Transcripts For CSPAN3 Mark 20240705

Good afternoon, everyone. Thank you for being with us our audience. Today is here at the competitive enterprise institute. My name is kent lassman im the president here. Im joined by Mark Calabria. It is also so welcome to our online participants. I will be taking questions throughout the hour in the room there will be a microphone available thatll be coming around to make sure that youre heard. And if youre online and you want to take part. The conversation with mark, our author today. Theres a q a function found at the bottom. Your screen. You can type in your question and itll be fed to me here at the front of the room today, were going to talk about shelter, the storm marks new book about a very interesting time in americas financial history. This is the intersection of covert government and some shakiness in the mortgage rental markets. I learned a lot reading the book. I look forward to the conversation and i just want to get started with a big thank you not only to you, for the work that you put in to this book, documenting your time and as a federal regulator and fha, but also to our friends at the cato institute, have made books available to us as the publisher, so those of us in the room can make sure to take one home. You welcome, mark. Lets start with the biggest softball that i have. Who did you write for . Whats this book all about . And why do we need to read it today . Well, let me start with at the end of that. I think its quite topical now that were again in an environment with signature and Silicon Valley bank where there is stress in segments of our Financial Market and again there are calls for bailouts and delivery of bailouts and. What i wanted to do with the book because again in march 2020, we went through a very similar situation where there was stress in the Financial Markets because of the fears from covid. So i wanted to give readers an inside sense of what it means to be a financial regulator sitting in that seat where pretty much 99 out of 100 calls you get are we need you to rescue this now. And i kind of have a sense what its like to feel that pressure and also for me to made different decisions. So part of the conversation, the book is how certain for bailouts were resisted in how we took a very data driven approach. So i want this to walk away with there are alternatives to bailouts you can directly households and families which is what we did in terms of housing rental distress from covid. So again, i wanted to give perhaps an alternative narrative that you dont always have to put a firehose on main street and on wall street in order to help main street and have some sense of what the inside of that is. So certainly those are interested in Financial Regulation writ large. It is, i believe, a very accessible book. Its what i would call a policy memoir. There are insights and antidote from the from covid, from the crisis in the Financial Markets. Theres explanations of what was going on in the Housing Market, in the Mortgage Market, again, i believe in a very accessible manner. So certainly a general audience, but also, again a guideline that, you know, were you to ever find in a similar position in government. Here are some things to kind of keep in mind and road map and some of the lessons i learned. And i thought it was important, having been part of those decisions to explain. We made certain decisions. So i hope in some sense to create a precedent for other policymakers. You know, had a number of books after the financial crisis 2008 where whether a secretary paulson or fed chair who wrote their side of the story. I think those are important to history, even if i may not agree with every element of it. So i thought it was just important to get some of the record down for what the response was to the nonhealth care side of issues from covid. I want to i want to sit eurus properly. It seems like a million years ago, 2020, it was, but you were relatively new. The job of what is also a relatively new regulatory agency. Theres some startling numbers that you share right at the outset of the book that were talking about early 20, 20, 22 million jobs from february to april two and a half months, 22 million jobs taken off the table. And by comparison, the financial crisis you just alluded to some ten or 12 years prior, 9 million jobs had disappeared over the course of two years. What was it that helped identify and even understand what was happening with respect to housing versus mortgages versus rental how did you understand where direct your attention. Good question and its important to keep in mind we have never and hopefully will again see that level of job contraction so quickly as we did in early 2020. And of course, as we know repeatedly in past recessions, when someone loses their job, they often have trouble paying their mortgage and paying rent. So we knew that right away. We also that the Unemployment Insurance system takes months to get there. You may have to wait three or four months. And for many you may not be able to cover your housing during that time. So quickly knew there was going to be a crisis. We were doing pretty good Data Analysis in march 20 and one of the things that hit us right away is that this was going to be predominantly a renter crisis. Only about 40 of those who lost their jobs during covid had a mortgage. So we had to give those families a timeout. And again, it was a time out. You know, we wanted to make sure that you could get in quickly in a theme of the book, really is, you know, i was i had the fortune or misfortune. If you want to think about it, of being staff in the Senate Banking committee during 2008 in a lot of the book is the lessons i took away from 2008 into things that i were done wrong. And to me, one of the things that was done horribly wrong in the postwar 28 was how difficult it was to get assistance. It was, you know, huge stacks of paper back and forth between lenders and borrowers and took months. But but i some of those memoirs and at least the telling of those Public Officials in the in the moment they were taking phone calls from new york every day they were getting, were they not. Yeah. Who was in trouble getting through wall street . Was wall street didnt seem to have trouble getting help in 2008, but main street did. And so the homeowners, the renters and we decided, you know, that know this is the story, the books, how we made this quickly so for instance rather than all this paperwork you had to do you know were you at risk of foreclosure in 2008. We made it very easy get in. But im an economist training and so if you make it easy get in you certainly risk that you get people in who dont need it and you are in the middle of a crisis. And just like on the Health Care System and the financial system, you do need to triage, youve got limited resources. How do you make sure that youre targeting . Those are the biggest impact. And i really walk through some of those decisions. So while we decided ultimately on the homeowner side, we would do what i call the honor system, we would let you call your mortgage servicer the one who collects your payment and forwards it to the investor. And if you simply stated that you had lost your job, an income declined from covid. Let you get in the program now of to make sure that people dont abuse it. We made it very clear that you were going to pay back whatever assistance you got. So, you know, there were calls at that time, of course, for mortgage forgiveness and free rent and such. Now, of course, you you sort of said, you know, i entered as a financial regulator, fannie and freddie, when covid hits, i guess i should roll back and say when i walked