Bethany McLean on the risk of a second GSE crisis

Fannie and Freddie, with their over five trillion dollars of securities outstanding, are operating on next to no capital.  If there's a sudden shock to the system, if interest rates go up, if they suffer a loss, taxpayers will have to foot the bill again.  And yet that risk is still there.  And it's a total example of government dysfunction that we've had seven years to figure out this problem and we've done nothing.

~ Bethany McLean, PBS interview, October 22, 2015

Franklin Raines on the erosion of credit standards

Most of the erosion in credit standards happened on Wall Street, it didn't happen amongst the GSEs. Wall Street led with the securitization of subprime loans, they led with the securitization of non-performing loans, loans that didn't fit the Fannie and Freddie standards. So, they really were the engine.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

Franklin Raines on risk management at Fannie Mae

When I was at Fannie Mae, we had a very tough risk management structure. That was 5, almost 6 years ago [2003, when housing bubble first took off]. Instead of staying the course as later management said, they changed that structure in order to become a bigger player in the market. They were losing market share by maintaining their tough standards, they wanted to be players, they jumped in and they bought a lot of things they shouldn't have bought. They've testified to this themselves so I'm not really speaking out of turn here, and that really led to the company's failing financially because they took on more risk than they should have.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

(Of course, this directly contradicts the point he made moments earlier in the interview, in which he argued that Fannie Mae, Freddie Mac and the FHA need to be available to support the mortgage market when traditional lenders become risk-averse and flee from these very types of mortgages he now says shouldn't have been made.)

Franklin Raines on how to prevent financial crises amongst large institutions

I think the American system and its focus on 30-year fixed-rate mortgages is a very, very powerful thing. Canada is a country of 20, 25 million people with adjustable-rate mortgages for banks, not a very consumer-friendly environment. Although, if you put the burden on the consumers, it's true you won't have as many crises amongst your large financial institutions.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

Franklin Raines on the importance of federal mortgage subsidies

Today, they [Fannie and Freddie] and the FHA are 100% of the mortgage market and we have seen in this last crisis that ordinary financial institutions will withdraw from that market at the slightest indication of problems. You simply can't have a country like ours, with a large middle class, that doesn't have a functioning mortgage market all the time.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

Paul Krugman on the impact of Fannie Mae and Freddie Mac on the financial crisis

And now we’ve reached the next stage of our seemingly never-ending financial crisis. This time Fannie Mae and Freddie Mac are in the headlines, with dire warnings of imminent collapse. How worried should we be?

Well, I’m going to take a contrarian position: the storm over these particular lenders is overblown. Fannie and Freddie probably will need a government rescue. But since it’s already clear that that rescue will take place, their problems won’t take down the economy.

~ Paul Krugman, "Fannie, Freddie and You," The New York Times, July 14, 2008

Paul Krugman on regulation of Fannie Mae and Freddie Mac

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

~ Paul Krugman, "Fannie, Freddie and You," The New York Times, July 14, 2008

Charles Schumer on Fannie Mae and Freddie Mac (2005)

... I think Fannie and Freddie over the years have done an incredibly good job and are an intrinsic part of making America the best-housed people in the world... if you look at the last 20 or whatever years, they've done a very, very good job.

~ Senator Charles Schumer (D-NY), Senate Banking Committe Hearing, April 6, 2005

Barney Frank: GSEs are "fundamentally sound" (2008)

I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under…I think they are in good shape going forward.

~ Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008

(Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.)

Karen De Coster and Eric Englund on the political makeup of Fannie Mae's Board

It is interesting to note that past and present Board members of Fannie Mae — some of whom are appointed by the president — have been highly representative of the Beltway elite: a former Reagan chief of staff, lobbyists, a former aide to Nixon, a Reagan Secretary of Labor, a US trade representative, and a top economic advisor to President Bush.

(Footnote. Naming names: Kenneth M. Duberstein, a lobbyist and former chief of staff to President Ronald Reagan; Frederick Malek, an investor and former aide to President Richard Nixon; Ann McLaughlin Korologos, a former secretary of labor under Reagan; Stephen Friedman, formerly President George W. Bush's top economic adviser and former co-chairman of Goldman Sachs with Robert Rubin; Robert Zoellick, US trade representative.)

