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

Charles Schwab on the government rescue of Fannie Mae and Freddie Mac

Q: Friday [July 11] was particularly scary. Do you think that the just-announced rescue plan for Fannie and Freddie will be enough to restore confidence?

A: It truly is a confidence issue. All professionals knew Fannie Mae and Freddie Mac would be sustained by federal assistance if required. I don't think that was really an issue. But yes, it is scary that it was even contemplated that they wouldn't [be backed by the government]. I think the Fed and the Treasury are doing all the things they can do. I wish we would do something like they do in firefighting—put a line in the sand a little bit further away from where the fire is that would stop the contagion that's going on.

~ Charles Schwab, "Chuck Schwab on Scary Markets and Election '08," BusinessWeek, July 16, 2008

Barney Frank on the GSEs: "We see entities that are fundamentally sound financially" (2003)

The more people, in my judgment, exaggerate an issue of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury - which I do not see - I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. And even if there were a problem the federal government doesn't bail them out, but the more pressure there is there, then the less I think we see in terms of affordable housing.

~ Representative Barney Frank (D-MA), September 10, 2003

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.)

Kevin Duffy on the lesson of the collapses of Fannie Mae and Freddie Mac

Isn't it that business and politics don't mix? You'll always have the schemers and dreamers. The dreamers promoted "home ownership" for the less fortunate and built political careers in the process, while the schemers - political capitalists like Angelo Mozilo - figured out how to game the system... until it fell in on them. And the media dreamers looked the other way.

~ Kevin Duffy, Bearing Asset Management, November 20, 2008

Kevin Duffy on the Henry Paulson led government takeover of Fan/Fred

It's official: The U.S. economy is headed for its worst recession in three decades. Henry Paulson's scheme to keep Fannie Mae and Freddie Mac on government life support and bail out its creditors (i.e. Wall Street, Big Banks, and Bill Gross at PIMCO) removes any doubt. The only question remaining: Will this downturn rival the Big Kahuna of the 1930s? Paulson was interviewed today on Bloomberg. Here is the money quote:

“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.”

The alternative, of course, is that Paulson’s friends are actually forced to take huge losses on their reckless, ill-fated loans to Fannie and Freddie. Unthinkable! Paulson assures the naïve interviewer that the taxpayer will come before the shareholder, forgetting to mention the shareholder has already been wiped out, putting the taxpayer last in line behind the creditors. Under Hanky Pank’s scheme, the taxpayer is simply the bagholder of last resort. Paulson was obviously a quick study under former Goldman Sachs CEO and Treasury Secretary, “Mr. Bailout” himself, Robert Rubin.

The initial reaction of the stock market was to celebrate with a 300 point rally in the DJIA. Our guess is the euphoria will fade quickly as investors realize bailout money does not grow on trees, and the cash will either be taxed, borrowed or printed. The only question: How much will the final tab run?

The more pressing concern, however, is the economy. This economy needs to break its addiction to cheap credit, remove the waste of the previous credit binge, shed its political parasites (e.g., friends of Hank), and rebuild on a solid foundation. Every intervention prolongs the process and deepens the malaise. A wholesale government takeover of the mortgage market virtually guarantees the economy will be mired in deep recession for years.

The only winners (besides whiners like Bill Gross)? Those who are short the market.

Note to self: Move those inflation hedges from the attic to the front hall closet.

~ Kevin Duffy, Bearing Asset Management, "Paulson's gift to the bears," Azimuth blog, September 8, 2008

Warren Buffett on Henry Paulson's plan to takeover Fannie Mae and Freddie Mac

I think the Secretary did exactly the right thing. I don't think there was an alternative that was anywhere close to this one in terms of calming the markets, in terms of providing an ongoing function for the two that makes any change less abrupt... I wouldn't change anything in the plan myself.

~ Warren Buffett, interview on CNBC, September 8, 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

Washington Post: Henry Paulson's plan to rescue Fannie Mae and Freddie Mac is really a bailout of the banks

Investor uncertainty over the long-term fate of the companies has left a pall over credit markets. It has been unclear which investors, if any, would suffer should the government intervene to prop up the firms.