the door as regulator for fannie and freddie in april 2019, they were leveraged 2000 to 1. So ferret say a strong wind would have blown them over. We had gotten them down to only 150 to 1, leveraged by the time covid hit, which is still dangerously leverage a Financial Institution part. The relevancy here is even had we to forgive everybodys mortgage, we didnt have the resources to do that and certainly congress was not going that direction. So both for how do you control people taking advantage of the program but being generous on one end you had to make sure that it was very clear that it was going to be repaid and we had to do that, be able to keep fannie, freddie afloat. Because, again, my job first and foremost was the safety and soundness regulator. How do you keep the system functioning . And so you know, compared to 2008 and i mentioned this in the book, we were able to help twice as many people six times as quickly. And we did it at close to zero cost compared to about the 30 billion that cost helping homeowners assistance in post 2008. And obviously parts of the response cost a lot of money, but we actually designed to pay for and you i want to back up there are some things we need to unpack there but you did all this as like i said a relatively new leader of the institution when everyone was working from home. Absolutely. Thats also part of the story of the book. So i was by the senate on april 2019. So on job about 11 months before we started getting hit by covid in march 20. In terms of lockdowns and other responses. And so had a had 11 months to, you know, essentially try to get the agency to where it needed to be. And as i do document in the book as well, the agency suffered of a morale. There were questions about whether the agency even exist in the future. So lot of the conversations look is how we got the agency ready and its you know perhaps interesting one of these i guess for you to think about, like, you know, being paranoid people are out to get you. This is one of these things about like me obsessed about season well one does actually come and when i started into the job in april 19, i repeated said to the staff and said my public comments, this has been a long housing cycle end at some point and itll probably painfully so. How do we prepare for that . So we had spent a year, you know, trying to strengthen the credit quality of the Mortgage Market, trying to strengthen the infrastructure of the Mortgage Market, not knowing what the next crisis being, but highly certain there would another crisis at some point. So lets back up just for a moment and unpack, leverage of fannie and freddie. Two institutions they they are involved in. When a regular person goes to the bank to borrow money to get a home fannie and freddie become involved. How so they would buy youre mortgage and theres a very excessive conversation the description of the book about how that bad room operation in the Mortgage Market and to keep in mind this is 7 trillion footprint of our economy that impacts almost lives somewhere and many people own a home. So when you go get a loan you would go to a lender they would originate it. Sometimes they would keep it on their Balance Sheet, they would sell it off and they would sell it. Fannie or freddie. How could such an institution get so leveraged if they have financial regulators where people are asleep at the switch . Thats been the trend has. Yes. I mean were so as may recall, fannie and freddie failed in 2008. Were taking the conservatorship by the regulator. A conservatorship is an administrative bankruptcy. So its essentially youre running a bankruptcy by an agency rather than a court. But the objective is the same, which is to fix the companies, bring back to the financials and get them out. That happened 2008. Fannie and freddie are unfortunately still conservatorship today despite the congressional mandate. You know, for them to be fixed. So i think part of the tension was, to be frank about it, until i got in there, there really had not been a real view at the agency. Their job was to carry out the law and fix the companies. And this is a decision its not a question of whether fannie or freddie should or not. Theres are congressional decisions, and i certainly have strong opinions on. But my view was im taking this job by a promise to carry out the law in the law as we fix them and we get ready. And of course, you know, the fortunate thing is that is consistent with also preparing them a crisis. So we started to build capital. In 2019 and it kind of put this in perspective when i walked in the fannie and freddie again over between them, 6 trillion footprint, another trillion with the loan banks. So them to back a 6 trillion footprint, they had 6 billion in capital. Again, 2001 leverage and. Why this was so critical is that their loss is during covid were in the neighborhood of about 6 to 7 billion so had we not started building capital in the fall of 2019, fannie or freddie would have failed during covid. So i you know, we often kind of write the stories about the disasters that happened and the First Responders and the people who come in clean. And i thought it was so critical that. Somebody write a story about the disaster or subvert it, you know, the things we did to make sure that bad things didnt get or didnt happen. So lets lets start with the first principle question. You ran a federal Agency Charged with regulating for soundness in the Financial Markets related to housing and mortgages. Why are these national concerns . Why you said you set yourself everyone lives somewhere . Yep, but no one lives in all of america now. Thats true. So like the tribe, i learned to my great unhappiness from your book. We have housing programs spread across the department of agriculture. Department of Defense Department of state department of hud. Obviously urban development, all of these agencies are involved. Theyre all doing something or another for homeowners why are we doing this at the federal of our government. Its a great question, because certainly the biggest problems we have are fundamentally local. I mean, the local government, state, city governments, county, really determine what housing supply. Housing is going to get built. Most of what we do at the federal level is subsidize the Mortgage Market. Are we sub in the financial behind that you know are we may provide assistance to the Public Housing or rental assistance but again at the end of the housing affordability, you know, despite the federal programs theres reason that, you know, Oklahoma City is cheaper than San Francisco other than the obvious demand reasons people wanted to live in one more than the other. So we certainly have had a very convoluted problem a lot of this is really dependent on the history. Weve had a very fragmented banking system. A lot of our infrastructure of our Mortgage Market goes to the Great Depression. The federal loan banks were created under president hoover and 30 to fannie mae was, initially created under president roosevelt. So you had these programs that grew out of a very convoluted banking system. And you really i mean, so much of the Great Depression focuses on 29, but we had a housing in boston, a mortgage boom and bust in the twenties as well. And so you we really are living with infrastructure that was built 100 years ago, 90 years ago, and certainly i dont think it makes sense for todays infrastructure. But, you know, part of the well, one of the recommendations i have in the book is that if youre going to take over, run a federal agency, youll save yourself a lot of bandwidth. If you wreck that, fixing the overall system is the prerogative of congress, the general