The Perils of Freddie and Fannie

Posted by: Michael Mandel on July 13

What we saw this weekend was the world’s biggest temporary sandbag. With the waters rising and about to swallow Freddie and Fannie, Paulson and Bernanke stepped in with—what? A bunch of promises. The Fed promised Freddie and Fannie access to the discount window, and Paulson promised an expanded (but unspecified) government credit line for the giant companies, with the vague promise of equity purchases.

These vague promises may keep Fannie and Freddie from sinking beneath the waves for the next week, or month, or two months. But the Paulson/Bernanke sandbags aren’t high enough to save the companies if the economic flood waters really start to rise. If the economy slumps, mortgage delinquencies will rise, and Fannie and Freddie will find themselves in deeper and deeper trouble.

In fact, we know what’s really needed—a massive $400-$500 billion government bailout of the U.S. housing sector. A straight infusion of taxpayer money, right into Freddie and Fannie and the banking system in general.

But the multi-billion infusion of funds can’t happen in the months before a hotly contested presidential election. Neither the Democrats or the Republicans want to be put in the position of “bailing out” Wall Street. It just won’t happen.

So Paulson is being forced to use smoke and mirrors. Yes, the credit line is expanded, but no, he won’t say by how much. Yes, he might buy equity,but he won’t say how much. But just read it here first: Presidental election = no agreement on a large scale bailout.

That means the next president—Obama or McCain—will come into office at a time of a very bad economy. His first act: Save the housing sector with a lot of big bucks.

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Reader Comments

David Smith

July 13, 2008 11:34 PM

Senator Shumer should be investigated under RICO statutes for intentionally undermining the integrity of financial institutions (possibly in conspiracy with the the Center for Responsible Lending (CRL) over which he had oversight responsibilities.

He has blatantly abused his authority and caused extensive financial harm to untold numbers of Indymac stockholders.

The mindless DemoRepulicrat "race" obscures the legislative and requlatory abusive truth.

There is a "Slow Train Coming"...


Anton lakshin

July 13, 2008 11:43 PM

Paulsen has just broken his promise that he made just this friday, that FRE and FNM would not be bailed out, that the private investors in these two companies would not be saved by government intervention.

While some argue that these banks are too big to fail, there is a very good argument for allowing them to do just that. First, these companies create bubbles by their very existence by acting as vacuum cleaners for bad debt entered into by banks, and secondly, that any bailout creates a huge moral hazard as the implicit message is clearly: do what you wont, if you get in trouble taxpayers will pay for everything.

this is everything American capitalism in theory opposes, the privatization of profits and the nationalization of losses.

Rick Friedl

July 14, 2008 12:26 AM

It would be an "act" to "save" the housing sector by sinking the dollar and the US taxpayer. It would be an act in a play that I don't want to watch.

Rick Friedl

July 14, 2008 12:27 AM

It would be an "act" to "save" the housing sector by sinking the dollar and the US taxpayer. It would be an act in a play that I don't want to watch.

John Q. Public

July 14, 2008 12:33 AM

This is insane. It is not the government's job to maintain the housing bubble by pumping hundreds of billions of dollars of tax payer money. Let the market work, let the stupid people - buyers, lenders, and investors - suffer the consequences of their greedy, foolish acts. Otherwise, our government shows its totally corrupt face, which will hurt us all more in the long run.

BCR

July 14, 2008 01:08 AM

So the Fed will respond to the crisis with exactly what created the crisis in the first place: too much credit. Then save the housing sector with a lot of big bucks? Whose big bucks? Bail out the irresponsible borrowers and lenders with money stolen from the taxpayers. Or really start inflating the money supply and then see what happens to prices. Everyone got a "free" $600 and now prices are skyrocketing. When will reality finally break through to the public? Government intervention, manipulation, and disastrous monetary policy are directly to blame, but all anyone wants is more of the same. They're running out of options. The laws of economic reality are starting to assert themselves. Our entire economic system is based on deception and fraud, and now we'll get what we've been storing up for ourselves for the past 100 years.

pedro

July 14, 2008 01:08 AM

The GSE should be allow to die. They are dinasours of a past era which were allowed to exist still only for political reason. This is what happens when politics dictates economic principles.

josepH

July 14, 2008 01:11 AM

The first article that really calls it the way it is. Suddenly Ron Paul sounds real intelligent just about now doesn't he? The only one that said we are in trouble and deep with our money and economic policies.

