So says Raines (former Fannie CEO), in an OpEd at the WSJ:
His points, one-by-one, but without expansion (buy a sub guys, its worth it):
"The current losses at Fannie and Freddie have nothing to do with the accounting restatements of several years ago."
I'll give you this one. Its the only pass you're gonna get.
"Fannie and Freddie do not have outsized losses from the meltdown in subprime mortgages."
No, they have outsized losses from redefining "prime" to be "fog a damn mirror", systematically dismantling, on purpose, the credit standards which stood for more than 50 years as the definition of a "safe, sound, prime" mortgage. Those, for new readers, are once again:
30 (or 15) year fixed term.
20% down in cash, no BS games, no "seller participation", etc.
28% "front end" (PITI) ratio to income, and 36% "back end", or DTI, ratio (all debt service to gross income.)
These standards were developed over time after The Depression because in the 1920s lenders did the same stupid crap that they did this time! They wrote interest-only balloon notes and other forms of exotic financing, which then collapsed when the Ponzi game was no longer able to be maintained by finding a bigger sucker.
Now we've gone out and done it again, and you're trying to justify it.
This speculative credit frenzy is WHY we had The Great Depression, and any dispassionate analysis of credit and market trends prior to 1929 shows this in absolute clarity.
Fannie and Freddie are still, to this day and in the middle of the bust, handing out AU approvals with DTIs well over 40%. TODAY.
That was unsound, it is unsound, and it will always be unsound.
Unfortunately this mess is not just Fannie and Freddie's. Its also the mess that every American finds themselves in, it is the reason we had a housing bubble, it fed the bubble and it encouraged the MEW-cum-ATM machine mentality.
These practices caused the losses that are now rippling through the housing industry to take place. It provided the "justification" for the subprime and ALT-A mess, being directly responsible for part of both by "providing liquidity" in buying up some of those securities after they were produced. It gave cover to the lenders and mortgage officers who saw these loans, chock full of fraud from the first instance, whether it be by appraisers, false income claims or hidden debts passed up and down the chain, some landing on the GSE's credit book. And it set a horrible example for the financial system as a whole, brazenly claiming that there was no such thing as too much leverage; after all, 1/2 of 1% of reserves is pretty damn close to zero, isn't it? Even at "full firm leverage" of 60:1 it remains at more than double the maximum "reasonable" investment bank gearing under good times, and three times where people seem to be targeting now (~20:1)
Yet to this day neither Fannie or Freddie are making any effort to sell down that book and get their leverage under control. To the contrary; as this mess has progressed they've been out buying more and arguing for lower capital requirements!
"The losses at Fannie and Freddie do not result from their large on-balance-sheet portfolios, where they manage an interest-rate spread between the debt they issue and the mortgages they hold. "
Right, they result from the off-balance sheet credit book, which makes their book-keeping look better than it actually is, just like a hedge fund or investment bank that has a whole buttload of similar "investments."
There was a firm that pioneered this sort of thing, in fact. Their name was ENRON.
Does anyone remember how it turned out for them?
"The shareholders of the GSEs have not received windfall profits in the past for which they should be punished today. "
Irrelevant. The shareholders of the GSEs have sat idly by and owned their shares, collecting dividends, on a firm that has a regulatory capital "requirement" that permits them to be geared in their credit book at more than 200:1. This is only five or more times the gearing in the most aggressive hedge funds and investment banks.
Who would ever think something might go wrong with that?
When you buy stock in a company that takes on more risk than it should you usually wind up with a big fat zero. If you'd like an example of another "too big to fail" company that took on too much risk and blew up, I present to you MCI/Worldcom, of which I was a shareholder when it went "bang." I believed (foolishly) that it was "too important to the government" (heh, it only handled like 60% of their communications at the time) to be allowed to blow chunks and die.
Bad bet, 100% loss. That's called "a learning experience" and the GSE shareholders need to receive one.
There is one critical difference. I didn't demand that anyone bail me out of my bad bet. I ate my loss like a man, instead of acting like a 2 year old that just got told "no" as he tried to stick his fingers in the light socket.
"Finally, the companies have not yet received a bailout. "
Yet.
Mathematically, this Ponzi scheme must end. In fact, with a 200:1 gearing ratio in the credit book just 1/2 of 1% of hard loss bankrupts you.
That's an inconvenient little problem, isn't it?
Now here's the obvious follow-on question - why is it that Morgan Stanley, who was hired to "examine" the risks for Treasury, isn't going to get to look at the internal books of the GSEs?
I'm rather curious about the marks on these retained securities in the credit book, in particular, and how "observable" they really are.
See, by Freddie's own statements, they have a negative net worth.
Right now.
The GSEs need to be forced to take down their credit book and full operational leverage to no more than 20:1, and it must come without one thin dime of contribution from the Taxpayer.
The Taxpayer got nothing out of this speculative fervor other than a crushing personal and federal debt load.
It is time to stop the stupidity while we still have national economic sovereignty available to us.
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