public, and that your job is to simply try to make a bad system work better. That one more thing i want to unpack. We move forward. You mentioned this obsession had with crises and part of this was borne out of. Your experience as a legislative staff person in the early aughts and leading the crisis, the legislative response. Youre very with these laws having held a pen that put some of these words down. But theres a particular in the book that id like you to expound upon, if you would, and that was from prior to going to fha, you were working at the white house for the Vice President and tasked with helping identify and staff financial regulatory agencies. And you write that one thing you wanted to screen for and was very important was how a person a nominee would handle a crisis, what you look for to identify a person who could handle a crisis, thats a great question. And let me start with making an observation of one of my my personal pet peeves, which is and weve heard this over the last couple of weeks as well. We heard it in 2008. We heard time where regulators will come out and say, you know, we were forced to we needed to do this or that. Thats all wrong. Choices were made. You know, the uninsured depositors in, Silicon Valley bank were there was they were chosen to be assisted and made whole aig was chosen to be rescued. Fannie mae was chosen to be taken. The and some of what i want to try to make there in the book is bring agency back to Financial Regulation where. This kind of like throw up your hands. This isnt to say whether the choices were right or wrong because. Thats important conversation, too, but it is to emphasize these are choices. Nobody is forced to bail out anybody. And we need make sure that since we recognize are choices, those choices need to be explained. And you do need have a question of, you know what, is your presumption. So when we were screening financial regulators at the white house. And, you know, i was working for Vice President pence at the time and hes fond of saying that hes the was the first member of the house of representatives to publicly oppose the Tarp Bank Bailout 2008. So we took very serious really that while we wanted regulators who would be able to not immediately go to bailouts, you know, again, maybe there are arguments where you know, as the lawyers would say, you have a strong presumption against a rescue. And of course, that presumption is rebuttable and. You could essentially, if you feel like you need to do do it. But, you know, there is i call it in the book, the rescue first ask questions later approach or, you know or you could all say when in doubt, bail it out of so much washington. So we wanted make sure we had regulators that flipped and said, you know, im going to actually look at the facts first. Im going to try to analyze it analyze the situation and. Therefore, maybe we can avoid balance. We can look for other alternatives. And thats really part of the conclusion of the book. And, you know, i do say i was a disappointed, you know in the crisis that some people who i had been involved in getting confirmed elected were perhaps too prone to to throw public money at problems, then hit than i had led to believe. You know, i think at one point i say in the book, in to the Federal Reserve, for instance, that one conclusion i have is that the federal changes the governors more than the governors change the Federal Reserve in terms the appointed leadership. And i did of want to give people a sense what its like to be in those positions. And again, 99 of the phone calls you get will be people asking you to rescue them. And we, for instance, you know, as has been, you know, several calls from Governor Newsom to the white house and and others during Silicon Valley. And i did want to give a sense of this is the pressure you feel. And i also, you know, relay some the stories at the time where, you know, there were press accounts calling for me to be fired and run out of town because. I wouldnt rescue the mortgage industry during that time. So again and one sided sort of pressure, the easiest thing is to do is just to give and i wanted to make the argument, the book why you shouldnt give in and why a principle approach that is based data and based on analysis, you know, is a preferred way to go that it can work well. So i wanted to give the story of, you know, heres a call for bailouts that we looked at the data and said it wasnt necessary, said no to. And despite dire warnings, the sky fall in the sky actually did not fall. We ended up being right. So i thought it was important to tell that story so that future regulators and the public can read that and say, lets slow down a little bit before we throw public money. At every time the Financial Markets have a hiccup, too. Did you have trouble sitting in this in the seat, taking these phone calls . Help me now. Did you have trouble with. The human problem . I mean, were talking about where people live. Exactly. And thats why we focus on homeowners. So we were, you know, arguably in the book, you know, very generous with homeowners and renters where we were stingy with lenders and and just to clarify, in every case, the lenders knew what they had signed up for. So they had absolutely for the risk know you know, that was the other disappointing the number of occasions where we had, you know, essentially insurance and then the Insurance Company want to pay you is the equivalent. Theres inches of where we paid for services and suddenly somebody didnt want to deliver those services. So theres a little frustration there. And again, you know, this is in the context of where, you know, the airlines are being bailed out. You know, everybody under the sun has been bailed out. So certainly there are parts of the mortgage industry who kind of felt like everybody else is going bail out. But again, you know, this was my part of the puzzle and how we resisted that and how we were really focused on the data and really to look at this and say where were the needs. And again, we also had resolution planning. So of the Big Questions today was for instance Silicon Valley bank is we were all told that doddfrank would end bailouts and youd this orderly resolution mechanism so that if anybody failed they wouldnt have to be bailouts and there wouldnt be a knock off on the system wasnt used whereas we were fortunate and again a lot of the stress in the Financial Markets discussed in the book is on mortgage servicers. Right. And remember the servicer, youve got your loan, the mortgage servicers. When you send your payment and they forward that payment to the investor. And if you run into trouble or, worst case, you need to be foreclosed upon. The mortgage servicer handles all that. So theres a window of time where. Even if you stopped paying your mortgage the mortgage servicers still is required some circumstances not all under some circumstances you forward that on to the investor so obviously theres a few months of Financial Stress on the mortgage servicer again, youve touched upon they were paid to take care of that. And so we wanted make sure that that system would continue functioning. We had actually in fall of 2019, had servicer enter bankruptcy. So had just only in the four or five months before covid taken a failed servicer and transported servicing. So we knew how this worked. And one of the messages of the book is its so critical in a financial crisis that you clearly as a regulator, if x happens. Were going to do y. And i really kind of feel like the current have gotten muddied because i mean, who knows . Depositors in which banks are really, you know, back today. So the argument really in the book and and i wanted this to be