The Fall of Fannie Mae

January 25, 2005 2:11 PM

The Fall of Fannie MaeThis is not your ordinary accounting fraud. Yes, there's the matter of $9 billion in overstated earnings. But the fight over Fannie is a nasty political showdown where everyone has his own agenda. And it's not over yet.
posted by trharlan (9 comments total)

does this just mean more debt for us taxpayers? or will it have an impact on the housing market (bubble)?
posted by specialk420 at 2:44 PM on January 25, 2005

Strictly speaking, a theoretical Fannie Mae blow-up should not effect taxpayers. Every analysis I have read says something about how "contrary to what many people think, Fannie Mae is not backed by the full faith and credit of the United States government." However, Fannie Mae and it's sibling company, Freddie Mac might together be so big that they are not allowed to fail.

Should one or the other (or both) fail, they will have to liquidate thier portfolio of mortgage backed securities. That should pretty well suck all liquidity out of the system, unless someone very big (like, say, Uncle Sam) steps up to buy it all. The net result of that is that since mortgage backed securities will be much less liquid, mortgages will be much less available. Why? Because Bank X will actually have to hold the note 30 years to get their money back instead of selling it to Fannie/Freddie and lending the same money to somebody else (getting a new set of fees in the bargain).

I could write for days about Fannie and Freddie, but I will leave it there for now.
posted by ilsa at 2:59 PM on January 25, 2005

The FNM and FRE headlines actually have more to do with presentational issues relating to the hedge portfolios than the actual underlying economics of the business. In this particular case Fannie was playing games to stockpile away current earnings from the housing boom to release to the P&L when things are not so good, under the assumption that the market will reward stability of earnings.

Derivatives like this are not easy to understand, and bear in mind that 1) theyare not evil - they fulfill a very important role in controlling risk 2) the notional values are absolutely meaningless to look at. The big fear of course is that the companies are speculating rather than hedging. But I havn't seen anything in the press that show that has been going on here,

There is a deeper issue at play though. The GSE's were chartered with the goal of fostering homeownership in the US. Fannie and Freddie are part of the reason why the US loves its 30-year fixed mortgages. They keep them nice and cheap. As a result of their charter though they have certain advantages (i.e. the implicit backing of the US government) that makes it virtually impossible for anyone to compete with them. There is an argument that Fannie and Freddie's activities of diversifying into ARM's, jumbo mortgages, etc. Are not part of fulfilling their mission. It is then argued that they should be forced to compete as fully private enterprises. Maybe not an unfair argument, but its pretty hard to split the traditional FHA lending business from the non-FHA It is, as this article states an absurd political football. Basically you have Wells Fargo, Countrywide, Citigroup, et al. on one side of the aisle with a not insignificant pile of cash to support themselves, with Fannie and Freddie on the other. Each side also seems to have a few particular politicians nicely locked up to make headlines when neccessary.
posted by JPD at 3:14 PM on January 25, 2005

For whatever it's worth, the author of this article, Bethany McLean, is often credited as being one of the first reporters to break the Enron story.
posted by mhum at 4:33 PM on January 25, 2005

Just for the record, I cannot understand what ilsa and JPD are saying. Layman's, not MBA speak, please? Start here: what happens to their, say, student loans when they go under?
posted by scazza at 8:59 PM on January 25, 2005

Scazza, if you focus on the too big to fail comment and go from there, you're good to go.
posted by billsaysthis at 9:45 PM on January 25, 2005

Ok - This I find irritating.

mhum - McLean had nothing to do with breaking Enron. The news on Enron "broke" because of some verbiage they were forced to add to an SEC filing in Q3 2001. All she did was write and article on it for Fortune maybe? or perhaps the Journal? not sure where she originally wrote about. But drawing the parallel you have is false and misleading.

The issue with the GSE's is not that they are going to fail. Though I do agree if they actually did fail, we probably would have to bail them out.

You have to understand the politics behind this as well though,and realize that anyone who reads this article and says "Fannie Mae is a cheat" or "Freddie Mac is Enron II" has allowed themselves to be manipulated by the even bigger businesses who have a massive vested interest in eliminating the GSE's line of credit at the Fed, and the attached implicit guarantee of their debt by the government.

Scazza - FNM and FRE don't do Student Loans. But basically, absolutely nothing will happen. Either they have securtized them (turned them into bonds) and sold them on already, or they have decided to hold the loan to maturity, and as part of their liquidation someone will buy that asset and become the new holder of your debt. You probably wouldn't even know that the holder of your loan had changed.
posted by JPD at 11:31 PM on January 25, 2005

Am I the only Brit that finds the line
"the fight over Fannie is a nasty political showdown where everyone has his own agenda." incredibly funny (in a crap benny hill way) ?
posted by couch at 1:55 AM on January 26, 2005

I'm so glad I've stopped paying any attention to the news.
posted by nanojath at 7:39 PM on February 24, 2005