Freddie and Fannie: Republican victims

Everybody must calm down about the Freddie and Fannie situation. No one needs to head for the exits or cyanide tablets.

The announcement on Sunday that the Fed and U.S. Treasury will backstop these two financial intermediaries is an entirely predictable, latter-day outcome as a result of the cowboy capitalism practiced in the lower end of American mortgage markets for years.

Sunday's announcement amounts to a "shoring up", and not a "rescue", of Washington's lending "hybrids" -- Freddie Mac and Fannie Mae.

And many more banks will follow Bear Stearns and IndyMac as a natural workout due to negligence on the part of governments to properly monitor mortgage markets in the U.S. for years. This is not the beginning of the end, but the end of the beginning.

Not perps
Fannie and Freddie are victims, along with taxpayers, and not perpetrators. They fulfilled their mandates which were to buy mortgages from banks. They only bought mortgages from banks who ascribed to strict guidelines about downpayments and the creditworthiness of home buyers.
The reckless mortgagors, many of whom have been indicted or should be, bundled up their junk debt then peddled through many intermediaries until it ended up on Wall Street where it was exported around the world along with good debts. Bear Stearns did this so well it has gone out of business. Thank goodness.

The "shoring up" is needed because Freddie and Fannie, along with many fiscally responsible banks and responsible homeowners, are "upside down" in terms of their mortgages. This means that the value of their mortgages' underlying real estate is less than their mortgages themselves.
That doesn't mean that every homeowner with an "upside down" mortgage must declare bankruptcy if they can meet mortgage payments. It means that these homeowners cannot sell without incurring a loss nor can they borrow more money against equity in their homes.

The same situation afflicts Freddie and Fannie.

They hold mortgages, and must buy some more from banks to keep the system going, that are worth more than the underlying real estate values.

(The two giants were created during the Great Depression in the 1930s to take mortgages off the hands of banks so that the banks could lend more money. Both were supposed to profit from these transactions.)

Unfortunately, Freddie and Fannie must still fulfill their mandate which can only happen if they can raise more capital from investors. Because rumors have hurt their stock prices, the Fed and Treasury had to step in as a comfort statement so that Freddie and Fannie can continue to buy more mortgages.

Put another way, if they did not do this they could not raise more money and the entire real estate lending and construction sectors would grind to a complete halt for awhile.

Needed action
So Washington is doing what it must to keep the wheels in motion.

It's just too bad that the Fed and the U.S. Treasury Department did not properly regulate the mortgage markets in the first place. Their negligence led to fraud and shenanigans and the real estate bubble that has now burst.

Efforts to regulate sub-prime mortgage lending and remove bad players were led by former New York Attorney General and Governor Eliot Spitzer and other state officials, but were impeded vigorously in the courts for years by the Bush regime.

Now they are finally stepping in, another example of the stupidity of Republican cowboy capitalism.

Facts are markets without government regulation are like football games without referees, full of thugs and chaos and eventually ruining the game altogether.

Comments

[PacificGatePost]

Bad management is bad management, and overpaid at that.

... and $200 million in lobbying money, as well as campaign contributions, paid out by Fannie and Freddie, served whose purpose?

Come on Diane, management "leaves a lot to be desired" ??? Please. Call it what it is.

They did what they did, incompetence and all, because they could. The symptoms run throughout North American businesses. CEO's, for starters, shouldn't report to themselves. They should report to an independent Board of Directors with an independent Chairman.

As for Fannie and Freddie, Congress won't do anything but following the dollar would tell why.

[themodernleader]

What is any prudent organization doing with interest rate--currency derivatives and other innovative financial instruments of this "new economic era?" Allowing Wall street to create a paper economy while decimating the real economy for personal and Wall Street Class transfer of wealth is the last stage of uncontrolled capitalism when all the wealth is accumulated in the hands of a few---individuals, monopolies, international trusts and mercantelistic countries.
This new era is producing a gilded age of the few atop the misery of the many.

[Diane Francis - Huffpost Blogger]

big "losses" for Freddie are interest rate/currency derivatives. Here's is an interesting take from Mish's Global Econmomic Trend blog June 14:
"Losses on its derivatives portfolio and a widening credit spread teamed to deliver a hit to Freddie Mac's first-quarter results, with the mortgage-finance giant reporting Thursday a loss of $211 million. The McLean, Va.-based company's per-share loss amounted to 46 cents a share, compared to earnings of $2 billion, or $2.80 a share, recorded in the first quarter a year ago.

