In trying to better understand the Fannie Mae - Freddie Mac mortgage debacle through reading news today I came across this impassioned tome calling for us to, like the doughty French, take to the streets to avoid being bankrupted by our own apathy and our weaselly government. This is a longish read but I encourage you to bite the bullet and read it. The knowledge may help you and yours. These giants of American business and finance aren't going down without dragging a lot of us with them. The current administration has argued for years, as part of its grandiose vision of an “ownership society”, that more Americans have been able to join the ranks of home ownership. They failed to note that it was being accomplished through artificially low interest rates, gimmick - sleazy mortgages, and non-existent lending restraint. So much for George W. Bush’s “ownership society”. Fasten your seat belts.
Here's a sample:
QUOTE Even worse, Fannie and Freddie, who guarantee their own bond issues, started buying their own paper. That is, they are writing insurance on a hurricane when they are both the writer of the insurance and the loss payee. This looks brilliant in that the "expense" of providing that insurance effectively disappears, thereby making the entirety of the spread they get from their source-of-funds to their paper issue theirs to keep, but that's the wrong way to look at it.
In fact that paper is uninsured, because the money comes from one hand goes to the other, attached to the same body.
Where were the regulators? Congress? Intentionally asleep. Remember that back in 2003 and 2004 both firms were found to have improperly accounted for their results. This should have led to an immediate clampdown and forced deleveraging to no more than 10:1 on an audited basis.
It did not, and in fact neither firm timely filed accounting statements until last year, more than three years after the "errors" were discovered.
But for Congress, The Fed and OFHEO looking the other way on purpose most of the Housing Bubble could not have happened, as the money necessary to fuel it simply would not have been available.
Now we are faced with the reality - Fannie and Freddie, under fair value accounting rules, are insolvent (if you listen to Bill Poole.) What does that mean? It means that if Fannie and Freddie were to sell their assets and net it out today, you'd wind up with a negative number. That is, its assets are less than its liabilities.
The question now comes down to "what do we do about this?"
There are several choices, all of which will have bad side effects. It is critical, however, that we understand those side effects and choose the path forward that represents the least risk to the broader economy and to the government, not just the most expedient or the one that the people who would lose will scream most loudly about. UNQUOTE
In fact that paper is uninsured, because the money comes from one hand goes to the other, attached to the same body.
Where were the regulators? Congress? Intentionally asleep. Remember that back in 2003 and 2004 both firms were found to have improperly accounted for their results. This should have led to an immediate clampdown and forced deleveraging to no more than 10:1 on an audited basis.
It did not, and in fact neither firm timely filed accounting statements until last year, more than three years after the "errors" were discovered.
But for Congress, The Fed and OFHEO looking the other way on purpose most of the Housing Bubble could not have happened, as the money necessary to fuel it simply would not have been available.
Now we are faced with the reality - Fannie and Freddie, under fair value accounting rules, are insolvent (if you listen to Bill Poole.) What does that mean? It means that if Fannie and Freddie were to sell their assets and net it out today, you'd wind up with a negative number. That is, its assets are less than its liabilities.
The question now comes down to "what do we do about this?"
There are several choices, all of which will have bad side effects. It is critical, however, that we understand those side effects and choose the path forward that represents the least risk to the broader economy and to the government, not just the most expedient or the one that the people who would lose will scream most loudly about. UNQUOTE
"NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. "
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