~ Karen De Coster and Eric Englund, "Fannie Mae: Another New Deal Monstrosity," Mises.org, July 2, 2007

Fannie Mae and Freddie Mac removed from S&P 500

Federal Home Loan Mortgage Corp. [FRE] will be removed from the S&P 500 after the close of trading on Wednesday, September 10. Its place in the S&P 500 will be taken by Salesforce.com Inc. [CRM], which will be added after the close of trading on Friday, September 12. As of today's close of trading Federal Home Loan Mortgage Corp. had a market capitalization of approximately $614 million, whereas the minimum market cap a company must maintain in order to be eligible for admission to the index is $5 billion.

-- Federal National Mortgage Association [FNM] will be removed from the S&P 500 after the close of trading on Wednesday, September 10. Its place in the S&P 500 will be taken by S&P MidCap 400 constituent Fastenal Co. [FAST], which will be added after the close of trading on Friday, September 12.

~ Standard & Poor's, "Standard & Poor's Announces Changes to U.S. Indices," PRNewswire, September 9, 2008

Karen De Coster and Eric Englund on Fannie Mae, New Deal monstrosity

Fannie Mae is not a free-market entity, nor is it a private body that must compete on the same playing field as its competitors. Fannie Mae is representative of all that's wrong with central planning institutions: it is a government-created conduit for carefully crafted financial and market socialism that the bureaucrats uphold for the purpose of propping up their fantasies for pandemic social engineering.

There's nothing "American" about this dream. In the eyes of the Republic's visionaries, this particular dream has turned into a nightmare.

~ Karen De Coster and Eric Englund, "Fannie Mae: Another New Deal Monstrosity," Mises.org, July 2, 2007

William Norman Grigg: What will happen to the CEOs of Fannie and Freddie in the wake of a government takeover

Fannie CEO Daniel H. Mudd, and Freddie CEO Richard Syron engaged in fraudulent bookkeeping right up to the eve of the federal takeover by deliberately overstating their capital holdings and financial health. However, neither of them faces criminal or civil prosecution. In fact, strictly speaking they're not even being fired: They will both eventually "step down" from their current posts, but will be given sinecures of some kind.

Solicitude of this kind is routinely displayed toward those who had helped generate hundreds of billions of dollars in perfectly rotten mortgage loans as part of a corrupt scheme to boost executive compensation through dishonest accounting methods. Fannie and Freddie practiced Enron-onomics and Arthur Andersen-style accounting on steroids, in the serene confidence that the taxpayers would eventually have to absorb the costs and that nobody of any consequence in those agencies would suffer significant repercussions.

That confidence, as we can see, was entirely justified.

~ William Norman Grigg, "Washington's Kleptocratic State: 'More Communist Than China'," LewRockwell.com, September 9, 2008

Henry Paulson on the government takeover of Fannie Mae and Freddie Mac

No one likes to put the taxpayer into situations like this. No one does; I certainly don't. Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.

~ Henry Paulson, Treasury Secretary, Bloomberg TV, September 8, 2008

Franklin Raines responds to WSJ op-ed questioning Fannie Mae's risk levels

Shame on you. The Wall Street Journal, of all publications, has the opportunity and responsibility to provide leadership and shed light on the Enron debacle. At the very least, markets jittery about Enron need calm, trustworthy, responsible voices to clarify complex issues, get the facts, get them right, and put them in the proper context.

Unfortunately, in your Feb. 20 editorial about Fannie Mae, you only fan fears with your glib, disingenuous, contorted, even irresponsible attempt to tar our company with the Enron brush. At best, the editorial betrays a complete lack of knowledge or understanding about our business. At worst, you chose the thrill of a good smear job over the hard work of reporting or writing opinion pieces grounded in facts.

~ Franklin D. Raines, CEO, Fannie Mae, "Don't Tar Us With an Enron Brush," The Wall Street Journal, February 25, 2002

Franklin D. Raines on why Fannie Mae is no Enron (2002)

There are many lessons to be learned from the Enron debacle. One is the importance of careful fundamental analysis of major companies. Fannie Mae welcomes and, indeed, we seek out, that type of analysis.

Another lesson from Enron is that corporate behavior is fundamentally a product of the culture of the company. At Fannie Mae we take pride in the tone we set at the top, in our risk management focus, in our commitment to integrity and intellectual honesty and in the values of our people.

~ Franklin D. Raines, CEO, Fannie Mae, "Don't Tar Us With an Enron Brush," The Wall Street Journal, February 25, 2002

Phil Duffy on the housing bill attempting to rescue Fannie Mae and Freddie Mac

You and I have just assumed responsibility for the irresponsible actions of these organizations and their investors. This has very little to do with home buyers and everything to do with bailing out bankers and investors. It has no effect on existing home owners. They already have their mortgages. It doesn’t matter to them if their mortgager goes out of business. The case that is being made for home buyers of the future is that they can’t do without Fannie Mae and Freddie Mac. But the market would move in to fill the role currently being played by these organizations. The market would be more prudent, but it is a lack of prudence that has caused the housing bubble and the demise of these government sponsored enterprises (GSEs).

