U.S. Treasury Department Contracts Out Its Own Job
The U.S. Treasury Department has recently hired Morgan Stanley, an investment bank, to assess how vulnerable the Government Sponsored Enterprises (GSE) of Fannie Mae and Freddie Mac are to future economic problems, in part by evaluating how much capital the GSEs should have in the future to weather any such similar housing problems. GSEs are basically privately owned institutions that are federally charted and help play an important role in terms of credit in our markets. Besides the fact the Treasury has essentially hired the industry to police itself, there are other glaring problems to this arrangement.
The president has recently signed into law a new overhauling housing measure designed to help the housing market by preventing future foreclosures as well as addressing the problems that helped spur the foreclosures. A vital piece to this legislation is the creation of a new independent regulator for Fannie Mae and Freddie Mac, so why hire Morgan Stanley to essential be a risk regulator for the housing market? Primarily a business focused on investments, I do not see a lot of specific experience Morgan Stanley brings to the table to justify the Treasury hiring them to do it’s own job. Keep in mind, Morgan Stanley is task with keeping an eye on evaluating the risk of the GSE’s of which they and their customers are financially invested in. Moreover, they weren’t so hot at evaluating their risks of the housing market previously as they are currently writing down billions of dollars in mortgage-related assets.
Lastly, Morgan Stanley is going to buy back billions of dollars to customers in the wake of the Auction Rate Securities (ARS) scandal, of which they mislead their investors into believing investing in the ARS market was as liquid as a money market fund. Although they are settling this issue, don’t forget the fact this was fraud and although not being litigated, should be remembered as such.
Just so everyone has this straight, the U.S. Treasury Department has hired Morgan Stanley to advise them on the actions of the GSEs in relation to their threat to our economy as whole, with total disregard to the fact that:
- Newly enacted legislation has created a new regulator for the Fannie Mae and Freddie Mac
- Morgan Stanley is financial invested in the GSEs, which poses a huge conflict of interest
- Morgan Stanley has proven to not be up to the task of evaluating the risk GSE pose to our markets by writing down billions of dollars in mortgage-related assets – a clear sign that they aren’t capable of judging the true value of housing related risk
- Morgan Stanley had action taken against them for committing fraud by purposely misleading their investors to invest in unsuitable products
- Investment banks, like Morgan Stanley, have recently been granted access to the Fed’s discount lending window. Meaning, if Morgan Stanley misjudges the GSEs and it cost them financially, they can just borrow from the Fed at a discount – not to mention they can now borrow to help pay for their ARS failures
Is it just me, or is something wrong with this picture? It’s probably best to avoid such problems like our current housing market has, by not letting those that helped fuel the crisis help prevent another. $
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