Reiss on Hedge Funds’ GSE Strategy

American Banker quoted me in Everything Lenders Need to Know About GSE Shareholders’ Lawsuits (behind a paywall, but available in full here). It reads in part,

A powerful group of shareholders is amplifying attacks on housing finance reform legislation as they await resolution of a major legal battle, attempting to slow momentum on the bill before it likely passes the Senate Banking Committee.

Several big hedge funds that stand to possibly win billions of dollars for their shares in Fannie Mae and Freddie Mac are leading the charge, both in federal court and in the court of public opinion.

New investors’ rights groups said to be backed by the funds have popped up in recent weeks attacking legislation by Sens. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Mike Crapo, the panel’s top Republican.

Their presence is yet another complicating factor in the tumult ahead of a scheduled April 29 vote by the committee, potentially hurting efforts to secure additional support for the measure.

“Now that different people have come out with their bills, it’s been laid bare that the people working on [government-sponsored enterprise] reform aren’t going to do major favors for the shareholders,” said Jeb Mason, a managing director at Cypress Group. “As a result, the shareholders have adjusted their strategy to muddy the waters – and, if they can, kill the Johnson-Crapo bill.”

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As part of their effort, investors have begun taking their concerns public through new tax-exempt groups in Washington. The investors argue they were on the receiving end of a rotten deal from the government, particularly those that bought the stocks before the enterprises were put into conservatorship.

“The hedge funds have this incredibly sophisticated, multi-pronged strategy – lawsuits, legislation, academics on the payroll, funding anonymous PR campaigns, offering to buy the companies. They’re coming at it from all angles,” said David Reiss, a professor at Brooklyn Law School.

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Given the size and complexity of the cases, it’s likely to take years before the matter is resolved entirely. Analysts have suggested that if both sides continue to push the issue, it could even rise up to the Supreme Court over the next several years.

“You’re talking about many-year or potentially, decades-long lawsuits,” said Reiss. “The stakes are humongous and the parties are incredibly sophisticated and well financed. The government parties’ incentives to settle are not the same as a private party – I could imagine them seeing this all the way through.”

Land Use Controls Caused The Financial Crisis?

Respected Housng Economist Edwin Mills and co-author B.N. Jansen write in their article, “Distortions Resulting from Residential Land Use Controls in Metropolitan Areas”,

The strong conclusion of this paper is that stringent residential land use controls were a primary cause of the massive house price inflation from about 1992 to 2006 and possibly of the deflation that started in 2007.

Indeed, it is difficult to imagine another plausible cause of the 2008-2009 financial crisis.  Popular accounts simply refer to a speculative housing price bubble.  But productivity growth in housing construction is faster than in the economy as a whole [citation omitted] and the US has an aggressive and competitive housing construction sector.  In the absence of excessive controls, housing construction would quickly deflate a speculative housing price bubble.

A final comment is that there appears to be no interest at any level of government, or among the articulate population, in reducing the stringency of land use controls.  Indeed, recent trends are in the opposite direction. (200)

Jansen and Mills rely heavily on a dataset constructed by Joseph Gyourko and others to analyze local land use control stringency.  I am not in a position to evaluate the dataset or the model that they use, but their findings are consistent with those of Gyourko and Edward Glaeser in Rethinking Federal Homeownership Policy.

It seems to me that Jansen and Mills overstate their case quite a bit — stringent land use controls may have been a necessary condition for the bubble, but I can’t see how their argument demonstrates that it was sufficient unto itself.  That being said, I would agree wholeheartedly that this hypothesis is worthy of serious study.  The relationship between land use and housing policy is way more important than most members of the “articulate population” understand.