McLean, Shaky Ground: Fannie Mae & Freddie Mac

McLean, Shaky Ground: Fannie Mae & Freddie Mac

Fannie Mae and Freddie Mac: Shaky Ground: The Strange Saga of the U.S. Mortgage Giants

At the request of the publisher, I removed my earlier review and am reposting it to coincide with the launch date of the book.
Columbia University Press has launched a new publishing imprint, Columbia Global Reports, to produce “six short, ambitious works of journalism and analysis a year, each on a different under-reported story in the world.” Bethany McLean, co-author of The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron andAll the Devils Are Here: The Hidden History of the Financial Crisis, has written the first title, Shaky Ground: The Strange Saga of the U.S. Mortgage Giants. It’s an auspicious beginning for the series.

Play Quizzes 4

Mervyn King, the former governor of the Bank of England, told the author: “Most countries have socialized health care and a free market for mortgages. You in the United States do exactly the opposite.” (p. 9) And, he didn’t add but I will, we do both badly.

In this well-crafted if depressing 160-page book McLean recounts the origins of the housing crisis, its temporary fix, and the aftermath, which she describes as “limbo.”

London Value Investor Conference: Joel Greenblatt On Value Investing In 2022

The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More

Fannie Mae and Freddie Mac have been in government conservatorship since the fall of 2008, at which point they had a combined $5.3 trillion in outstanding debt. If this figure had been put on the government’s balance sheet, the public national debt would have increased by about 50%. Partly for this reason, some of their common and preferred stock remained in private hands.

Hedge funds made big bets in the darkest days of Fannie Mae and Freddie Mac that these two companies would become profitable again and that they would make a fortune on stock they had bought for next to nothing. They were right on the first count. The companies have paid $231 billion back to the U.S. Treasury, over $40 billion more than they got from taxpayers. But they were wrong on the second count since, in 2012, the government “changed the terms of the bailout and is now directing almost all their profits toward reduction of the federal deficit.” (p. 19) The hedge funds cried foul, filing some 20 lawsuits, alleging that the bailout’s third amendment, the one in 2012, “violates the Constitution’s Fifth Amendment: The government cannot confiscate private property without paying for it. … [T]his isn’t about the government’s actions in a time of crisis, but rather about the government’s actions after the crisis had passed. … A joke goes: ‘What’s the difference between the GSEs in the United States and Repsol in Argentina?’ The punchline: ‘Argentina settled.’” (p. 125)

The investors have been losing their battle in the courts, with one judge dismissing a suit because of a provision in the Housing Economic Recovery Act that reads: “No court may take any action to restrain or affect the exercise of powers or functions of the Director as a conservator or a receiver.” (p. 128) But they haven’t given up on the GSEs. Bill Ackman bought about 13% of the remaining 20% of the GSEs’ common stock in the spring of 2014, and in February of this year Bruce Berkowitz’s Fairholme Fund picked up nearly five million shares. They are betting that Fannie Mae and Freddie Mac will be revitalized.

The federal government has been trying, though not very hard, to kill off Fannie and Freddie ever since the housing crisis. At a conference in early 2015, a Treasury official said that the administration “’believes that private capital should be at the center of the housing finance system.’ And he reiterated that Fannie and Freddie had to die. ‘The critical flaws in the legacy system that allowed private shareholders and senior employees of Fannie Mae and Freddie Mac to reap substantial profits while leaving taxpayers to shoulder enormous losses cannot be fixed by a regulator or conservator because they are intrinsic to the GSEs’ congressional charters,’ he said.” (pp. 146-47)

But Fannie Maw and Freddie Mac soldier on, severely undercapitalized and on shaky ground. They seem destined to have long, if not necessarily happy, lives. And the cult of homeownership remains intact—at least in Washington, if not among millennials.

Fannie Mae
Fannie Mae

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  1. Fannie and Freddie hold more than $5.3 trillion in secure paper. In other words, more than $5.3 trillion is ultimately owed to Fannie and Freddie. To pretend that they have to pay $5.3 trillion and that they have no way to do so is idiotic in the extreme.

    What is also idiotic in the extreme is the idea that an unregulated banking system should take charge of all mortgage lending. The Wall Street banks and investment houses (which, by 2007, were one and the same) are the entities which caused the worldwide financial collapse to the tune of $72 trillion…which now is somewhere in the $15 trillion range. Fannie and Freddie regulation was also lax, though not as much so as big investment bank regulation which didn’t exist after 1999 and had been under attack since the onset of the reaganite delusion. Consequently, Fannie and Freddie, in 2005, decided to get into the game Wall Street was playing…and they had the bad timing – er, ‘misfortune’ – to get into it only a couple of years before it all fell apart. The big banks had been ‘securitizing’ very, very bad mortgages since early 2002 so they were on the hook for far more than Fannie and Freddie. But, sure, privatize all mortgage lending so as to be certain that the next ‘honest banker’ scam will be even more out of control.

    When we finally learn that there is no such thing as a ‘free market’, since ALL markets are quickly controlled by their biggest player(s), and that government regulation is the only possible ‘invisible hand of the market’ which can prevent catastrophes which will otherwise be created by the out-of-control greed of people who spend their entire lives making money by pushing money around, we will finally go back to Depression era government controls which work. If not, we will bankrupt the entire economy at some not-too-distant point in the future.

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