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					Fannie y Freddie

Que no había pasado lo peor lo confirmaron nuevos resultados de
bancos y, los no menos reveladores problemas de solvencia de las
agencias gubernamentales, Fannie Mae y Freddie Mac, manifestados
en toda su extensión a partir del 11 de julio de 2008. Estas eran
victimas singulares.

Fannie caía a media mañana de ese viernes un 24.9%, hasta los
9.92$, mientras que las acciones de Freddie lo hacían un 26%, hasta
5,92$. Se concluía una de las más aciagas semanas en los mercados
de acciones.


Fannie and Freddie shares both dropped about 45% last week and are down more than
80% over the past year. Investors are worried that the companies eventually will have to
raise large amounts of capital to cope with growing losses stemming from mortgage
defaults. Freddie has announced plans to raise $5.5 billion by selling common and
preferred shares, but it is likely to wait for a calmer market. Fannie raised $7.4 billion in
share offerings in April and May.

Like Fannie and Freddie, the 12 regional Federal Home Loan Banks, cooperatives that
lend to commercial banks and thrifts, "also would have temporary access to expanded
lines of credit," a Treasury official said.

A spokesman for Freddie said the company understands that any purchase of equity in
Freddie by the Treasury "can only occur with the mutual agreement of both parties."



Desde los mínimos desde 1991, registrados el día anterior, las
cotizaciones de las acciones de esas dos agencias se desplomaba a lo
largo del viernes. En la mañana americana del 10 de julio la
cotización de las acciones de esas dos agencias se desplomó. Los
rumores de que sus elevadas perdidas exigiría el rescate del gobierno
cobraba entidad. El convencimiento de que ese rescate se haría
cuando la infracapitalización de esas agencias fuera manifiesta, una
vez los accionistas privados perdieran buen aparte de su riqueza en
esas compañías era lo que amparaba ese desplome.

Las acciones de ambas caian tras conocerse un informe que sugería
que la Reserva Federal terminaria garantizando el acceso la facilidad
de descuento de emergencia que extendio a los bancos de inversión
en dificultades.

Una paradoja adicional la deparaba la posibilidad de “nacionaliacaion”
de las agencias, contemplada en los planes de contningecnia que
empezaron a contemplar las autoridades esydadounidenses.


                                                                                            1
La administración Bush trató de anular las sugerencias de que el
gobierno de los EE.UU. podría tener que nacionalizar Fannie Mae y
Freddie Mac, el gigante hipotecario empresas, ya que sus acciones
cayeron a sus niveles más bajos de diecinueve años

Victimas singukares porque, en primer lugar, eran consideradas
pilares del sistema financiero estadounidense: entre mabas
mantienesn activos o han concdido garantias por un valor equivalente
al 50% de las hipotecas vivas en aquel país.

No existe una política regukadora o legislativa clara al respecto que
permita al gobierno auxiliar en la quiebra de una empresa
gubernamental.

El regulador de F&F, “The Office of Federal Housing and Enterprise
Oversight “ no esta habilitado para el apoyo a las compañías, al
menos estas estén “ críticamente infracapitalizadas”.

Markets also anticipated the weekend bailout announcement by bidding down the share
prices of the two mortgage giants, and also bidding up the prices of their debt (driving
down their interest rates). That was a bet that the forthcoming bailout would result in a
dilution of shareholder value, and protection for the bondholders.



Yields on Treasuries rose, as the government's balance sheet was expected to expand by
whatever the net liabilities of these two companies might be (less, presumably, than
their $5.3 trillion gross liabilities). The dollar tumbled in anticipation of more deficits,
and more inflation to pay for all this.

OPINION


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End the Mortgage Duopoly
By GERALD P. O'DRISCOLL JR.
July 15, 2008; Page A19

Despite last week's protestations by Treasury Secretary Hank Paulson and Federal
Reserve Chief Ben Bernanke, markets knew that Fannie Mae and Freddie Mac were
not well capitalized.



