Today in the WSJ, the editorial board has a nice little piece on our favorite siblings, Fannie and Freddie. Apparently, Henry Waxman and the other esteemed gentlemen and women are having a horse and pony show in Washington to absolve themselves from the meltdown of these two government behemoths.
There are a few things that strike me as ridiculous about the whole Fannie and Freddie concept to begin with. First, what exactly is the motive of a government-sponsored enterprise? A government initiative is supposed to promote the “public good,” something that has obviously been totally distorted. But anyway, say the government makes the excuse that providing “affordable” housing for lower-income people is a public good (though of course, apples to oranges the bad from these companies has clearly outdone the good). What about the enterprise part of the equation? Generally an enterprise is in the business of maximizing profits by providing a service that the market demands. Now, I would certainly argue that private enterprises serve the public good because they give the public what they want at a competitive price and create jobs. However, to ask a government sponsored enterprise (of that efficient government we have in Washington) to serve the dual mandate of both providing a public good and seeking to maximize profit seems like somewhat of an impossible balancing act.
As the journal notes,
Memos and emails at the highest levels of Fannie and Freddie management in 2004 and 2005 paint a picture of two companies that saw their market share eroded by such products as option-ARMs and interest-only mortgages. The two companies were prepared to walk ever further out on the risk curve to maintain their market position. The companies understood the risks they were running. But squeezed between the need to meet affordable-housing goals set by HUD and the desire to sustain their growth and profits, they took the leap anyway.
That is a pretty good reflection of the problem with these companies. They were trying to balance out achieving market share (in reality crowding out true free market competition if there were other people willing to take the risk to provide “affordable” housing to people that probably couldn’t really afford the housing in the first place) with helping people live in houses that again, most probably could not afford. Wasn’t there a time where if you struggled to pay for a house, you simply rented? Not in America I guess.
Anyway, besides these fundamental problems, these companies received the management quality that the taxpayers deserve from their quasi-owned enterprise:
In early 2004, Freddie’s executive team was engaged in a heated debate over whether to start acquiring “stated income, stated assets” mortgages. And in April of that year, David Andrukonis, the head of risk management, wrote to his colleagues, “This is not an affordable product, as I understand it, but a product necessary to recapture [market] share. . . . In 1990 we called this product ‘dangerous’ and eliminated it from the marketplace.” Freddie went ahead anyway.
One Fannie Mae document from March 2005 notes dryly, “Although we invest almost exclusively in AAA-rated securities, there is a concern that the rating agencies may not be properly assessing the risk in these securities.” But they bought them anyway, both to maintain their market share and to show people like Democrat Barney Frank that they were promoting affordable housing.
By April 2008, according to a document prepared for then-Fannie Mae CEO Daniel Mudd and marked “Confidential — Highly Restricted,” Fannie’s $312 billion in Alt-A mortgages represented “12% of single-family credit exposure.” This book of business, the document notes, “was originated to maintain relevance in market with customers — main originators were Countrywide, Lehman, Indymac, Washington Mutual, Amtrust.”
Oh yea, and the CEO of Freddie Mac also had the audacity to state that, “It is remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible effort to enforce any limits.” So even though it was his people that mismanaged the company, it was the government regulators fault for not ensuring that the company was taking prudent risk? Imagine if any of the CEOs of the Investment Banks blamed the regulators for the financial crisis? No real enterprise could ever make this argument.
Of course Franky Raines also had a point. “What Mr. Raines failed to mention was that, all along, Fannie and Freddie were spending millions on lobbying to ensure that regulators did not get in their way. As the AP reported Sunday night, Freddie spent $11.7 million in lobbying in 2006 alone…” This is another fundamental problem with these businesses. The politicians supported affordable housing for low income people because it would help their constituents. To me, it seems like a big slush fund to get votes. Personally, if I knew the government was going to redistribute our tax money to subsidize a housing market for low income people, I’d rather them just buy the houses outright. That way we would at least see where the money was going.
The fact of the matter however is that the government does not see or care for the unintended consequences of maintaining a quasi-governmental enterprise to do this. Shouldn’t it tell them something if the market never dictated that their be real competitors for Fannie and Freddie? Ah well, Barney Frank and Co. can always blame it on greedy corporate America and the wild excesses of the free market.