Pay Up for Fannie and Freddie

Submitted by Rich Toscano on July 14, 2008 - 3:41pm

I will begin this blog entry with an allegorical play in three acts -- starring you as the protagonist!

Act I

Your deadbeat brother-in-law shows up at your door and explains that his business, Joe's Exclusively Deep-Fried Seafood and Mortgage Hovel, hasn't been doing so well. You aren't surprised, given that his company is extremely indebted and has been mired in accounting scandals for years.

As a result of his troubles, he has gotten himself into so much debt that he has no chance of paying it off. He asks you and your spouse for a loan.

Act II

Your spouse, sympathetic of course, suggests that you lend Deadbeat Brother-In-Law (DBIL, for the remainder of the play) some money. You suggest to your spouse (Spouse) that since DBIL is unable to pay his current debts, loading him up with yet more debt isn't really a good solution. You also note the unlikelihood of being paid back in such a scenario.


Without asking you, Spouse dips into the joint checking account and lends DBIL the money anyway. Spouse also makes a big investment in the stock of DBIL's insolvent Mortgage and Deep-Fried Seafood business. But Spouse tells you not to worry: it's in everyone's best interest, and anyway, DBIL wasn't actually having any financial problems in the first place! Also, the stock pays out its dividend in fried clams!



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Submitted by Dougie944 on July 14, 2008 - 3:57pm.

Nice job of putting that into a way for people to understand what has happened here.

Maybe, now that Freddie and Fannie are fixed, they can take on even more of the IB's bad investments.

In the meantime, I suggest everyone get a copy of Rosetta Stone's Mandarin Edition and do a little brushing up.

Submitted by jpinpb on July 14, 2008 - 4:38pm.

I think after all the Deep-Fried food I'm gonna have a heart attack.

Well, it almost feels like it. Every day more demoralizing news.

Submitted by ucodegen on July 14, 2008 - 4:55pm.

** I want a divorce!!! **

Submitted by 4plexowner on July 14, 2008 - 5:39pm.

Failure of the GSEs was sooooo hard to see coming ...

Submitted by edna_mode on July 14, 2008 - 5:42pm.

I'll see your dramatic story, and raise you with some dark humor (warning: it's a bit gruesome):

A fictionalized future? Perhaps...

Submitted by cr on July 14, 2008 - 6:40pm.

The government's age old task of keeping people scared enough to not revolt, but not so scared they panic and take out all their money...oh, wait, that's happening?

Obviously they didn't learn from Bear Stearns.

I look forward to the day they realize they should have just let the market correct itself.

Submitted by BailoutMania on July 14, 2008 - 8:09pm.

Is it just me or does it seem like the FDIC is shirking its duties to depositors, to benefit homeowners:

Does the FDIC really think they will get more out of a foreclosed home in a month or year's time than they would now?

Seems like a backdoor bailout to me.

Submitted by DWCAP on July 14, 2008 - 9:00pm.

It was the best of times
It was the worse of times........

The tale of two markets, the stock market and the houseing market. Tied together, but both living in a vacume, and moving in different directions.

Submitted by Dougie944 on July 14, 2008 - 11:02pm.

Am I missing something....

I thought the stock market and housing were moving in the same direction.

I challenge you to point out the best of times part of the economy. I can come up with the worst of times list myself.

Submitted by Dougie944 on July 14, 2008 - 11:03pm.

Am I missing something....

I thought the stock market and housing were moving in the same direction.

I challenge you to point out the best of times part of the economy. I can come up with the worst of times list myself.

Submitted by barnaby33 on July 15, 2008 - 8:04am.

I found the fried clams part to be the most subtle and entertaining, an allegory in itself. I do wail for the poor innocent children though, won't somebody please think of the children? You never actually see DBIL's children, but they are implied as hovering just offstage to the left.

Submitted by DWCAP on July 15, 2008 - 9:58am.

damnit, that was suppose to say moving in the SAME direction (down). Need to lay off the sauce when posting on here.

