Neither fish nor fowl nor good red herring

Congress looks hard at the housing crisis and . . . punts:

The deal includes several compromises. It would allow Fannie Mae and Freddie Mac to purchase loans of as much as $625,000 in high-cost areas of the country, a lower number than many House Democrats wanted but higher than some Senate lawmakers originally envisioned. It would also give the new regulator for Fannie Mae and Freddie Mac more control over the compensation packages received by top executives at either housing-finance giant, an unusual mark of government control over a publicly traded company.

The GSEs got into an enormous mess because their special status allowed them to take an unsafe chunk of the market, its executives were rewarded for risk-taking, and its management was excessively entangled with the government, which made it hard for them to say no when the regulators asked them to take on even more loans.  Congress's plan is . . . more of the same.  Instead of moving to put FM/FM into a more easily understood model--either nationalizing them, or privatising--they're making the GSEs even weirder, and of course, piling on more debt.

It's time for Congress to bite the bullet:  nationalize them, or take them private.  But keeping pet companies on a leash so that you can use them as a sort of housing market slush fund, while pretending that the liabilities you thereby create don't really affect the government, is the kind of thing one expects to see in a banana republic, not a free and prosperous nation.

Comments

Yeah, it's a good thing that Congress is on the ball, making sure that those hard working blue collar folk don't have their chances to get $600,000 mortgages constrained.

Posted by Will Allen | July 23, 2008 10:50 AM

Is this "blog" to be taken seriously? Or is it the Atlantic's intent to provide a forum for unqualified opinions as amusment for the readers?

For example, when writing the about the subject of patent law, the blogger states: "So what should be done? There are three broad reforms that I think could make a difference. First, the courts need to be much stricter about allowing patents on abstract concepts." Depending on one's perspective, such sentences may be considered amusing - but certainly this cannot be taken seriously.

Posted by Scott | July 23, 2008 12:00 PM

Scott,

This is the blogger who states that Fannie and Freddie took bigger risks than the free market even though their rules forbid them from doing sub-prime loans. So to answer your question it is obviously the latter.

Posted by freddiemac | July 23, 2008 12:15 PM

"its executives were rewarded for risk-taking": well, the executives got rewarded all right - but what risks did they take? Back strain from an overfull wallet? Embarrassment from their riches?

Posted by dearieme | July 23, 2008 12:40 PM

"what risks did they take?"

They took risks with other peoples' money. Also they used their government granted advantage to make larger than normal profits, and used that to enrich themselves and to influence legislators. Are you trying to say that shouldn't be rewarded?

The problem is Congress. If they just let FM/FM fail and held executives accountable to shareholders through the civil court system, taxpayers wouldn't be left holding the bag. But then congressmen wouldn't get their free lunches from all those lobbyists anymore and what fun would that be?

Posted by Nelson | July 23, 2008 12:52 PM

This is the blogger who states that Fannie and Freddie took bigger risks than the free market even though their rules forbid them from doing sub-prime loans. So to answer your question it is obviously the latter.

And the above is from the commenter who neither cited the blogger making that actual statement, and apparently didn't see stuff like this happening already a year ago:

http://www.marketwatch.com/news/story/fannie-freddie-face-47-billion/story.aspx?guid=%7B039A6514-2144-4BC7-B9F6-8573CC3699ED%7D

http://www.realestatejournal.com/buysell/mortgages/20070420-hagerty.html

Posted by aMouseforallSeasons | July 23, 2008 5:14 PM

aMouseforallSeasons,

"However, in U.S. mortgage lending specifically, the term "subprime" simply refers to loans that do not meet Fannie Mae or Freddie Mac guidelines."

http://en.wikipedia.org/wiki/Subprime

"Because they are government sponsored, the government let them get away with practices that would never fly in the private market"

http://meganmcardle.theatlantic.com/archives/2008/07/fannie_mae_and_freddie_mac_too.php

Game, set, match.

