Fannie Mae and its cousin Freddie Mac have been a key component in funding the housing bubble. They purchase mortgages or mortage-backed securities from the mortgage issuers. They either hold the mortgages in their own portfolio or resell them with a form of credit insurance attached. They borrow money at below market rates that lenders are willing to give them based on an implied guarantee of a government bailout should their debt become insolvent. Led by Clinton appointee Franklin Raines, they have long been one of the permiere lobbying machines on the political landscape. One analyst referred to them as a lobbying corporation with a finance business.
The solvency of their capital structure has been based on a series of incredible claims, one of them that they could adequately hedge interest rate risk on a several trillion dollar portfolio; another that their a tiny sliver of equity would constitute an adequate reserve for the the default risk of their portfolio.After fending off several attempts by regulators to reign them in, it appears that they are finally becoming unglued. The New York Times reported in a series of stories this week that the management may have been manipulating earnings in order to ensure bonuses for top executives, and they are not the target of an SEC investigation. Raines would surely be a goner if charges prove to be true.
But more importantly, the mystery meat known as Fannie’s Financials will start to come under scrutiny. This could impact the preferential treatment that the credit markets accord these giants, and affect the willingness of foreign central banks buying dollar-denominated assets to accord agency debt the same risk level as treasuries.
- Fannie CEO May Not Withstand Challenge
- Reading Fannie Mae’s Scary Cookbook by Pulitzer-prize winning Gretchen Morgenson
- Odd Man Out in U.S. Inquiry Into Fannie Mae
- A Possible Case of Fudging Profit to Match Desires
- Overseer Says Fannie Mae May Be Due for Shake-Up
- S.E.C. Opens Investigation of Fannie Mae
- Fannie’s Woes Threaten Level Of Core Capital
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Stories are beginning to appear about the possibility of privatizing Fannie and Freddie.
“How to Privatize Fannie, Freddie,” by Peter J. Wallison Article in American Banker, October 1, 2004 Full text: http://www.aei.org/news21314/
I’m wondering again if it is possible that the tax-cutting and increased-spending patterns of the Bush Administration might have at their heart a truly ‘limited government’ agenda, one wherein Bush allows the Congress to spend US into crisis and then compelling cuts of the monstrosity.
Might Fannie’s unchecked bureaucratic crash-and-burn be a pattern of things to come, of how agencies are to be unraveled?
With the pending surge in ‘unfunded liability’ obligations of the Federal Government, there would be enormous support to cut spending on other government agencies in favor of the big redistributive programs.
Might permitting unlimited growth now, and refusal to fund later, be the correct solution to destroying the Federal Administrative Agency beast?
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