Why Fannie Shouldn't Marry Freddie

Includes: FMCC, FNMA
by: John Jansen

The New York Times has an article which advances the idea that FNMA (FNM) and Freddie Mac (FRE) should merge. The author outlines various cost savings and synergies which would strengthen the combined firm.

[I always wondered what a synergy was in the real world. Well, when I worked for JPMorgan (NYSE:JPM) and Chase acquired the firm there were a bunch of synergies. While I was at JPM I received 5 weeks vacation. My counterpart at Chase with the same corporate title received four weeks vacation. The synergy was that post the merger we all received four weeks vacation. In a further personal note on that merger I was a curious victim. My best client as a salesman for JPM was the Chase Manhattan Bank portfolio. I pretty much made a living from the business I did with that one active counterparty. But ,alas, another synergy quickly became apparent as you cannot sell bonds to yourself. So in a matter of time I was asked to leave. It remains the single best place that I ever worked and I still have numerous friends from the 11 years I spent at JPM from 1991 through 2002. I digress.]

The author also makes the outlandish statement that the combined firm would be too big too fail.

I think that part of the problem which confronts policymakers and regulators is that  a laissez fairre attitude allowed the formulation of concentrations of capital which are too big to fail because their failure would threaten an economic calamity unlike anything observed since 1929. I return to a discussion of JPMorgan as it is currently constituted. Think about this. It is a combination of JPMorgan, Chase, Manny Hanny, Chemical Bank, Texas Commerce Bank, First Chicago, National Bank of Detroit and Bank One. I do not know for a fact but would suspect that the last three banks I mentioned are themselves products of several mergers which made each of them substantial regional powerhouses in their own right.

Why would regulators allow for the construction of something so massive, bulky unwieldy and potentially sclerotic? I do not know but if something such as this had been suggested in the late '70s or early '80s it would have been met with hoots and derision.

In comparison, Bear Stearns was not anywhere near the size of the banking behemoths and the regulators and policy makers felt that its uncordinated demise would have been a debacle.

Why would we want to create another gigantic web of financial intrigue worse than that which already exists? I think the best suggestions for the GSEs are those which recommend splitting them into pieces, each of which is not too big too fail. That should be the goal of those in power.

After I wrote my piece on the possible merger of Freddie and Fannie I read this piece at Calculated Risk. It is better written than mine and, disappointingly for me, much funnier. It is an excellent commentary on a dumb idea.