Posted by freddiemac | July 23, 2008 5:57 PM

Game, set, match.

Uh-huh. I call for a line judge.

What you claimed:

"This is the blogger who states that Fannie and Freddie took bigger risks than the free market even though their rules forbid them from doing sub-prime loans."

What you quoted MM as saying that allegedly proves the accuracy of your paraphrase:

"Because they are government sponsored, the government let them get away with practices that would never fly in the private market."

If your point was that the quoted statement and surrounding context in the original post was a bit vapid for lack of explained meaning, I would agree. But as it lies, it doesn't contain any dissertation on subprime loans.

Posted by aMouseforallSeasons | July 23, 2008 6:35 PM

aMouseforallSeasons,

You are a fool for continuing down this argument. You say: "But as it lies, it doesn't contain any dissertation on subprime loans."

Why should it? Megan didn't write a "dissertation". She made a blanket statement without a shred of evidence, not even a 30 second google search, and I called her out for it then. If you were paying attention you would remember it, it wasn't that long ago. And she continues to make unsubstantiated, uninformed assertions like this gem:

"The GSEs got into an enormous mess because their special status allowed them to take an unsafe chunk of the market, its executives were rewarded for risk-taking, and its management was excessively entangled with the government, which made it hard for them to say no when the regulators asked them to take on even more loans."

Your assertions are demonstratably wrong. Are you really that stupid or are you just bored?

Posted by freddiemac | July 23, 2008 9:54 PM

I'm going to go ahead and side with freddiemac on this one. It was a clean snark that was linked when called out.

Posted by ajudgeforallseasons | July 23, 2008 10:03 PM

Megan didn't claim FM/FM were responsible for the subprime mess. She said they took risks that the private market couldn't. They both overextended themselves by keeping too low of cushion of capital.

Put a different way, if they didn't take excessive risks, why are the taxpayers being asked to bail them out?

Game, set, match!

Posted by Think38 | July 23, 2008 10:09 PM

This is the blogger who states that Fannie and Freddie took bigger risks than the free market even though their rules forbid them from doing sub-prime loans. So to answer your question it is obviously the latter.

...

"However, in U.S. mortgage lending specifically, the term "subprime" simply refers to loans that do not meet Fannie Mae or Freddie Mac guidelines."

http://en.wikipedia.org/wiki/Subprime

"Because they are government sponsored, the government let them get away with practices that would never fly in the private market"

http://meganmcardle.theatlantic.com/archives/2008/07/fannie_mae_and_freddie_mac_too.php

Game, set, match.

Hardly. It would have helped if you had actually read the linked articles. FM/FM are forbidden by the rules from buying a subprime loan. They are not forbidden from buying mortgage backed securities which are based on subprime loans. According to the marketwatch article linked above, FM/FM have a combined $182 billion of subprime backed securities.

Quoted from the linked article at realestatejournal.com:

"Yesterday, however, Freddie's chairman and chief executive officer, Richard Syron, said the company plans to buy over several years $20 billion of subprime loans to be held on its portfolio. Fannie had said Tuesday that about 1.5 million homeowners who face potential "payment shocks" as rates on their mortgages adjust may be eligible for refinance loans that Fannie could buy. A Fannie spokesman said yesterday it isn't clear how many such loans will be available for Fannie to purchase in the next few years but that "we're probably looking at tens of billions of dollars."

...

The Fannie spokesman said his company already is buying subprime loans under a recently announced plan to help troubled borrowers."

In other words, Fannie Mae was buying bad loans off of the hands of borrowers to get political clout. Again, from the linked article:

"The move shows how the two government-sponsored companies are redeeming themselves on Capitol Hill by depicting themselves as part of the solution to surging defaults on subprime mortgages, those for borrowers with weak credit records or high debt in relation to income."

