Monthly Archives: April 2015

“In the complaint, Quicken said that the Justice Department based its settlement demands on a sampling of 55 of 246,000 loans and that the defects included miscalculating a borrower’s income by $17 and lending a borrower $26 too much…

…Quicken Loans Inc. late Friday sued the U.S. Department of Housing and Urban Development and the Justice Department, alleging it is a target of a “political agenda under which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into paying nine- and 10-figure sums and publicly ‘admitting’ wrongdoing.” In its complaint, Quicken says it is fed up being pressured to settle charges for fraud it says it didn’t commit.”, Joe Light, “Quicken Strikes Back, Suing DOJ and HUD Over Investigations”, The Wall Street Journal

“For those who don’t understand, 55 loans (and likely non-randomly selected nonperforming ones at that), out of 246,000 made, is not a statistically-valid sample that can be used to draw any factual conclusions about Quicken’s FHA mortgage underwriting. I’ve said time and again throughout this blog that the government has not proved their allegations in any court of law, in any mortgage loan underwriting case that I am aware of. Instead they have used their awesome power to coerce some of the largest banks and Wall Street firms into multi-billion settlements, where no facts have been determined in court (the agreements specifically say this) and the banks/Wall Street only ACKNOWLEDGE receipt of, they don’t agree with, an appendix listing “government facts.” It’s nice to see someone who has the financial strength (and is not a regulated bank or public company) so it can actually stand up and fight these unproven (and denied) government allegations. It’s one of the most patriotic things that a company can do to preserve the truth and American liberty and justice for all of us.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Markets

Quicken Strikes Back, Suing DOJ and HUD Over Investigations

Detroit lender alleges it’s a target of a political agenda, being pressured to settle fraud cases

The Department of Justice finds itself a defendant in a suit brought by Quicken Loans Inc. over investigations of mortgage fraud.

The Department of Justice finds itself a defendant in a suit brought by Quicken Loans Inc. over investigations of mortgage fraud. Photo: Associated Press

By Joe Light

Long on the attack in mortgage-fraud cases, the U.S. government now finds itself the defendant in a lawsuit brought by one of the country’s largest consumer lenders.

Quicken Loans Inc. late Friday sued the U.S. Department of Housing and Urban Development and the Justice Department, alleging it is a target of a “political agenda under which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into paying nine- and 10-figure sums and publicly ‘admitting’ wrongdoing.”

In its complaint, Quicken says it is fed up being pressured to settle charges for fraud it says it didn’t commit.

The lender says the government threatened to file a lawsuit unless the company paid a multiple of damages based on a sampling of its loans backed by the Federal Housing Administration, admit that its lending practices were “significantly flawed” and publicly state that it had committed fraud under the False Claims Act.

Spokesmen for the Justice Department and HUD declined to comment.

The complaint from the Detroit-based company, filed in the U.S. District Court for the Eastern District of Michigan, said that the Justice Department investigation was launched almost three years ago and that the department had subpoenaed more than 85,000 documents.

The lawsuit is a rare pre-emptive move by a company under investigation and a twist in government efforts to collect crisis-related penalties. It also reflects lenders’ frustrations with what they say are unfair moves in the government’s yearslong effort to punish firms involved in the crisis.

The Justice Department has been investigating a variety of lenders in connection with mortgages insured by the FHA before the financial crisis.

Quicken, as a large issuer of FHA mortgages, is part of that probe, but since it isn’t a public company, it hasn’t disclosed any investigations as other big lenders have.

Quicken Loans CEO Bill Emerson calls the U.S. probe ‘a shame.’ Photo: Susan Walsh/Associated Press

Over the past few years, the Justice Department has reached several multimillion-dollar settlements with banks including J.P. Morgan Chase & Co., SunTrust Banks Inc. and U.S. Bancorp for submitting loans for insurance to the FHA that the government says weren’t eligible or had mistakes.

The FHA sells insurance to make lenders whole if borrowers default and is one of the primary means through which borrowers with low credit scores and low down payments get loans.

However, for the past few years, some lenders have been pulling back from the program, citing heavy and uncertain penalties on loans made during the crisis.

“It’s a shame the DOJ would choose to attack the country’s largest and highest-quality FHA lender providing government lending for home buyers and homeowners across all 50 states at the very time our nation needs expanded access to credit for middle-class Americans who benefit most from the FHA program,” said Quicken Chief Executive Bill Emerson.

In the complaint, Quicken said that the Justice Department based its settlement demands on a sampling of 55 of 246,000 loans and that the defects included miscalculating a borrower’s income by $17 and lending a borrower $26 too much.

Because lenders must certify the FHA-backed loans they make have no errors, the government has sometimes pursued damages under the False Claims Act, a Civil War-era law that lets the government recover triple damages.

That has led to what some banks say are onerous settlements for minor penalties. Rather than audit banks’ entire loan portfolios, the Justice Department also tends to extrapolate mistakes based on a sample, another practice that has drawn some banks’ ire.

“The risks of doing FHA loans for lenders is too high and marks a low point when a Quicken Loans has to fight back,” said David Stevens, president of the Mortgage Bankers Association, which lobbies on behalf of lenders. “This has gone too far and will only hurt consumers’ access to credit.”Mr. Stevens is a former FHA commissioner.

A Quicken spokesman in an email said that the company would continue to make FHA loans in the near term and that “like nearly every lender in the country, we will be evaluating the prudence of our continued participation with FHA.” Last year, Quicken’s FHA loan volume declined roughly in line with the rest of the industry.

“In the court of world opinion, a large majority seems to believe that even if the Greeks may have been a tad fiscally irresponsible, it is the Germans who have driven Greece into depression through cruel insistence on austerity and debt repayments…

…The deeper issue is that European integration by design has reduced the independence of European Union member states legally, fiscally and politically. Interdependence helped Greece run up debts far in excess of a normal advanced emerging-market country, but it is now making these debts devilishly difficult to unwind…Greece’s external creditors as a group have given Greece much more in new money than they have taken out in repayments since the start of the crisis. But capital flight (mostly by Greeks) has reduced bank deposits by more than €100 billion. Once again the ECB has stepped in to provide Greek banks with emergency loans to help prevent the fire sale of Greek business, consumer and government debt…Solutions to Greece’s woes ultimately require structural reforms at both the national and pan-European level. Its debts will eventually need to be further written down, and the country will need aid beyond that. Greece may yet someday suffer the yoke of heavy repayments; we hope not. But so far austerity in Greece is due to having maxed out its credit-card limits. Let’s not be confused by populist rhetoric.”, Jeremy Bulow and Kenneth Rogoff, “Don’t Blame Germany for Greece’s Profligacy”, The Wall Street Journal, April 17, 2015

“Clearly, this was a well-intended government-caused crisis (just like the U.S.’s crisis was). European government bureaucrats established the EU and a common currency, without the cultural, political, economic, legal, and monitoring/enforcement infrastructure required to make sure it worked properly. And Greece has its own long-term, dysfunctional political, legal, and economic issues.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

Don’t Blame Germany for Greece’s Profligacy

Greece would have faced far greater austerity had Germany and the rest of the EU not come to its rescue.

