Finance and fear (Why Fannie Mae and Freddie Mac Failed)

NY Post ^ | 20 July 2008 | William Poole

[shrinkermd]

Q.: What's your diagnosis of what happened to Fannie Mae and Freddie Mac?

A.: First of all, they had too little capital to withstand adverse circumstances. And the adverse circumstances were the severe downturn in housing, the decline in house prices, and the rising default rate on mortgages. I don't know of anyone who early enough was saying that there would be a major national decline in house prices, so I can't hold them to that standard, but I can hold them to a standard of holding adequate capital to be able to withstand unforeseen circumstances. That's what capital is for.

William Poole, former president of the Federal Reserve Bank of St. Louis, on Economists View ( www.uoregon.edu/~mthoma/)

[shrinkermd]

In respect to why these entities failed, this is the best short answer I could find anyplace.

Mr. Poole was kind enough not to point out the nature of these entities was such than when they were making money they paid hundreds of millions in bonuses and dividends. But when they failed they were the government's responsibility.

An invesor's dream machine--Freddie Mac and Fannie Mae.

[Kolokotronis]

“I don’t know of anyone who early enough was saying that there would be a major national decline in house prices,”

A substantial part of our law practice is real estate. 4-5 years ago we, and the local bankers we work with, were saying that home prices had reached an unsustainable level and people were getting far too deep in debt to own them. Luckily for them, the banks we represent never got into the loaning frenzy which seems to have infected the big players in the market. You see, some of us of an age have seen this before, back in the mid to late 80s and that bubble burst too and real estate prices went down to levels where young couples could afford them, at least for a while.

The highly paid, country clubbing bankers whose shoes cost more than my car should have seen this coming. Country lawyers and country bankers did. I think some of them did but figured they’d make what they could while it lasted and then hand the bill to the taxpayers. Their buddies in DC were sure to pull their chestnuts out of the fire. I think they ought to be bankrupted and jailed, the sooner the better.

[Lynne]

Dead on. Anyone with a brain and a little bit of real estate knowledge could have seen this coming a long time ago.

[P.O.E.]

How about liberal do-gooders trying to push home ownership to the underprivileged?

How about the corrupted national political system that needed to artificially (via over-leveraged credit) puff up the economy to sustain re-electability?

How about the corrupted local political system that was only too happy to inflate tax revenues through over-valuation?

How about the Wall Streeters who rail against government intervention until they need a bail out?

How about the gullible public - who elects the politicians and refuses to believe that there’s no free lunch?

[Lonesome in Massachussets]

Shouldn’t the title have been “Finance without Fear”?

For Fanny and Freddie, it was a game of “Heads we win, tails the taxpayers lose.”

Everyone engaged in a loan should have real fear. If borrowers make little or no down payment, they have little fear of losing their investment. If lenders think the Treasury will bail them out, they have little reason to fear that borrowers can actually repay the loans, so long as they “follow the rules” regardless of how little the rules reflect reality.

The whole housing bubble wouldn’t have been possible without at least implicit government guarantees to the lenders.

[coloradan]

Several Freepers were calling Fannie and Freddie insolvent years ago.

[Buckhead]

The Wall Street Journal has been railing about Freddie and Fannie for years.

[JasonC]

Tell it to the shareholders who bought at $70 and lost 80-90%. The people who benefit from saving the companies are their future customers, not their present shareholders. The latter have already lost their shirts.

[JasonC]

The whole housing bubble wouldn't have been possible without insanely reckless deadbeats signing loans they could not possibly perform.

There is blame and to spare to go around, and pretending anyone is innocent in any of it, is plain pretending. Everyone, and I mean everyone, benefited from the bubble upside, and pays on the down. Indirectly for most, but everyone.

[JasonC]

Yes, and plenty did. But did they make billions betting on their convictions, or sit around carping? If they had bothered to do the former, they would have stopped it before it got large. Not enough did. Now we are indundated with useless carpers.

[RegulatorCountry]

Everyone, and I mean everyone, benefited from the bubble upside

People who bought a home to live in, before the bubble, with a sane, conventional mortgage, got hit hard with property tax adjustments due to appraisals based upon bubble prices. Same for people who owned their homes outright. These people did not benefit.

In the worst bubble markets, there is something that's not being talked about much, and that is houses being financed and rented out immediately, with the mortgagee never making the first payment. It was a deliberate strategy to profit via outright fraud. Nothing down, never pay a dime, make a couple thousand in rent per month for close to a year or more. The identity of the buyer was fraudulent, all the paperwork was fraudulent, and the liklihood is very high that the mortgage brokers were not unaware.

[A_perfect_lady]

Here’s a question: has the federal government always been in the habit of bailing out failed businesses, or did this trend start in the 1980s with the failed Savings & Loans? Anybody know?

[gitmogrunt]

Affirmative Action managers, Affirmative Action borrowers........