a counter you know you kind of see this where you know you know greenspan was known for his constructive ambiguity and. Treasury secretary bob rubin was was known. I notice he didnt use scare quotes. Chris kerrigan and treasury actor bob rubin was known for his view of like maximal optionality. And so there is this view among regulators that we dont want to take it. They want to take of their options off the table. But what they missed from the flip side is that if theyre not willing to bind themselves a path, the Market Participants and the general public dont know what theyre going to do. And to this day still dont really, really know why lehman treated one way and bear was the other. So an Important Message of the book is why important to be transparent and, consistent in a crisis and not to just assume as a regulator that youre better off, you know, keeping all of your options but also keeping the public guessing the the academic training that you receive. Theres a lot of discussion in economics, in Public Administration and in policy studies about whats called capture. Yeah, what youre describing is a regulators, real regulators who are think of their as railroads or people who ship on railroads as air air traffic you know the same was your constituency law or was your constituency in the Financial Markets because weve described you as a former financial regulator. Correct i mean because the faa federal Housing Finance agency, fha regulated Fannie Freddie, the filament banks which are Financial Market participants now, there is a conversation of balancing various pulling and pulling in different directions. And so certainly you even really need to be deeply cynical about it. And im not dismissing the cases but certainly with a lot of financial regulators there a revolving door where somebody leaves the regulator one day and goes works the industry the next day. Those things are real more impactful is the fact that the regulators spend 90 of their time talking to the regulators entities. So even if its something where its intentional, it just becomes the you know, you end having, you know, sort of stockholm syndrome, which shared set of assumptions and that really influence the regulator. And this is whether its long term career staff or political, but you know, partly because having worked on capitol hill, you know, ive long been of the view, you know, youre first and foremost responsible as to the statute. Congress has made deals. Congress has made trade offs. And your job is to respect those. And i do think part of anger and sometimes toward regulators is when decide to treat congress, as you know the laws is advisory. So you know congress decided that 50 is the limit for deposit insurance and you really shouldnt as a regulator second guess that unless you got a really really good reason. And so part of the message of the book is to really kind of inspire again, deference for the executive branch, to respect the decisions that, you know, has made and to say, this isnt your decision to make. And so there were a number of things where, you know, i might have felt this way. I might have felt that way. But i recognize and this is my call. You know, that call was made by somebody else. And its a reminder that, you know, im the first to complain about some of our members of congress. But as i reminded myself pretty regularly in talking about that, thats a different cspan show. But they were elected. I was not. And again, having that humility, a regulator of recognizing youre not an elected official, i want to remind our audience, if youre online, theres a q and a function at the bottom of your screen or you can send an email to events at cia dot org and. Well try to get the question to mark. Likewise in the audience here, if you just signal to the back of the room, well make sure the gets over to you and get your questions. Mark i took away maybe three big lessons that you drew and i wanted to ask you, if i got it right and if you would add to my list. But in a in a and in this when regulation matters, i took away real stress you on transparency in the twin of that or the flipside of that is Clear Communication about what will happen in the future if it happens will do b i took away a lesson about targeting means testing creating limits for programs, different ways to target the Government Programs and independent. And you spend a lot of ink talking about the necessary to respond in a crisis. Are those the big items . Are there other big ticket items that you want people to take away . That really covers a lot. I mean, there are conversations about know how you can deal with the troubled agency and how you can get you know, there are leadership lessons in government that arent only as important in a crisis but also an important in a non environment. And getting the agency there. But you know, the real takeaway of you know in a crisis but in a non crisis its just critical for leaders of agencies to be transparent, to be Community Pretty regularly what the mission and also partly thats how you get the career behind you thats how you signal the public as well as stakeholders in the agencys mission that this is what were going to do and is how were going to be transparent about it. And again that i think a transparent city is incredibly important because at the end of the day, you know, Market Participants, everybodys got to go about their daily lives. And if you to keep guessing what the governments going to do, how are you ever going to figure that . So to me, i put the onus to me is always on upon the government to youre going to if youre going to be the rule maker, you need to have transparent rules that people could follow. And they will know what they are and they can be tough rules, but they need to be clear and its more than i think its, worth elaborating here. Its not just being a rule maker and saying this is in bounds this is out of bounds. Its its the rule maker for who shall benefit where hundreds of billions of dollars are on the line. Absolutely. People are talking about their ability to keep a roof, their head. These are very consequence. And thats why we really, first and foremost focused, you know, on the assistance programs. But how do you keep people in their homes . And so, again, im not a Public Health official. You know, if we all go back and think about when, you know, we were speculating whether you could get coverage from a doorknob or from the elevator and really a lot of questions we. Didnt know the transmission. We did know that people were the vector. So we didnt know that if you were going to have a house under foreclosure, that, sure, stephanie did not want to go through that house and you did not want that sheriffs deputy in that house you didnt want it. And we did know theres a tremendous amount of research on how diseases spread via homelessness and other factors. So again, we were dealing a lot of uncertainty. And one of the things i try to do in the book is actually candid about what we did know, what we didnt know, where we were taking chances, where we were taking gambles, where we were making calculated risks. And even in some instances where we think we may have it wrong, but all that said, im trying really lay bare what those decisions know are made. And so how do you keep in their homes . And of course, you had courthouses across the country down in early part of covid. So even if you wanted to continue not only the foreclosure process, but also the home buying and selling process, which of course requires deed transfers, all of that kind of shutdown. So part of the conversation on book about how we kept that going, how we made it so you could get an appraisal on your house