By Jeremy Bulow And Kenneth Rogoff

In the court of world opinion, a large majority seems to believe that even if the Greeks may have been a tad fiscally irresponsible, it is the Germans who have driven Greece into depression through cruel insistence on austerity and debt repayments.

This populist narrative misses the essence of the problem: The Greeks are experiencing an emerging-market debt crisis, albeit one on steroids. Those convening in Washington, D.C., this week for the spring meeting of the International Monetary Fund might want to keep in mind that Greece’s problem is not simply the straitjacket of the single currency. The euro has fallen by 13% over the past year against an effective index of eurozone trading partners, yet Greece is hardly booming.

The deeper issue is that European integration by design has reduced the independence of European Union member states legally, fiscally and politically. Interdependence helped Greece run up debts far in excess of a normal advanced emerging-market country, but it is now making these debts devilishly difficult to unwind.

Let’s first dispense with the “it’s all German-led austerity” nonsense. In 2009, fueled by a three-year jump in government spending to 54% of gross domestic product from 45%, the Greek government was running a primary deficit equal to 10% of its GDP, according to IMF estimates. In other words, new borrowing equaled all principal and interest due, plus an extra 10% of GDP. When major accounting fraud was reported, private lending to the Greek government stopped and bailouts from the “troika” of the European Central Bank, European Commission and the IMF—to the tune of €240 billion—were needed.

Laid-off workers protest outside Greece’s Ministry of Labor in Athens, April 6.  Photo: Michael Debets/Zuma Press

Yet the bailouts could not begin to substitute for both the lost lending and the collapse in tax revenues caused by a deep recession. By 2014, Greece supposedly ran a 0.3% surplus with government spending at 47% of GDP plus continuing “cohesion” transfers from the EU of about 3% of GDP and ECB support for the Greek central bank.

True enough, northern EU countries are saying they want to be repaid the debts Greece still owes even after the significant write-downs it has already received. Sober observers realize that further debt write-downs are both desirable and inevitable. But don’t blame today’s austerity on tough repayment terms that have never been, and probably never will be, implemented. Already the EU’s current bailout terms include no principal or net interest until 2020. Greece has enjoyed a much smoother cushion than say, the Asian financial crisis countries in the late 1990s.

Greece has experienced a fall in income comparable to the Great Depression of the 1930s. Its per capita income, which rose to 70% from 49% of German levels in the heavy borrowing period between 1999 and 2009, returned to 47% in 2013. And the so-called troika has exercised considerable leverage over how Greece’s fiscal consolidation has been engineered, including over tax hikes, spending cuts and labor-market reforms. But Greece would have experienced far greater austerity had it been forgiven all its external debts in 2009—with all foreign sources then refusing to lend the country more money.

Greece’s external creditors as a group have given Greece much more in new money than they have taken out in repayments since the start of the crisis. But capital flight (mostly by Greeks) has reduced bank deposits by more than €100 billion. Once again the ECB has stepped in to provide Greek banks with emergency loans to help prevent the fire sale of Greek business, consumer and government debt.

Greece’s integration into the EU does limit its options more than those of a standard emerging-market defaulter. For example, even if a Greek eurozone exit, or “Grexit,” were to occur (we consider mutual consent to a wall of capital controls far more likely), European courts could well insist that Greece honor the euro value of contracts. Normally, dunning creditors can threaten to hassle a country’s trade, and to seize future repayments to any new foreign creditors—witness Argentina. Greece, however, is far more exposed because of the huge trade, subsidy and commerce privileges it enjoys through EU membership. Whether such threats are credible or not remains to be seen, but Greece’s Prime Minister Alexis Tsipras’s recent trip to Moscow was clearly intended as a warning.

Eurozone leaders would like to portray the Greek crisis as unique, but in many respects it is merely extreme. The ECB has been able to contain the fallout to other eurozone-periphery countries by promising to buy their debts in mass quantities and support their banks. But the ECB guarantee is fragile and could be undermined by politics in northern EU countries, or a populist surge in suffering debtor countries.

Solutions to Greece’s woes ultimately require structural reforms at both the national and pan-European level. Its debts will eventually need to be further written down, and the country will need aid beyond that. Greece may yet someday suffer the yoke of heavy repayments; we hope not. But so far austerity in Greece is due to having maxed out its credit-card limits. Let’s not be confused by populist rhetoric.

Mr. Bulow is a professor of economics at Stanford University’s Graduate School of Business. Mr. Rogoff is a professor of economics at Harvard.

“…there seem to be two Ben Bernankes out there, and, presumably, both would profess to tell the truth. The think-tank scholar (at the Brookings Institution) last week wrote that long-term interest rates were not set by central-bank policies but by fundamental factors, notably inflation and real interest rates, which are a function of economic growth. In contrast, in November 2010, the then Fed chairman wrote a Washington Post op-ed article to explain why the central bank was buying hundreds of billions of dollars of government securities. The answer, according to his defense of the central bank’s policy moves, was to lower long-term interest rates…

…At this point, Bud Collyer, the bow-tied emcee of To Tell the Truth, would exclaim, “Will the real Ben Bernanke, please, stand up!” Is it the Bernanke who now insists that central banks have no influence over long-term interest rates? Or the other guy, who argued four-plus years ago that the Fed was undertaking unconventional policies in order to drive down long-term rates?”, “The Two Faces of Ben Bernanke”, Randall W. Forsyth, Barrons, April 2015

Up and Down Wall Street

The Two Faces of Ben Bernanke

Suddenly, ex-Fed boss sees fundamentals, not central bank policies, dictating long-term interest rates.

By Randall W. Forsyth

To Tell the Truth. That was the title of a TV quiz show that baby boomers and their parents might remember from the 1950s and ’60s. As on similar shows, such as What’s My Line and I’ve Got a Secret, celebrities would play contrived parlor games guessing something about the contestant’s identity or some other attribute.

Viewers could pretend they were part of the salon of this seemingly smart set of B-list celebs. That placed the shows apart from the more typical contests that involved the eternal desire to hit some sort of jackpot by guessing the name of a tune, the price of a product, or the answer to some trivia question. This was what passed for reality TV at the time, even though much of what was presented was phony.