As for the best of times, if you are in oil, commodities, mining, US based exporter of mechanical goods(ie cat), alternative energy, or maybe just aspire to be an FDIC regulator, things are looking pretty good right now.

I was very poorly trying to show that even though alot of things are afoot in many different markets, it is all connected, regardless if BB or paulson claim it is or isnt. A revolt in one will cause unforsceen events all over the place.

Submitted by qcomer on July 15, 2008 - 8:02pm.


Your analogy has a basic problem which shows your misunderstanding of this issue. The dire financial situation of your step brother doesn't really effect you except from some emotional baggage from your spouse. But in reality, the collapse of Freddie and Fannie will definitely effect the US citizens, US economy and financial system. It will make it impossible for you to get a mortgage. So closer analogy would be if your only customer was your step brother's business or something.

So like it or not, but we all will have to pay for the greed, stupidity or misfortune of some in this country. We all share the cost of govt involvement in case of terrorist attacks, Iraq war,Spending on missile programs, etc when everyone doesn't agree with it. I know that this is different from those situations but you can't tell that to millions of people losing their jobs/homes.

Submitted by Rich Toscano on July 15, 2008 - 9:13pm.

The analogy is intended to be a dramatization to illustrate the absurdity of this whole situation.

It's a little ironic that you accuse me of "misunderstanding the issue." Three years ago, or maybe more at this point, I was talking on this site about the systemic distortions caused by Fannie and Freddie. Such warnings, by myself and others, were roundly ignored. So how is it that I am the one that misunderstands the issue?

I'd say that the people who lack understanding are the vast hordes who for years ignored the obvious danger and non-sustainability of the massive housing leverage, including that of the GSEs. The way to solve this problem was not to let it happen in the first place -- but that solution was forestalled by greed and willful ignorance.


Submitted by barnaby33 on July 15, 2008 - 11:14pm.

It will make it impossible for you to get a mortgage.

Impossible, or just much more expensive? Id say the supposition that its possible to borrow money for a 30 year period at 6% is what should be impossible. Nobody in their right mind can predict what will happen in 30 years. All mortgage subsidies did was make houses more expensive over time. They neither enlarged the supply of houses, nor the buyer pool.

Fannie and Freddie collapses will have huge repercussions on our economy that much is true. However it is the distortions that they caused by artificially lowering borrowing costs that were the real problem.

Submitted by qcomer on July 16, 2008 - 3:04am.

I didn't mean to criticize you, just the analogy you made. I have been a great fan of your work, this website and you were definitely among the first, calling out this liquidity bubble. I agree like the Iraq war, we shouldn't have made the mistake of inflating this bubble or invading a country. But we can only look at future and the whole issue of how to handle this economic crisis doesn't seem to have simple answers.

Submitted by urbanrealtor on July 16, 2008 - 7:47am.

So I am confused...
Is the Supreme Court in this example the 3rd member of a menage a trois or like an affair or just a drunk threesome.

Seriously, calling this informative is like calling Ayn Rand economics (or L Ron Hubbard philosophy).

Its humorous but...well really thats it.

Submitted by Rich Toscano on July 16, 2008 - 11:11am.

@qcomer - I agree there are no simple answers. But the people who could have prevented the problems years ago but instead chose to greedily buy votes/reappointments and denied that there was a problem are now panicking and throwing huge tax money at the problems they said didn't exist. Damned if I'm not going to mock them.

That said I actually don't believe this is the right solution. The right solution entails, first and foremost, everyone acknowledging that this government sponsored leverage orgy should never have happened, let alone happened with explicit govt encouragement, but that now that it did, we have to take some serious pain to fix it AND we should avoid doing more of the same in the future. Instead they are just doing more of the same by propping up the credit bubble with taxpayer dollars and jamming rates down in exactly the same way that caused this problem in the first place -- all without acknowledging that this kind of thing is how we got into trouble in the first place. So great, you still get your 6% mortgage but it is creating tremendous problems down the road, not the least of which is a potential currency crisis.