if you needed to refinance, even though the appraiser didnt, to come in your house, and nor did you want them in your house. And so some of that is reminding kind of how we kept that going in the back and even also to say, you know, heres where we took a chance and we werent sure how this was going to work. So i hope one of the things that comes through this is some reflection of the uncertainty and some of the decisions that were done and some of the lessons learned. So one of the changes that we we all went through apparent right here where were on zoom. Yeah, right. You talk about things like appraisals and the immense amount of paperwork associated with this set of industries for the consumer and for the participants to information to regulators how much that was aside, lets just talk about regulatory forbearance, how how much that was set aside. The moment of crisis during these lockdowns has now crept back in versus weve been able to do away with because we learned new ways to. And thats a crazy great set of questions. And many of these i either the questions try to get some kind of answers in saying you know they were flexibilities that were given to be able so maybe ill start with its its its it really was impressed upon me and a reminder of how much of the mortgage and home buying thats historically been face to face. And if you think about like you know, youre buying a house, youre going to the title agent, whatever you close in on it and its you in the in the in the, in the seller, in their agent all crushed in a small conference room. Boy, thats maybe not a superspreader, but a minor spreader event. And so again, remind you that so much of this is face to face. And so looked at things that we needed to do where. For instance, we gave flexibilities where. Someone could drive by the house and do a drive by appraisal. We also knew that was riskier. It was much less likely you were going to get an accurate. So one of the other themes of the book is we would give flexibility here, but we would tighten here to offset the additional risk of that and making what we were going to do and though we had a massive housing boom, people moved out of some areas, particularly trying to move to areas of the country where the schools were open and such we saw a lot of this remote work. We certainly concerned at that time, which is why even though you had this big refinance boom and homebuying boom in 2020, 21, we were actually standards, which i can tell you not everybody in the mortgage industry loved that but we were looking at this saying, you know, how do we kind of pull back and make sure that if were going to get people homes in this environment when the were likely to come back to earth someday that we can get them in a sustainable so having that sustainable there were certainly things like i said earlier on the mortgage assistance programs where we set up the honor system, whether that should be the path going forward, whether we should do it differently and a different environment. Of course, we set up rental programs where, you know we gave forbearance to the landlord and the landlord but agreed that not evict you the whole cdcr Eviction Moratorium was a separate issue that we were not involved in. But i do give my views on that. And again, how do we come up with things that keep people in the home in that regard . So i think some of this will absolutely stay. There were certainly some of some of the regulatory fare forbearance. Yeah, exactly so for instance, one of the bigger changes and this was probably a third of the states precovid, you could kind of have the deed remotely notarized. And this was mostly places like alaska where know good luck getting a lawyer or a notary to come out to your home on a regular basis. So a lot of parts of the country where youve got very vast rural areas, there are already some flexibilities. Again, its its not like you couldnt be in the room but its more like that persons a two day, two day boat ride from, you know, wherever. So, you know, some of that stuff. Other states changed, some of the stuff which changed some of the stuff we did changed in my my opinion need to change back. So again, it really was a sense how do we have flexibility and of course, part of the big question is you can on one margin take additional risk. Youve offset elsewhere. But unfortunately, the long history in the Mortgage Market from government is we keep, you know loosening on one side and then maybe theres some safeguards. But these safeguards erode. So again, there is a worry over a time in my mind that things that we chose to do and had to do to keep the market Housing Market going during covid you know may or may not be appropriate for the long run. And again, part the conversation of the book is maybe should stop you know as as a public and question these like should this be the norm should this not be the norm . What are the and cons of this rather than just keep this going. So weve weve used this now in context of regulation and the obligations to a deal done forbearance, regulatory, a central decision. And its a theme throughout the distinction between forgiveness and forbearance. Can you talk a little bit about that and contrast it with where we were in 2008 versus how you approached the question in terms of homeowners and for that matter, so to go back. That, you know, we had fha were in our financial regulators and so its not a grant making agency, its not fema, its not hud. And so the authorities are not to simply say, well, you dont have to pay your mortgage. But what we could do so forgiveness of just saying your, you know, missed payments is forgiven that wasnt even an option for us financially. It was an option for us legally, wasnt an option for us financially. It quite frankly it wouldnt be needed anyhow because we were able for most and again important to keep in mind about 90 of the households you ever entered into a Fannie Freddie Forbearance Agreement currently have are out of it, back on their feet. So it was this tension of, you know, i mean, again, a good analogy is the student loan. You know, forgiveness thats been done under covid, where someone may not have made a student loan payment years. Well, if youre back to work in your back, on your feet, you know whats rationale . So we did try to this in a very targeted way where it was lets assist those who need it. Lets target the assistance to what the problem is. And so it wasnt taken as this is going to be a give away or this is going to be a gift. It was going to be how do we target it to the immediate problem at hand to get through that and not turn it, you know, another washington expensive you know that that has no basis to program so i do believe at a fundamental level whether its a student loan or, whether its a mortgage or credit card, if you borrow money, you pay it back. If you cant pay it back, then your lender can work with you and of the themes of the book is we really ran these programs in the same way a business would have run them. And the fact that lenders who didnt have to use these programs as i was meant, as i mentioned earlier, you get a mortgage that might be bought by fannie and freddie, but a lender may hold it on their Balance Sheet and make it be put in a private label security. And so fact that the part of the market didnt have to do what we were doing, did what we mimicked, what we were doing, i think is a pretty good indicator that we were actually running this in a fairly responsive, more businesslike manner and not as that is a giveaway of any sort, but really is a targeted assistance that was both helpful to the homeowner and helpful to fannie and freddie because we couldnt withstand