Bernanke's Next Step To US Bank Nationalization: MBS Insurance

This weekend's Wall Street Journal reported on Fed chairman Ben Bernanke's comments, delivered to a mortgage finance conference via video link, on a continuing Federal role in housing finance.

My business partner and I have reasoned, since the Fannie and Freddie takeovers, that the government is unlikely to allow the past levels of profitability in mortgage finance to continue in the future. It's the simplest way to avoid a repeat of the excesses of the past few years and recent real estate lending cycle.

I've written a few posts on the nationalization of US banks, both recent, and, ideally, in the future.

Part of those futuristic musings of mine came a step closer to reality with Bernanke's comments. I actually saw part of his address live on Friday, but didn't know the context of what I was viewing.

In his remarks, Bernanke sketched out a continued role for the Federal government in housing finance in at least one of three ways: heavily regulated covered bonds to back mortgages; a 'public utility' model which featured a cooperative between private mortgage originators and GSEs, or; Federal mortgage bond insurance.

Taken in conjunction with Bernanke's comments concerning the difficulty in making the current GSE model function, it's not clear how the 'public utility' model is really any different than the current one.

But his description of government-issued mortgage bond insurance sounds like the sort of step that will further cement a nationalized banking system into place.

Can you imagine trying to sell mortgage-backed bonds in a market without such Federal insurance, when all the competing, similar bonds carry the Federal insurance? It would seem foolish.

About the only way you could do so would be to market the mortgage equivalent of high yield, or junk bonds. And we just saw what has happened to those in the past year. Much like the original junk bonds, such a mortgage-backed variant, even without the CDO overlay, would only be attractive during periods of risking markets.

But, back to Bernanke's comments. Introducing government-sourced mortgage bond insurance would encroach upon the conventional, private-sector bond insurers, such as MBIA and AMBAC. However, observing their disastrous plunge into insuring CDOs, it's unclear whether they could credibly re-enter the non-municipal bond insurance market again and offer simple mortgage-bond insurance.

With government provision of mortgage bond insurance, there would likely be a permanent foreclosure of the market to private enterprise, much like the effective elimination of private mortgage conduits when Fannie and Freddie were allowed to dominate that market.

We are probably seeing, therefore, the next concrete step along the road to heavy governmental regulation and de facto nationalization of core banking and lending functions in the US.