kdo

The True Nature of Fan and Fred

No, FNM has guaranteed $8B of subprime, of which any LTV over 80% requires collateral enhancements. They own SP as investments, which gives up a gross exposure of $52B, but there is nothing in their charter about not being able to hold securities. That is a different thing, since the egg that's being protected that the govt is scared about is the ability to hold the guarantees. So you're right. $8 billion is not a zero number, so out of a book of $2.7 Trillion of guarantees, that comes out that FNM guaranteed about .296% of it's book of business in SP. Throw in the wraps of private labels which I'll guess required enhancements and we can double that figure. .6% of their total book of business. The sluts.

I'm not defending F/F. *If* F/F go to liquidation, then all securities holdders should be wiped out so that taxpayers have the last liability. I absolutely agree with that and if you were to really pay attention, no one here has commented that they don't think taxpayers will not pay a dime. That is only your interpretation. The problem is you state things as if they've already happened combined with a lack of understanding of how F/F operate and who funds them (private money). Taxpayers have no rights over F/F liquidation since they have yet to provide a dime to F/F. If we end up guaranteeing the loans I think it should be nationalized, because that actually wipes out shareholders and allows taxpayers to make their money back from any potential liabilities they will incur. Putting taxpayers on the hook while equity holders remain intact is ridiculous. It's the facts that are the problem in this article.

btw - I am no expert on F/F, but I don't believe there is anywhere pointing to the fact that their SP exposure is held in CDOs or securities tranched up by risk. If they're simple pass-throughs, using the MER amount they sold their CDOs for is not a remotely realistic measure. The loans *ARE* collateralized, unlike some of the tranches of the CDO, which are collateralized by tranche.

The reality is, if you look at the quality of the loan guarantees in their book, it's dramatically better than what what most banks and mortgage brokers were selling.

86% was long-term, intermediate term fixed.
90% primary residence.

IMO, the problem with F/F is their capital requirements didn't prepare for the 100 year flood, even though it was very apparent that flood was coming. That's what happens if you're overreliant on statistics instead of combining that with common sense. There's quite a number of institutions out there which suffer the same flaw.

The True Nature of Fan and Fred

I don't believe the responses by DCBill and others are related to "which side is correct" about what will happen to the GSEs. It relates to significant distortions and inaccuracies within the article. If we're going to talk about the GSEs, we should all be able to agree that at least we should have our facts straight and not invent them right?

Let's see the accusations:
1) FNM and FRE are headed by Skull and Bones Society members. Mr Tan says that the WSJ article in fact "showed us the inner circle of the secret "Skull and Bones" society around Fannie Mae (FNM) and Freddie Mac (FRE)".
Funny, cause I read the WSJ article too and I was pretty sure when I read it the first time there was nothing about Skull and Bones secret government running society anywhere in there!! Low and behold, checking it again, I can't find that passage he refers to.
2) Talks about these entities borrowing from the govt.
The GSEs absolutely, do not borrow money from the govt and this fact alone shows enormous disregard for facts or actually knowing what one is talking about. I think it is quite easy to dismiss the article right here because of the fundamental nature of the organization of these entities is not understood, not even remotely.

But let's go on:
3) Let's see: "Apparently Mr. Mozilo and Mr. Raines were partners, with Countrywide feeding mortgages to Fannie to make Mr. Mozilo very rich".
Again, this reeks of lack of understanding the fundamental nature of FNM and FRE. Pretty much ALL banks sold many mortgages to FNM and FRE, because that is their fundamental nature to buy and guarantee loans they are allowed to buy. Mr Mozilo did not have a special relationship in this regard. If the mortgage fit certain criteria, they bought it.
4) "Fannie was creating shaking derivatives from these mortgages to generate more profits,"
While, I'm not exactly sure what a shaking derivative is, I'm guessing Mr Tan doesn't know much about them or what kinds of derivatives FNM might be using either and derivative is just a bad scary word to use. FNM had primary issues in 2002 about it's derivative accounting, of which FNM went through a significant period of time to get results restated. I don't believe there is anyone making those accusations today and that is conflating the issue of what happened several years ago with questions about their solvency today. Details, details.
5) "Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management"
-- There isn't a subsidy. Taxpayers don't fund FNM. There has been an implied guarantee as a quasi-public entity that has never been tested. That is what this is about. I have my doubts that seven basis points is all the "benefit", but whatever. That's a real study at least by people who know WTF FNM and FRE actually did and is a legit point of discussion unlike anything this article has provided.
6) "Taxpayers not only have paid so much and so dearly to support this crony capitalism of friends of Mozilo"
Well, at least Mr Tan is consistent in his lack of knowledge of the GSEs. Taxpayers haven't paid anything, which says so much about this person's knowledge of the situation surrounding the GSEs. The friends of Mozilo, was funded by Countrywide, but why not conflate various issues to confuse various things people are angry about!?
7) "This is really the beauty of quasi-private and quasi-public dual structures. Profits go to the few Skull & Bones, while losses are dumped to the whole society, and all is done in the name of "helping poor people to own houses".
I wonder if Mr Tan has thought about how well the purely private companies fared in this whole mess? The GSEs couldn't do jumbos or subprime, which are the biggest messes of all.

I have no significant love of the GSEs. The privatization of profits on the backs of an implicit guarantee of the govt is not something I'm wild about in any shape or form. But Mr Tan is not entitled to his own facts and if I ran Seeking Alpha, I'd yank the article, because it is that bad. I'm not saying it's bad because of the opinion, it's the complete lack of understanding of the entities in question.

"Better to keep your mouth closed and be thought a fool than to open it and remove all doubt".