those losses, i mean, the finish rating, were not going to be able to foreclose and take millions homes in 2020. So that was an unreasonable outcome anyhow. So that was on the table. But we needed to to think about doing this in a way where again the assistance was, you know, is Larry Summers would say what a timely, targeted and temporary as he say often, well, lets talk turkey for a second. I want to i to hear firsthand account about the underbelly of the Imperial City here. Washington, d. C. Weve weve mentioned youve worked at the white house, youve worked on capitol hill, and very positions youve served as a regulator regulator. I checked the text this morning and the First Amendment still protects against creating a law that somehow with people assembling peaceably and seeking redress of grievances. So what did you learn during this whole episode that you write about about lobby and how lobbying works . Its a great, great question. And unlike you, i, i might have some disagreements. Some individual lobbyists, but im an ardent believer in, the right of people to be able to lobby grievances their government. And i will defend that were lobbyists truthful with you. What is anybody really always true for you in these circles . Of course not. But you know. But but this is why i flipped the script a little bit. And its the onus on Public Officials like you to have a responsibility to meet outside parties whether its lobbyists whether, its advocates whether its citizens. And sure you understand that anybody youre going to meet with has an agenda always. You know, way i would describe it sometimes i think in the book is, you know, and i said this when worked on the banking committee, you know, if youre meeting with some wall street lobbyists, half of what theyre saying is really important, critical that you need to hear, the other half is completely. But your job is to figure out which half is which. And that is your job, you cant you cant go in and say, oh, well, they didnt tell me everything i needed to know. Now its on you to ask the right questions. It would be great if everybody just was, you know, lobbyists who came in and solely told you purely the truth and didnt have any interest. And i would go as far to say the lobbyist ive always respected the most are the ones who were trans about heres my interests, you know what my members are, heres what were representing, heres the landscape we see. But, you know, one of the lessons in the book and im a big believer in that the most important element of leadership in these positions is humility and recognizing that in any situation, 90 of whats going on, youre not seen. And so you need to seek outside of information, but you cant rely on anyone. So just as you have to as a regulator with speak in front of meet with the trade associations, the industry. But you also have to recognize theyre here in the beltway too so theyve got a certain they live in like we all do. And so you do need to talk to people in the directly so you you write about these phone calls that you made. You had your own kind of phone tree where you would pick up the phone and call the ceo and say, tell me about the soundness of your. So thats a great so, you know, again, you get a big part of the book is the push and pull over whether we should rescue mortgage servicers so youre in your book, big believer in an empirical work and data, how did you separate the of the phone call where ceo says were doing okay, its rough but were going to be fine with the whole industry. So you have to look at all the others data points. And so for instance, you know, at the time of march 20, fannie and freddie did business with 346 nonbank mortgage servicers. Now as the regulator, because fannie and freddie have contractual with these businesses, we income statements and Balance Sheets all of these entities but obviously accounting data is stale the moment you report it. So what we would immediately do is and again the mortgage industry, like many industries, has some degree of concentration. So we get on the phone with the largest 20, 30 immediately in march 2020 and say, im looking at your most recent financial submissions. Whats changed for you . You know, this is what this is what you told me. Your liquidity was weeks ago. What is it today . And every morning i would get a list of, you know, high risk servicers, the ones that we knew were right on the line. And an important story. The book so often kind say the lesson of Lehman Brothers. My lesson, which i think is a bit counter conventional wisdom, is that if you lead an entity to believe will be rescued, it will reject offers to be assisted in. For instance, we know leading up into 2008 that Lehman Brothers had three separate offers to bought and each time it said no, we wont take anything less than bear stearns got. So you created this expectation of assistance and it made the crisis worse. So im happy to say and i dont name names in here, but anybody who wants to google a little bit can figure out who im talking. In the book, they were two large servicers who had private equity parents that had pulled literally pulled billions dollars out of these entities in 2019. And again, i have nothing. Investors taking returns on their investment, but if you come after youve taken that return and take money out and you come to washington and say, oh, wed like the government to put money in, then im going to be a little more skeptical. And so these were instances where we told these entities, if you fail, we will shut you down and transfer the value of your assets to somebody else. And so if you would like to keep the value of those platforms going, you may want to consider putting money back in. And you know what happened. They put the money back in and those entities are around today and survived without having the taxpayer put money. And some of this is you have to project willingness to say, we know how to shut you down if you fail. And were going to shut you down with that public money. And were going to do it. And if you want to avoid that, put your own money back in and this is a direct link to what looking at last month. Yeah, im so there are processes available for shutting down these companies and as long as you credibly promise that you will follow through, you get better behavior. I know it sounds a little hokey, but its like, you know, say what youre going to do and do what you say and then you is an effective way to govern and its a shocker nowadays. Reminder would, before we come to the top of the hour to, the online audience, if youd like to participate with mark you, can certainly buy the book. Thats one way to participate with him, but you can send a question by using the q a function at the bottom of the screen and itll show up here for us. Id like you to just pick up with Current Events for a moment. Interest rates. What how how should we understand whats happening, whats happening with Financial Markets. Well, certainly in the banking that every time we have had in history these kind of Interest Rate. You know this is really a driver in the savings loan crisis for instance was you saw these big changes under then fed chairman volcker rates went up quite quickly, not as quickly they did this time. I mean, its in fairness to say the rate increases weve seen under jay powell have been unprecedented in their and because Financial Institutions hold long but not magnitude not in magnitude. A cigaret but because we ensure citizens have long dated assets like mortgage or Mortgage Backed securities or treasuries, those assets are highly sensitive to rate changes and. So again, many institutions have that risk. Many institutions sell off that risk. But was