                                                                                           2
Markets also anticipated the weekend bailout announcement by bidding down the
share prices of the two mortgage giants, and also bidding up the prices of their debt
(driving down their interest rates). That was a bet that the forthcoming bailout would
result in a dilution of shareholder value, and protection for the bondholders.
                                           Yields on Treasuries rose, as the
                                           government's balance sheet was expected to
                                           expand by whatever the net liabilities of
                                           these two companies might be (less,
                                           presumably, than their $5.3 trillion gross
                                           liabilities). The dollar tumbled in anticipation
                                           of more deficits, and more inflation to pay
                                           for all this.
                                           The focus must now be on the way forward.
                                           This should entail putting both institutions on
                                           a sound financial footing, and never again
                                     Chad Crowe


allowing them to become a drain on the taxpayer and a threat to financial stability.
By last week, both corporations were operating at odds with their own charters.
Consider Freddie Mac, chartered by Congress in 1970. Its first stated purpose was "to
provide stability" in the secondary mortgage market. Its second purpose (of four) was
"to respond appropriately to the private capital market." But Freddie and Fannie had
both become a source of financial market instability, helping to drag down share
prices of other firms exposed to their obligations, and forcing private capital markets
to respond to their possible collapse.
FANNIE MAYHEM


A compendium of our Fannie and Freddie coverage over the years1.
Whatever the outlines of what will inevitably be a hastily crafted bailout plan, the
result must be true privatization. That means no more government lifeline: no
Treasury line of credit, no Fed line of credit.
If the government takes an equity stake in the companies as part of a bailout plan,
there needs to be a time line to end government ownership. Freddie and Fannie must
cease to be "special," and become quite ordinary.
They must also be downsized, because institutions so dominant in housing cannot be
truly private. Additionally, as banking expert Bert Ely has pointed out, Freddie and
Fannie have bulked up their balance sheets by taking on excessive interest-rate risk.
Like savings and loans in the 1980s, Fannie and Freddie have maturity mismatch –
borrowing short and lending long. That risk is a function of their large holdings of
                                         mortgage-backed securities. No matter their
                                         efforts at hedging that risk (which has
                                         previously landed them in trouble), there are
                                         no perfect hedges.
                                              2


                                              Fannie and Freddie must also be reformed
                                              because of their role in the culture of
                                              corruption in Washington. They have
                                              become political ATM machines for



                                                                                              3
campaign contributions. That has to stop.
We must also realize that, whatever the deficiencies of the mortgage market in
Depression-era America, that era is over. There is no "market failure" in housing
finance today, except the one created by government-backed institutions dominating
housing finance. Money flows where it is rewarded. Home mortgages are plain
vanilla financial instruments, perhaps partly due to Fannie and Freddie. So by all
means, let us thank them for their service as we bid them adieu in their present form.
As nearly every responsible commentator has observed, Fannie and Freddie urgently
need more capital. Thus we have an overall diagnosis and treatment plan: downsizing
and capital infusions. In the near term, the capital may come from Treasury because
of the dire condition of their share prices. Congress could authorize the Treasury to
purchase shares of preferred stock convertible into common shares in, say, five years,
but it would have a mandatory conversion feature in 10 years. At that point, the
Treasury should be required to sell its common stock in an orderly fashion (but
within two years). Socialism in housing finance must not be made permanent.
Over the course of the 10-year period, Fannie and Freddie should systematically sell
off their security portfolio and raise additional capital. By the end of that period (or
sooner, if management desires to get out from under the government's yoke), their
capital ratios should be up to the level of a commercial bank: 6%-8% of assets.
Follow these guidelines and at the end of 10 years, perhaps sooner, we could have a
truly competitive market in housing finance. No single institution, nor a duopoly,
would play a crucial role in housing finance. The idea that a government-sponsored
enterprise is needed to provide liquidity is at best obsolete. Global financial markets
provide liquidity, except when impeded by the effects of bad, government-directed
policies. Credit allocation and easy money created a housing mess that now threatens
the viability of even government-sponsored enterprises. Never again.
These recommendations run counter to the prevailing wisdom at the Treasury and the
Fed, which is to encourage ever larger institutions, too big to fail, which can be then
placed under Fed ministrations. Let us not resolve one crisis by sowing the seeds of
the next. We need to empower markets, not embolden central bankers.
Mr. O'Driscoll is a senior fellow at the Cato Institute and was formerly a vice
president and economic adviser at the Federal Reserve Bank of Dallas.
See all of today's editorials and op-eds, plus video commentary, on Opinion Journal3.
And add your comments to the Opinion Journal forum4.

