Friday, July 11, 2008 at 5:15 pm
Financial crises are more fun when they involve companies with goofy names like Fannie and Freddie
I've just churned out a quickie Fannie-Freddie analysis for Time.com. Here's how it starts:
All debt issued by mortgage giants Fannie Mae and Freddie Mac comes with a prominent disclaimer: "Not guaranteed by the United States." But the business model of both companies, not to mention the continued functioning of the U.S. mortgage market, depends on nobody quite believing that disclaimer. Wrap your head around that contradiction, and you're well on your way to understanding the Fannie-Freddie drama currently gripping U.S. markets.
Anyway, go read it, if you're into that kind of stuff. Then come back and tell me if I've gotten it all wrong.
Update: Ha! Newsweek's Dan Gross had to write a quickie online Fannie/Freddie explainer too!
2 Comments to “Financial crises are more fun when they involve companies with goofy names like Fannie and Freddie”
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Friday, July 11, 2008 at 6:02 pm
Just a quick read through of it, Justin, and it looks like you sum things up pretty well. You should go into more detail about the decision to allow Fannie and Freddy to start wading into the jumbo market. Hank Paulson lobbied for that, didn't he? I remember seeing red lights going off mentally at the time.
Sunday, July 13, 2008 at 12:12 pm
"Ely also thinks that Fannie's and Freddie's charmed existence as private enterprises with tacit government backing can't continue. "What all this bailout talk does is blow away the notion that there's an 'implicit' guarantee. There is a guarantee, or there isn't."
It seems to me that, apart from the previous accounting scandals and the outsized CEO compensation packages that you mentioned, Fannie and Freddie basically did what they are supposed to do. Their current plight is the result of the crisis in the overall home mortgage market, rather than their own transgressions. Without Fannie and Freddie the crisis would have been much worse.