Michael Perelman wrote: > I had assumed that Daniel was correct all along, but I still do not see the > fingerprints. Sor far, it sounds like a policy wonk question with pretty vague > explanations. > > No political leader seems to be questioning the charges against Fannie Mae or warning > about the consequences. -------------------------------- Below a recent Washington Post article which may be of some use. It points to competitor complaints (note Freddie mac's chutzpah!) about an unfair borrowing advantage, as well as warnings from conservatives like Greenspan and other public officials that a government bailout shouldn't be taken for granted if Fannie, given the magnitude of its obligations, runs into trouble. That in itself is may be an effort to talk up Fannie's borrowing costs in the interests of its rivals.
But I think the strongest concerns may be coming from the holders of Fannie Mae bonds, shares, and mortgage-backed securities, worried about the safety and value of these in the wake of the company's questionable accounting practices. Since the explosion in derivatives and in the wake of Enron and its aftermath, reliable accounting (oxymoron?) has, as we know, become a major issue for big institutional investors like banks, mutual funds, and pension funds, worried about the complexity of these "structured" products and the ease with which they can be manipulated and moved off balance sheets. Fannie Mae is simply the latest corporation to come under investor scrutiny for its accounting practices, with the attention magnified because of its size and critical role in the financial system and housing market, and, additionally for conservatives, their residual antagonism stemming from its origins in the New Deal. Fannie's black CEO and former Clinton administration budget director, Franklin Raines, probably symbolizes for conservatives everything that's wrong about the company. MG --------------------------------- As Fannie, Freddie Regroup, Impact May Be Minimal By Albert B. Crenshaw and Ben White Washington Post Wednesday, September 29, 2004 "As the American dream grows, so do we," mortgage finance giant Fannie Mae says of its explosive growth of the past decade. Now, in the wake of accusations of accounting irregularities that its federal regulator says raise questions about the company's safety and soundness, the nation's financial and housing markets face a different question: Can the American dream grow if Fannie Mae doesn't? For most of the past decade, Fannie Mae and its cousin and rival Freddie Mac have gone about their business in a way that has been beneficial for U.S. home buyers and profitable for the two companies. They have borrowed money cheaply, which they can do based on their relationship with the federal government, and used it to buy mortgages that carry higher interest rates. They have held many of those mortgages in their portfolios, profiting handsomely from the interest rate "spread." But their growth and their increasing dominance of the mortgage market have brought complaints from government officials, who see them as money machines abusing their status. Federal Reserve Chairman Alan Greenspan has said they "automatically profit" from their "subsidized" borrowing rates, while exposing the government to great risk if their business goes sour. At the same time, competitors have kept up a drumbeat of complaints that the two companies have an unfair advantage in the marketplace. Earlier this year, Freddie Mac chairman and chief executive Richard F. Syron said that while Freddie Mac's portfolio carries what he called "very low risk," the company "can't and shouldn't" expand it "the way it grew in the past." "It clearly is both politically and financially . . . not feasible for us to begin to have people thinking that we're a hedge fund and running a pure arbitrage" business, he said, referring to Freddie's ability to profit from the difference in interest rates. The exposure of accounting irregularities at Freddie Mac last year and questions about Fannie Mae this month have added fuel to the fire, and while a Fannie Mae spokeswoman would not comment directly, it is clear both companies will have to convince regulators that they are not abusing their position. A key to increased safety at Fannie is to increase its capital, which is in effect a reserve that could be used to cushion unexpected reverses in the marketplace. But to increase capital, the company will have to change strategy, seeking to raise more cash and to reduce the risk that regulators see in its holdings, since the greater the risk, the greater the capital required. One likely step will be to reduce the number of mortgages it buys and holds. Buying and holding is regarded as risky -- though both firms argue that they essentially remove the risk through hedging -- but profitable when it goes well. Moving away from it would almost certainly cut into profit. If Fannie Mae and Freddie Mac shrink their balance sheets, the potential impact on housing and related areas theoretically could be major. After all, the two companies between them own or guarantee nearly half the $7.9 trillion U.S. housing mortgage market. In addition, they issue billions of dollars in debt, which finds its way into the holdings of millions of Americans, either directly or through mutual funds or pension investments. Full: http://www.washingtonpost.com/wp-dyn/articles/A58153-2004Sep28.html