Moral hazard on the road to increasing profits
By John Authers and Stephanie Kirchsgaessner
Published: July 15 2008 01:13 | Last updated: July 15 2008 01:13


Many US economists, on the right and the left, are today able to say: “I told you so.” Few developments in
US financial policy over the past half century have been more controversial than the decision to allow
Fannie Mae and Freddie Mac to develop to their great size as private shareholder-owned institutions.

Fannie Mae (originally the Federal National Mortgage Agency) had its roots in New Deal legislation of the
1930s. It was set up in 1938 as a government-owned development bank. Its purpose was to ensure that
mortgage interest rates would stay at low levels that kept home ownership within the reach of the US
middle class.




                                                                                                            4
In 1968, the decision was made to re-charter the FNMA as a private entity, funded entirely by
shareholders. As it continued to operate under an explicit mandate from the government, however, the
belief took hold that Fannie Mae enjoyed an explicit guarantee from the government.

The complaint was that private sector institutions could not possibly compete against a company that in
effect held a government guarantee. To address this complaint, Freddie Mac (the Federal Home Loan
Mortgage Corporation) was chartered in 1970, with a similar mission to ensure stability, liquidity and
affordability, and to compete with Fannie.

But this did not quiet the objections. First, the existence of the agencies was held to create “moral hazard”
– the mere presence of such a guarantee, it was held, would create an incentive for excessive risks. As it
was obvious the government could not allow the agencies to go bust, capitalism’s normal controls against
risk-taking would not work.

Second, academics complained that the agencies would create “crowding out”. With the government
effectively competing against the private sector, the argument was that the private sector would be
crowded out of anywhere that Fannie and Freddie were competing.

This argument looks stronger over time. By definition, Fannie and Freddie make no “subprime” loans. It is
part of their charter that their borrowers should have documented sources of income, and should put down
a reasonable deposit when buying a home.

But because Fannie and Freddie’s implicit government guarantee gave them access to cheaper funds, it
can be argued that new players in the mortgage business had no choice but to pile into subprime and
“jumbo” mortgages (too big to qualify for funding from the agencies). Hence their mere presence providing
medium mortgages for those who could afford them may have contributed to the excesses that occurred
elsewhere.

As time went by, these arguments strengthened. The mortgage market grew, backed by the model of
securitised finance that Fannie and Freddie had made it much easier to adopt. But Fannie and Freddie’s
market share continued to grow. To the principled arguments against them were added practical and
political ones. The agencies had developed their own power base in classic Washington fashion, and often
provided a friendly home for politicians. This enabled them to build their mission further. It also emerged
that they had been taking liberties with their accounting policies.

As accounting scandals came to light, and the agencies still grew, Republicans sought to overhaul their
oversight. One proposal by Chuck Hagel, the Nebraska senator, would have forced the Treasury
department to regulate the companies directly.

“Confidence is the coin of the realm in this business,” Mr Hagel said in 2003. “We must do a more
responsible job of regulating Fannie Mae and Freddie Mac. We owe it to the residential mortgage market.
We owe it to the investors. And we owe it to the American taxpayer.”

But the agencies were given more power recently, as they became a critical weapon in the government’s
attempt to stave off the credit crisis. “Nationalising Mortgage Risk” an American Enterprise Institute
pamphlet written by Peter Wallison and Bert Ely and published in 2000, now looks prescient in its attack on
the way the agencies were allowed to evolve and the potential for a crisis.

“Many private organisations are now capable of purchasing mortgages from originators and selling them –
either directly or through securitisation – into the capital markets,” they argued. There was no need for the
government to be in the business any more.

But by 1998 Fannie and Freddie either held or had guaranteed more than 73 per cent of all conventional or
conforming mortgages. Their leaders predicted that the figure could only grow.

As the writers saw it, Fannie and Freddie had three options: to slow their growth to reduce risks; to
continue their growth at lower levels of profitability; or to continue growth in assets and risks to keep profits
rising. “The evidence is that they are pursuing the third course.”

