5 Steps For Saving Fannie

I've been worried about Fannie Mae (FNM) for a long time. A few months ago I wrote a column about it. More than ten years ago, when it was riding high, I was worried, too. Now I'm really worried.

Fannie always seemed to me to be built on the worst of propositions--private profit and socialized risk. What was supposed to be a nimble hybrid, the ultimate public-private partnership, represented the worst of both worlds.

With the collapse of Fannie stock this morning--shares already pummeled are off by another 40 percent or so at the time I'm writing this--the question is what to do now.

First, Congress really needs to move on a housing bill. It will help the ailing housing market which is the best thing that could happen to Fannie. It will strengthen Fannie regulation giving more confidence to the markets. And it will allow Fannie, should it fall, to go into a receivership that would prevent its losses from spinning further out of control.

Second, we need a Bear Stearns like weekend of phone calls with Fannie's regulators from OFHEO (Office of Federal Housing Enterprise Oversight), Treasury, HUD, the Fed, and everyone to be sure they're on the same page come next week. Mind you, I don't think Fannie will collapse. It's adequately capitalized by most standards and today's sell off seems to stem more from the New York Times's decision to place a rather hypothetical story on A1. But a panic is a panic and it makes sense for everyone to be ready to go should we be heading into the shitter.

Third, we gotta start to talk about a longer term solution for Fannie, something that will, when we get past the housing mess, put it on a stronger footing. I like the long-term privatization ideas of Burt Ely, frequent Fannie critic, but that's a longer term discussion and it may be that the hybrid model can continue to work.

Fourth, the myriad figures who have checked in at Fannie Mae and built it into a Washington lobbying behemoth ought to be asked their opinion on what to do now. There's Jim Johnson, who recently resigned from Obama's Veep search committee after it was revealed he'd gotten a favorable mortgage from Countrywide. There's Franklin Raines. But also Tom Nides of Morgan Stanley (a friend, I should say), Jamie Gorelick at WIlmer Hale, Arne Christensen (former top aide to Newt Gingrich), Tom Donilon (at O'Melveny & Myers), etc. These folks did quite well at Fannie when it was on a roll. Now that it's not, we need to hear from them.

Fifth, the presidential candidates need to weigh in on what to do about Fannie. They've offered some thoughts. John McCain has said it can't be allowed to fail. Barack Obama has supported allowing Fannie to sell a wider variety of mortgages. They need to offer long term plans.

Fannie and the world of GSEs (government sponsored enterprises) once only attracted the attention of finance nerds or investors who liked a sure thing. Now that it's not a sure thing, everyone needs to get involved.

Comments

[Edward Janeck:]

You could see this coming. a derivative book nobody understood, more leverage than investment banks and Fannie didn't file financials for a couple of years.

2008 Jul 11 11:55 AM

[ezrasfund:]

Do any of these "steps" really suggest a way out of this mess? Or is the writer saying that although he saw it coming, he can't even suggest a solution to the problem beyond talking about it?


"move on a housing bill" which does what?

"weekend of phone calls to get on the same page"

"start to talk about a long term solution"

"ask the opinion of myriad figures"

"presidential candidates need to offer long term plans"

stick a fork in it?

"private profit, socialized risk" says it all...and they're not giving back that profit any time soon...just ask Mr. Raines et al.

2008 Jul 11 12:00 PM

[pochovilla:]

Freddie and Fannie are tied to the railroad track watching the train coming.

2008 Jul 11 12:22 PM

[Reinko:]

If Fannie was build on the worst of propositions, why should it be saved?

2008 Jul 11 04:21 PM

[viewfromnyc:]

The privization model started to fail a year and a half ago when the mortgage REITs imploded. Does their model, lend money, securitize the loans, buy RMBS sound familar? Sure it does! It is Fannie's and Freddie's model too the only thing that kept the banks and GSEs afloat was the lack of margin calls. With insured deposits at the banks and the implicit guarantee of credit at the GSEs, no need to worry about repaying the borrowed funds. As long as the regulators who are beholden to the politicians, allow the game to continue, there is fun for the whole family. Oh sorry a tax bill for generations!

The solution is to let them fail and end sudsidized loans for housing. But the politicians want to continue to give away money to buy votes. After all if you own a house, you are unlikely to move to another congressional district. Let them fail. Let the bond holders take a hiarcut. Unfortunately, I am sure our government willpay bondholders 100 cents on the dollar, but hopefully over 10 or 20 years in that perverse government accounting way that ignores the time value of money.

Back to the solution. The first American dream most people have is owning a car. Ford and GM found a way to finance that purchase without the government. I'm sure homebuilders and banks can find a solution (or commit thier own capital) without the assistance of Senators Schumer and Dodd and their misguided housing bill.

2008 Jul 12 08:35 AM

[chinooking:]

same page,not even the same library,and the guy that caused this run is poole ,an ex fed chief,with unsubstantiated rumors ,he should be jailed

2008 Jul 12 01:06 PM

[bearfund:]

Congress needs to "help the ailing housing market"? How exactly? I don't know where you live, but around here housing is by no means cheap. Most of the price declines have been in areas that represent a 60 to 90 minute one-way commute, with no mass transit available, to any decent job. Given tighter lending standards, more expensive money, and the need to buy an automobile and fuel it with copious amounts of $5 gasoline to take advantage of these "fire sale prices", I daresay nothing has changed at all. The downtown condos people actually want to live in haven't got a penny cheaper. Throw in stagnant wages and higher prices for everything from milk to memory and that house in the 'burbs that's 30% cheaper than last year still looks like a stinker to the prudent would-be buyer. The bottom line is that most of the housing stock that's losing value today should never have been built at all and has very little real value; the only people who wanted it were those with inadequate income and capital to own real estate at all. Accordingly, the market is far too rosy in its predictions. I would not be surprised to see especially banal developments written off as worthless, depopulated, bulldozed, and sold back to farmers for the cost of cleaning them up. Many others will lose 80% of their peak values and become slums.

There is no force in the universe that can put things back the way they were. If the market has decided that a piece of property is worth $100k but the mortgage on it is for $200k, there are only two ways out. The "owner" can lower the price of the house to $100k and, with the lender, eat the loss; or the government can lower the value of the dollar to match the market's price and force Chinese savers (Americans no longer save) to eat the loss on an investment they never benefited from. It never ceases to amaze me that even very smart people constantly fail to grasp this basic truth and eagerly look to the government to somehow put Humpty-Dumpty back together again. At most, the government can choose how long the pain lasts. How much of it there will be is out of its hands.

Thankfully, we don't have to bother guessing which of those paths the powers that be will choose; they've already made it clear that large banks and other institutions like Fannie and Freddie will not be allowed to fail, and with leverage exceeding 50x at many of these institutions now, that means no further price decreases can be tolerated. The Fed will print more cheap money, and the Treasury will issue more notes, rather than allowing that to happen. It's an open question which will dominate; that is, how much of the increase in the money supply will be sterilised. Fortunately, that doesn't matter, either - the long gold, short Treasuries pair trade will work well at any point on that continuum. And another advantage: not having to guess which financial institutions will live and which will die. It simply doesn't matter.

Disclosure: long gold, silver, GLD, PST, TBT; short long-dated Treasuries.

2008 Jul 13 03:30 AM