Lying was the basis of To Tell the Truth. Three individuals would assert forthrightly that he or she was a certain person, and the panelists would have to guess who was the real deal. The more convincing the imposters were, the more they won by duping the panelists. There were no doppelgängers, just folks who could plausibly pass for the authentic person.

If the game show were revived, the first contestant could be Ben Bernanke. But it would be an unfair contest because there seem to be two Ben Bernankes out there, and, presumably, both would profess to tell the truth.

One of them last week started a blog in his current position of distinguished fellow in residence, economic studies, at the Brookings Institution. Another used to be the chairman of the Federal Reserve Board. Yet, those two Ben Bernankes seem to be at odds with each other.

The think-tank scholar last week wrote that long-term interest rates were not set by central-bank policies but by fundamental factors, notably inflation and real interest rates, which are a function of economic growth.

In contrast, in November 2010, the then Fed chairman wrote a Washington Post op-ed article to explain why the central bank was buying hundreds of billions of dollars of government securities. The answer, according to his defense of the central bank’s policy moves, was to lower long-term interest rates.

At this point, Bud Collyer, the bow-tied emcee of To Tell the Truth, would exclaim, “Will the real Ben Bernanke, please, stand up!”

Is it the Bernanke who now insists that central banks have no influence over long-term interest rates? Or the other guy, who argued four-plus years ago that the Fed was undertaking unconventional policies in order to drive down long-term rates?

In his initial Brookings blog post last week, Bernanke wrote, “If you asked the person in the street, ‘Why are interest rates so low?’ he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate.

“But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate),” he continued. “The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited.

“Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed,” Bernanke concluded. He made no mention in the blog of quantitative easing, the large-scale purchase of intermediate- and long-term Treasury and mortgage-backed securities. The express aim of QE is to lower longer-term interest rates—especially real rates—when short-term rates (which the Fed normally sets as its main policy tool) already are at or near zero.

In his Washington Post op-ed, Bernanke explained the central bank’s decision to undertake a second round of securities purchases, dubbed QE2. The first buy of more than $1 trillion had “helped reduce longer-term interest rates, such as those for mortgages and corporate bonds.”

Moreover, the expectation of QE2 already had been felt in the easing of financial conditions. “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action,” he wrote.

In other words, it would appear that Bernanke, the Fed chairman, was taking credit for lowering long-term interest rates in 2010—something that Bernanke, the academic, contends in 2015 that the central bank cannot do.

The latter argument is all the more curious, given that other central banks are engaged in their own QE schemes. The European Central Bank is buying 60 billion euros ($65.88 billion) of European government bonds per month. Those purchases have driven their yields down to levels never seen in the history of lending, going back to the Medicis.

The yield on the 10-year German Bund ended the holiday-shortened week at 0.19%—down by nearly a half (17 basis points or hundredths of a percentage point) in the past month. Moreover, with the Bank of Japan’s QE a cornerstone of Abenomics, more than $5 trillion of debt securities worldwide now have negative yields, according to a Bank of America Merrill Lynch estimate. That stunning factoid reflects the decision of central banks in Europe to set policy rates below zero, as well as massive QE—two actions previously beyond central bankers’ imaginations.

Bernanke’s protestations notwithstanding, other observers contend that the role and influence of central banks have expanded far beyond the textbook description. Speaking at a media lunch last week, Dan Fuss, Loomis Sayles vice chairman and co-manager of its flagship Loomis Sayles Bond fund (ticker: LSBRX), said that another objective has been added to central banks’ remit. In addition to the traditional ones of safeguarding the banking system, controlling inflation, and fostering economic growth, international roles now loom large for all major central banks.

“Central banks have been cornered by geopolitics,” he said, in what he described as an increasingly tense world. While Fuss asserted that it’s “about time” for the Fed, for domestic reasons, to lift its federal-funds rate target from the near-zero that has prevailed since the depths of the financial crisis in December 2008, he added that such a U.S. move would make “no sense at all” for much of Asia.

Higher U.S. rates would further lift the dollar and hurt other currencies, causing severe problems for those countries, he explained. While Southeast Asian lands have taken steps to lessen their vulnerability to hot-money flows, like those seen during the region’s crisis in 1997-98, they still are subject to sudden outflows. And those money movements don’t just have financial repercussions, but can also lead to “breakdowns in societies,” as economies tumble and prices of imports soar, as often happens in currency crises.

For such reasons, Fuss used to be reticent when visiting the Boston Fed in expressing his view that a “dotted line ran from the State Department to the Fed.” No more; now he says there is a solid line between the two. Economic crises could only make a perilous geopolitical situation that much worse.

In a world in which central bankers try to manipulate or at least affect financial variables, from currencies to bond yields to stock markets, in order to promote prosperity and maintain what passes for peace these days, it’s a bit strange for a former central banker to profess his cohorts’ impotence in influencing anything but the cost of short-term money. But to tell the truth apparently is just for game shows.

FUSS ALSO OBSERVED AT midweek that the Boston Fed has economists who can come up with numbers to show why employment isn’t as strong as it seems, “giving the central bank a legitimate out” from raising rates anytime soon. No need for that now, given the punk jobs figures for March, released while most of Wall Street was off for Good Friday.

Nonfarm payrolls increased by just 126,000 last month, far short of forecasts of another 235,000 rise, and after downward revisions in the two preceding months totaling 69,000. The unemployment rate, which comes from a separate survey of households, was steady at 5.5%, in part because of a small dip in the labor force. Average hourly earnings rose 0.3% last month, leaving wages roughly in a dead heat with inflation at 2.1% over the past year, notwithstanding the widely publicized raises for low-paying jobs at McDonald’s MCD -0.6483321133535501% McDonald’s Corp. U.S.: NYSE USD95.01 -0.62 -0.6483321133535501% /Date(1429292833050-0500)/ Volume (Delayed 15m) : 2844269 P/E Ratio 19.5979381443299 Market Cap 91721313729.8147 Dividend Yield 3.5770647027880065% Rev. per Employee 65336.4 More quote details and news » MCD in Your Value Your Change Short position (MCD).

The subpar payroll performance “was not weather related,” write Philippa Dunne and Doug Henwood of the Liscio Report. Some 182,000 people reported they couldn’t get to work because of the weather, in line with historical standards for March. But, adds David Rosenberg, chief economist and strategist at Gluskin Sheff, the dollar’s impact “was all over this report,” just as with the weaker-than-expected jobs tally of 189,000 by ADP.

