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FANNIE MAE, FREDDIE MAC, AND THE CURIOUS CASE OF THE ABSENT REGULATORS.
If you're interested in the Fannie Mae/Freddie Mac crisis, you should really be reading Dean Baker and Paul Krugman. But as a quick explanatory note, this is a pretty extreme example of regulatory failure. And the failure was that government didn't do enough regulatin'. Essentially, Fannie Mae and Freddie Mac were considered bulletproff investments because their government sponsorship was considered something of an implicit government guarantee. Investors assumed they couldn't fail, because the government would cover their debts.
In large part, this was probably a correct assumption. But then it was the government's responsibility to ensure that Fannie May and Freddie Mac didn't fail, and thus the government didn't have to cover their debts. But instead of forcing a heightened level of transparency and responsibility from Mae and Mac, regulators succumbed to the banks' aggressive lobbying campaign and continually fought against more stringent regulation, received reductions in their capital requirements (which set the amount of money they have to have on hand to cover debts), and so forth. The Washington Post has the whole sordid story.
COMMENTS (9)
The new bill will require lenders to verify earnings. Imagine that!!!
This is the problem with having the government in the business of guaranteeing the debt of borrowers. It's not their money. If the government would ease out of the loan guarantee business, those whose money it is would be more interested in things like...ummmmm....can they pay back the frikkin' loan!!
Fanny Mae holds over 5 trillion, has private stockholders, pays no income tax and is not regulated by the SEC. It's a failed policy of the new deal that simply took a long time to prove its insolvency.
Posted by: El Viajero | July 14, 2008 1:54 PM
Ezra, you are right on Fan/Fred needing more regulation, but who is it who stopped it? Congressional democrats, led by Barney Frank, Chuck Schumer and the congressional black caucus. From the WSJ in 2004:
"In his speech last week, Mr. Mankiw explained a few undeniable facts that Fannie spokesmen like to deny. One is that the "perception" that the federal government guarantees Fannie's debt creates an "implicit subsidy." Mr. Mankiw cited evidence showing that, instead of helping home-owners by reducing mortgage rates, most of this subsidy is pocketed by Fannie itself: "It goes to executive compensation and to shareholder profits."
Mankiw was Bush's budget director at the time.
From the same article:
"The two companies have so far avoided a calamity, though you might get an argument from shareholders who've had to cope this year with at least three accounting or earnings surprises. But Mr. Mankiw says the "implicit public guarantee" may create an incentive for the duo to take even more risk. What's the worry if they know Uncle Sam will pick up the pieces? "The savings and loan crisis of the 1980s illustrates the adverse incentive effects that can arise as a result of government guarantees," Mr. Mankiw said, in epic understatement."
Again, this is four years ago. The WSJ has been likening Fannie/Freddie to Enron since 2002. The Fan/Fred collapse is a direct result of government subsidy of enormous risk taking which they used to ride the housing bubble and make enormous salaries for ex-pols and the fellow travellers--Jamie Gorelick, Franklin Raines and Obama's VP vetter (Johnson?) all have made tens of millions from Fan/Fred; the companies have poured 10's of millions into lobbying.
Who thwarted increased regulation and mission creep at Fannie/Freddie? Primariliy Chuck Schumer, Barney Frank and the CBC, bought and paid for over decades. A good number of R's as well. Who wanted more regulation? GWB and his budget managers, as well as Greenspan.
The idea that Fannie/Fred have gotten to their present state because of insufficient government involvement is laughable, they got in their present condition because the government is doing things it shouldn't be doing.
Posted by: Scott | July 14, 2008 2:04 PM
Ezra, you are right on Fan/Fred needing more regulation, but who is it who stopped it? Congressional democrats, led by Barney Frank, Chuck Schumer and the congressional black caucus. From the WSJ in 2004:
"In his speech last week, Mr. Mankiw explained a few undeniable facts that Fannie spokesmen like to deny. One is that the "perception" that the federal government guarantees Fannie's debt creates an "implicit subsidy." Mr. Mankiw cited evidence showing that, instead of helping home-owners by reducing mortgage rates, most of this subsidy is pocketed by Fannie itself: "It goes to executive compensation and to shareholder profits."
Mankiw was Bush's budget director at the time.
From the same article:
"The two companies have so far avoided a calamity, though you might get an argument from shareholders who've had to cope this year with at least three accounting or earnings surprises. But Mr. Mankiw says the "implicit public guarantee" may create an incentive for the duo to take even more risk. What's the worry if they know Uncle Sam will pick up the pieces? "The savings and loan crisis of the 1980s illustrates the adverse incentive effects that can arise as a result of government guarantees," Mr. Mankiw said, in epic understatement."
Again, this is four years ago. The WSJ has been likening Fannie/Freddie to Enron since 2002. The Fan/Fred collapse is a direct result of government subsidy of enormous risk taking which they used to ride the housing bubble and make enormous salaries for ex-pols and the fellow travellers--Jamie Gorelick, Franklin Raines and Obama's VP vetter (Johnson?) all have made tens of millions from Fan/Fred; the companies have poured 10's of millions into lobbying.
Who thwarted increased regulation and mission creep at Fannie/Freddie? Primariliy Chuck Schumer, Barney Frank and the CBC, bought and paid for over decades. A good number of R's as well. Who wanted more regulation? GWB and his budget managers, as well as Greenspan.
The idea that Fannie/Fred have gotten to their present state because of insufficient government involvement is laughable, they got in their present condition because the government is doing things it shouldn't be doing.
Posted by: Scott | July 14, 2008 2:04 PM
Sorry for the double post, I blame the internal server errors.
Posted by: Scott | July 14, 2008 2:06 PM
Fanny Mae holds over 5 trillion, has private stockholders, pays no income tax and is not regulated by the SEC.
My, my, we don't know what we're talking about, do we?
Posted by: Herschel | July 14, 2008 2:22 PM
Conservatives called for phasing out FNMA over a 5 year period since 2005.
http://www.heritage.org/Research/GovernmentReform/bg1861.cfm
Posted by: El Viajero | July 14, 2008 3:33 PM
A little more nuance is called for here.
Yes, F&F should be better capitalized and comp. should be be lower.
But F&F were/are much more discriminating about loans than the sub-prime lenders and would be ok if the credit debacle weren't so pervasive.
Keep in mind that the wall street sharks attack F&F at every opportunity because they don't like the competition.
Posted by: ron | July 14, 2008 3:37 PM
I have friends working on lit related to this in the private sector. it's some really screwed up shit in which they claim (without getting into details) that no one was watching out for the consumer at all. Peo didn't know what they were doing, but signed off on it because it was easy money, or so they thought. my point is ignore idealogues like el val. this was just plain old fashion lack of oversight- both by the government and within companies.
Posted by: akaison | July 14, 2008 5:12 PM
This seems to me to be a classic case of "shit the gov't shouldn't be doing at all" rather than "damn this would have turned out peachy if only we had better regulators."
The better regulators will always get rolled eventually.
Posted by: TW Andrews | July 15, 2008 3:22 PM