Tuesday, July 15, 2008

Fannie Mae -- a legacy of ignored warnings

In a piece titled "Fannie Mayhem: A History," the Wall Street Journal lays out a six-year timeline of warning signs about Fannie Mae an Freddie Mac, complete with linked editorials raising alarms about the increasingly dire condition of the federal government's tools for pusing the mortgage industry to make loans it would normally consider to be bad bets. Take this piece, for example, from February 20, 2002:

It seems that Fan and Fred, two "government-sponsored enterprises" that hold the majority of all home mortgages in the U.S., have been growing their debt at an annual rate of 25%. They now have about $2.6 trillion in debt outstanding, a big number in any case, but really big considering that taxpayers are on the hook for it. The budgeteers also expressed some anxiety about Fan and Fred's increasing dependence on derivatives.

Hmmm. Where have we heard this before? The more we've since looked at Fan and Fred the more they look like poorly run hedge funds: lots of leverage and snarkily hedged risk. The word Enron ring any bells?

Last year, Fan's debt/equity ratio was about 60 to 1, more than five times the average for commercial banks. Moreover, as mortgage lenders, Fannie's equity can hardly be said to be well-diversified. Risk thus becomes a critical question.

This from March 19, 2002:

The point all of this makes, and the point we've been trying to make all along, is that Fan and Fred don't function like other companies. The two biggest mortgage holders in the country are allowed to pile up debt, implicitly guaranteed by taxpayers, without being held to even the minimum of corporate governance standards that every other publicly traded company has to observe. Sooner or later this is asking for trouble.

From October 4, 2004:

For years, mortgage giant Fannie Mae has produced smoothly growing earnings. And for years, observers have wondered how Fannie could manage its inherently risky portfolio without a whiff of volatility. Now, thanks to Fannie's regulator, we know the answer. The company was cooking the books. Big time.

But if Fannie Mae and Freddie Mac have been so poorly run -- even corrupt -- how did they get away with it when private-sector executives get slapped for much less? The Journal has an answer to that question, from April 27, 2006:

It's well-known that Fannie Mae and Freddie Mac have good friends on Capitol Hill. But last week the Federal Election Commission shed some light on how Freddie Mac rewarded its friends. In a settlement with the FEC, Freddie admitted to illegally raising $1.7 million for candidates from both parties between 2000 and 2003. In 2001 alone, Freddie Mac's Senior Vice President for Government Affairs boasted of holding 40 fund-raisers for House Financial Services Committee Chairman Michael Oxley.

That's the same Oxley who torpedoed a reform effort intended at reining in Fannie Mae's and Freddie Mac's investments in risky mortgage-backed securities.

It's not just Republicans, though. Rep. Barney Frank and Sen. Charles Schumer actually tried to raise the ceiling on the two institutions' risky investments.

NPR notes a long history of ignored warnings about Fannie Mae and Freddie Mac here.

The crisis faced by Freddie Mac and Fannie Mae — and the government that chartered them — is not a surprise. For decades, critics have warned about the potential for an event like this. But their warnings failed to gain traction on Capitol Hill, where Freddie and Fannie wielded enormous clout.

And, writing for the Ludwig von Mises Institute, Karen De Coster and Eric Englund reveal the inherent flaws in setting a taxpayer-backed political instrument loose in the mortgage business.

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.

Of course, for whatever satisfaction there is in saying "I told you so," it's better to avoid the mess to begin with.

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March 19, 2009 1:14 AM  

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