All of which pushes back expectations for the first Fed rate hike. “June vacation plans just got a little safer,” quips Michael Feroli, JPMorgan’s Fed watcher. September would then seem to be the next possible time for the first increase. But the fed-funds futures market was pricing in a rate of only 0.34% for December—roughly half of the level of the Federal Open Market Committee’s median projection of 0.625% in its “dot plot” chart.

Looking ahead to baseball’s opening day, Cliff Corso, chief investment officer at Cutwater Asset Management, thinks that fears of rising interest rates, the impact of the strong dollar, and margin pressures from labor winning a greater share of profits, could be a “three-fingered knuckle ball” for the stock market. After a flat first quarter, the pitches aren’t going to get easier once earnings season starts this week.

“El-Erian (former CEO of PIMCO Investments) is making a valuation call. Due to ongoing central bank interventions globally, asset prices and valuations have been inflated to levels that historically proven to provide very low or negative forward returns on invested capital.”, Lance Roberts, Streettalk Live, April 8, 2015

The Misunderstanding Of El-Erian’s Cash Position

“The FHFA’s latest decision to lower fees for some (riskier) borrowers is “just starting to look like part of a larger trend, that’s my real concern. What’s next?” said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute. “There was not some single moment or event that got us into the last mess, but the accumulation of lots of errors.””, The Wall Street Journal, April 16, 2015

Markets 

Fannie, Freddie to Lower Fees for Some Borrowers

Modest changes likely to disappoint affordable-housing advocates

The Federal Housing Finance Agency is set to direct Fannie Mae and Freddie Mac to reduce mortgage fees on some borrowers.

The Federal Housing Finance Agency is set to direct Fannie Mae and Freddie Mac to reduce mortgage fees on some borrowers. Photo: Manuel Balce Ceneta/Associated Press

By Joe Light

The regulator of Fannie Mae and Freddie Mac will direct the housing-finance firms to slightly cut mortgage fees for riskier borrowers, a decision that falls short of what housing advocates wanted and yet is likely to anger conservative politicians who wanted higher charges.

For most people taking out a loan, the change will be negligible. Some riskier borrowers, who make lower down payments and have lower credit scores, will see slight savings that could translate to hundredths of a percentage point on a mortgage rate—an amount that would have little effect on the housing market—according to people familiar with the Federal Housing Finance Agency’s plan.

To cover the cost of the reductions, Fannie and Freddie will raise fees on some other borrowers, such as those borrowing for an investment property and some of those who have safer borrowing characteristics, with the intent of the changes to be revenue-neutral for Fannie and Freddie, the people said.

The fee changes will put an end to more than a year of speculation as to what the FHFA would do under Melvin Watt, a former Democratic congressman from North Carolina who was sworn in as director in January 2014 and some advocates had hoped would prove more amenable to lessening borrowing costs than his predecessor.

As one of this first moves after taking office, Mr. Watt halted a planned fee increase by the former acting director, Edward DeMarco, a move that Mr. DeMarco had said was necessary to encourage private investors, who require a higher rate of return, to compete for business. That increase would have been the latest in a string of fee increases over the past several years.

After Mr. Watt halted the increase, some had speculated that he could move significantly in the other direction, sharply reducing fees for riskier borrowers in an effort to broaden credit access. However, the FHFA’s ultimate direction, in which costs will remain little changed, signals that Mr. Watt has chosen a middle route.

“What we’ve seen so far from Director Watt is he is an incrementalist,” said Julia Gordon, senior director of housing and consumer finance at the left-leaning Center for American Progress, who has pushed for Fannie and Freddie to step back from charging higher prices to riskier borrowers. “It’s important that this not be the last word” on fees, she said.

Nevertheless, the changes that are being made—which include the termination of a borrowing surcharge imposed by Fannie and Freddie during the crisis—are likely to draw the ire of some conservatives on Capitol Hill, who believe that the government is generally encouraging riskier lending practices.

But ultimately for most borrowers and the economy, the changes will have little impact except on the margins, said Mark Zandi, chief economist at Moody’s Analytics. “It sounds like they’re maintaining the status quo, roughly speaking, and that feels right to me. It’s exactly what they should be doing,” said Mr. Zandi.

Fannie and Freddie don’t make mortgages. They buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default. In exchange for those guarantees, Fannie and Freddie charge lenders fees that are typically passed through to borrowers as a component of mortgage rates.

The government put Fannie and Freddie in a so-called conservatorship in 2008 after the companies suffered significant crisis-era losses. The companies ended up receiving $187.5 billion in aid from the U.S. Treasury, but then became highly profitable, sending the U.S. Treasury more than $228 billion in dividends.

“This decision is a step in the wrong direction, and it increases the liability of American taxpayers who are already on the hook for countless billions of dollars in guaranteed loans,” said Rep. Scott Garrett (R., N.J.). “It’s just another example of the worst kind of cronyism that punishes qualified borrowers while promoting many of the same policies that played a major role in our most recent financial crisis.”

In the past year, some conservatives have criticized Mr. Watt’s decision to allow Fannie and Freddie to back loans made to borrowers with down payments of as little as 3%, down from the previous 5% minimum.

Separately, the Federal Housing Administration—which insures loans to borrowers who make down payments of as little as 3.5%—in January said it would cut fees by 0.5 percentage point for most borrowers.

The FHFA’s latest decision to lower fees for some borrowers is “just starting to look like part of a larger trend, that’s my real concern. What’s next?” said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute. “There was not some single moment or event that got us into the last mess, but the accumulation of lots of errors.”

In making the decision not to significantly change fees, the FHFA likely weighed the potential risks of Fannie and Freddie needing a taxpayer bailout if their revenues were reduced significantly, said Isaac Boltansky, an analyst with Compass Point Research & Trading LLC in Washington.

“The potential for a draw, even though it would largely be symbolic, had to weigh on the FHFA when they were making their pricing decision,” Mr. Boltansky said.

“There will be a lot of pressure put on the next Republican president to employ Alinsky’s tactics on the opponents of conservatism. Let’s see how these leftist bullies like an aggressive IRS targeting and auditing them, denials of tax-exempt status, reputations destroyed by Justice Department investigations aplenty, bankrupting progressives with attorney fees and personal-property confiscations, plus threats and accusations made by the new leaders of the SEC, FCC and the rest of the executive branch alphabet soup.” Tom Budds, Huntington Beach, Calif.

Letters 

Alinsky’s Tactics Are Effective but Do We Want Them?

As radicals pass the governing torch to a Republican president, they shouldn’t be surprised when the new leader turns the monster they created on them.