@urbanrealtor - What does the supreme court have to do with it? They haven't done squat and they aren't going to (even though Volcker himself has suggested that what the Fed's been doing is borderline illegal).


Submitted by moneymaker on July 16, 2008 - 6:57pm.

If I could buy a house 12 cents on the dollar I would do it. So why shouldn't the government "buy" Fannie Mae or Freddie Mac?

Submitted by 4plexowner on July 16, 2008 - 9:46pm.

Because we, as taxpayers, have to cough up the other 88 cents?

Submitted by moneymaker on July 17, 2008 - 7:20am.

Wouldn't it be the investors that would be coughing up that 88 cents. I'm not advocating a bail out but a buy out, a takeover. Like it happens in the real business world.

Submitted by cr on July 17, 2008 - 10:11am.

No, because the investors are predominantly foreign, China being the largest. They'll dump the rest of our money back on us and call it worthless if we don't throw 'em a bone for the reckless investing into poorly managed GSE's.

Keep in mind this is Helicoptor boy. He'll give money to anyone who has proven to manage it poorly.

Submitted by urbanrealtor on July 17, 2008 - 11:49pm.

Rich Toscano wrote:

@urbanrealtor - What does the supreme court have to do with it? They haven't done squat and they aren't going to (even though Volcker himself has suggested that what the Fed's been doing is borderline illegal).


Embarassed. Well the issue here is that I missed the allegory. The comment section and the extended version of the post really should be on the same url. See I thought the "you" and "spouse" were branches of government (legislative (senate hearing) and executive (Paulson and Bernanke).
However while I did miss the whole "read more" thing, I stick by what I said. As an analyst (in whatever form that takes) it is always a temptation to slip into the role of the contrarian. The post was not up to your usual standards of analysis.
Also, could you give a citation for Volker's thoughts? That's pretty interesting and I had apparently missed it.

Submitted by Rich Toscano on July 18, 2008 - 1:01am.

urbanrealtor wrote:
As an analyst (in whatever form that takes) it is always a temptation to slip into the role of the contrarian.

You seem to be saying that I am being contrarian for the sake of being contrarian. If so, you are dead wrong.

This -- the fact that they let the GSEs become so leveraged to an asset bubble and so intertwined with the rest of the economy, that they denied the risks, and that now that the inevitable risks have come to pass they are bailing out the GSEs out with taxpayer money and monetary debasement (without actually acknowledging that there is anything wrong with this approach or making any attempt to move away from the system of serial bailouts and ever bigger moral hazard) -- is an outrage. An absolute outrage. It's the culminating event in a system that has become entirely corrupt, dysfunctional, and ultimately unsustainable. If people were understood what was going on they'd be rioting in the streets. (And if they understood and didn't riot in the streets, they'd deserve what they're getting).

And that's how I feel about it. If you disagree, that's fine -- then how about discussing the actual issue instead of engaging in a superficial (and completely wrong) analysis of what my motivations are?



Submitted by urbanrealtor on July 19, 2008 - 12:14am.

My disagreement was not with the issue. My criticism was that your post was below your usual standards. If your post read more like the paragraph above (minus the histrionic language) it would have been as good as your usual stuff. My intention was not to impeach your motivations. They are, in the final analysis, irrelevant. However, I don't think it is off topic (or superficial) to criticize your piece as being reactionary. The whole reason that you are one of the most read real estate journalists is because your stuff tends to be analytical and avoid reactionary excess.

As for other topics, (see email---this post is getting long)

Submitted by Rich Toscano on July 19, 2008 - 9:20am.

Well, it's a fair point urbanrealtor, which is to say that you are certainly correct that I am pretty worked up about this issue. Nerds have feelings too you know.

I'll go check my email now...


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