Copyright The Financial Times Limited 2008




                                                                                                                5
Descripción de F&F:




Fannie Mae — the Federal National Mortgage Association — was
created in the 1930s to facilitate homeownership by buying
mortgages from banks, freeing up cash that could be used to make
new loans. Fannie and Freddie Mac, which does pretty much the
same thing, now finance most of the home loans being made in
America



The case against Fannie and Freddie begins with their peculiar
status: although they’re private companies with stockholders and
profits, they’re “government-sponsored enterprises” established by
federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of
investors that if Fannie and Freddie are threatened with failure, the
federal government will come to their rescue

Such one-way bets can encourage the taking of bad risks, because
the downside is someone else’s problem. The classic example of how
this can happen is the savings-and-loan crisis of the 1980s: S.& L.
owners offered high interest rates to attract lots of federally insured
deposits, then essentially gambled with the money. When many of
their bets went bad, the feds ended up holding the bag. The eventual
cleanup cost taxpayers more than $100 billion ( PK 130708)



The case against Fannie and Freddie begins with their peculiar
status: although they’re private companies with stockholders and
profits, they’re “government-sponsored enterprises” established by
federal law, which means that they receive special privileges.




                                                                         6
The most important of these privileges is implicit: it’s the belief of
investors that if Fannie and Freddie are threatened with failure, the
federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses
are socialized. If Fannie and Freddie do well, their stockholders reap
the benefits, but if things go badly, Washington picks up the tab.
Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because
the downside is someone else’s problem. The classic example of how
this can happen is the savings-and-loan crisis of the 1980s: S.& L.
owners offered high interest rates to attract lots of federally insured
deposits, then essentially gambled with the money. When many of
their bets went bad, the feds ended up holding the bag. The eventual
cleanup cost taxpayers more than $100 billion.

But here’s the thing: Fannie and Freddie had nothing to do with the
explosion of high-risk lending a few years ago, an explosion that
dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing
rapidly in the 1990s, largely faded from the scene during the height
of the housing bubble.

Partly that’s because regulators, responding to accounting scandals
at the companies, placed temporary restraints on both Fannie and
Freddie that curtailed their lending just as housing prices were really
taking off. Also, they didn’t do any subprime lending, because they
can’t: the definition of a subprime loan is precisely a loan that
doesn’t meet the requirement, imposed by law, that Fannie and
Freddie buy only mortgages issued to borrowers who made
substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates
have been offset by the fact that Fannie and Freddie were and are
tightly regulated with regard to the risks they can take. You could say
that the Fannie-Freddie experience shows that regulation works.

In that case, however, how did they end up in trouble?




                                                                         7
Part of the answer is the sheer scale of the housing bubble, and the
size of the price declines taking place now that the bubble has burst.
In Los Angeles, Miami and other places, anyone who borrowed to
buy a house at the peak of the market probably has negative equity
at this point, even if he or she originally put 20 percent down. The
result is a rising rate of delinquency even on loans that meet Fannie-
Freddie guidelines.

Also, Fannie and Freddie, while tightly regulated in terms of their
lending, haven’t been required to put up enough capital — that is,
money raised by selling stock rather than borrowing. This means
that even a small decline in the value of their assets can leave them
underwater, owing more than they own.

And yes, there is a real political scandal here: there have been
repeated warnings that Fannie’s and Freddie’s thin capitalization
posed risks to taxpayers, but the companies’ management bought off
the political process, systematically hiring influential figures from
both parties. While they were ugly, however, Fannie’s and Freddie’s
political machinations didn’t play a significant role in causing our
current problems.

Still, isn’t it shocking that taxpayers may end up having to rescue
these institutions? Not really. We’re going through a major financial
crisis — and such crises almost always end with some kind of
taxpayer bailout for the banking system.

And let’s be clear: Fannie and Freddie can’t be allowed to fail. With
the collapse of subprime lending, they’re now more central than ever
to the housing market, and the economy as a whole. PK



Fannie: Creada por el Congreso estadounidense durante el New Deal
con el fin de hacer mas asequibles la adquisición de viviendas a las
familias de renta baja-media

Freddie Mac: established later with a similar purpose.