April 16, 2015

With regard to Pete Peterson’s “The Alinsky Way of Governing” (op-ed, April 10): The tactics espoused by Saul Alinsky and his disciples in academia, the press and government are perfectly rational when viewed in the context of the Soviet Union in the 1920s and ’30s when everything—art, literature, science, music, religion, philosophy, psychology—was viewed through the lens of Marxist class warfare. Thus, what was advertised as a glorious revolution to liberate humanity—free speech, justice, freedom of conscience, freedom of assembly—became a means of establishing the Soviet dictatorship. It’s clear that many on the American left have appropriated this class-warfare narrative and broadened it to encompass ethnicity, gender identity and dogmatic environmentalism. Initially these policies were pursued under the auspices of liberal principles but with increasing authoritarianism as the left’s power increased, not because it lost its way, but according to a master vision that’s been in place from the beginning. The intellectual violence produced by subjecting art, thought, behavior to this brutish ideology is incalculable. The Soviet Union may be gone, but its ideological progeny are alive and well on the American left.

Thomas M. Doran

Plymouth, Mich.

Pete Peterson should be praised for shining light on the Alinsky “tactics” of Rep. Raul Grijalva for targeting an ideal example of academic excellence and integrity. Steven Hayward’s honest pursuit of the truth is attractive to promising students seeking understanding, who have not yet been corrupted by an inability to think for themselves.

Niccoló Machiavelli argued that a republic with good laws was preferable to maintain the favor of a free and independent people, even more than one ruled by a “good prince.” Unlike Machiavelli, who was no fan of “evil,” Saul Alinsky is notable for his “over-the-shoulder acknowledgement to the very first radical . . . Lucifer,” (“Rules for Radicals,” 1971). Machiavelli opined, “that men will willingly change their ruler in hope that they will fare better . . . But in this they are deceived, because, as they invariably discover, their lot under a new ruler is inevitably worse” (“The Prince”). The history of the 20th century is replete with horrific examples of the hubris of the mediocre and their unquenched thirst for power. If unchecked by either laws or courageous individuals, such power grabs never end well for anyone. By preserving brilliant academics like Steven Hayward, the 21st century might do better.

Mike Niehuser

Portland, Ore.

The tactics of President Obama may come from a book published in 1971, but the founders of the American experiment were well aware of the threat to liberty inherent in a democracy posed by ideologically driven factions. The most effective antidote the founders recognized against the tyranny of the masses was an electorate educated about the fragility of their condition yet enthralled with the extraordinary experience of a truly free society.

The welfare state has compromised the citizenry to the extent that the faction that uses government to distribute unearned wealth wins national elections. Even the most conservative candidates must never threaten the entitlement programs that have done so much to erode the national love of liberty so essential to preserving our constitutional republic. The specter of debt now threatens the felicity and prosperity of a generation that insists on squandering the greatest gift that civilization could ever bestow, liberty.

Glen Risley

Houston

There is another book that President Obama, Valerie Jarrett and the rest of the administration’s radicals should read: Mary Shelley’s “Frankenstein.” There will be a lot of pressure put on the next Republican president to employ Alinsky’s tactics on the opponents of conservatism. Let’s see how these leftist bullies like an aggressive IRS targeting and auditing them, denials of tax-exempt status, reputations destroyed by Justice Department investigations aplenty, bankrupting progressives with attorney fees and personal-property confiscations, plus threats and accusations made by the new leaders of the SEC, FCC and the rest of the executive branch alphabet soup.

As these radicals pass the governing torch to a Republican president on Jan. 20, 2017, they shouldn’t be surprised when the new leader of the free world turns the monster they created on them.

Tom Budds

Huntington Beach, Calif.

“In a famous speech to the American Economic Association in January 2010, then Federal Reserve Chairman Ben Bernanke postulated that the Fed had no significant impact on the housing bubble or on the increase in financial leverage and that monetary policy was too blunt a tool to be used to smooth asset cycles. After emphasizing for years that low rates have the ability to boost asset prices, under what criteria can the Fed insist that it had no influence on the boom preceding the financial crisis?…

…How can the risk-reward of the Fed’s continued expansionary policies not account for the current high levels of debt and asset prices? The benefits of further supporting asset prices have fallen, and the potential costs of higher leverage continue to grow.

QE has ushered in a new sense of power by central banks. Yet monetary policy has limitations. It is mostly well-suited to filling in temporary shortfalls in demand. Except for exceptional conditions, it borrows growth from the future.”, Christian Broda and Stanley Druckenmiller, The Wall Street Journal

Opinion

The Fed’s Faulty 1937 Excuse

Central bankers aren’t likely to observe financial excesses until it’s too late.

Photo: Getty Images

By Christian Broda And Stanley Druckenmiller

Policy makers and financial pundits insist that the risk of the Federal Reserve raising rates too early exceeds that of moving too late. The Fed appears to agree. In recent years, the Fed has repeatedly moved its goal posts, seemingly to avoid raising the federal-funds rate from near zero.

But is the prevailing consensus correct if emergency economic conditions are long past?

Comparisons with 1937 or with Japan in the 1990s are commonly used as examples of mistakes to avoid. Both occasions were preceded by a severe financial crisis, and years later monetary policy was prematurely tightened.

The differences between the current policy conjuncture and these historical analogues are striking, however. Eight years after the 1929 crash, consumer prices in the U.S. had fallen by a cumulative 18% and unemployment remained above 14%. And in Japan today prices are still down relative to their pre-banking crisis levels.

In contrast, since 2007, prices in the U.S. rose by an accumulated 16%, and the Fed’s favorite annual inflation measure has never been below 1%. Current unemployment is at 5.5%, the same rate prevailing in the boom years of 1996 and 2004. The U.S. is currently far from being mired in deflation and low growth as was the case in the late 1930s or in Japan in the 1990s. Therefore the initial conditions for considering the conduct of future monetary policy are radically different.

Another aspect of 1937 and Japan’s crisis is also being overlooked. In 1937 U.S. household net worth and the stock market were significantly lower than their 1929 levels. Similarly in Japan 25 years after the bust, neither household net worth nor stock prices have returned to their peak levels. By contrast, the U.S. stock market and household net worth have risen substantially above their 2007 peak levels. Even the Fed now acknowledges that asset prices were then unsupported by economic fundamentals and contributed to the subsequent financial crisis.

How can the risk-reward of the Fed’s continued expansionary policies not account for the current high levels of debt and asset prices? The benefits of further supporting asset prices have fallen, and the potential costs of higher leverage continue to grow.

