Q&A with Senator Bob Corker

A key player in the Senate when it comes to financial reform and housing policy, Senator Corker offers his views on Fannie and Freddie, Dodd-Frank, the Qualified Mortgage rulemaking and whether the GOP will take back the Senate.

 

Mortgage Banking

Juy 2012

 

By Robert Stowe England

Sen. Bob Corker (R-Tennessee) has taken a leadership role in the ongoing debates over the shape of financial regulatory reform in Congress. First elected in 2006, he joined the Senate Committee on Banking, Housing and Urban Affairs in January 2008 and is ranking member of the Subcommittee on Financial Institutions and Consumer Protection.

 

The Tennessee Republican helped forge a bipartisan financial regulatory reform package in 2010 with Sen. Mark Warner (D-Virginia) and others, only to see it abandoned by the Democratic leadership. Congress instead enacted into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 

Corker has been critical of some of the banking and mortgage market regulations that have emerged under Dodd-Frank, as well as the fact that Congress failed to address the future of Fannie Mae and Freddie Mac at the same time it established in Dodd-Frank a requirement for a new regulatory regime overseeing the private mortgage-backed securities (MBS) market.

 

Last year he sponsored the Residential Mortgage Market Privatization and Standardization Act, which proposes a new regulatory regime that would be more supportive of the private sector in the mortgage finance markets. The legislation also sought to sort out the future of the two government-sponsored enterprises (GSEs) and offer new rules to govern the private mortgage sector.

 

More recently, partly due to Corker’s urging, Senate Banking Committee Chairman Tim Johnson (D-South Dakota) held a hearing June 13 on $2 billion or more in trading losses at JPMorgan Chase & Co.’s chief investment office in London where JPMorgan Chairman and CEO Jamie Dimon testified as a witness and was questioned by Senators. The losses have heightened interest in the ongoing effort of regulators to define how they will enforce the Volcker Rule as authorized under Dodd-Frank. The rule would limit the ability of banks to engage in proprietary trading as a way to limit potential losses to taxpayers, who back up the deposit insurance system.

 

The losses at JPMorgan were made by French trader Bruno Iksil, known as the “London whale” for the large positions he took in his hedging operations. The losses came from credit protection Iksil sold against the CDX.NA.IG.9, a credit default index tied to the credit quality of investment-grade bonds of more than 100 North American companies.

 

Mortgage Banking caught up with Sen. Corker at his office on Capitol Hill recently to discuss his concerns about the impact of regulations emerging from Dodd-Frank and other issues.

 

 

Q: With the American economy weakening, to what extent should we blame the regulatory burdens being imposed by Dodd-Frank for holding back the recovery or helping push us back toward recession?

 

A: I don’t think there’s any question but that Dodd-Frank has affected the recovery, especially at the community banks, which, [in turn] affect so much of the economy in Tennessee and across the country. I would add to that just the overzealous nature of regulators after the crisis happened. Many of them missed what was taking part in the marketplace [before the crisis hit].

 

All I hear right now [from community bankers are laments] about the examiners in charge of their respective banks, but also the uncertainties that are out there. I think if you look at the uncertainties of Dodd-Frank and then the uncertainties of what may happen at this year-end with a $5 trillion tax increase, [and] the uncertainties of whether Congress and the White House will get [their] act together and deal with the fiscal issues of this nation [that adds up to a lot of unknowns]. [These domestic uncertainties are set against a global backdrop of uncertainties,] meaning what is happening right now in Europe, and slowdowns in China and India. I think all of those things are having a very big and negative effect on our economy right now.

 

Q: You have expressed concern about the $2 billion or more in trading losses at JPMorgan Chase. Do you think the Volcker Rule could have prevented these losses?

 

A: I haven’t been concerned about the trading losses. I understand JPMorgan could probably lose $80 billion over the next 24 months and still be healthy. It hasn’t been the order of magnitude [of the losses]; it’s been the fact that I know these rules are being promulgated right now--all of these [federal] agencies, the regulators, have had difficulty coming to a conclusion on [how to write the] Volcker Rule. And I know that what happened at JPMorgan is going to have an effect on that rule making. And so it isn’t that I want to get up under the hood at JPMorgan to in any way have Congress intervening in their action. It’s more the whole notion--Volcker has been very difficult for the regulators.

 

And I think [it’s important] for us in real time to understand the difference between what a proprietary trade and a portfolio hedge is. First of all, I think [the trades] began as a real hedge. I think it may have evolved into a prop trade. By the way, both hedging and prop trading are still legal because Volcker is not in effect. But I think to go through and develop an understanding of what happened here, it would certainly be very helpful to the Senate Banking Committee itself as it relates to any future regulation.