                                                                        8
Neither provides home loans. Instead, the companies buy mortgages
from banks and take on the risks of possible defaults – allowing
banks to make even more mortgages.

Today they own or guarantee about half of the country’s $12 trillion
in mortgage debt. Dominant role.

And as Fannie and Freddie grew, so did the fortunes of Wall Street,
which reaped rich fees from issuing debt for the two companies, as
well as the mortgage and housing industries, which banked billions
of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few
years ago, attempts to push through stronger oversight were stymied
because few politicians, particularly Democrats, wanted to be
perceived as hindering the American dream of homeownership for
the masses.

Lots of perks came with Fannie and Freddie’s charters and
government backing: exemptions from state and federal taxes,
relatively meager capital requirements, and an ability to borrow
money at rock-bottom rates.

F&F: Garantia implicita del gobierno

FM: creac

By issuing debt, these shareholder-owned companies guarantee or
own more than $5 trillion in home mortgages. Got that? $5 trillion.

Because the federal government established the companies,
investors view them as backed, at least implicitly, by taxpayers. And
that implied guarantee is what drove Fannie and Freddie’s business
models.

The advantages the companies gained from this unique arrangement
were huge. They had to keep less cash on hand than traditional
lenders, for example. They also made more money on their
mortgages than lenders because they paid less to borrow money in
the bond market. These profits enriched Fannie and Freddie




                                                                        9
shareholders over the years and bestowed significant wealth on the
companies’ executives.



There was some debate within the administration about the best way to handle the two
companies. Some Republicans have long worried that taxpayers would eventually be on
the hook for risks taken by the two companies on behalf of shareholders.




Federal National Mortgage Association (Fannie Mae)
FNM: NYSE; Financials/Consumer Financial Services
Fannie Mae is the nation's largest mortgage buyer and a financial juggernaut that
affects the lives of tens of millions of home buyers. It was created during the Depression
to make sure that sufficient funds were available to mortgage lenders, then rechartered
by Congress in 1968 as a publicly traded company.

Fannie Mae, like Freddie Mac, which was created by Congress in 1970, buys mortgages
from lending institutions and then either hold them in investment portfolios or resell
them as mortgage-backed securities to investors. The two companies play a vital role in
providing financing for the housing markets.

After significant accounting problems, the companies since 2004 were required to hold
30 percent more capital than the minimum previously required, in effect capping their
ability to purchase mortgages.
As the housing market has soured, both companies have reported steep losses. But the
mortgage meltdown has also made the companies more important than ever. Since the
credit markets seized up, Fannie and Freddie have regained their central role in
mortgage finance after losing significant market share to investment banks during the
housing boom. They have issued the vast majority of mortgage securities sold in the last
six months, because investors have lost confidence in deals put together by big
investment banks.

In February, federal regulators announced they were easing some restrictions on
lending by Fannie and Freddie. Then on March 19, 2008, the federal government
announced that it was easing those restrictions in an effort to calm the turmoil
afflicting the mortgage markets. Officials said the change could allow the two
companies to invest $200 billion more in mortgages

Freddie Mac
FRE: NYSE; Financials/Consumer Financial Services
Freddie Mac, a publicly traded company that operates under a federal charter, is the
nation's second largest mortgage buyer.

Like its larger rival, Fannie Mae, Freddie Mac buys mortgages from lending institutions
and then either holds them in investment portfolios or resells them as mortgage-backed




                                                                                       10
securities to investors. The two companies play a vital role in providing financing for
the housing markets.

After significant accounting problems, the companies since 2004 were required to hold
30 percent more capital than the minimum previously required, in effect capping their
ability to purchase mortgages.

As the housing market has soured, both companies have reported steep losses. But the
mortgage meltdown has also made the companies more important than ever.

Since the credit markets seized up, Fannie and Freddie have regained their central role
in mortgage finance after losing significant market share to investment banks during
the housing boom. They have issued the vast majority of mortgage securities sold in the
last six months, because investors have lost confidence in deals put together by big
investment banks.