The latest quarterly results include losses of $1.2 billion reflecting the impact of declining interest rates on the company's derivatives portfolio. A year ago, Freddie recorded a gain of $742 million. Total revenues were just $424 million for the March quarter, compared to the prior year's $2.5 billion."

Using derivatives to hedge positions, both interest rate/currency or commodity prices, is prudent. But when the world falls apart it all falls apart.
These are not actual cash losses, but notional accounting ones.
Very ugly nonetheless.

[Diane Francis - Huffpost Blogger]

The management of Freddie and Fannie leaves a lot to be desired, but then again look at the private sector governance among U.S. corporations which is also abysmal.
These greedy people, and enabling rules, are ruining "capitalism"...

Freddie and Fannie, by the way, did not indulge in the fraudulent conspiracies that characterize the sub-prime mortgage markets. They only bought "good" mortgages which are now bad, or upside down, mortgages because the sub-prime mess created the bubble and burst it too.

[Henry]

My professional experience is that Fannie and Freddie "conforming" loans were conservative. I believe that had all mortgage loans in this country conformed to Fannie guidelines there would have been no housing boom, no securitizations millionaires, and also no great popping of the bubble that recklessness in lending always leads to.
Deregulation gave free reign to the "markets" (brokers) to put all kinds of people into homes and humble Little George was walking around the country bragging about his "ownership" society. What a fool George Bush was and is.
There is one thing. The Income Statement of Freddie Mac show $2 billion loss last year and $ 1 billion loss so far this year in foreign exchange losses. What the hell is that? Doesn't really seem to have anything to do with domestic lending.

[StephenBarry]

Marx was correct, the supersession of Capitalism by Socialism is inevitable. We can not endure these so called "free market" crises continually. The system is on the verge of a massive generalized implosion. Keynesian and fiscal stimulus is useless now. A political hammer is needed to smash Wall Street and its political running dogs. We are already half way there as you correctly point out - privatization of gains and socialization of losses. The very WORST of both - the maximization of exploitation of the public. The capitalists are frantically clinging to a sheer cliff face by their bloodied fingernails and could care less about anyone else. The dialectic of this is that after the Soviet Union collapsed they moved closer to Capitalism. When we crash, and we will crash, we will move closer to Communism, as we did under FDR. We will end up meeting in the middle - Socialism. And after all, as Marx pointed out, Socialism is merely the prolonged historical epoch preceding Communism.

[Henry]

Stephan,
Marx may have been an insightful philosopher back in the mid 1800s, but the stages of dialectic ( capitalism, socialism, communism) in his writings have been overtaken by the very namesake of his greatest writing Das Kapital. I mean, take a look at the internet, take a look at Caterpillar(these a capital goods that change the argument). These were not part of his world and they have changed the economic dynamic beyond any comparison. It's quite simple, as long as the mega-majority of the middle class have their house, their healthcare, their income streams...there's not going to be any revolution.
Social healthcare, by the way, does not result from revolution or failure, it results from enlightened choice by a voting public. Social healthcare is more efficient than private.

[PacificGatePost]

Delving into how these two government run organizations might change the tone of this post.

The executives who took the bonuses are reporting to whom right now?

[Pquilson]

I presume that you are referring to Franklin Raines and Jamie Gorelick. I hav read that the Obama campaign is asking Mr. Raines for advice at this time regarding economic issues. I have not verified that.

[themodernleader]

Diane: You must be unaware of the enormity of the mortgage defaults.Otherwise, you would be crying to high heaven not to bail out any organizattional default so we may save our currency. Such mortgage defaults will be in the trillions. And our foreign lenders own tens of billions of dollars of these mortgages. And they were sold as seen as "guaranteed" by the United States Treasury. Our lenders expect to be paid in full.
Full payemt is clearly impossible because the mortgage wrapped bonds were fraudlently derived and of low value relatively to the mortgages
We are in a heap of trouble. Our leaders seem to be in a blanket of fog which keeps them from seeing the perils of financial, economic collapse right in front of their noses.

[Desiderata]

Hey all you people lining up at the bank,
I borrowed all of your money before the bank sank.
Borrowing your money was groovy, paying it back not so.
So the bank foreclosed my mortgage, and I had to go.

The plastic people, they lent me even more;
But they can't find me, got no phone and no front door.
Don't got no car , they took it away, too.
All I got is sweet memories of the good times I had with the money I borrowed from you.