Near-zero rates during and in the years after 2008 no doubt helped end the so-called Great Recession. But the U.S. economy is no longer under emergency conditions or facing the perils of 1937. Why then does it require emergency monetary policy? While inflation targeting gave no warning of what was to come in 2008, why is inflation moving from 1.5% to 2% a necessary condition for raising rates from the current emergency levels? Even models that the Fed used to justify quantitative easing (QE) in recent years are today pointing to rates well above 1%. Why now use new, untested theories to justify zero?

Policy makers purport to be looking for signs of financial excesses. At present, private companies are being valued at $10 billion with no revenues. Corporations are borrowing $600 billion a year to buy back stocks at record prices. Leveraged loans, “covenant-lite” loans with loose loan requirements, and the high-yield bond market are well above their 2007 record size.

Even if policy makers judge that these levels are not excessive, since when do we need to see the seeds of the next crisis for an extremely accommodative policy stance to be reduced? Because excesses are seen best only ex post, policy should be cautious ex ante.

The two real culprits of the Fed’s constant moving of the goal posts are the prevailing “Bernanke doctrine” and the growing sense of unlimited power of monetary policy. In a famous speech to the American Economic Association in January 2010, then Federal Reserve Chairman Ben Bernanke postulated that the Fed had no significant impact on the housing bubble or on the increase in financial leverage and that monetary policy was too blunt a tool to be used to smooth asset cycles. After emphasizing for years that low rates have the ability to boost asset prices, under what criteria can the Fed insist that it had no influence on the boom preceding the financial crisis?

In the last six years and despite growing financial regulation, global debt (public and private) has increased by $57 trillion, three times faster than the growth of world GDP. Low real interest rates are likely responsible, at least in part, for this growth. So even if the causality between rates and asset prices is hard to discern academically, it seems unwise to assume that the current policy stance has no expected, future costs. Even if we are not on the verge of another crisis, the public debate should take account of the potential consequences of current policies.

After the severe stress generated by the Great Recession, was the cost not sufficient to warrant the pre-emptive use of a blunt tool like monetary policy? Given the relationship between interest rates and asset prices, the deflationary scare post-2008 could well have been mitigated by less expansionary policies in the early 2000s.

QE has ushered in a new sense of power by central banks. Yet monetary policy has limitations. It is mostly well-suited to filling in temporary shortfalls in demand. Except for exceptional conditions, it borrows growth from the future.

The Fed seems all-too-convinced that this is a trade-off worth making. With unemployment at 10%, history was likely on their side. At a 5.5% unemployment rate, it fails the test of history and common sense. May the risk-reward of too early versus too late prevailing in policy circles be backward?

Mr. Broda is a managing director at Duquesne Capital Management. Mr. Druckenmiller was the founder of Duquesne Capital and is the CEO of the Duquesne Family Office.

“A federal judge on Tuesday approved an unusual resolution to the case: The Securities and Exchange Commission and the former Freddie Mac executives agreed “that no party is the prevailing party.”, New York Times, April 15, 2015

“As I have said consistently on this blog, crisis era allegations that securities disclosure fraud (intentional or negligent actions resulting in misleading or omitted information in securities filings) was a primary factor in the financial crisis, whether these allegations were made by the S.E.C. or private securities class action attorneys or both, are bogus (a red herring) and, as far as I am aware, remain to this day unproven in any court of law. P.S. Yesterday on this blog, I said that I thought the Fannie and Freddie executives did not commit securities disclosure fraud.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Ex-Freddie Mac Leaders Reach Deal With S.E.C.

By BEN PROTESS and PETER EAVIS

At a news conference in Washington three years ago, federal regulators trumpeted their case against former executives at the mortgage giant Freddie Mac, proclaiming that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations.”

Now a case that began with such fanfare has ended with a whimper.

A federal judge on Tuesday approved an unusual resolution to the case: The Securities and Exchange Commission and the former Freddie Mac executives agreed “that no party is the prevailing party.”

The deal requires modest payments to Freddie Mac investors rather than stiff financial penalties. And in another twist, it explained that “the parties agree, without conceding the strengths or weaknesses of their respective claims and defenses, that it is not in the interest of justice to continue to litigate this matter” — a phrase that has rarely, if ever, appeared in an S.E.C. settlement.

The settlement with the executives — Richard F. Syron, the former chief executive; Patricia L. Cook, who served as chief business officer; and Donald J. Bisenius, who was a senior executive in the mortgage guarantee business — is a bookend to one of the most prominent S.E.C. actions stemming from the financial crisis.

In taking aim at Freddie Mac and its sister company Fannie Mae, symbols of the crisis that fed the housing bubble, the case brought by the S.E.C. seemed to offer a moment of catharsis for the public.

The S.E.C. settlement with the former Freddie executives, one of its last items of unfinished business from the crisis, shows that actually winning a complex securities case is an altogether different challenge. It also could foreshadow a settlement with former Fannie Mae executives whom the S.E.C. sued, though no such deal is imminent.

The case against the Freddie executives started to crumble after the S.E.C. took more than 30 depositions from witnesses, according to people briefed on the matter. Many of the witnesses did not support the theory of the case put forth by the S.E.C., the people said. And with lawyers on both sides expecting the case not to go to trial for at least another two years, they chose to open settlement talks about six weeks ago.

The Fannie and Freddie cases were hardly the only S.E.C. actions arising from the crisis. It has charged more than 170 individuals and companies, including big banks like Goldman Sachs and Citigroup.

The Freddie Mac cases stem from the height of the financial crisis. The federal regulator of Freddie Mac and Fannie Mae, the Federal Housing Finance Agency, took over both entities in September 2008, after rising mortgage defaults undermined their financial conditions. As losses piled up, the companies received $189.5 billion from the government. As of September last year, the companies had paid back $219 billion to the Treasury Department. Last year, Freddie Mac and Fannie Mae guaranteed half of all new mortgages in the United States, according to a survey by Inside Mortgage Finance, an industry publication.

The case against the Freddie executives never struck legal experts as a slam dunk. The S.E.C. accused them of misleading investors about their company’s exposure to risky subprime mortgages, saying they played down the true extent to which they had guaranteed the loans. Whereas the S.E.C. estimated that Freddie Mac had some $250 billion in subprime holdings, the company pegged its figure at $6 billion.

The case hinged on the meaning of the word subprime. While the term generally refers to borrowers with low credit scores, lawyers for the executives had emphasized that even financial regulators never clearly defined subprime. And in the settlement on Tuesday, both sides stipulated that “there was no one universally accepted definition of subprime that was used by market participants.”

