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ASSIGNMENT DESK: FANNIE MAE AND FREDDIE MAC (OUTSOURCED).
Folks are, rightfully, worried about Fannie Mae and Freddie Mac, both of which are tanking so rapidly that there's talk of a federal bailout. The problem with Assignment Desk, of course, is that there's lots of stuff I don't know enough about to comment on. So I asked two economists I know and respect, Jared Bernstein and Dean Baker, to give the skinny. Jared directed me to an analysis he just wrote for CNBC, where he says:
The prospect of Fannie Mae and Freddie Mac failing is almost too unsettling to contemplate. As one investor told the New York Times, “If people lose faith in Fannie and Freddie, then the whole system freezes up, and nobody can buy a house, and the entire housing market can crash.”He's got more analysis at the link. Dean Baker e-mailed his thoughts on what was about to happen, and how we should feel about it:We’re talking about a pair of institutions that hold or guarantee more than half of the nation’s mortgages.
In other words, they’re TBTF (too big to fail) and it’s a sure bet that we won’t let them go under. Treasury Secretary Henry Paulson apparently asserted today that the government is not planning an imminent bailout, by which he means that the government is busy planning an imminent bailout.
well, they are not going to let fannie and Freddie go under, that's for sure. they are (together with FHA and VA) 80 percent of the mortgage market, so there is no way that they are going bankrupt in the normal sense. There will be some sort of receivership where they are kept operating, although it seems likely that this will be a somewhat slower speed for at least a period of time.And for good measure, he adds:Second, the question is what happens to shareholders. They deserve zero. That's what the free market types should demand (funny, I don't hear them right now). Anyhow, my guess is that they will get some non-zero sum, ala Bear Stearns, because they will threaten to tie up a receivership in court and extort some money out of Treasury.
Third, the top management all should be sent packing. If there was anything resembling a progressive movement in this country, they would be screaming about this at the top of their lungs. Running a business successfully means making profits and raising the share price, not driving it into bankruptcy. The clowns who ruined these companies should get zero, zilch, and they should be replaced with people getting normal salaries (e.g. $1-$2 milion) who might not be too dumb to recognize a housing bubble.
Fourth, the Treasury will have to kick in money to make the creditors whole. My guess is that it will be around $100 billion at the end of the day. We will probably see the failure of some other big banks, so the total fall out to the public sector from the housing crash is likely to be in the range of $200 billion to $300 billion.
Is this a big deal, not really in the scheme of things. Homeowners have already lost about $5 trillion in equity and are on the way to losing about $3 trillion more. So, adding this amount to the public sector debt is not too alarming. Of course, if we allow the shareholders and top management of these institutions to walk away with anything, then we should strangle the folks in charge.
Finally, I was curious to find the first time that I warned of the disaster at Fannie and Freddie. It was back in October -- of 2002.All of which is to say, this is a catastrophe, but it was a predictable, preventable one. And there should be consequences for those who failed to predict and prevent it.“If housing prices fall back in line with the overall price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions.” [http://www.cepr.net/err/october_7_02.htm]
As they say in the economics profession, who could have known?
COMMENTS (14)
That's it, the housing market will freeze because no one can get a loan.
It's already frozen, so let them fail.
We've got to let capitalism work and that means letting companies shut down.
Where is the political courage in this country? All our leadership is doing is sticking it to the American taxpayer everytime a big institution implodes.
This has got to stop.
Posted by: Robert59 | July 11, 2008 7:04 PM
Wouldn't it be a better world if families across the US all got their home mortgages from local banks and credit unions? Instead of getting screwed over and ignored by bloated national lenders who play the odds on whether or not your household budget will tank, you'd work with local people in your community to finance your home. Maybe we should just ride the wave of Freddie and Fannie crashing and burning. We could use the momentum and political will to build local infrastructures and resources to handle home mortgages locally. A representative you see in person at a local bank is not going to sell you a mortgage you can't afford.
Posted by: Jeff | July 11, 2008 7:08 PM
This country is on the brink of collapse.
Posted by: jeebus | July 11, 2008 7:43 PM
Heya Ezra - that was my post from work sorry I didn't sign it.
The feds just siezed Indymac. Second largest bank failure ever. WaMu and Wachovia can't be far behind. Then Citicorp? We might be left with 3 or 4 of the top 10 banks when this is over. And I bet it costs us more than 300 billion.
So the depositors are guaranteed at 100K. The question is, does FDIC make the ones over 100K whole like we did during the S&L crisis? If the shareholders of Fannie and Freddie are going to eat dust, the depositors should too.
As the wiki quote I linked said, there is a very widespread perception out there that the GSEs are somehow connected to the government. I mean, what could be safer than investing in the mortgages of hard-working American?
I agree with your economist friend. People should go to jail over this.
Regards.
Posted by: luko | July 11, 2008 8:55 PM
I'm all for the management of Fannie and Freddie going to the pokey, they are by and large big democrats, Howell Raines, Jamie Gorelick and Robert Johnson(?) Obama's former VP vetter who all made 10's of millions on it.
Curiously, by ar the biggest critics of Fannie and Fred these last 6 years has been the WSJ editorial board (a bunch of noted lefties) the biggest defenders those sterling conservatives Chris Dodd and Barney Frank. Who both raked in $$ millions in contributions from fannie, freddie and their hangers on.
Posted by: Scott | July 11, 2008 9:04 PM
“Washington Floats Bailout Plan for JohnnieMac”
By Liz Sidoti, Associated Press Writer
Speaking before reporters at the White House today, President George Bush called on Congress to join him in developing a rescue plan for embattled presidential candidate JohnieMac.
