Bright Ideas

Michael Bright and Edward DeMarco released a paper for the Milken Institute in June, Why Housing Reform Still Matters regarding Fannie Mae, Freddie Mac and the future of the US secondary housing market.

Apparently, this paper is the first one in a four-part series. What’s interesting is that Mr. Bright just joined Dr. DeMarco in June at the Milken Institute.

The Milken Institute was founded by Michael Milken, who in March 1989 was indicted by a grand jury on 98 counts of racketeering, fraud, insider trading and tax evasion.

From its website:

The Milken Institute is a nonprofit, nonpartisan think tank determined to increase global prosperity by advancing collaborative solutions that widen access to capital, create jobs and improve health. We do this through independent, data-driven research, action-oriented meetings and meaningful policy initiatives.

The institute is funded through different levels of sponsorship and strategic partnerships. One of Milken’s strategic partners is Citigroup, the company that agreed to a $7 billion settlement in July 2014 for packaging and selling bad mortgages to Fannie Mae and Freddie Mac. These practices, along with those at dozens of other banks, led to the 2008 financial crisis.

Though Milken Institute dubs itself as independent, strategic partners like Citigroup would likely expect a return on their investment. And Citigroup, along with the nation’s other mega-banks, has a vested interest in the outcome of housing reform.

Bright and DeMarco in their recent paper call for the elimination of Fannie and Freddie by merging them and then renaming the new entity where “…it could be folded into a government agency that provides the catastrophic guarantee for MBS (such as a Federal Mortgage Insurance Corp., a National Mortgage Reinsurance Corp., or simply Ginnie Mae).”

Our good friend Joe Light analyzed the plan writing for Bloomberg stating:

“DeMarco and Bright want to see Fannie Mae and Freddie Mac converted into mutual companies, owned by lenders, that would sell insurance against defaults instead of buying and securitizing mortgages. As they do now with Federal Housing Administration loans to less-wealthy borrowers, the lenders would issue mortgage-backed securities under the auspices of Ginnie Mae. As an exception, Fannie Mae and Freddie Mac could still buy loans directly from small lenders, the authors said.”

In other words, big banks, like Milken’s strategic partner Citigroup, will inherit a share of Fannie and Freddie’s business if they are eliminated per Milken’s recommendation.

By now, everyone is aware of the Wall Street-Washington revolving door. Banks support their executives taking on bank regulating roles in government where they can influence laws and regulations that ultimately benefit mega-banks. Those executives then return to Wall Street as heroes.

One WS/DC revolving door executive is none other than Michael Bright.

In the years leading up to the 2008 financial meltdown caused by unethical and illegal practices by mortgage lenders, Bright worked as a top executive at Countrywide and Wachovia from 2002 – 2008. Both of these companies needed to be rescued by larger banks in the wake of the crisis, which the parent banks eventually paid billions of dollars on settlements relating to faulty mortgage practices at Countrywide and Wachovia.

Was Michael Bright charged with wrongdoing while he was an executive at Countrywide or Wachovia?

Of course we know that no executive was ever charged with crimes that brought about the 2008 financial crisis.

Then surely Mr. Bright’s career must have suffered by his involvement with two collapsed mortgage companies?

Well, you likely know that’s not true either.  The following is Bright’s career path as listed on his Linkedin profile:

Countrywide: 2002 – 2006

Wachovia: 2006 – 2008

Office of the Comptroller of the Currency – U.S. Department of Treasury: 2009 – 2010

Senior Advisor to Senator Corker: 2010 – 2014

BlackRock: 2014 – 2015

PennyMac: 2015 – 2016

Milken Institute: June 2016 – Present

So, after his leadership at collapsed Countrywide and Wachovia, Bright went to work for the Treasury. Here’s what it says about the OCC on their website.

“The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury.

Mission: To ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.”

Apparently, the qualification to become a bank regulator is to first have experience with a collapsed bank. Isn’t that like saying the qualification to become Fire Chief is to first become a master arsonist?

Where does a failed banker turned bank regulator go next with his career? Of course, the next step in the career path would be to join Senator Bob Corker’s office as the Senior Financial Policy Advisor. While working for Corker, Bright was the principal author of “Corker-Warner” and later “Johnson-Crapo” housing finance reform bills that called for the elimination of Fannie and Freddie.

Any good revolving door executive knows when best to revolve from government back to Wall Street. Next up for Bright was his move to BlackRock.

Here’s how Bright’s career path was described in the article: Fannie Mae: Former Staffer Behind FMIC Goes To BlackRock

“You may remember there was a bit of controversy last April when it came out that the Corker-Warner bill to replace (Fannie and Freddie) with a new government agency was largely written by former Countrywide Financial exec Michael Bright, now working as Senator Bob Corker’s senior financial advisor. Corker-Warner has since morphed into Crapo-Johnson, which kept the same basic framework in place, but critics still argue that Crapo-Johnson’s proposed FMIC would benefit Wall Street at the expense of smaller banks and homeowners.