The final settlement reflects that challenge. Mr. Syron, who was awarded over $50 million in compensation during the nearly five years that he led Freddie Mac, according to the company’s pay disclosures, must donate $250,000 to investors. Mr. Bisenius, who is represented by Daniel Beller of Paul Weiss, is responsible for $10,000 and Ms. Cook $50,000.

But the former executives will not make these donations out of their own pockets. As Mr. Bisenius explained in a statement, “I am not making any payment to the S.E.C. or to anyone in connection with this case; rather, the insurance carriers for Freddie Mac are making a nominal donation to an unrelated fund to benefit investors on my behalf.”

While the deal prevents them from signing certain documents as the chief executive or chief financial officer of a publicly traded company for a brief period, it does not go as far as the S.E.C. once wanted. When the agency filed the case, it sought to ban them from being officers or directors of any company.

Steven M. Salky of Zuckerman Spaeder, Ms. Cook’s lawyer, explained that “while at Freddie Mac or elsewhere, Ms. Cook has never signed the forms she now has agreed not to sign.”

And Mr. Syron, who was represented by Thomas C. Green at Sidley Austin, said, “I remain proud of the work we did at Freddie Mac.” He added: “It has been a long, tough road, and I am happy for the opportunity to move on with my life.”

Andrew J. Ceresney, the S.E.C. head of enforcement, said, “The settlement’s limitations on future activities and financial payments reflect an appropriate resolution of the matter.”

Mr. Ceresney and the S.E.C.’s current chairwoman, Mary Jo White, were not at the agency when the case was filed in 2011.

A version of this article appears in print on April 15, 2015, on page B3 of the New York edition with the headline: Ex-Freddie Mac Leaders Reach Deal With S.E.C..

“I’m going to frame my bank statement, which shows that Bankinter is paying me interest on my mortgage,” said a customer who lives in Madrid. “That’s financial history.”, Patricia Kowsmann and Jeannette Neumann, The Wall Street Journal

“In reading and thinking about this article, I came away with a strong feeling that the world’s central bankers are “out-of-control”, in their efforts to stimulate economic activity through manipulation of (distorting free and fair markets for) money and rates. This manipulation may (or may not) work in the short-run, but what about the unintended consequences (asset bubble/busts, increased speculation, reduced financial stability, etc.)? And what about the long-term consequences of these massive market distortions? Won’t people forget (or give up trying) how to make rational economic decisions and couldn’t that permanently damage free markets? And nearly everyone agrees that there is no “free lunch”, where distortive monetary policy drives long-run, higher economic and employment growth, and price and financial stability. So, to me, it seems like a lot of risk, relative to the uncertain and temporary benefits.” Mike Perry, former Chairman and CEO, IndyMac Bank

Markets

Tumbling Interest Rates in Europe Leaves Some Banks Owing Money on Loans to Borrowers

Subzero rates have put some lenders in an inconceivable position

Residential properties in Lisbon. As Euribor, an interest-rate benchmark commonly used in the eurozone for setting mortgage rates, heads into negative territory, banks face the possibility of having to pay borrowers. Photo: MARIO PROENCA/Bloomberg News

By Patricia Kowsmann in Lisbon and Jeannette Neumann in Madrid

Tumbling interest rates in Europe have put some banks in an inconceivable position: owing money on loans to borrowers.

At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes.

The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.

Interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the eurozone, including cutting its own deposit rate. The ECB in March also launched a bond-buying program, driving down yields on eurozone debt in hopes of fostering lending.

In countries such as Spain, Portugal and Italy, the base interest rate used for many loans, especially mortgages, is the euro interbank offered rate, or Euribor. The rate is based on how much it costs European banks to borrow from each other.

Banks set interest rates on many loans as a small percentage above or below a benchmark such as Euribor. As rates have declined, sometimes to below zero, some banks have faced the paradox of paying interest to those who have borrowed money from them.

Lenders, hoping to avoid the expense of having to pay borrowers, are turning to central banks for guidance. But what they are hearing is less than comforting.

Portugal’s central bank recently ruled that banks would have to pay interest on existing loans if Euribor plus any additional spread falls below zero. The central bank, however, said lenders are free to take “precautionary measures” in future contracts. More than 90% of the 2.3 million mortgages outstanding in Portugal have variable rates linked to Euribor.

In Spain, a spokesman for the central bank said it is studying the issue.

The vast majority of Spanish home mortgages have rates that rise and fall tied to 12-month Euribor, said Irene Peña, an economist with Spain’s mortgage association. That rate stands at 0.187%.

Bankers in Italy said they are awaiting guidance from their local banking association, because loan contracts don’t include any clause on what happens if benchmark rates go below zero. About half of the mortgages outstanding in Italy have variable rates, most of them linked to Euribor, according to mortgage broker Mutuionline. Some other countries, such as Germany, often use fixed rates.

In Spain, Bankinter has been forced to deduct some clients’ mortgage principal payments because an interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory.

In January, the Swiss National Bank ended a 3½-year policy of capping the strength of the franc against the euro, sending the Swiss currency soaring against the common currency and U.S. dollar, and cut bank deposit rates into negative territory. The move to end the cap on the franc was designed to relieve pressure on Swiss exporters, many of which are reliant on the eurozone for sales.

During Spain’s home-building frenzy in the middle of the last decade, Bankinter issued mortgages tied to the one-month Swiss franc iteration of the London interbank offered rate, or Libor. At the time, clients were attracted to the offer because Swiss franc Libor was lower than Euribor, the traditional reference for Spanish mortgages.

“I’m going to frame my bank statement, which shows that Bankinter is paying me interest on my mortgage,” said a customer who lives in Madrid. “That’s financial history.”

The client in 2006 took out a roughly €500,000 ($530,000) home mortgage loan based on Swiss franc Libor, plus 0.5 percentage point. Since then, Swiss franc Libor has fallen far enough into negative territory to make his mortgage rate negative.

It is hardly a windfall for this customer, however, because, while Swiss franc Libor has fallen, the Swiss franc itself has risen in value against the euro. That means the value in euros of the total mortgage debt he owes Bankinter has also increased, because that debt is denominated in Swiss francs.

Bankinter has few such mortgages tied to a negative Libor rate, a spokesman said, declining to provide a figure.

An executive at another Spanish bank said the lender in recent months has started to put in place an interest-rate floor on thousands of short-term business loans that are tied to short-term variations of Euribor. Two-month Euribor, is at minus 0.004%. For new loans, the bank is increasing the cushion it charges customers above Euribor.

Hundreds of thousands of additional loans would be affected if medium-term Euribor rates enter negative territory, the executive said. The six-month rate is currently at 0.078%.

