They Called It Early …

The demise of Fannie Mae and Freddie Mac was warned of for years. Some of those warnings:“Be prepared, then, for a shock: the federal government, which explicitly guaranteed the safety of savings-and-loan deposits, also implicitly stands four-square behind $700 billion in obligations issued by several government-sponsored, government chartered, off-budget enterprises.The $700 billion figure comes from Rep. Jake Pickle (D-Texas), a member of the House Ways and Means Committee. He acknowledges that ‘we just don’t really know’ the full extent of the liability these GSEs represent to the taxpayer. But that the implicit guarantee is as binding as the explicit guarantee to S&Ls and banks-of that, there is no doubt.Yet, says Washington attorney Thomas H. Stanton, these GSEs ‘tend to be even less regulated financially and are subject to less strict capital requirements [if any] than are thrift institutions.’ That, of course, also tends to make them attractive stock-market investments.”— “S&Ls Could Be Just the Beginning,” Hobart Rowen, Washington Post, June 22, 1989“Everyone talks about the national debt of some $2.5 trillion, but few people know that an obscure group of Government Sponsored Enterprises has piled up nearly $1 trillion in additional borrowing. As recently as 1970, they owed only $37 billion. Congress likes GSEs because their activities are off-budget; it has created four new ones just since 1987.GSEs go by monickers such as Fannie Mae, Freddie Mac, Sallie Mae and Farmer Mac. There is no evidence that their lending activities to such groups as home buyers, farmers and students are in serious trouble. But since their $981 billion in outstanding debt equals the amount held by the entire savings and loan industry, the Bush administration has decided it would be prudent to exert more oversight over them in case one or more ever becomes insolvent.”— “Uncle Sam’s Lenders,” Wall Street Journal, July 1, 1991“The industries affected by this new mercantilism and the risks they pose to the taxpayers are:Banks: $1,942,000,000Savings and Loans: $654,000,000Credit Unions: $197,000,000Fannie Mae: $456,000,000Freddie Mac: $369,000,000Federal Home Loan Banks: $107,000,000Farm Credit System: $74,000,000Sallie Mae: $43,000,000.”— Texas-based Institute for Policy Innovation, June 11, 1992“‘Fannie buys these guys off,’ says Tom LaMalfa. ‘There’s no one important on the Hill who hasn’t gotten a big check from Fannie.’ In reality, it is fear as much as love that keeps potential Fannie critics silent.”— “Nice Work If You Can Get It,” Michelle Cottle, Washington Monthly, June 1, 1998“‘Imagine what the repercussions might be if one of the GSEs happens to stumble in difficult market circumstances and what the potential impact on the FDIC and NCUSIF could be?,’ Baker asked.”— “Rep. Baker Compares Risk of GSE Debt to Long Term Capital Management,” Dow Jones Newswires, April 11, 2000“Credit creation by the federal mortgage agencies has been accused of inflating a credit bubble. To meet their ambitious profit-growth targets, Fannie and Freddie will need to undertake ever riskier lending, and to retain ownership of a growing proportion of mortgages. They will find it ever harder to hedge away their risks. So any downturn in the housing market could easily cause one or both of them to stumble, with knock-on effects throughout the economy. Any bill would almost certainly go to the taxpayer.”— The Economist, April 15, 2000“Short of fully privatizing Fannie and Freddie, the only way to prevent the buildup of losses would be to give their regulator the authority to monitor and close them down in the event of insolvency.”— Statement by the Shadow Financial Regulatory Committee on Government-Sponsored Entities, American Enterprise Institute, December 2007“Given the possibility of future losses and the thin capital cushions that Fannie and Freddie hold, policymakers should be making contingency plans for the institutions’ futures.Limits on the size of the mortgage portfolio held on the books of the GSEs have done nothing in practice to deal with the most important source of risk currently facing the institutions and ultimately taxpayers. Moreover, a substantial part of subprime losses have come from loans that Congress has forced them to take on under affordable housing goals.One respected private analyst has forecast that both Fannie and Freddie would become insolvent if housing prices, on average, fall another 15 percent from year-end 2007 level. Indeed, in early May, Fannie reported that if all its assets and liabilities were measured at ‘fair value’ (a concept that is admittedly subject to question when markets are highly illiquid), its common equity actually would be negative. But even if the GSEs suffer losses well short of insolvency, the capital of both GSEs might fall below current requirements, presenting regulators and policy makers with yet another major challenge.”— “The Great Credit Squeeze” by Martin Baily, Doug Elmendorf, and Robert E. Litan, The Brookings Institution, May 16, 2008“It was October 2003 and the CEO of Countrywide Financial was berating me for the Wall Street Journal’s editorials raising doubts about the accounting of Fannie Mae.”— “The Fannie Mae Gang,” Paul A. Gigot, Wall Street Journal, July 23, 2008

They Called It Early …

They Called It Early …

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