almost certain, in my view, that to this change in Interest Rate environment, you were going to something break. And i think its an open question you know, i certainly raised some of these issues when i still in government with other regulators i expressed concerns the concentration of Mortgage Backed securities at banks you know and said, listen is going to turn at some point. So it a bit frustrating to see some Officials Say well, who knew . Well, you should have known and many of these things you know were of course i want to very clearly state first and foremost responsible for any bank failure. We think even if you operate in an insane, contradictory, destructive regulatory environment, youve chosen to a business in that environment. And if others can run it successfully, so can you. But that said, certainly the regulators were, in my opinion, asleep at the wheel. Really kind of missed some of this. I do think we know and more that some of the front line regulators see it. And again, a theme of the book, how do you make sure as an organization that the information, the front line employees see gets the top and i dont really i wouldnt say that so far for what weve seen for Silicon Valley bank. Its not a suggestion necessarily that the fed examiners were missing things. They were seeing it. Its a question of why didnt it get to the top of San Francisco fed . Why didnt it get to board . Why werent these things know, raised and acted upon . And again, there is a difficulty how you can get that information to the top of an organization. And so admittedly, a little uncomfortable me as an economist to talk about culture, but i really walked away from the experience running an fha fe that the Organizational Culture at the regulator and the Organizational Culture at the entities such as fannie and or Silicon Valley bank is critical. So getting that Corporate Culture is is makes a big difference. But you have to have the rules be transparent and people know how it needs to be acted upon so. We have a institution and i want to ask i want to follow up on this culture point. We have an institution that might not be widely understood, widely known, goes by the the acronym f soc. Yes. So the social stability oversight, this is a like a super team, the dream team of regulator is, if you will, for banking, finance related activity that came out of doddfrank. You you discuss different personalities and conversations that were taking place. Members of the sec, what is the efsf and most importantly, does its culture maintain through time or is it really dependent the administration so the Financial Stability Oversight Councils by doddfrank and its chaired by the treasury secretary and the heads of the independent financial regulators like the sec, the fha, fe, scc, all sit on it on a day to day basis. The treasury and the Federal Reserve have a tremendous amount of influence. So even though its theory, a council of equal and everybody gets the vote there certainly is a tremendous amount of day to day sway from treasury and the fed. I mean, they have an outside the vote council a bit more in everybody else and to some degree and of course, treasury. The chair so they set the agenda and they so there is a degree to whoever is chairing it does matter and does have an influence, but it also kind of matters how cordial you were because i was involved often in the selection of some of the other members of fsoc. I started with a familiarity with many of the players and so had a pretty Good Relationship people which is why we had a very cooperative process in 2020 where we started a designation determined whether fannie and freddie were systemic. And again, we did a cooperatively with the fed and treasury and identified a number of problems in the mortgage and just unpack for everyone to determine if fannie and freddie were systemic. What is that that a Legal Definition what it means these institutions represent just a risk to themselves but, whether they represent a risk to the financial system. Um, thank you. You know, and if you are designated systemic, what ultimately means is you have some back up regulation the Federal Reserve of the entities in question but certainly know the treasury sets a lot of the agenda and if you want to focus on Financial Regulation that will be part of the agenda. If you feel like the focus is on issues beyond Financial Regulation that can take up the agenda. You know, part of the frustration course is that, you know, i kind of quip and book that fsoc is really at identifying problems. None of its members have actual responsibility for. And its not so at, you know is a real chance to criticize your fellow council members. Well that lets press that for sure i understand collegiality and different of expertise on different questions underlying statutes that drive the active of these different agencies. But youve used the word throughout the hour that i think its really important that we we tackle before we finish, and thats independence and if theyre truly independent, it doesnt matter what. One member of a of a dream team of regulators about them. I mean, the oxi and the the f hfa, the cfp, these, these folks are independent political pressures, right . Because if they were to to a degree because no, no degree of independence is, is pure. So certainly you should say yeah, if the treasury secretary doesnt want it on the agenda, it doesnt get on the agenda. So i mean, i mean to slightly cynical about it my view that doddfrank created a f to give the Treasury Department more influence for the rest of the financial regulators. Thats what it means on a day to day basis. And i would say the success failure of the f soc in any one day of the week depends on the treasury secretary. You can try to put things on the agenda as. A if youre if if, if youre a member other than treasury or the fed and you will generally have a hard time doing it, not impossible. But again, ultimately, what gets debated. What gets decided is really first driven by treasury and second driven by the fed. And again, you know, that really is kind of the process in a big way. Certainly, you know, is you know, as you may know in the book, talks about the Supreme Court ruled on the independence of the agency i headed fha fe and we lost a degree of that independence which i think is unfortunate. And i talk about that in the book a little bit. But, you know, it also allowed us to move quickly. So, for instance, i talk in the book here, decisions we were making that, you know, we would make a decision and let the white house know. And i was at the white house. I know you got to clear things omb, you got a process. Its not always designed to move quickly, but we were independent. We could kind of force that process to move quickly. But i said, well, you know, were going to announce this on tuesday if youre ready, go with this. Great. If youre not going to go ahead. And so you have your willingness to kind of nudge people along is an independent, but also to kind of keep divorced from the day to day. And i mean that in a way where you divorce from day to day political decisions. So at no and we had a great collaboration at with hud with the white, with treasury, with with with the fed. And i detail some of those conversations, interactions in the book built into the day. We had a fair amount of flexibility go the way to the thats the im to be a cynic for just a moment i dont live that i dont wake up as a cynic every day but to say that you had a measure, independence from the politics, the day to day political decision. So i think is the phrase you use that suggests the nonindependent agencies are not, you know, so that somebody over at ag, somebody