 

But secondly, I think it will be helpful for the [current] regulatory process. One of the things that we don’t want to do, of course, is through our actions make banking actually more risky. OK? And I think, to understand what was happening here, to understand in a large complex organization like this, a very outstanding [JPMorgan Chairman and Chief Executive Officer Jamie Dimon] quite candidly was caught off-guard. I think those kinds of things are helpful to understand and to acknowledge. It’s not because I worry about a $2 billion loss at JPMorgan. I’m sure there are some $2 billion gains in other places relative to positions they have taken.

 

So, again, I realize that this is a blip, an embarrassing blip, on the radar screen as it relates to JPMorgan. But the more important thing right now [is that] there is a tremendous amount of activity occurring in the bowels of all these regulators, and I think that having a discussion about the difference between a prop[rietary] trade and a portfolio hedge, and the purpose of those, in public, is something important that [we need to do.]

 

Please let me just emphasize it has nothing to do with reprimanding JPMorgan or getting involved with concerns over JPMorgan having lost $2 billion. Again, when you look at the order of magnitude of their earnings and the size of the company and their capital base, again, it’s a blip on the radar screen.

 

Q: What do you make of the intense media coverage and finger pointing about the losses at JPMorgan?

 

A: Some of the reaction you’re talking about is exactly why I called for a hearing. Our staff was talking with JPMorgan. We were aware of the [Bruno Iksil trades and some of the discussions that were taking place around some of the trades in London before] our staff began talking with JPMorgan [and learning about] their discussions about what was happening inside the institution. Volcker has been very difficult to define. And I guess the people who passed the amendment want to show the world they were right.

 

And I think we have to look at this with the understanding that these complex organizations do try to hedge risk. Was this a hedging of risk? Was it intended to be in the beginning? Was this a prop trade? Again, I think it is educational [to hold hearings]. There are a lot of folks that are beating their chests about what might have happened if Volcker were in place, [as well as] what wouldn’t have happened if Volcker were in place. I don’t think we know that yet. I think the situation [that led to the loss] evolved at JPMorgan. And it probably, candidly, I’m not sure [the JPMorgan trade] didn’t evolve into a prop trade in its third iteration.

 

Again, I think for us in real time to look at this example at a time when many rules are being made that are greatly going to affect the financial system in our country, I think having a hearing seeking understanding is an appropriate thing to do.

 

Q: A May Citigroup report authored by one of its credit strategists, Hans Lorenzen, charged that U.S. and European governments, through a variety of carrots and sticks, are “essentially forcing” banks to buy up their government debt. Do you agree this is happening, and what dangers to you think it poses?

 

A: Here [in America], it seems to me it’s been the central bank that has been more the purchaser of government debt. I think on the secondary market they bought as much as 60 percent of our indebtedness of new issuance this year. I’m not sure I see that incentives are being put in place for the financial system here--other than our central bankers taking upon themselves to buy up to 60 percent of the new issuance, which I think is of concern.

 

But I think there’s no question that in Europe those incentives have been in place. Yes. Obviously, the credit quality of those [government Treasury bonds held by banks] is of great concern. I think all of us are very concerned about the financial system in Europe. I met [recently] with [Federal Reserve Board] Chairman [Ben] Bernanke, along with a couple of other senators, just to talk about our exposure to Europe. And I think he feels relatively good about the overall exposure that our banks and our financial system have to Europe. Obviously, though, the concern for all of us is more so the exposure [of the U.S. economy to a further slowdown and possible return to recession if events worsen in Europe.] I mean, that has an impact on us that is very important. I think our money market system has some exposure, but mostly it’s to the northern countries of Europe, which have performed reasonably well.

 

Q: Do you think it was a mistake in Dodd-Frank to separate out the future of Fannie and Freddie from rules governing the future of the private mortgage securitization market?

 

A: Well, we should have dealt with Fannie and Freddie [at the same time that Congress considered and passed banking and Wall Street regulatory reform]. I understand that housing finance is a very complicated system and a complicated market. And we need to deal with it. Over 90 percent of the new originations are now being done with some kind of government vehicle. And, certainly, we need to do everything we can to encourage the private sector to come back in. And there’s no question there are elements of Dodd-Frank that will discourage that. I know that [the federal regulators] put off now until after the election promulgating the rules around something called the Qualified Mortgage.

 

[I am troubled about] some of things that are being contemplated [in the proposed ability-to-repay rule that has a legal standard of] rebuttable presumption. [This means] that a lender should have known for whatever reason that someone would default--even though he checked all the boxes regarding FICO® score, regarding employment, regarding the amount of debt, regarding all of those things that a loan applicant might have had. That obviously is going to be of concern to the private system, there’s no question.

 

We actually have a piece of legislation [the Residential Mortgage Market Privatization and Standardization Act], which we have been working on that [deals with this issue and deals with the relationship between the private sector and the GSEs and government sector]. And, obviously, if you want to wind down Fannie and Freddie’s involvement and government involvement in general--I can’t imagine there’s anybody around here who likes where we are today--then what you’ve got to do is figure out a way to bring the private sector back in. And certainly Dodd-Frank is something that has not been helpful in that regard.

