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.)

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

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

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

Michael S. Rozeff on the GSEs: Let them fail

The stock price of Fannie Mae, which almost hit $90 in December of 2000 is down to $22. It fell over 10 percent on March 6 alone. I hope this company goes bankrupt along with Freddie Mac, which is down to $20 after being north of $70 a share. The government has no business butting into the mortgage business, so if Fannie Mae and Freddie Mac fail, good riddance.

Although I’d enjoy seeing a complete debacle occur in these two government-created monsters, quite possibly the government will prevent or otherwise forestall their bankruptcies should they ever be imminent. The government provides no explicit guarantees to these companies, and the companies state that there are no guarantees. Nevertheless, investors have acted as if the companies had some implicit guarantees. They have good reason. Congress clearly wants these companies around so that they can buy up mortgages. The political fallout from their failures would be severe.

Investors therefore have lent money to Fannie Mae and Freddie Mac at (low) rates not in accord with their risk. This has allowed these companies to create and dominate a secondary market in mortgages. They bought up mortgages originated by banks, packaged them up, and resold them... These securities have been turning sour because the mortgages in them are defaulting. As a result, the yields on these debts are running 3 percent higher than Treasury bond yields, as compared with a more typical 1 percent. And even that premium is not as high as other troubled mortgage-related debts.

~ Michael S. Rozeff, "Let the Bankruptcies Roll," LewRockwell.com, March 8, 2008

Henry Paulson on expanding the role of Fannie Mae and Freddie Mac to deal with the mortgage mess

If we ever need them it's during times like today, and they're most valuable when there is distress in the mortgage market. I'd like to see them playing an even bigger role.

~ Henry Paulson, Treasury Secretary, "Paulson Shifts on Mortgages; Treasury Secretary SeeksBroad Moves by Lenders;'Not Business as Usual'," The Wall Street Journal, November 21, 2007

(Mr. Paulson faulted Congress for failing to pass several bills that could potentially provide relief for borrowers, and took aim at a Republican senator who is holding up a piece of legislation that would allow the Federal Housing Administration to play a greater role in the cleanup. While the Bush administration and Democrats in Congress backed the bill, Oklahoma Republican Sen. Tom Coburn objected, saying it will result in additional risky loans for which taxpayers will be liable.

Mr. Paulson said he understands Mr. Coburn's concerns, but notes: "This is not business as usual. This is an extraordinary situation.")

Richard Syron on future credit losses

We don't anticipate [the need to raise capital] at this time. If the floor were to fall out, then who knows what would happen.


~Richard Syron, CEO, Freddie Mac, as appeared on CNBC, December 11, 2007

FBR analyst downgrades Freddie Mac: "How do you value these companies?"

A lot of us were looking at fair value book. Now you get the fair value book dropping by $9 billion in one quarter. You have to throw up your hands and say "How do you value these companies?" We don't know.

~ Paul Miller, analyst, Friedman Billings Ramsey

(Mr. Miller cut his rating on Freddie Mac to "underperform" from "market perform" and his price target from $55/share to $20/share following the company's dismal 3rd quarter results. He expects the stock to be under pressure until credit costs and capital levels stabilize.)

Freddie Mac's Syron: "Playing a stabilizing role in the markets"

We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them. At the same time, as our charter mandates, we have continued to meet our mission by playing a stabilizing role in the markets and supporting our customers.

It will take time for this market to turn around. But as it improves, we are optimistic about Freddie Mac's longer-term prospects. The market shift towards fixed rate originations and improved pricing and credit standards should position us well as the weakness in credit markets begins to improve and we are able to leverage our traditional strengths.

~ Richard Syron, Chairman and Chief Executive, Freddie Mac, "Freddie Mac Net Loss Widens," The Wall Street Journal, November 20, 2007, by John Flowers

(Freddie Mac reported a 3rd quarter loss of $2 billion, said its estimated regulatory core capital is almost below the regulatory minimum of 30%, is "seriously considering" reducing its 4th quarter dividend by 50%, and has engaged Goldman Sachs and Lehman Brothers to help consider "very near-term capital raising alternatives.")