The answer, in Paulson's plan, is that holders of preferred shares and subordinated debt, a riskier but higher-paying class of debt, might be made whole. Government leaders were reluctant to allow holders of those assets to incur major losses because they are widely held by banks, and major losses could cause a wave of bank failures.

~ Washington Post, "U.S. nears rescue plan for Fannie, Freddie," September 5, 2008

Barney Frank on the package to rescue Fannie Mae and Freddie Mac

Of the problems that were created by the reckless deregulation that led to the subprime crisis and the neglect of affordable housing that has marked Republican rule in Congress, this package of measures is the best response we could make. It cannot solve all of these deep rooted problems immediately but the bill does represent a mutually reinforcing set of approaches that will begin to diminish the problem. This will begin to lay the groundwork for a turnaround in the housing market and hopefully in the broader economy as well.

~ Barney Frank (D-MA), House Financial Services Committee Chairman, House Committee on Ways and Means press release, July 30, 2008

Nouriel Roubini on the Treasury plan to bail out Fannie Mae and Freddie Mac

The treasury bail-out plan (the mother of all moral hazard social bail-outs) is socialism for the rich, well-connected, and Wall Street. It is the continuation of a corrupt system where profits are privatized and losses are socialized.

~ Nouriel Roubini, RGE Moniter, July 2008

Paul Gigot on the lesson of Fannie Mae and Freddie Mac

The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.

~ Paul A. Gigot, editorial page editor, The Wall Street Journal, "The Fannie Mae Gang," July 23, 2008

Bill Fleckenstein on the government's efforts to rescue Fannie Mae and Freddie Mac

The government's efforts will not create a bottom for financial stocks because of the fundamental problem in this country: People carry too much debt against homes that are sinking in value, homes they really couldn't afford in the first place and homes that have become all the more burdensome due to the inflation that's ravaging their paychecks. That the implosion of the housing debt bubble is dragging the economy down with it will just put additional pressure on jobs and the ability to service housing debt.

~ Bill Fleckenstein, "The Repugnant Bailout Nation," Contrarian Chronicles, MSN.Money, July 28, 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

Christopher Mayer on the GSE ticking time bomb (2002)

An explosive concoction has been created with the GSEs. The GSEs have increasingly dangerous levels of debt, coupled with an implicit government guarantee that seems to encourage even more debt. In the case of Fannie and Freddie, they are publicly traded companies accountable to shareholders for delivering earnings growth that is going to be increasingly difficult to deliver as they grow to the limits of their market. Thus, they are faced with the prospect of lower earnings growth or of finding a way to expand into other (riskier) areas of consumer finance—and further spreading the threat of nationalization beyond just the mortgage market.

The only way to correct this problem is the same way all socialistic practices are corrected—the government’s involvement must be severed completely. Just because the GSEs have led a charmed life so far is no reason to infer that their future will always be so bright. Socialism is not dead; it is alive in institutions like the GSEs, which are for all practical purposes government agencies.

It has often been said that there are no free lunches. Surely, Americans cannot continue to subsidize (indirectly) mortgage finance without cost. What most Americans cannot see is that such subsidization of the mortgage industry has led to the assumption of a great deal of risk on the part of the taxpayer. The longer the GSEs are able to expand as they have, the more certain it becomes that someday taxpayers will have to bear the cost of such excess. Like Russian roulette, the longer you play, the more certain it becomes that you will bear the risk for playing.

~ Christopher Mayer, “Mortgage Market Socialism,” The Free Market, March 2002

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

OFHEO director: GSEs "are adequately capitalized"

OFHEO has been monitoring and continues to monitor closely Fannie Mae, Freddie Mac and the mortgage and financial markets. As one would expect, we are carefully watching the Enterprises’ credit and capital positions.

As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.

~ James B. Lockhart, Director, Office of Federal Housing Enterprise Oversight (OFHEO), Press Release, July 10, 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

Daniel Mudd on Fannie Mae underwriting

Fannie Mae, the largest source of money for U.S. home loans, would avoid taking on excessive risk under a government plan allowing it to buy home loans as high as $729,500. It’s wrong to say there is a magic line between $417,000 and $418,000, one part is not risky, one part is risky. We will follow the same risk policy, the same underwriting criteria, the same conservative philosophy.

~ Daniel Mudd, CEO Fannie Mae, Bloomberg, January 29, 2008