[JasonC]

Wrong. People have jobs, their jobs depends on sales of goods and services, which depend on overall demand, which was being goosed enourmously by mortgage finance as people cashed out of appreciated houses or took profits on sales to the next buyer. The stock market doubled in five years. *Everyone* benefited from the externalities of the bubble on the way up, other than people directly shorting rising stocks or something similar.

I despise one entry accounting and the associated moralizing witch hunts. Market cycles are normal, they can get excessive and they cause losses and dislocations of course. But everyone pretending they deserve all the boomtime benefits, primary and secondary, and some evil thief is responsible for the downswing costs, is a narrow minded selfish jerk who doesn't know what is actually happening, practicing one entry accounting.

[MainFrame65]

Crooks in control. Both of these were political organizations that just happened to engage in the mortgage business while their real business was to provide cushy jobs for retiring politicians. Here is a partial list of who led these “enterprises” into their current financial crises:

Fannie Mae

James A. Johnson, former chairman and CEO: Aide to Vice President Walter Mondale; recently led Sen. Barack Obama’s vice-presidential search team

Jamie Gorelick, former vice chairwoman: Deputy attorney general under President Bill Clinton; former Defense Department general counsel; member of 9/11 Commission

Franklin D. Raines, former chairman and CEO: Budget director under Clinton

Thomas E. Donilon, former executive vice president: Former assistant secretary of state under Clinton; senior adviser to Michael Dukakis’ presidential campaign; national campaign coordinator for Walter Mondale’s presidential campaign; congressional liaison for President Jimmy Carter.

Robert B. Zoellick, former executive vice president: Former deputy secretary of state and U.S. Trade Representative under President George W. Bush; currently president of the World Bank

Louis J. Freeh, board member: Director of the FBI under Clinton; federal judge

Stephen Friedman, former board member: Assistant to Bush for economic policy

Michele Davis, former senior vice president: Deputy assistant to Bush; currently assistant secretary of the Treasury.

Wayne Berman, outside lobbyist: Assistant Secretary of Commerce under President George H.W. Bush; senior adviser in Bush-Cheney presidential transition; currently a fundraiser for Sen. John McCain’s presidential campaign.

Steve Ricchetti, outside lobbyist: Deputy chief-of-staff to Clinton

Kirsten Chadwick, outside lobbyist: Special assistant to President George W. Bush for legislative affairs; currently a fundraiser for McCain’s campaign.
Freddie Mac

Richard F. Syron, chairman and CEO: Deputy assistant secretary of the Treasury

Ralph F. Boyd Jr., executive vice president: Assistant attorney general for civil rights

Dennis DeConcini, former board member: U.S. senator from Arizona

Robert R. Glauber, board member: Undersecretary of the Treasury under President George H.W. Bush

David J. Gribbin III, former board member: Aide to Vice President Dick Cheney; assistant secretary of defense under President George H.W. Bush

Harold Ickes, former board member: Adviser to President Clinton and Sen. Hillary Clinton; member of the Democratic National Committee.

Rep. Rahm Emanuel, former board member: Senior adviser to President Clinton; former chairman of the Democratic Congressional Campaign Committee and chairman of the House Democratic Caucus.

Susan Hirschmann, outside lobbyist: Chief-of-staff to former House Majority Whip Tom DeLay of Texas

Michael J. Bates, outside lobbyist: Campaign official for President Reagan, presidential candidate Bob Dole, President Bush.

Martin Paone, outside lobbyist: Secretary of the Senate

J. Patrick Cave, outside lobbyist: Acting Assistant Secretary and Deputy Assistant Secretary of the Treasury

Susan Molinari, outside lobbyist: U.S. Congresswoman from New York

[JasonC]

Always.

Before the S&Ls there was the bailout of Continental Illinois bank and of Chrysler. A decade before that it was the Penn Central railroad system. Before that there were bailouts of failing textile mills and coal mines, both by direct payments and by protection and subsidies. Before that, the whole farm sector was bailed out by price supports and transfer payments, which we still pay to the tune of tens of billions per year.

The Tennesse Valley Authority of 1930s vintage is still government owned, and is in all other respects a normal electric utility. There was a whole movement from the 1890s to the 1940s by state and local governments into utilities in particular, and most water systems are still government financed and run.

In the 19th century, the government literally gave a quarter of the western states to railroad companies, not just to put through lines but to finance their construction by real estate sales. Before that, it took an act of a state legislature to form a corporation, and the government was directly involved in every major business enterprise. Canals were the biggest in the first half of the 19th century, starting with the Erie canal.

The idea that business and government are separated like church and state is a complete myth, propogated by a libertarian ideology that thinks things would be better that way. But they never have been. The colonies themselves before independence, were founded as English corporations.

[EternalVigilance]

Both “major” parties are corrupt.

[Freedom_Is_Not_Free]

“I don’t know of anyone who early enough was saying listening that there would be a major national decline in house prices,”

There, I fixed it. Plenty of people were saying the housing bubble would collapse. Few were listening to that which they did not want to believe.

[A_perfect_lady]

Thank you for that very detailed and informative response. I didn't realize how long it had been going on.

Suddenly I feel like reading Creature From Jekyll Island again! LOL!