Counterparties: Government’s governance problem
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The US and UK have a unique sort of corporate governance mess on their hands. Both countries are trying to deal with the complications of owning a multi-billion dollar financial institution, and are having a hard time doing so.
Britain‚Äôs problem is RBS, which the government owns 81% of as a result of 2008 bailout that ended up costing $71 billion. In the US, it‚Äôs Fannie Mae and Freddie Mac, the mortgage giants that have been under federal conservatorship since 2008.
Hours after a senior official at the Bank of England called for a more certain timetable for RBS‚Äôs privatization, CEO Stephen Hester, who took over in November 2008, unexpectedly announced his departure.
Reuters‚Äô Matt Scuffham reports that the RBS board decided Hester need to be replaced after he refused ‚Äúto make an open-ended commitment to remain‚ÄĚ. Analysts, the WSJ says, were ‚Äúsurprised and disappointed‚ÄĚ by Hester‚Äôs departure just as the bank‚Äôs privatization process is getting underway. Faisal Islam thinks Hester‚Äôs exit may be a sign that the government wants to restructure how it manages the bank, something it has had trouble doing in the past.
The US government, meanwhile, is facing a lawsuit from Fannie and Freddie shareholders seeking $41 billion in damages for improperly seizing the companies in 2008. Fannie‚Äôs stock has been on a tear recently, based on the essentially speculative rationale that the government will decide to privatize the company. Matt Levine makes the great point that the bailout-related lawsuit could should cause the government to keep its hands on the mortgage companies:
Fannie and Freddie were designed to carry out a public purpose while also making money for private shareholders. When those goals conflicted, the public purpose won and the private shareholders were thrown into the abyss. If you‚Äôre the government: that‚Äôs perfect. Except now those shareholders are suing, as shareholders tend to do. If you‚Äôre the government: why would you set yourself up for more of that?
Jesse Eisinger argues that Congress continues to find new and interesting ways to bungle Fannie and Freddie‚Äôs rehabilitation. Neither of the two main proposals to reform Fannie and Freddie, Eisinger writes, reflect what we‚Äôve learned about the housing market since the crisis. Not that Frannie were ever that sound to begin with. The companies were flawed all along, Eisinger says: “hybrids, privately held institutions with government charters ‚Äď along with too much political influence and too little capital.‚ÄĚ¬†‚Äď¬†Ben Walsh
On to today‚Äôs links:
Foreign exchange rate benchmarks may have been manipulated daily for the last decade – Bloomberg
Maybe all that FX market manipulation was just standard trading – Felix Salmon
The term “market manipulation” used to mean something – Matt Levine
Dan Loeb is giving more money to charter schools to get back at the teachers’ union – Bloomberg
And, of course, there are many more links at Counterparties.