Bright has never been accused of any wrongdoing, but for him to move from the heart of the subprime crisis to an important government position, influencing the future of the US mortgage market is jarring. For him to take a job with BlackRock…who lobbied Senators Corker and Mark Warner during the process, seems to confirm people’s worst fears about the revolving door between Washington D.C. and private interests.”

The Door Keeps Spinning

Bright’s seven month tenure at BlackRock was followed by a Senior Vice President position at PennyMac. For those unfamiliar with PennyMac, the mortgage finance company is basically a reincarnation of Countrywide founded and staffed primarily with former Countrywide executives.

Countrywide: It’s baaack  PennyMac is “…headed by the former executives of the most notorious subprime lender of the era that led to the financial crisis… ‘There’s free money on the table and you don’t have to work that hard to get it, especially if you are the former executives of Countrywide,’ says Michael Widner, an analyst who covers PennyMac at brokerage firm Stifel Nicolaus. ‘You’ve done this before.’”

Bright lasted twice as long at PennyMac than BlackRock clocking in a full 14 month tenure there.

Now onto Milken Institute, the independent think tank. At Milken, Bright is the Director of the Center for Financial Markets. DeMarco is a Senior Fellow for the same group. Joining Bright and DeMarco at the Center for Financial Markets is Aron Betru, Managing Director (formerly with Goldman Sachs) and Staci Warden, Executive Director (formerly with JP Morgan and US Treasury).

Bright also counts the fellow travelers at Mortgage Bankers Association (MBA) among his friends. While at PennyMac, Bright was asked to join an MBA task force charged with recommending action on housing reform.

As described by MBA: GSE Reform Legislation 

“MBA has convened a Board of Directors-level Task Force to address many of the outstanding questions surrounding GSE reform. That task force plans to unveil its recommendations in the second half of 2016.”

Though the recommendations have not been released, the following is what MBA supports:

  • An explicit federal guarantee for mortgage securities
  • Private capital in a first-loss position, backed by a federal insurance fund in the event of catastrophic losses
  • Single, highly liquid security delivered through a common securitization platform
  • Preservation of key GSE infrastructure – technology, systems, data and people – by transferring them to any new or reconstituted entities created by GSE reform

What both Milken and MBA are recommending is to merge Fannie and Freddie into one entity – back the securities with a federal guarantee and to back the entity with catastrophic loss insurance.

How is this new scheme with less competition and enhanced government support supposed to protect “the taxpayer” any better than the current structure?

Further, those that back this recommendation obviously want “something for nothing.” Common Securitization Solutions (CSS) is the company that was developed by Fannie and Freddie and paid for by Fannie and Freddie’s shareholders. CSS will manage a “single, highly liquid security” and will be administered “by key GSE infrastructure – technology, systems, data and people.”

I’m on the edge of my seat waiting for the next three Milken papers, as well as the recommendations from the MBA task force on housing finance reform.

I just can’t wait to learn more of those Bright ideas…

6 thoughts on “Bright Ideas

  1. Fannie-Freddie Would Be Lender-Owned in DeMarco’s Plan

    “DeMarco and Bright want to see Fannie Mae and Freddie Mac converted into mutual companies, owned by lenders, that would sell insurance against defaults instead of buying and securitizing mortgages. As they do now with Federal Housing Administration loans to less-wealthy borrowers, the lenders would issue mortgage-backed securities under the auspices of Ginnie Mae. As an exception, Fannie Mae and Freddie Mac could still buy loans directly from small lenders, the authors said.”


    What does this mean?

    1. FnF will become like mono-line insurance companies or like AIG.
    All these companies went bankrupt during 2008 crisis.
    BTW, PLMBS issuers bought insurance/CDS from these companies on crappy PLMBS but rated AAA.

    2. FnF will become like private Federal Reserve Banks (FRBs) or private FDIC , where mostly FIs will be shareholders. It will serve like another proxy private institution that will control access to mortgage finance. It will be an institution that will be indirectly controlled by FIs but when things go south, Gov/taxpayers will hold the bags and member FIs will run to hills.

    It is like limited risk but unlimited license for FIs to do whatever they want. Remember even though many FIs were FDIC insured and regulated by hundreds of federal and state agencies, most FIs were free to commit fraud and bring down the whole financial system

    3. This plan will essentially eliminate any Gov control over secondary housing finance and FIs will have free hand to do whatever they want.


    • Thanks for your comments. Bright and DeMarco in the paper’s conclusion promise more details in their subsequent papers. We should look for more clarity on their proposal regarding the points you note.

      This paper does offer a cursory review of your point #3 regarding eliminating government control. It states,
      “If government saw its role more as providing direct subsidies where needed and otherwise ensuring transparent and open markets supported by consumer and investor protections, the power of private markets to innovate and provide capital for housing would be unleashed.”

      Personally, I do not see our government abdicating its role in controlling lending standards, regulations, housing goals, etc. That may be what opponents of Fan and Fred seek with their various proposals. However, I just don’t see a laissez-faire approach coming to fruition.


      • Thanks, Most agree with your views.
        People like of Bright and DeMarco were able to spread false information in 2008 crisis. But now with so much awareness about FnF, it is very difficult to manipulate the system

        Liked by 2 people

  2. Pingback: July 2016 - GSE Links

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