In February, federal regulators announced they were easing some restrictions on
lending by Fannie and Freddie. Then on March 19, 2008, the federal government
announced that it was easing those restrictions in an effort to calm the turmoil
afflicting the mortgage markets. Officials said the change could allow the two
companies to invest $200 billion more in mortgages.

Under a conservatorship, shares of Fannie and Freddie would be worth
little or nothing, and any losses on mortgages they own or guarantee —
which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also
considered calling for legislation that would offer an explicit
government guarantee on the $5 trillion of debt owned or guaranteed
by the companies. But that is a far less attractive option, they said,
because it would effectively double the size of the public debt.

The officials involved in the discussions stressed that no action by the
administration was imminent and that Fannie and Freddie are not
considered to be in a crisis situation. But in recent days, enough
concern has built among senior government officials over the health of
the giant mortgage finance companies for them to hold a series of
meetings and conference calls to discuss contingency plans.

Stephen Labaton contributed reporting from Washington.
July 14, 2008

NEWS ANALYSIS

Government as the Big Lender

By PETER S. GOODMAN
The desperate worry over the health of huge financial institutions with country
cousin names — Fannie Mae and Freddie Mac — reflects a reality that has
reshaped major spheres of American life: the government has in recent months


                                                                                          11
taken on an increasingly dominant role in assuring that Americans can buy a
home or attend college.
Much of the private money that once surged into the mortgage industry has fled
in a panicked horde, leaving most of the responsibility for financing American
homes to the government-sponsored Fannie and Freddie.
Two years ago, when commercial banks were still jostling for fatter slices of the
housing market, the share of outstanding mortgages Fannie and Freddie owned
and guaranteed dipped below 40 percent, according to an analysis of Federal
Reserve data by Moody’s Economy.com. By the first three months of this year,
Fannie and Freddie were buying more than two-thirds of all new residential
mortgages.
A similar trend is playing out in the realm of student loans. As commercial
banks concluded that the business of lending to college students was no longer
quite so profitable, the Bush administration promised in May to buy their
federally guaranteed student loans, giving the banks capital to continue lending.
In short, in a nation that holds itself up as a citadel of free enterprise, the
government has transformed from a reliable guarantor into effectively the only
lender for millions of Americans engaged in the largest transactions of their
lives.
Before, its more modest mission was to make more loans available at lower
rates. Now it is to make sure loans are made at all. The government is setting the
terms and the standards of Americans’ biggest loans.
On Sunday, that federal oversight and protection was made more explicit, as the
Bush administration sought to mount a rescue of Fannie and Freddie, asking
Congress to devote public money to buying the two companies’ flagging stocks.
The new reality is scorned by libertarians and conservatives, who fear state
intrusions on the market, and by populists and progressives, who dislike the
idea of education and housing increasingly resting upon the government’s
willingness to finance it.
“If you’re a socialist, you should be happy,” said Michael Lind, a fellow at the
New America Foundation, a research institute in Washington. “But you should
really wonder whether you want people’s ability to pay for housing and college
dependent on the motives of people in Washington.”
The government is trying to support plummeting housing prices and spare
strapped homeowners from the wrath of the market: last week, the Senate
adopted a bill authorizing the Federal Housing Administration to insure up to
$300 billion in refinanced mortgages, enabling borrowers saddled with
unaffordable loans to get better terms.
How the government came to dominate these two crucial areas of American
lending is — depending on one’s ideological bent — a narrative of regulatory and
market failure, or a cautionary tale about bureaucratic meddling in commerce.
Perhaps it is both.
To those prone to blame lax regulation, the mortgage fiasco was the inevitable
result of a quarter-century in which American policy makers prayed at the altar
of market fundamentalism, letting entrepreneurs succeed or fail on their own.
This was the spirit in which Alan Greenspan, the longtime chairman of the
Federal Reserve, allowed banks to engineer unfathomably complicated webs of
mortgage-based investments that, through the first half of this decade, sent real
estate prices soaring and expanded homeownership.
The banks relied on these investments to raise money for the next wave of loans.
The system worked so long as lenders could keep selling their mortgages, and so