“JohnnieMac is a American institution, which for the past thirty years has made it possible for thousands of members of the fourth estate to feed their families and purchase homes. Today I am asking Congress to work with Treasury Secretary Paulson to formulate a plan which will allow JohnnieMac to stay afloat and continue to his run for the nation’s highest office.”
JohnnieMac is a hybrid private-public entity created by the U.S. Navy shortly before World War II, and now owned largely by lobbyists and large corportations. It was orginally set up to make it easier for members of the American press to improve their living standards, and over the years has helped thousands of them find access to housing and food. A merger with drug-taker Hensley & Co. in 1980 increased JohnnieMac’s liquidity and cash-reserves still further.
It is also one of the largest owners of homes in the entire country, with major holdings in at least nine different states. A recent scandal revolved around JohnnieMac’s inability to account for all the homes in its possession.
JohnnieMac has suffered from other missteps as well, including its announcement this week that Americans should “quit their bellyaching” about the economy, a half-hearted attempt to restructure its chain of command, and admissions that it had still not mastered the Google. As a result of its poor performance, confidence in the institution has eroded precipitously in the past few months. JohnnieMac stock was trading at around 5.0 on Intrade at the close of the day on Friday.
Prominent Republicans quickly seconded the President’s call for a bailout. “JohnnieMac is as much a part of America as Tang, or computer chess,” said former governor Mitt Romney. “I don’t think it’s enough just to save it: we need to double Johnnie Mac.”
And in a striking show of bipartisanship, Senator Joe Liebermann, head of the Connecticut for Liebermann Party, also spoke in favor of the proposal. “I think I speak for myself and for others in my party when I say that our country owes an enormous debt to JohnnieMac. Johnnie Mac is the American Joe Liebermann has been waiting for.”
Yet there were some dissenters, including Nebraska Senator Chuck Hagel, who called the proposal “pure horseshit,” and presumptive Democratic nominee Sen. Barack Obama, who said, “This is just another a typical Washington quick fix. As much as I honor JohnnieMac’s service to America, it will take much more to get that aging institution back on its feet.”
It was not clear when Congress and the White House would begin talks on the plan.
In his remarks, President Bush also hinted at the consequences of failure: “If we can’t get together a plan to save JohnnieMac, we may have to do what the state of Florida did back in November of 2000,” he said, adding, “We are fully prepared to go that far, if necessary.”
Posted by: lampwick | July 11, 2008 10:54 PM
Posted by: Jeff | July 11, 2008 7:08 PM
On the evidence, it would be better for Fannie Mae and Freddie Mac ... that was the mortgage market for which they were set up and in which they seemed to do OK.
Indeed, that is the reform that ought to (but won't) be the price of the bail out ... they only buy mortgages from institutions that hold a substantial percentage of the mortgages they originate to maturity.
Posted by: Anonymous | July 11, 2008 10:58 PM
"On the evidence" comment, signed,
Posted by: BruceMcF | July 11, 2008 10:59 PM
I think the bigger question is what will be the impact on Charlie Rangels 4 rent-controlled apartments, one of which he illegally uses as an office, thus depriving at least 3 New York families of low-income housing, ending uop on the street.
Abuse of power, is abuse of power regardles if its done by a white rich CEO or a black rich politician.
It would be nice if Charlie could at least let a couple homeless families see the aparments so they know what they are missing.
And this was the party that was going to end the Republican coruption...what utter crap.
Posted by: Anonymous | July 12, 2008 6:59 AM
No doubt. The really important question is Charlie Rangel's alleged corruption. Not that millions of Americans may lose their homes and see their retirement nest eggs disappear as this mess reverberates through the economy.
I'm glad Anonymous checked in to keep us focused.
Also -- Michael Moore is still fat.
Posted by: mb | July 12, 2008 12:55 PM
More unintended consequences of meddling by the gov't. It was Roosevelt's new deal to involve the gov't in private lending by guaranteeing mortgages. The gov't shouldn't be in the business of guaranteeing someone else's debt in the first place.
"But wait!" you say. "This is a private company with private shareholders.". Hey, if you are unwilling to let them fail, then they are defacto government.
Posted by: El Viajero | July 12, 2008 1:49 PM
The really important question is Charlie Rangel's alleged corruption. Not that millions of Americans may lose their homes and see their retirement nest eggs disappear as this mess reverberates through the economy.
It's not an either/or issue. If this were suspected Republican corruption, you would be all over it like Michael Moore on a chicken-fried steak!!
Posted by: El Viajero | July 12, 2008 1:53 PM
Yes, only after 80 years do we see the truly misguided nature of the New Deal meddling in the economy. Or maybe, just maybe, it's the deregulation of those rules that's creating all this.
Listen, there are lots of reasons to dislike New Deal housing policies -- try the extensive segregation built in as a condition of those programs -- but the creation of secondary mortgage markets isn't one of them.
Posted by: Andrew | July 13, 2008 1:37 PM
...the extensive segregation built in as a condition of those programs...
I have always found it curious why liberals like Andrew don't acknowledge the fourth dimension of time.
It's just silly to hold those in history to today's standards. By their standards, they were good guys and well meaning.
Perhaps, in the future, we as a culture decide that using animals for food and clothing is morally wrong. Will they look back, see you ate meat and wore leather and proclaim, "That Andrew was a first-class asshole for abusing animals".
Posted by: El Viajero | July 13, 2008 2:51 PM