PrintThe extent of the disaster paralyzing America’s housing economy tragically unfolds in the pages of Fannie Mae’s 2008 annual report released last week.
Some tombstones in the graveyard:
• Last year Fannie lost more money that the entire gross domestic product of Bolivia, Burma or North Korea. Its $59 billion loss in 2008 is 12 times more than what the Federal government spends on cancer research each year or six-and-a-half times what we spend for school lunches annually.
• A year ago at this time, Fannie’s stock traded around $27 a share. Last weekend it was at 42 cents and falling. In order to stay listed on the New York Stock Exchange, by no later than May 11 it must bring the price of its common stock above $1,000 for 30 consecutive trading days.
• Fannie’s net worth fell below zero at the end of the quarter, forcing the once-proud company that four years ago was spending $10 million a year on lobbying to request $15.2 billion more in Federal bailout aid.
More than anything else, the 2008 annual report makes it crystal clear that the Fannie Mae whose CEO once told the nation’s mortgage lenders that “Fannie is the Coca-Cola of the mortgage industry and they are the bottlers” no longer exists. It’s time to end the charade. Fannie Mae is no more a company than the National Park Service, except Fannie’s losses make it 20 times mpore expensive to operate. Fannie and its sibling Freddie Mac are wholly owned subsidiaries of the Treasury Department.
Nearly half of Fannie’s loss occurred in the fourth quarter, after it was “placed under conservatorship” by the Treasury Department in September. Immediately Treasury began to use Fannie and Freddie to buy up mortgage backed securities at a loss in an effort to restore faith in the MBS market. Now it is clear that Fannie and Freddie will be the Obama Administration’s primary conduits for refinancing and modifying mortgages held by foreclosure prospects—and the costs will be borne by the taxpayers through the $200 billion of TARP funds set aside for the government sponsored enterprises (GSEs). It’s a good thing Fannie’s shareholders aren’t being asked to bear the costs because there aren’t many of them left, with the possible exception of hundreds of loyal Fannie employees who for years received performance bonuses in stock that is now worth less than the paper it is printed on.
Henry Paulson, in his final speech before leaving office in January, described the inherent conflict created by the GSE’s charters. Speaking in the past tense, he said the GSEs served both a public mission and private shareholders – they received public support but operated for private shareholder gain.
“The debate about the future of Fannie and Freddie requires answering the much larger and more important question of the Federal government’s role in the mortgage market and in housing policy, generally. Given the bubble we have experienced, policymakers must ask what amount of homeownership subsidies are appropriate. Numerous long-standing indirect subsidies already exist, including the mortgage interest deduction, subsidized FHA mortgages, and the variety of other HUD programs that expand homeownership opportunities,” Paulson said.
“Policymakers must decide if the GSE subsidy is a public policy priority. If the GSEs are to play a role, then, the debate is clearly framed: Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. Any middle ground is a recipe for another crisis,” he argued.
Paulson laid out three conditions for restructuring. Then he laid out three conditions. “First, there must be no ambiguity as to government backing. It must be explicit or non-existent. Second, there must be a clear means of managing the conflict between public support and private profit. Third, there must be strong regulatory oversight of the resulting institutions.”
With the passage of time it seems as though there will be little reason to worry about conflict between public support and private profit because there won’t be any of the latter. As wholly owned subsidiaries of the Treasury Department, there can be no ambiguity at all about their role. Delivering that message as clearly as possible to Wall Street investors holding their mortgage backed securities may indeed be the highest priority for Fannie and Freddie today.
Leave a Reply