                                                                               12
long as someone would guarantee most of the debts. Fannie and Freddie took
care of both tasks. Together, they now guarantee or own roughly half of the
nation’s $12 trillion mortgage market.
Belief in Fannie and Freddie gave banks a sense of certainty as they plowed
more of their capital into residential mortgages. That easy financing, in turn,
brought more and more people into the market for homes, generating a belief
that American real estate prices could keep rising forever.
And that contributed to the banks’ ultimately making extraordinarily risky
loans, which defaulted first when home prices started falling. As lending became
conservative, the whole speculative bubble burst.
As some called for intervention by the Fed to cool a speculative binge, Mr.
Greenspan resisted. He believed the risks of real estate were effectively limited
because debt was widely dispersed. The market would sort it all out.
“Alan Greenspan had this view that the light hand of regulation was best,” said
Vincent R. Reinhart, a former Federal Reserve economist and now a scholar at
the American Enterprise Institute.
When housing prices commenced plummeting, the ugly truth emerged that
many banks did not understand the details of the mortgage-backed investments
they owned. Ignorance proved expensive.
As one bank after another announced losses that now exceed $400 billion and
that some estimate will ultimately cross the trillion-dollar mark, money ran
screaming from the field, leaving Fannie and Freddie pretty much the only
players.
A general fear of debt took hold. Banks that had offered loans to students under
a federally guaranteed program suddenly could not sell investments linked to
those outstanding debts, meaning they could not raise cash for the next crop of
loans. Dozens of banks pulled out of the program.
“What’s happened kind of speaks for itself,” said Dean Baker, co-director of the
Center for Economic and Policy Research in Washington. “You had this effort to
weaken the government’s role. There was this conscious effort to turn things
over to the private sector, and it failed.”
But there is a parallel narrative, the story that critics and competitors of Fannie
and Freddie have told for years: how the two companies exploited their pedigree
as entities backed by the government to secure an unfair advantage over the
private sector.
They swelled into highly leveraged behemoths, it was said, on the implicit
guarantee that the government would step in and rescue them if they ever got
into trouble. This allowed them to borrow money more cheaply than their
competitors could, enabling them to make loans more cheaply.
That secured more business and rewarded their shareholders, along with their
handsomely compensated executives. It emboldened them to trade in highly
risky investments.
“They were using their privileged position as favored children of the government
to dominate the market, and taxpayers were on the hook for substantial risk,”
said Martin N. Baily, a chairman of the Council of Economic Advisers in the
Clinton administration. “You couldn’t possibly say this was a pure unfettered
market.”
The government was getting something for its protective largess. It was using
Fannie and Freddie to pursue the social goal of broader homeownership,
particularly among racial minorities.



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“When you’re looking at the upside, here’s the government helping people get
mortgages and student loans,” said David R. Henderson, a self-described
libertarian economist at the Hoover Institution at Stanford University. “The
downside is there might be a bailout and then you pay in taxes. These things
don’t come cost-free when government gets involved.”
As the Bush administration readies funds to buy student loans from cash-short
banks, and officials plot a potential bailout of Fannie and Freddie that could run
into tens of billions of dollars, the government’s outsize role in these two huge
areas will not shrink anytime soon.
It seems a strange coda to an era in which markets were sacred, and regulation
heresy.
For a generation, American policy makers have lectured the world on the need
to unleash the animal instincts of the market. China’s rickety banks should stop
lending to protect state factory jobs, Americans said, and focus on the bottom
line. Now the Bush administration is reluctantly concluding that Fannie and
Freddie might need to be propped up to protect the American homeowner.
During much of Japan’s lost decade of the 1990s, Americans called for an end to
its coddling of weak banks. Better to let them keel over, along with the paper
tiger companies they sustained. No company was “too big to fail,” Washington
said.
Yet here, in the aftermath of a financial crisis brought on by what were once
called American virtues — financial engineering and risk management —
Washington may bail out Fannie and Freddie for the simple reason that they are
too big to fail. If they go down, so do whole neighborhoods. So, perhaps, does
the global financial system.
“The thing we have to do now is to make sure that Fannie and Freddie remain
solvent and continue to make loans,” Mr. Baily said. “We just don’t have any
choice.”




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