(2008-09-06) Fannie Freddie Nationalized

The government announced yesterday they're taking over FreddieMac and FannieMae (Credit Crisis 2008). The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said. It is not possible to calculate the cost of any government Bail-Out, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation's history.

The Economist thinks this is a half-measure: they should be nationalized and then dismantled.

An explanation of why they pushed the Sub-Prime market forward (to distract regulators from their accounting scandals of 2004-2005). It also blames Democratic Party members of US Congress for blocking proposals to regulate these players.

• an article from 1999 about FannieMae relaxing its credit quality standards under pressure from the Bill Clinton administration.

• Thomas J Di Lorenzo thinks it goes back even further to the Community Reinvestment Act (CRA) of 1977.

  • but that really picked up after the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA) which set actual targets for Low Income Housing support for FreddieMac and FannieMae.

  • heh, 1999 article notes Andrew Cuomo pushing plans to raise the affordable housing goals for FannieMae and FreddieMac by 19% over the next two years. Wayne Barrett thinks these rules were key. Fannie had gone from $1.2 billion in Sub-Prime-mortgage and securities purchases in 2000 to $9.2 billion in 2001 and $15 billion in 2002. Freddie's numbers were murkier, but clearly also on the rise. In 2003 alone, the two bought $81 billion in subprime securities - which also count against the goals.

Charles Duhigg also focuses on the huge change in behavior since 2000. Between 2001 and 2004, the overall subprime mortgage market - loans to the riskiest borrowers - grew from $160 billion to $540 billion... Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers - more than three times as much as in all its earlier years combined.

Bill Burnham thinks it goes back just to FannieMae's Game Playing starting in the early 90s. Inherent in the GSE model.