, we were not defending it directly at FHFA when I was there. We ended this week, which I believe was the most important thing we could do and was somewhat an admission of that we did see it is.
Wrong, you know.
Granted, you know you could get in the question, like you know, if you say the sweep was wrong. Well, what does it, you know, open you up to damage?
Is?
You know. The frustrating thing is and this is true under almost any administration. The DOJ perspective is to try to defend the ability of the executive branch to do as much as possible. I mean to only slight exaggeration. The view of the Solicitor General is that the executive brands could do whatever it wants. And if you have any sort of you know, I fundamentally think of myself
as an Article one constitutionalist. You know, we no amount of my time in the White House of the executive branch has reduced my respect and appreciation that Congress put Congress is first in the Constitution, and these legislative decisions are Congresses. Sadly, that is not the general perspective at DJ, and so our ability to argue a different side of
this was handcuffed by DJ. And I just found that extremely frustrating, and that we were the agency, we were the nity most directly impacted, and yet we're not able to present our side of the case that said, you know, what would the DAMAGEES have been if we had you know, to me, we undid the sweep. So the harm, you know, essentially kind of was undone going forward. We had no money, of course, because we barely had solvent companies. You know.
I think DOJ and Treasurer of course concerned that if we, you know, kind of admitted that the sweep was not legal, that they would be opened up to a bunch of damages. And again I want to reiterate the DOJ view is
government can do whatever it wants pretty much. So, I mean, I'm exaggerating only only modestly when you deal with government lawyerslu general and just defend so and obviously I thought the structure part that they got the Collins case wrong in my view, and as I note in the chapter, I mean, the whole issue was around DeMarco, who was acting at the time, and it's generally accepted that acting directors are removable will. The court never had to even
reach into the question of the permanent structure. So to me, I thought Collins was just a horrible example judicial activism.
I want to shift topics yet again, ask you about another tweet of your's. This is a preview of your next right Senate confirmation hearing, which actually maybe it's another question. Would you ever return to government service.
Before I go to the question, I believe in public service, and if asked to serve again in a capacity where I could make a difference, I certainly would be hesitant to say.
No any particular position. You would really want.
To think I would make a great ambassador to the Bahamas.
Well, we'll make sure to record our next podcast episode. But so the tweet I want to ask you about comes from May and it was in the wake of, you know, the scathing reports coming out of the coming out of the FDIC about work conditions there, and you tweeted, quote, the fd I CE is far from being the only financial regulator with a troubled work environment. I'd encourage Congress to examine others as well. End quote, can you tell us you know what what you were getting out there?
Rather than name names, I'll simply say all of the regulators have public reporter what are called feb's Federal Employee Viewpoint Survey that's done every year, and you can see these declines and reflections at FDIC. And I would encourage Congress and other journalists and others to look at the fab scores of different agencies and look at trends. And I will simply say where there is smoke, there is almost certainly fire.
All right, very very diplomatic. Yeah, you're already I went for an ambassador position by being diplomatic.
An ambassador to for answer or anything.
Well, mulvaney got an ambassadorship, right at some point.
It's a special envoy iron something like that.
All right. I think that's gonna do it. For the substance of questions, So we'd like to end every episode with sort of a grab bag set of questions related to music. And usually we ask our guests, you know, for three pieces of music they would want to take
with them on a desert island. But we want to do something a little different with you, and we want to tailor it a little more specifically to the Dead and Fish and maybe other jam band since I know you're a big fan, and you know, actually I enjoyed reading in your book that you during part of the COVID. One of the COVID chapters, you talked about how you start each day by picking a dead show from that day on the read Listen app, which I do as well.
It's a great app. Listened to June seventh, nineteen ninety one. This morning on my way into work, which was a great show Deer Creek. There's also straight there were you there?
Yeah, yeah, I did Dear Creak ninety one.
That's awesome, and I picked it because I love standing on.
The Moon and great that was a great version of it as well.
Yeah it was. I was gonna say, my my favorite is the Auttin Stadium ninety three eight twenty one, ninety three, but this was also really good. There's also great you know, the nineteen seventy seven June seven shows. You know up there it's a Winterland show and just you sort of see it as one of the top ranked shows of all time. But so a few questions for you, you know, related to the Dead and fish curious how you even got into them.
You know, it was as much kind of a social circle, I think. You know, my first Dead show was actually going to see them at RFK in eighty six when it was Bob Dylan and Tom Petty and the Heartbreakers were actually doing that backup for Bob Dylan that tour, So you know, I was a big Bob Dylan fan.
Has given away the title of the book, and you know, and I had kind of heard the dad I knew a few songs, but I mostly got pulled into going in eighty six because of Dylan and Tom Petty and then you know, the Dead played got to see him. I was like, Wow, this is really something I would say. I don't think it was until you know, I went and saw them in Ronot eighty seven that it was really one of those like now I get it shows.
You know, that was probably the you know, there's no turning back after this kind of experience if you will, and so. But it was also for some probably very random reason. Where I went to high school and friends, there were just a lot of people who listened to the Dead tapes circulated, So, like a lot of things, you get exposed to it by your friends.
Yep, yep. Where did you go to high school.
In Virginia out in Falkyar if that came in our path southwestern.
Area closer to d C. I was in Fairfax County.
Oh yeah, I didn't you know exactly where?
Yeah. But to my regret, no one took me to any Dead shows when I was in high school. I didn't get introduced to them until after Jerry died, which is one of my probably my biggest life regret. But and so what about Fish When did you get into them? Uh?
In college? First show was nineteen ninety at the Bayou used to be that bar down on M Street. I can't remember whether you ever made it made it there, so saw them a number of times. Again. It was you know when I was in college. You know, we were seeing you know, Blues Traveler, Fish Mow, you know, Widespread pan Off, all the kind of you know, second gen jam bands, and you know, the Bayou was kind of where you went off and spent a lot of
time with the which is no longer there. You know, it really just had a great experience exposure to all sorts of bands. There are also, you know, imber odd enough because I live in the neighborhood where the old reggae club Kilimanjari used to be. It's like two blocks from where I live now, and would go there all the time in college and see like still Pulse and you know, fans like that. So and now it's like a gym.
All right, I think we'll leave it there. This was a really great discussion, wide ranging, you know, from from COVID crisis to Fanny and Freddie and fhf A to the dead and fish Mark Calabria. Thank you so much for talking with us today. Uh, you know, we're extremely grateful for your time and I think our listeners are to Ben, thank you for co hosting your first show co hosting. As a reminder to all our listeners, you can read all of our Bloomberg intelligence research on the
Bloomberg terminal at Big and we'll leave it there. Thank you again. We