 

Q: Of course, this delay in defining a Qualified Mortgage until after the election delays the rules that would allow a private sector to be revived--that is, if the rules actually turn out to be workable.

 

A: That’s right. If you ended up having rules, like you say, that were workable, then you might actually see some greater desire on behalf of the private sector to come back into the market. But there’s no question that if you want to diminish the role of Fannie and Freddie, what you’ve got to do simultaneously, or even in advance of that, is you’ve got to create a mechanism for the private sector to again to feel safety in coming back in.

 

This last go-around, [the private sector] had great difficulty with warrants and representations. Basically, we continue to be concerned about them. And look at what happened with the [Attorneys General (AG)] settlement. Basically, the big servicers got 45 cents in credit for every dollar that they crammed down the private [securitization] side. A lot of people hailed this as a victory, but who’s paying a big part of the price? [It’s] individuals who have 401(k)s and pensions where investments have been made in fixed income like this; and I don’t think people realize that when these things happen, it just continues to push the private market away from the residential mortgage market.

 

Q: Many mortgage investors were very unhappy about the AG settlement.

 

A: We do need to have some stability, and I don’t think we are going to have that stability until the rules of the road are fully written and understood regarding the private side and people understand what is going to happen with the GSEs. So, as you mentioned, to have one [element] dealt with through one piece of legislation and Fannie and Freddie still not yet done, I think you’re right--it’s just going to create a situation where the private sector is not going to come back into the market in a way that’s healthy for our overall system.

 

Q: Do you think that ultimately, after new mortgage finance legislation is enacted, there will remain some government involvement in housing finance?

 

A: Obviously, we believe there’s a way for the system to function--if you build it right--without the need for the GSEs. But we also know that majority rules. Let me put it this way: I think something that I would bank [on as] certain at this point for the mortgage market, whatever system we [may eventually] have, I think the private sector is going to be taking the lead on the risk portion. We’ve seen that work [for the most part] in the multifamily component [of the mortgage market].

 

Q: How do you rate the job being done so far by the Consumer Financial Protection Bureau [CFPB] and its new director, Richard Cordray? What have they done that you approve of? What have they done that needs rethinking?

 

A: I do wish the organization had been set up properly and that it had a board and [it] had a rules process . . . so the rules [could] be challenged. Obviously, they are [just now] starting right out of the block. I think one of the concerns that we have is for them to begin looking at the Qualified Mortgage and the use of the rebuttable-presumption standard.

 

[As for Cordray’s performance on the job,] I think it’s too early to tell, candidly. I don’t think there’s been enough activity for me to place a grade, but I think it should be of concern of all to know that the agency is set up in a way that one person--not the agency, not a board, but that one person--basically makes the sole determination as to what those rules are going to be. You can end up with a situation where you have a good leader and they do a balanced and fair job. You can end up [with] a situation where that’s not the case. I think it’s too early to tell right now with the existing director.

 

Q: Are you worried about the state of the Federal Housing Administration [FHA] mortgage insurance fund? Are you satisfied that enough is being done to raise premiums and tighten the program to prevent a taxpayer bailout? What else needs to be done to be sure that FHA is on solid financial footing?

 

A: So, look: There are plenty of signals that say it is undercapitalized. We continue to have legislation to be considered up here where you are going to take a lot of the risk from the private sector and put it back on the public sector through the FHA. I’m concerned about what Congress might do in the name of making financing available. I’m afraid of what Congress might consider doing as far as the FHA taking on risks that reside out in the private sector.

 

Q: If the Republicans take both the Senate and the House and the White House in the November elections, how do you think that might change housing policy and the outlook for the GSEs? What do you think the odds are that the GOP will take back the Senate?

 

A: Well, if you look at just the number of seats [up for election this year], 23 on the Democratic side and 10 on the Republican side, [I would say that] you’d have to say the odds are in the Republicans’ favor to take control of the Senate. On the other hand, all across the country there is just no momentum out there. Each race is dependent on the two candidates. My guess is that could well change between now and election day. But I think if you were going to bet a dollar, you would have to bet a dollar on the side that the Republicans will take the Senate.

 

I do think it would be irresponsible for us not to deal with the GSEs, [given] that we’ve lost almost $200 billion with the GSEs--which, by the way, makes the losses at JPMorgan look like a pittance. JPMorgan’s money was the stockholder’s money. This is our taxpayer money. At a minimum, what I think you’ll see happen is private investors being in a first-loss position. I do think, by the way, that we will take it up and I think we’ll deal with the GSEs in a very balanced and appropriate way [in a new Congress next year]. And I think we’ll come up with a solution that works for our country.  MB

 

Robert Stowe England is a freelance writer based in Arlington, Virginia, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Copyright © 2012 Mortgage Banking Magazine

Reprinted with Permission

 

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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