Calculated Risk: Why Merging Fannie/Freddie is 'Dumb'

At Calculated Risk, the mysterious Tanta says Andrew Ross Sorkin’s idea of merging Fannie (FNM) and Freddie (FRE) is “the dumbest thing I’ve ever heard of” because . . . well. . . it might involve layoffs:

Fannie and Freddie have, in fact, historically paid decent salaries for skilled workers, and their benefit packages tend to be excellent. They are known for having diverse workforces and for recruiting and promoting women. They even offer family leave and flexible work hours and child-care plans and pinko crap like that. Obviously someone needs to teach these people the real meaning of capitalism, which is that we do not deal with big, structural, complicated problems. We "downsize" and collect bonuses in the M&A houses. 

Why, in the midst of the Great Housing Meltdown, we should worry about GSE employment levels is beyond me. For his part, Alan Greenspan takes a view opposite of Sorkin’s, and believes Fannie and Freddie should be nationalized, then broken up into a clutch of smaller companies. How would that help? The mini-GSEs would all be in the same commodity-ish business, and would thus be able to grow only by cutting price, easing underwriting standards, or both. I don’t see how that would prevent a rerun of the current fiasco.

A Sorkin-style “Frannie” meanwhile, would be a semi-monopoly, and so somewhat insulated from any temptation to do dumb things at the peak of the cycle. That sounds like one way to deal with the “big structural problems” that has Tanta so addled. I’m not saying I’m convinced a merger is a smart move, but it sure isn’t the obvious clunker Tanta makes it out to be. . . .

Comments

[dlaw:]

Hating the GSEs when the private banks have TOTALLY failed is ridiculous, and yet it is the preoccupation of the business pages. The problem with Fannie and Freddie is that the managements used anarcho-capitalist politics to argue they should be treated like truly private companies when they are not. They are regulated entities and they should have been regulated more thoroughly.

The idea that Fannie and Freddie are the problem here is nothing short of insane. Yes, they should have been regulated more. But the proximate cause of Fannie and Freddie's troubles is the fact they took on non-qualifying mortgage debt from originators they mistakenly trusted. Fannie's Alt-A book is the nightmare here because of course Alt-A was nothing more than a scam by originators selling lemon loans that were like used cars with "broken" odometers.

Thank goodness for the GSEs. Without them our financial system would be in total collapse. We have to recapitalize them and get them going again with better regulation.

What we really need is a new GSE organized to pool problem mortgage debt into huge tranches so it can find value.

2008 Sep 04 02:52 AM

[Dave K:]

Well said Mr. Stichnoch... the destructors of our economy are only worried about working hours, diversity, wages and raising taxes. Have someone get in there, cut the fat, cut staff and waste, and get these companies moving in the right direction. Maybe they need to get Al "Chainsaw" Dunlap in there.

2008 Sep 04 06:25 AM

[jackooo:]

Where's Al when u need him???

2008 Sep 04 02:54 PM

[madasiwannabe:]

I agree partially with you dlaw. The GSE's are regulated, the problem is the regulators "encouraged" them to lower the bar and take on more risk. They didn't lower their capital requirements from 30 to 15 &20 by themselves. One only has to listen to FRE's CEO response to questioning about ignoring the risk officers warnings to understand the GSE's don't make their own decisions. The only chance they have is to have a strong lobbying presence to keep congress from running them into the ground.

Companies like Countrywide used their beltway influence to open the flood gates so they could write more loans. If we want to bash someone, lets go after the big banks that peddled their junk and the congressional regulators for making sure the checkbook remained open.

2008 Sep 04 05:43 PM

[jboswell:]

Back in 2000 the PMI Insurance Companies because of the fear of what Fannie and Freddie might do with their newly developed Underwriting systems proposed to Congress that they let Ginnie Mae (a completely government, non-gse corporation) compete against Fannie and Freddie. Ginnie Mae with its unbloated staff of approximately 70 government employees was managing a portfolio of $600 billion of mortgage-backed securities that had the Full Faith and Guaranty behind them, but was constrained to the non-conventional, federally-insured housing market. As a former "risk manager" for Ginnie Mae, I was tasked to consider the risk issues involved with such a plan. My conclusion after looking into the consideration was this: Ginnie Mae could have blown Fannie and Freddie out of the water with only minor changes to their organization. Any one, as far back as 2000, could see what the oligopoly power of Fannie and Freddie was doing to our economy. Fannie and Freddie were bloated beyond all necessity. In fact, the GSEs were reorganizing about every six months just to keep up with their changing money-grabbing strategies. Well, what happened to the PMI Insurance Companies proposal? It was being worked on when 9/11 happened, but shortly after that it was scuttled because all government focus turned to Homeland Security issues. Guess now, which entity no one talks about having any problems: Ginnie Mae, the truly one organization that did securitize loans for low and moderate income homeowners. Should Fannie and Freddie be merged. Hell yes they should be merged and when they are, they should cut the staffing of both organizations by 90 percent. If everyone is so scared of real Government intervention into Fannie and Freddie, then I think it might be worth while looking at the model of the GSEs weaker sister, Ginnie, and see how she has performed during and throughout this current crisis. ps. I believe in private enterprise over government, but the concept of a government sponsored enterprise should be forever dropped from anyone's consideration ever again.

2008 Oct 02 04:56 AM