Fannie Mae Forced To Buy Toxic MBS 40 billion Month pre crisis via TimHoward717.com
https://www.mcclatchydc.com/ excellent analysis of lead up
Jim Chanos has a new short target in his sights. Earlier this week, the hedge fund manager disclosed that he is betting against "legacy" data centers that face growing competition from the trio of technology giants, which have previously been their biggest customers. The fund manager, who is best known for his winning bet against Read More
Freddie MAc (OTCB:FMCC) and Fannie Mae (to Buy $40 Billion a Month in Toxic Sub-prime and Alt-A Mortgages.http://www.mybudget360.com/freddie-and-fannie-to-buy-40-billion-a-month-in-toxic-sub-prime-and-alt-a-mortgages/
Roosevelt Institute Fellow Mike Konczal writes on the troubled nature of GSE’s in a time of recession.
I want to talk about this, from Megan McArdle:
“It’s looking increasingly like Fannie Mae and Freddie Mac are going to cost the US government much more than AIG. In its latest long-term budget outlook released in late January, the CBO projected that the AIG bailout would ultimately cost the Treasury $9 billion dollars. Indeed, the entire private financial industry bailout is ultimately expected to cost less than $30 billion…By contrast, the nationalization of the Government Sponsored Entities is expected to cost the Federal government $64 billion between 2011 and 2020, on top of the $110 billion we’ve already spent.”
Matt Yglesias has more. There will be more interesting stuff about an endgame for the GSEs here in the near future, but for now I want to talk about this argument.
You’ll probably see a lot of this going forward, that the banks losses weren’t really all that bad, especially compared to the GSEs Fannie Mae and Freddie Mac, as if these were two separate issues. However it is likely the GSEs took on some of the worst loans and mortgage-backed securities of the banks during 2007 and 2008, transferring losses from the private banking sector to the quasi-private-quasi-public GSEs.
Let’s look at The Reckoning articles from the New York Times on the collapse of the GSEs (my bolds), some particularly good reporting on the topic. Here’s Pressured to Take More Risk, Fannie Reached Tipping Point from Charles Duhigg, Oct 2008:
“Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks.
Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.
The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.”
And also this article in the series, White House Philosophy Stoked Mortgage Bonfire by Becker, Stolberg and Labaton, from Dec 2008:
“In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios – a decision derided by former White House and Treasury officials who had worked so hard to limit them.”
One doesn’t have to be an advanced game theorist to see the adverse selection in play – the loans sold to the GSEs from the major banks, under much political pressure, in this period were almost certainly of poorer quality and too expensive. Let’s get a little bit of data:
As the private sector started to dump housing and housing bonds quickly in 2007 and 2008, government officials made sure that the GSEs would be capable of absorbing these bad loans. See that relationship above? This constitutes one part of many “shadow bailouts” according to Roosevelt Institute senior fellows Rob Johnson and Tom Ferguson; this argument, and the graph above, is from their Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown Part II paper. (In Part I, they argue that the Federal Home Loan Bank System was also used in a similar manner.)
Astute readers will notice that the action of government officials using public funding sources to provide makeshift backstops for losses of the banking sector to clear the balance sheets of toxic assets to “unlock the frozen credit market”, without having to go to Congress for funding, was also a central feature of Geithner’s PPIP plan, with FDIC stepping up to the plate once the GSEs went bust.
I sincerely hope a lot more of this information and analysis comes to light, especially the numbers and losses on the books. There are things that are good about the GSEs, and things that are bad, but the fact that it might have been ready to go as a garbage bag for the private sector’s bad bets, a bag taxpayers have to eat out of, has been the most surprising, and terrible, thing about it in this crisis.
Fannie Mae’s involvement in the subprime market was “minimal,” he said, consisting primarily of purchasing AAA-rated private-label securities backed by subprime loans, which contributed to its housing goal objectives. “With the benefit of hindsight, had we anticipated the extraordinary market meltdown, we would have been far less likely to expand our involvement in these non-traditional products,” he said.
Fannie Mae began to reduce its participation in the Alt A market in 2007, when the market took a turn for the worse, Levin said. But at that point, it was too late. “An unprecedented decline in home prices, a high unemployment rate, a global liquidity and credit crisis, engulfed Fannie Mae and its only line of business, a secondary market for mortgages. These crises were centered on our market and our asset class, and we took the full brunt of the market crisis head on, which would have been difficult for the company to deal with under any circumstances.”