Certainly the action by Congress with Fannie Mae and Freddie Mac, the bailout of Bear Stearns and hundreds of other interventions in the market have nothing to do with free enterprise and constitutional government. So what label accurately describes the nature of our current government? This was an issue addressed by Friedrich von Hayek, the author of The Road to Serfdom (Hayek was the co-winner of the 1974 Nobel Prize for Economics). He pointed out that socialism and fascism have many similarities. Certainly if the government owned Fannie Mae and Freddie Mac outright, that would be socialism. The government ‘sponsors’ but doesn’t own these entities. We the people don’t own them either, although we are forced to fund them. They will still be owned by private investors who will benefit at the expense of the rest of us. That describes a system called fascism. Surveillance of ordinary citizens is also a characteristic of fascist nations. As difficult as it may be to accept, our government is becoming increasingly fascist by any objective measure. We can no longer claim to be a constitutional republic because we refuse to be limited by our own Constitution.

Having lived through the World War II days and grown up in its aftermath when the question was asked, “How could Nazi Germany have occurred?”, I remember how we lulled ourselves to sleep. It couldn’t happen here. The problem was in the inherent nature of German stock (today we would call that DNA). We were biologically different, or so we convinced ourselves. The truth is that we are on the road to serfdom.

Phil Duffy, July 27, 2008

Kevin Duffy on the shareholders of Fannie Mae and Freddie Mac

I’m shedding absolutely no tears for the nearly wiped out shareholders of Fannie Mae and Freddie Mac. Equity owners are last in line in the capital structure. Fan/Fred were leveraged 50x, so their equity was always a lottery ticket masquerading as long-term investment. Shame on these so-called "investors" for taking on such risk. Why did they? Because they thought the taxpayer would come to their rescue. They got what they deserve, as Mencken would say, “good and hard.”

~ Kevin Duffy, Bearing Asset Management, July 11, 2008

WSJ: Did friends of Countrywide get preferential treatment on loans?

Countrywide Financial Corp. makes mortgage loans through a vast network of offices, brokers and call centers. But a few customers have gotten their loans a special way: through Countrywide Chief Executive Angelo Mozilo.

These borrowers, known internally as "friends of Angelo" or FoA, include two former CEOs of Fannie Mae, the biggest buyer of Countrywide's mortgages, say people familiar with the matter.

One was James Johnson, a longtime Democratic Party power and an adviser to Sen. Barack Obama's campaign, who this past week was named to a panel that is vetting running-mate possibilities for the presumed nominee. Another was Franklin Raines, a onetime Clinton administration budget director, who left Fannie Mae amid an accounting scandal in 2004.

There is nothing illegal about a mortgage firm treating some borrowers better than others. But if Fannie Mae officials received special treatment, that could cause a political problem for the government-sponsored, shareholder-owned company.

Its code of conduct, a spokesman said, "requires the disclosure of potential conflicts of interest and prohibits acceptance of substantial gifts, including loans with preferential terms, from an organization seeking to do business with the company without prior review and approval by the company." The spokesman said the code has been in effect since the early 1990s.

~ The Wall Street Journal, "Countrywide Friends Got Good Loans," June 7, 2008, by Glenn R. Simpson and James R. Hagerty

David Dreman recommends "gold-standard financials" for 2008

For 2008 I recommend holding on to these three gold-standard financials: Fannie Mae (37, FNM), Wachovia (35, WB ) and Bank of America (39, BAC ), as well as Washington Mutual (14, WM ) and CIT Group (22, CIT ). As the experience of the 1990s shows, they will have substantial upside once the current fright subsides.

I expect the market to likely end the year flat or down somewhat. A real bear market, which we can define as a 20% decline, is quite unlikely from here.

On the positive side: A recession is not likely. The financial panic will gradually ease as we move into 2008. Investors will crawl out of their fallout shelters. Remember that this is an election year, and the incumbent party will do what it takes to prime the pump. Increased federal spending and more Federal Reserve easing are givens. My high-quality financial stocks will soar once that becomes apparent. Just as they did in the early 1990s, banks will maintain fairly good yields on their assets while their funding costs go down. BofA earned $4.70 a share in precrisis 2006. I think it will earn $5.50 or more in postcrisis 2010.

~ David Dreman, "Tug of War," Forbes, February 11, 2008