Meanwhile, some borrowers in Spain haven’t found relief.

A Madrid judge in November ruled against a client of Banco Santander SA who claimed that Spain’s largest bank inappropriately established a floor on his mortgage in 2013 and therefore owed him money. The plaintiff had taken out a mortgage in 2005 that offered a fixed rate of 2% in the first year and Euribor minus 1.1 percentage points thereafter. The plaintiff said he was now owed money from the bank.

To buttress his argument that a bank shouldn’t have to pay a borrower for a loan, the judge quoted from a June 2014 statement from the Bank of Spain that “a payment in favor of the client in these situations would never apply, but rather the application of an interest rate of zero by the entity.” The Bank of Spain spokesman said the statement cited in the case was issued by the central bank’s customer-complaints service, which typically responds to particular cases. The Bank of Spain hasn’t issued a systemwide decision on how banks should treat negative interest rates, he said.

In Portugal, interest rates on most mortgages are linked to a monthly average of three- and six-month Euribor. Both have been steadily sinking and are hovering just above zero.

João Coelho da Silva, a 53-year-old real-estate agent in Lisbon, has seen his mortgage payments fall from about €450 a month when his loan began in 2008 to €235 now, thanks to a falling three-month Euribor. “With the economy in such a bad state, these monthly savings are more than welcomed,” Mr. da Silva said.

“Investors need to focus on long-term strategies and long-term outcomes,” Mr. Fink said, suggesting we’re currently living in a “gambling society.”, Andrew Ross Sorkin, The New York Times

BlackRock’s Chief, Laurence Fink, Urges Other C.E.O.s to Stop Being So Nice to Investors

Andrew Ross Sorkin

On Tuesday morning, the chief executives of 500 of the nation’s largest companies will receive a letter in the mail that will most likely surprise them.

The sender of the letter is Laurence D. Fink, chief executive of BlackRock, the largest asset manager in the world. Mr. Fink oversees more than $4 trillion — that’s trillion with a “t” — of investments, making him perhaps the world’s most important shareholder.

He is planning to tell the leaders that too many of them have been trying to return money to investors through so-called shareholder-friendly steps like paying dividends and buying back stock.

To Mr. Fink, these maneuvers, often done under pressure from activist investors, are harming the long-term creation of value and may be doing companies and their investors a disservice, despite the increases in stock prices that have often been the result.

“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Mr. Fink writes in the letter. He says that such moves were being done at the expense of investing in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

At a time when most investors are clamoring — and applauding — high dividends and bigger buybacks, Mr. Fink is bucking the trend.

United States companies spent nearly $1 trillion last year on stock repurchases and dividends, and virtually every big American company is engaged in these practices. General Electric announced last week that it would buy back $50 billion of its stock after selling most of GE Capital. Apple authorized a $90 billion buyback of its own stock last year. Exxon Mobil spent $13 billion last year on its own stock. IBM, which I’ve questioned for its aggressive use of buybacks and dividends, has spent $108 billion buying back its own shares since 2000.

Rather than consider the return of all this money to shareholders positively, Mr. Fink says the move “sends a discouraging message about a company’s ability to use its resources wisely and develop a coherent plan to create value over the long term.” Moreover, he argues that “with interest rates approaching zero, returning excessive amounts of capital to investors” isn’t helpful because they “will enjoy comparatively meager benefits from it in this environment.”

Mr. Fink and I have been discussing — and debating — this topic for more than a year. Last week, before mailing his letter, which he writes annually, he shared it with me.

“I feel the same pressures as other C.E.O.s,” he told me. But he suggested that it’s not just the fault of managements for being so shortsighted — the investors themselves may be the problem. “Investors need to focus on long-term strategies and long-term outcomes,” Mr. Fink said, suggesting we’re currently living in a “gambling society.”

Mr. Fink has a novel suggestion for encouraging shareholders to take a broader perspective, but it may very well upset his peers on Wall Street. He recommends that gains on investments held for less than three years be taxed as ordinary income, not at the usually lower long-term capital gains rate, which now applies after one year.

“We believe that U.S. tax policy, as it stands, incentivizes short-term behavior,” he writes in his letter. “Since when was one year considered a long-term investment? A more effective structure would be to grant long-term treatment only after three years, and then to decrease the tax rate for each year of ownership beyond that, potentially dropping to zero after 10 years.”

Mr. Fink contends that such a shift in tax policy “would create a profound incentive for more long-term holdings and could be designed to be revenue neutral. In short, tax reform that promotes long-term investment will benefit both the companies who rely on capital markets and the hundreds of millions of people saving for retirement.”

Asked whether such a change in tax policy would reduce liquidity in the market, Mr. Fink scoffed: “I don’t think Warren Buffett cares about liquidity that much.”

It is refreshing to see a finance executive talk some sense on these issues.

However, Mr. Fink is not simply being altruistic. To some degree, he is talking his own book: BlackRock’s business model, unlike those of so many finance companies that rely on trading fees, does not require it to turn over its portfolio. Given its size and scale, BlackRock often holds its investments for decades.

So from a financial perspective, Mr. Fink has little to lose. In fact, the firm may have much to gain if tax rules were adjusted to be more favorable to the way Mr. Fink invests. (And what’s the harm in suggesting tax policy change, as smart as it may be, that has a low probability of ever happening?)

That’s not to suggest Mr. Fink doesn’t believe what he’s saying; he does. He is a relatively progressive finance executive who has been a longtime Democrat and has taken positions that many of his peers in finance abhor.

To Mr. Fink, the shortsightedness that pervades corporate America is just a symptom of a larger issue. “This is not just a corporate problem,” he said. “It’s a societal problem, whether it’s health care or politics or business.”

He also said he recognized that his letter might not be popular in certain quarters but he qualified his approach by saying, “I’m not trying to make friends or enemies.”

Despite his protestations, Mr. Fink said, “There is nothing inherently wrong with returning capital to shareholders in a measured fashion.” He added, “Nor are the demands of activists necessarily at odds with the interests of other shareholders.” But it’s when it is taken to extremes — such as it seems to be in the current marketplace — that has Mr. Fink concerned.

Still, Mr. Fink is taking a direct shot at the rise of activist investors, like Carl C. Icahn, who have made careers out of pressing companies to return cash to shareholders.

Mr. Fink said he met with two activists last week. One of them, he said, told him, “You hate me, don’t you?”

“No, I don’t hate you,” Mr. Fink said he replied. “I’m just trying to get some balance.”

A version of this article appears in print on April 14, 2015, on page B1 of the New York edition with the headline: Quit Bowing to Investors, Fellow Chief Urges.