Posted by: arnegrim | March 29, 2011

Examining Freddie and Fannie

Part I:

“…The federal government took over Fannie and Freddie after bailing them out in 2008. The bailout cost taxpayers more than the bailouts of GM, Goldman Sachs, Bank of America and Citigroup combined.

By 2010, roughly 90 percent of all new mortgages issued in this country went through the U.S. government. For all intents and purposes, the $1.5 trillion U.S. mortgage market is now a government-run industry…

…In the language of finance, Fannie and Freddie didn’t have enough capital — the money financial institutions use as a buffer, in case of emergency. Fannie and Freddie were allowed to hold less than half as much capital as regular banks. This made them riskier, but also more profitable.”

Part II:

“…At the top of every security that Fannie and Freddie issued, right there in big black letters, it said, “This security is not backed by the U.S. government.”…

…But to some of the people who mattered — the ones who were buying Fannie and Freddie securities — the companies said something else entirely.

Scott Simon was one of those buyers. He works in the mortgage department at Pimco, the world’s largest bond manager, and one of the biggest buyers of Fannie and Freddie securities:

Fannie and Freddie in meetings with investors, whether it was us or anybody else, essentially just would sort of laugh and say, ‘Well, you know the government will stand behind us,‘” Simon says…

…The implicit government guarantee had become a self-fulfilling prophecy. Fannie and Freddie used the belief that they were too big to fail to actually become too big to fail. And so, just as decades of critics had predicted, just as Fannie and Freddie themselves had secretly promised, the U.S. government came in and bailed them out.”

Part III:

“…For years, the companies reaped huge profits for their shareholders. Then, when they collapsed during the financial crisis, the government took them over and bailed them out — at a cost of $130 billion and counting

…Jaffee points to European countries that have higher home ownership rates than the U.S. despite the fact that their governments aren’t involved in the mortgage market…”



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