There is a fundamental breakdown of the entire economic model. Banking as we know it is over. Next I hope is that the greedy sharks on wall street have their heads loped off, and the stupid politicians who didn't have brains enough to see the greed of lobbyist for deregulation. We are in for it I for one am happy to see this.

william

July 14, 2008 08:53 AM

and where do the big bucks come from? our printing press. and doesn't that mean an increase in our money supply, and therefore stoke even further price inflation? with the present economic situation, it's unlikely that wages would ever be able to keep up with inflation.

Howard

July 14, 2008 10:59 AM

IndyMac was probably going to die, but that blowhard Shumer had to make some publicity for himself. When you have a very responsible position, you need to think before you speak. Getting reelected to the Senate is not the highest priority for this country.

Brian

July 14, 2008 01:10 PM

We continue to allow Wall Street to self-fulfill its prophecies. C'mon, the mortgage "crisis" continues to be over a very small percentage of the total mortgages out there. How many of these are actually underwritten/owned by Fannie or Freddie? And they're going to bring down the entire works? Only if we let every little rumor, half-truth, and outright lie become the "truth". I agree with John Q Public: Let the market work and let the crooks and idiots take their lumps. Those of us who played by the rules get screwed again, while the speculators and cheats cover their losses and then some.

Thomas

July 14, 2008 03:07 PM

This is probably the worst article I have read on the subject and demonstrates a clear lack of understanding of what is really occurring in the real estate market. Freddie and Fannie have about $80B in reserves and their businesses will generate about $80B in cash-flow over the next three years, giving them $160B in capital to address the situation. Much different scenario than: "These vague promises may keep Fannie and Freddie from sinking beneath the waves for the next week, or month, or two months." But, of course the MSM can't be expected to understand things like cash-flow and its impacts on corporate life.
Additionally, most of the GSE's loan portfolio is in vintages other than 2005-07, which means that most of their loan portfolio is performing and won't experience the losses seen in the headlines of the press.
"In fact, we know what’s really needed—a massive $400-$500 billion government bailout of the U.S. housing sector."
What??? What is needed is an orderly market to clear the 2005-07 overleveraging by the consumer that doesn't imperil markets that are highly interconnected through derivative structures. Letting banks wantonly fail without considering the overall impact on the system is childish and ignorant. Some money will be required from the government, but I haven't seen anything that justifies $400-$500B.
I'm not sure where the author got his facts or how he developed his opinions, but this misses the mark by a country mile. And, no I don't care how many ignorant commenters support his position.

Mike Mandel

July 14, 2008 03:46 PM

Thomas writes:
"This is probably the worst article I have read on the subject"

Well, at least I've achieved something!

Seriously, after the accounting debacles of the past few years, I don't trust anything that Fannie and Freddie report in their accounting statements.

Moreover, these guys are utterly dependent on continuous access to the capital markets to keep their businesses operating. In the second quarter Freddie Mac alone issued $306 billion (gross) in debt securities, mostly short-term
(See http://www.freddiemac.com/debt/funding/2008quarterly.xls).

If they lost access, that would quickly erode all of their capital base.

vee

July 14, 2008 08:25 PM

I went to Las Vegas to make millions, but
I lost millions, do you think the government should bail me out? Its the same way all the people who bought houses at high price to make a huge profit, but today are in big loss, its the same as the
previous scenario, so should the government bail them out? Ridiculous. poor tax payers always the culprit.

Mark

July 14, 2008 09:27 PM

"In fact, we know what’s really needed—a massive $400-$500 billion government bailout of the U.S. housing sector. A straight infusion of taxpayer money, right into Freddie and Fannie and the banking system in general."

Ick. You want to steal $2500 from me, a renter, to bail out the wreckless housing/banking industry? These people should be bankrupt, and in some case where there was fraud, in prison.

desibud

July 14, 2008 10:49 PM

is it too early to call it the fall of the United States, I hope so.

Viking

July 15, 2008 12:01 AM

It is true that if Fannie and Freddie were allowed to "fail" the responsible people who are making their mortgage payments would not feel a thing.Instead the cost of new mortgages would go up reflecting current market conditions and that would cause the home prices to fall further,as fewer people could afford to buy at higher rates.However this is the market clearing process that the market needs in order to get back to a health and any prop-up or massive injection of taxpayer money would only prolong the process.Mike,how can you seriously advocate this massive additional borrowing,when I think we all agree that too much borrowing caused the problems we face now in the first place?I keep coming back to the article you wrote re.the $3 trillion that we borrowed and used to live beyond our means in the last decade that are the root of our current problems.How do we solve the problem by borrowing an additional $500 billion from China or the Middle East,because as we all know,we do not have the money?

