Unlimited Support for GSEs? Government Doesn't Have a Clue

Includes: FMCC, FNMA, KBE, XLF
by: Gary Townsend

Though the administration attempted to bury its action with a post-market, Christmas Eve release, it is big news that the Obama Administration will write two blank checks to the Frannies, the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. The Treasury removed the $400 billion financial "cap" on aid provided to these mortgage GSEs. Taxpayers have shelled out $118 billion already. Last summer, Treasury estimated that losses would not exceed $170 billion over the next decade.

Even as the President excoriates the money center banks for a multitude of sins (real and imagined) and threatens to hobble the banks with punitive regulatory reforms, administration and congressional poobahs exclude the mortgage GSEs from all discussions of reform. Given that these two "government sponsored entities" were arguably the root cause of last year's financial panic, it's especially worthwhile to revisit relevant comments of our leaders during the buildup to placing the GSEs in conservatorship on September 7, 2008, about a week prior to the Lehman bankruptcy.

April 25, 2008: Democratic Representative Barney Frank, Chairman of the House Financial Services Committee, chose to blame short-sellers for Fannie and Freddie's problems. Frank stated, "I believe Fannie and Freddie are better off than the market thinks. Over the long term, the market is a very rational distributor of resources, but in the short term it can fall prey to hysteria. Sometimes you need to deal with that. Part of the problem is rumor mongering by short-sellers. Our hope is that just by making U.S. financial support available, we'll quiet the fears and eliminate any need for that support."

July 14, 2008: In an interview on CNBC, Barney Frank said: "I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under. They're not the best investments these days from the long-term standpoint going back. I think they are in good shape going forward."

July 11, 2008: Democratic Senator Christopher Dodd, former candidate for President, revealed his grasp of the situation when he strongly defended the financial condition of Fannie & Freddie: "This is not a time to be panicking about this. These are viable, strong institutions. To suggest somehow they are in major trouble is not accurate. These institutions are in sound shape. The economics are fine in these institutions and people need to know that. [There's no reason] to talk about failure. These two institutions are fundamentally, fundamentally strong. There's no reason for the kind of reaction we're getting. They have adequate capital. They have access to that capital. This is the reason for people to have confidence in Fannie and Freddie."

July 8, 2008: In response to a question on Bloomberg TV as to whether or not the capital that Freddie and Fannie had just raised was enough, OFHEO Director James Lockhart said: "The key issue here is that they are generating profits on their new book of business, and that combined with their capital, assuming that the market doesn't really tank, is enough. If housing prices go down another 15% or 20%, they may need to raise more capital. My view is that Fannie and Freddie are adequately capitalized at this point."

July 9, 2008: Dow Jones--"Mortgage financiers Freddie Mac and Fannie Mae are both 'adequately capitalized' at current levels," the head of the Office of Federal Housing Enterprise Oversight said ... OFHEO Director James Lockhart ... said Fannie's $15 billion capitalization is enough for the company 'to ride out the storm' in the housing market over coming months. He also said recent pledges by Freddie to seek $5.5 billion in fresh investment would help sustain that company as well."

July 10, 2008: "As I have said before, [Fannie and Freddie] are adequately capitalized." OFHEO Director James Lockhart, statement.

To the best that can be determined, our President had nothing controversial to say on the GSE issue during his whole campaign.

Meanwhile, the money center banks and most large regional commercial banks have fully repaid taxpayers, with a tidy profit after interest, dividends, and warrant sales. Barney? Chris? Mr. President? How did you get it so wrong last year? And why should we suspend disbelief that you've got it right about the GSEs this time?