By Ray Birch
WASHINGTON—Geoff Bacino recalls staring at a three-by-five index card on which were printed the signs of an impending financial crisis.
In 2007, then a member of the Federal Housing Finance Board (FHFB), Bacino was headed to address a meeting of the National Association of Realtors. He asked the FHFB economist for a particular piece of data.
Within those numbers was a startling sign, recalled Bacino.
“He gave me an index card with numbers that showed a huge increase in the number of advancements of loans the Federal Home Loan Banks made to financial institutions over the previous quarter,” recalled Bacino. “This was a certain precursor to the beginning of the financial crisis, where institutions were loaned out of liquidity and the only other place they could go was the Federal Home Loan Bank.”
Bacino spoke to CUToday.info about those years in which the Finance Board eventually was called on to play a key role in dealing with and was eventually merged with the two huge government-sponsored enterprises that are the backbone of the housing market, Fannie Mae and Freddie Mac. Many analysts have stated the lack of attention to sound underwriting declined as they competed for business, contributing to a corresponding decline in underwriting standards at other lenders across the United States that finally culminated in the collapse of the housing market.
The combined GSE losses of $14.9 billion and market concerns about their ability to raise capital and debt threatened to further disrupt the already stressed U.S. housing financial market more than 10 years ago. Fannie Mae and Freddie Mac, at the time, had outstanding more than $5 trillion in mortgage-backed securities and debt—the debt portion alone was $1.6 trillion.
The GSEs were conserved in 2008, and they remain in conservatorship today—and at the center of a great deal of debate around when the two companies will be released from federal control and how they will be structured in the future.
‘Really Good or Really Bad’
CUToday.info spoke with Bacino, a member of the NCUA board in 2001 and 2002, as part of its lookback on the financial crisis and the corporate crisis 10 years later.
Going back to that day in June of 2007 when he asked FHFB Chief Economist Joseph McKenzie what those numbers on the index card really indicated, Bacino recalled McKenzie saying, “‘The numbers could indicate something really good or really bad,’ but he had the feeling it's something really bad.”
Bacino said those numbers led to the Finance Board being included in legislation to be merged with the Office of Federal Housing Enterprise Oversight (OFHEO)—the regulator for Fannie and Freddie.
“I recall the chairman of our agency, Ronnie Rosenfeld, was called over to Secretary (Henry) Paulson's office. Our offices used to be on Eye Street, which is right across from the White House and Treasury. And he walked over there and came back and said, ‘This is what Treasury wants.’ “Even though the Finance Board was doing our job, it was inevitable that we were going to be merged with OFHEO.”
Merger Takes Place
The Finance Board and OFHEO were merged in 2008 under the newly created Federal Housing Finance Agency, established by the Housing and Economic Recovery Act of 2008.
“Congress didn't feel Fannie and Freddie would be able to make it without some sort of government action, either conservatorship or receivership, which would be more dramatic,” said Bacino. “In April 2008 they finally realized that Fannie and Freddie were so big and so influential thatdrastic action was needed. Until then, I think people were holding out on hope.”
Bacino emphasized that Fannie and Freddie, prior to conservatorship, were controlled by OFHEO, which lacked certain authorities, he said.
“They did not have the tools. They didn't have the threat of conservatorship. It’s like police in London, who don't carry guns. I remember the Robin Williams, joke–‘Stop, or I’ll yell stop again.’ So you may ask, where were the regulators with the GSEs? OFEA had people on staff at both Fannie and Freddie, I just don’t think they had the ability and the tools to be able to do what they wanted to do. The need for that kind of power, which the Federal Housing Finance Board had, drove the push to merge our two organizations.”
Geoff Bacino
Events Move Quickly
Once the Housing and Economic Recovery Act of 2008 was enacted in July of 2008, things moved swiftly, said Bacino, who now runs a consulting firm in Washington that manages the Internal Auditor trade association, speaks at conferences, does strategic planning and continues to work with institutions that have issues with NCUA and the Federal Housing Finance Agency.
“I would say within a week or two, OFHEO was meeting at our offices to conserve Fannie and Freddie,” he said. “I remember when they first showed up at our building—I saw a bunch of black Lincoln Town Cars out front and thought, what's this?”
Bacino noted the four Finance Board members were the ones who lost their positions in the merger. Bacino said he stayed on for about a year before reopening his firm, Bacino & Associates.
Looking back on the financial crisis, Bacino said the FHFB played a key role in navigating through the troubled times—not only merging with OFHEO to provide the authority to conserve the GSEs, but also delivering much-needed liquidity to financial institutions across the country.
“I don't think a lot of credit unions realize there are a lot of other folks who have an influence on them outside of NCUA,” said Bacino. “I don’t think a lot of credit union people understood the impact the Federal Home Loan Banks could have on credit unions. I didn’t get many calls from credit union people when I was nominatedto the FHLB board.”
CUs Miss the Bigger Picture
Bacino added he believes credit unions often don’t see the bigger picture as they get caught up too much in what NCUA is doing.
“At the Finance Board, we were able to provide liquidity in those tough years when liquidity started to get tight with institutions,” he said. “At times, that came with an additional cost—we worked closely with Senator (Chuck) Schumer's (D-NY) office, because they had concerns over the quality of collateral that institutions had then with regard to loan advances we made. But we were able to work with his office and reach consensus. And that liquidity we provided was fairly elastic—we were able to quickly address additional need and contract as needed, so when things got tight we could open up the spigot and vice versa. In 2008, many people worried if there was going to be enough money for the next day, and the Federal Home Loan Banks were able to provide that liquidity to get folks through the next day, the next week and then the next months.”
The Real Issues
What contributed to the problems at Fannie and Freddie, assessed Bacino, was not onlythe lack of an oversight agency with authority to take effective action, but also Fannie’s and Freddie’s structure.
“Their structure was stock ownership backed by a government guarantee—the best of both worlds,” he said. “With a stock structure, people can invest and get rich. Talk about morale hazard–I can play with the government's money and do what I want until the cows come home.”
But Bacino does not place all the blame for the housing crisis on Fannie and Freddie.
“Not the blame for everything; they just were a part of everything that went bad then,” he said. “They were just another player, but a big one.”
Bacino said concerns were bubbling to the top at the FHLB in 2007.
“It’s one of those things where we knew there was a possibility for problems, but Fannie and Freddie had yet to experience problems,” Bacino said. “Like in San Francisco; you look at those tall buildings and you know if there is an earthquake they could topple. Well, there was an financial earthquake and things toppled.”
Finger Pointing
In the decade since it occurred, there has been considerable analysis about what led to the housing crisis, but Bacino insists suggestions those close to the GSEs simply missed the problems that led to their conservatorships is nothing more than finger pointing.
“Frankly the group that oversaw Fannie and Freddie, OFHEO, missed the same thing everybody else missed—from the Treasury to the FDIC to the OCC... It was a universal meltdown,” Bacino emphasized. “People like to placeblame somewhere, but in this case there was enough blame for everyone.”
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