at treasury is taking calls from a senator whos taking calls from the president. Yeah. The biggest bank in that state. And they are making decisions that are not adhering to the law theyre making political decisions is is that what im here . I think you have to think it on a kind of continuum because as somebody who spent two years in the white house, you know, youre biggest frustration at the white house is that the are going their own way and ignoring the overall vision and coordination of the administration and and may actually be working in conflict or you know are likely to be unduly influenced by the constituency groups of the agencies. So thats kind of the white house of like boy, none them are really, you know, acting if theyre on the white house team, the administration team. So there is that tension back and forth but the white house itself, obviously subject to pressure from constituents. They like i said, in the Silicon Valley bank case, we know the Governor Newsom repeatedly, the white house believe i also also called treasury. So people may try know different avenues to try to influence agencies if you are a quasi independent agency like the Federal Reserve, you have, you know, a fair amount of influence, although you know, if youre the Federal Reserve and you send your alumni to treasury or the white house, you know, i quip at one point, maybe we need to make sure independence of the rest of the government, the Federal Reserve, in that regard, rather than the other way around. But all that said, having that kind of independence, but you also have play people who have, you know, worked together for a very long and thats got pros and cons i mean much of the existing team, whether its brainard or yellen or powell have worked together or gruenberg, the fdic have worked together for years were all part mostly architects of doddfrank, you know, so they own the status quo. Two would agree, but having those working relationship chips, ironically enough in some sense, i think i was to maintain a fair degree of independence from the administration for the white house because had worked in it. And they knew me. And so there was a trust in well, you know, marks to do this. And we understand that that simple question. Sure. And and i do want to get one other topic in the last two or 3 minutes here, but a simple question. If the white house popularly elected president charged with administering the being the executive, our federal government, if the white house views these different agencies as not on the team, what branch of government are they in . Thats a great question. So, you know, and it is i mean, its a a its your principal agent problem that we all learn about. You know, thats different than the question oh, there is a degree to which so some of it, as i mentioned, financial regulators set aside the kind of revolving door style capture that is real and we worry about but just the everyday who you interact with, you know if youre at the Us Department of agriculture your time is spent talking to farmers and i grew up a farm. I love farmers, but you know, have a financial interest like everybody else. If youre at hud, you spend all your time talking to the housing industry, you know, if youre so of these agencies, i mean, even like think about the purest of of public missions, defense. I mean, i think its fair to say that you spend all your time talking to defense contractors thats going to influence what you think the approach is on anything. So part of the job at any white house is trying to get the agencies reorient to what are the bigger when. Again, its not a malicious thing necessarily, but the information they receive on a day to day basis is not you know, its now non self serving and you buy into in your you know reinforced with the assumptions that go around that policy issue. Okay and thats very for an agency to break out of really. And again, i try to give some advice and in the book how to, you know, not only be kind of independent, you know, how do you how do you follow along . How do you be independent of mind . I in just a moment, im going to ask you for summary statement. You know, the one thing or the two things that we didnt get to cover that you think most important but beforehand. I do have a selfserving question and. I want you if you would, to share with our audience. The Mark Calabria vote on the greatest jam band of all. So ive heard different argument. Ill just and you say, well, just provide the context that one of the things i tried to achieve in this book was to bring to bear anecdotes of to day living during covid. So, you know, mentioned my cats on occasion, mentioned music and id be listening to that when when chairman powell calls and again, im going to press you i havent heard an answer that thats fine. So because you raised this because theres a reference to as one of the weekend, you know, fire drills in march 20 is evolving. And i start that day listening to a little grateful dead on my on my radio. So again just kind of the the we were all kind of putting up with and the importance of music and pets and family and all the sorts of other things that youre trying deal with during this pandemic. Hopefully, when people, you know, read those and think about that, that we relate to that. And then in the future historians or maybe put that in the context, what it was like to be, you know, i actually think is a point that really deserves far more digging into, which is i make the observation in the book that in 2008, you essentially know, had all of these people stuffed into like, you know, Conference Rooms at treasury and the fed and these hour long meetings where everybodys, you know, yelling at each other you know, reinforcing group they could panic. Where is the response . Covid was one 1015 minute call after another by yourself. And so i mean, there was never a moment in march 20, 20 i might over the course of the day spoke to manoogian for an hour or two, but it was never at once, an hour or two it was like, okay, thank, im going to get back to that. So it really was a very different environment and quite frankly, i think it was an environment that probably lent less to groupthink than what you saw in 2008. And so certainly is an interest of mine. How do you set up Decision Making structures to reduce groupthink so there is a risk and i do think that part of the outcomes we had in 2008 were because the psychology of how the decision were made. So i delve a little bit into that in the book as well. So what i what, i hear here is that regulators are people too. They deal with pressures of family and pets and home and. Its helpful that they have regular lives. So that they can deal with the people that theyre regulating and theyre more than Dave Matthews widespread panic fish that youre a dead guy and i try to be the grateful dead i try to convey some of that in the book. All right. The person ality of it and living through some of that in the book. Last word before we wrap up. And i want to give special thanks to our audience with cspan with online who will be watching this you to mark whats the last word for the day . Well, i think the last word for day is to remember that decisions made in the truly are choices and decisions and Public Officials owe the public an explanation of why they made certain choices and the public that transparency. So i just want to with you dont have to abandon principle in a crisis. In fact, its just the opposite. Thank you very much. Book is shelter from the storm. Its out this month from the cato institute. And i appreciate all of you being with us. Thank you, kent lassman. And well be back. More programs, including book forums at cia dot org