A normal company wouldn't take on that kind of risk for those reasons. A normal company would not even concern itself with the state of the market as a whole, but with its own profits and the risks to its shareholders. Due to the fact that FM/FM are quasi governmental bodies, shareholder benefit is not the primary concern, and since there was an implicit government underwriting, FM/FM were able to take risks that a company without that implicit backing would likely not take.

Posted by MikeMangum | July 23, 2008 11:10 PM

FM/FM would have taken even riskier positions had they not been subjected to any federal regulations at all. They did their best to be as stupid as possible, but the gov't did prevent them from being as dumb as they wanted to be.

Personally, I am apt to believe Tanta's take in this article where she points out the flaws of a recent Krugman op-ed(please make corrections where she is incorrect):

http://calculatedrisk.blogspot.com/2008/07/krugman-on-gses.html

But, Megan phrased things in such a way as to make it sound like FM/FM would have been more responsible had they been entirely private. I don't see how this take is justified by any evidence in the real world. Sure, their gov't power let them overdo some things, but it limited them in other ways.

And to the commenter that suggested we just let them fail, although I agree with letting failing businesses fail in theory, in this case, a failure of FM/FM would be absolutely devastating to the economy and its the lesser evil, by far, to help them out, although I wish the gov't would help them out in a way that didn't save their stock holders. The stockholders should lose it all, but the company can't be allowed to fail entirely. But, as we've also seen with the attacks on short-sellers, the Paulson/Bernanke regime seems absolutely allergic to the idea of stock owners losing their money.

Privatized profits and socialized losses, its the Wall St. way. Its not too different from how the oil companies begged and begged the gov't for money when oil was cheap, but now that they have record profits, do you see them paying the government back? Heck, Exxon still hasn't even finished paying for the Valdez spill. Similar things could be said for the airline industry which seem to have no shame about their bi-decade bailout needs.

How is that surprising when even the president made his fortune by driving companies into bankruptcy (OK, he didn't run the Rangers into the ground).

Back to the topic...there is NO reason to assume that FM/FM would have behaved better if unregulated, and it is completely naive and short sighted to suggest that we let them fail.

Posted by Nylund | July 23, 2008 11:43 PM

Megan didn't claim FM/FM were responsible for the subprime mess. She said they took risks that the private market couldn't. They both overextended themselves by keeping too low of cushion of capital.

Put a different way, if they didn't take excessive risks, why are the taxpayers being asked to bail them out?

Game, set, match!

Posted by Think38 | July 23, 2008 11:59 PM

Wow. The Dems REALLY don't like it when people point out that they've been running their own Enron for the past few years.

Posted by Some Ex-Dem | July 24, 2008 9:14 AM

Wow. The Dems REALLY don't like it when people point out that they've been running their own Enron for the past few years.

Posted by Some Ex-Dem | July 24, 2008 9:24 AM

I am not used to US acronyms. For those who are like me : a GSE is a "government sponsored enterprise".

Wikipedia : "The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education."

Posted by Marc Baronnet | July 24, 2008 11:13 AM

"Back to the topic...there is NO reason to assume that FM/FM would have behaved better if unregulated, and it is completely naive and short sighted to suggest that we let them fail."

I don't think anyone is arguing they shouldn't be regulated. Private enterprises are still regulated. It's just that tax payers and dollar holders shouldn't be the ones paying for their mistakes. And think about letting them fail for a second. What would that mean really? The houses still exist. It just means the stock and bond holders would take losses. The risk of loss is natural. Sure everyone wants to make a profit, but that's just not how things work in a capitalist economy.

Instead of bailing out FM/FM, the government should those same resources to protect bank accounts above the 100k already insured. Depositors aren't speculators and should be protected. Stock and bond holders ARE speculators (or at least the risks of bankruptcy and default are known) so they should be allowed to take losses.

Posted by Nelson | July 24, 2008 11:27 AM

This is a banana republic. I'm going out to buy a house I can't afford tomorrow. And all you suckers are going to pay for it.

Posted by JB | July 25, 2008 12:06 AM