Bellcord

July 15, 2008 04:19 AM

Article is sheer balderdash...the only accounting scandal at Fannie was efforts to hide Profits..not Losses (Execs could trot out the old profits if needed to pad their bonus quotas). SEC is investigating shortsellers who start rumors to torpedeo share prices on targeted corporations,ie. 3.4 billion J P Paulson made on Bear Sterns fall..

belle

July 15, 2008 10:47 AM

A bail out would not solve the crisis...it's just a quick fix. Filing for bankruptcy and re starting would be the lesser of 2 evils. Either way, it's a no win situation.

Belle

random

July 16, 2008 11:38 PM

As Bernanke keeps reassuring the public, please note that Paulson is using him as a sort of sock puppet.

Don't pay attention to the Goldman Sachs guy behind the curtain pulling the levers and speaking into the voice changing machine...

Joe Cushing

July 17, 2008 09:31 AM

I hate the idea of a bail out. It lowers the risk level of risky investments at the tax payers expense. Would it cost tax payers money if banks failed? Yes, but at least we would get something for our money--investors who are more careful in the future. This idea of two big to fail is beyond me. Maybe we need to break up banks if they are too big to fail. We need to be able to let banks fail.

Russ Walker

July 18, 2008 12:09 PM

The "fourth estate" is not doing their jobs either.

The government and business related organizations such as the Fed should have all of these actions carefully recorded so to be held accountable when the smoke clears.

The corruption and deals making we are not being kept informed about will make Watergate look like a kid taking a ten cent lollipop from a candy store.

It is indeed sad to observe the "unwitting or unknowing" ignorance of so many management teams of our large investment houses and financial institutions about their own internal operations.

The meltdown we are all watching is probably a good thing that should cause a "shaking out of the rugs and opening of windows". When you commit a business or personal sin soon thereafter you "sometimes get what you want; but sometimes you get what you deserve."

Obviously the sloth, greed and contentment that has been the prevailing emotions for the last two or three years is now proving to be a short lived condition. We ourselves are a little to blame while we let our leaders drive this mess or at the least did nothing about these "business sins".

One cause of concern for this old credit manager and former credit analyst is the USA federal agencies and our government's willingness to float loans and support to these bad guys (and they are bad guys or at the least maybe just "olde style buffoons") using the same sketchy commercial mortgage-backed securities, retail mortgage-backed securities, and collateralized debt obligations as collateral.

I do hope our citizenry are keeping a watchful eye on these federal decision makers and taking notes because I portend a worse problem when the continuing meltdown requires a "dunning" on these assets too.

The taxpaying public will be the final collection target and the final bill payers but all the managers on both sides of this equation should be run out of their jobs and their fiscal town with their reputations and financial stakes "tarred and feathered" - thoroughly!

FastFreddie

July 18, 2008 04:14 PM

There are some great comments in this blog, some that mirror my own. I especially like the post by BCR. Too darn much money floating out there. Where do people think speculators are getting fund from to invest in oil? What would you do with extra cash if continued its meteoric rise? Also bailing out the small percentage of mortgages that actually are bad by spending 300 Billion? What do you wanna bet that this will be the biggest boondogle that will have marginal if mat disasterous effects?

akkirocks

July 19, 2008 01:52 PM

Article is sheer balderdash...the only accounting scandal at Fannie was efforts to hide Profits..not Losses.As Bernanke keeps reassuring the public, please note that Paulson is using him as a sort of sock puppet.The government and business related organizations such as the Fed should have all of these actions carefully recorded so to be held accountable when the smoke clears.
akkirocks
Debt Consolidation

kp

July 21, 2008 09:06 PM

Great post Thomas. Nail on the head. Thanks

frank bennett

July 22, 2008 09:41 AM

Its like a house of cards until we have some major changes.

Improve My Gas Mileage

sid

July 24, 2008 12:28 PM

I know that what i will say will sound very bitchy and discusting
, but living in France, the real estate crisis in the US is actually a good thing for us the french and the people following the Euro!
For the simple reason that for years, the Brits and Americans have been buying off french real estate for it's history "something Americans lack of"....Now for us the french and Europeans, we lack space in Europe, so real estate in the US is good AND affordable, with the $ so low!
http://www.youtube.com/watch?v=mAHEqV4HDP4

Cheers

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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