Dick Bove Gets Backup On Fannie Mae And Freddie Mac

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Dick Bove Gets Backup On Fannie Mae And Freddie Mac
By User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

If you’ve been following Rafferty Capital Markets VP Richard Bove’s commentary on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), you know that he considers the GSEs to be essential parts of the US economy that the government liquidates at all of our peril. In light of the recent setback to GSE shareholders, he’s decided to take another shot at explaining the theory and brought in another banking expert to back him up for good measure.

Solutions to the wrong problems put in place, says Bove

Bove’s version of what happened during the financial crisis focuses a lot more on global macro trends and less on moral hazard than the typical rendition. The sequence of events that he sees is the population growth ‘outside the North Atlantic communities’ (eg India and China, as opposed to the UK and US) meant that there was an abundance of cheap labor to produce goods for consumption in the West, causing huge flows of capital to these developing economies. Since those countries couldn’t absorb so much capital so quickly, investors sent that money back to the West where it quickly outpaced the amount of responsible investment opportunities and new assets were created to meet the rising demand, resulting in a lot weaker loans being issued and new investment products being created.

“The shortsighted view that greedy bankers created the financial crisis has done this nation incredible harm. This is because solutions have been put in place to solve the wrong problem,” writes Bove. In particular, he has argued repeatedly that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have been a backbone of the economy and that, far from putting us in more danger, they played the safety valve role that they were intended to play during a crisis.

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