Fannie and Freddie: 1 Year Later

This Monday, Sept. 7, is Labor Day. A day to celebrate. Relax. Forget about the hustle and bustle.

One thing we won't be celebrating is what went down exactly one year prior: The collapse, and subsequent government takeover, of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) .

In the year since, Fannie and Freddie have received roughly $96 billion in taxpayer support, incrementally, to keep their net worths above zero. Originally, a backstop of $200 billion was allocated to keep the two afloat. That number was later bumped up to $400 billion.

While not solely, or even mostly, responsible for Wall Street's collapse, this was really the first shot fired in what turned out to be the fiercest financial panic in generations. Within days of the mortgage giants' fall, Lehman Brothers went bust, Merrill Lynch fell into Bank of America's (NYSE: BAC  ) arms, AIG (NYSE: AIG  ) imploded, money market funds froze, and the funding mechanism that financed Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) vanished. It turned real ugly, real quick. The beginning of the end, in a sense.

Danger from day 1
Markets, investors, politicians, and homeowners knew all along that Fannie and Freddie were backed by the full faith and credit of the government. This was not your average bailout. Unquestioned government support was expected long, long before markets began to unravel. However flawed this was, it was their purpose: To have semi-private, semi-government, organizations guaranteeing liquidity to the housing market, kept alive by taxpayers at any cost.

It was that arrangement, though, that ultimately turned them into nuclear bombs. Back in 2004, fellow Fool Bill Mann wrote a fantastic article on how Fannie Mae operates, summing it up nicely:

Want to know why Fannie Mae is in trouble? It's simple enough: This company, more than any other in America, is run by, in the interests of, and with the protection from politicians, not businesspeople.

Fannie and Freddie had two bosses to answer to: private shareholders, and Congress. One side, theoretically, wanted calculated, prudent risk. The other wanted to make people happy, put everyone in a home, and get reelected. The chasm between the two interests is so vast that, in hindsight, ever assuming the outcome would be anything but terrible was truly unrealistic.

What now?
What happened last year happened last year. The question now should be what to do with what's left of Fannie and Freddie.

In a press release last September, then-Treasury Secretary Hank Paulson said, "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

All well and true. But it raises the question: What's changed since then? Are the two now less prone to blowing things up?

With a bottomless backstop, I suppose they are. But what's really changed in the past year is that the two now only have to answer to one master: Uncle Sam. Consequently, risk restrictions on refinanceable loans have been relaxed twice, first from LTV ratios north of 80%, then recently to 125%. Fannie Mae admits it isn't in the business of making profit anymore. Both can keep capital levels at or near insolvency, knowing more capital will be provided as needed.

Who accepts Fannie and Freddie's risk has indeed changed, but the amount of risk at hand has not.

I don't doubt that putting the two into conservatorship was the right thing to do. As Berkshire Hathaway (NYSE: BRK-B  ) co-chairman Charlie Munger noted, "Nationalizing Fannie Mae and Freddie Mac and promptly allowing all the sound loans in the country to be redone at low interest rates was a marvelous idea."

What's questionable is the path the two are currently on, post-nationalization: They have been effectively stripped of their duties to shareholders, now only obligated to serve a group whose priorities may wander away from what's beneficial in the long term, to put it politely. If you've ever watched the House Financial Services Committee debate, you know what I'm talking about. This isn't a group even vaguely qualified to run what's essentially a blind, drunk, multitrillion-dollar hedge fund.

You take it from here
At any rate, I want to know what you think. What should happen to Fannie and Freddie? Break 'em up? Nurse 'em back to health? Kill the two once and for all? Hit the reset button and start again? Feel free to share your thoughts in the comment section below.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Stock Advisor and a Motley Fool Inside Value recommendation. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.


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  • Report this Comment On September 04, 2009, at 12:50 PM, gilsh wrote:

    The main problem with the worries regarding Fanny, Freddie, AIG and their similar, near-solvent, bothers and sisters, is the impatience of analysts.

    If, instead of wondering, how on earth can these companies return their debts to the government in the coming decade, the question would be re-framed, the answer will be clear, and most worries will be put to bed.

    Time is the best answer.

    Instead of expecting the government to end its involvement in the coming decade, make it a silent partner, expecting to be bought out in small chunks, over the next 30 years.

    This will give money-makers like AIG (which is mostly an excellent company), the chance to pay back. surely, when economy returns to high-speed, the annual payments to the government will not be too difficult for those behemoths.

    As for fanny and freddie ? give economy its time, and a rather surprising part of those horrible loans will turn out rather less-horrible. it might be that due to their huge debt, and small profit margins, F&F will need more time than the real commercial financial players saved by the government. So let the government give them a 100 years to pay back the debt.

    This is, after all, a one in a century crisis. so lets take the time to deal with it, properly, and not hastefully.

  • Report this Comment On September 04, 2009, at 12:59 PM, skeptico wrote:

    What should happen to Fannie and Freddie? Break 'em up? Nurse 'em back to health? Kill the two once and for all? Hit the reset button and start again? These are vague questions. First of all, pay the executives no more than those paid at Berkshire Hathaway. Greed is incentive for cooking the books. Second, before dispersing bonuses, make it a rule that a company, especially these two, has enough capital to run for two years without profit. Our system of "a company is liquid so long as it can pay its bills as they become due" is bad for family financial planning, and ,worse, for corporate financial planning. Imagine a guy that spends every dime he earns and suddenly loses his job. He becomes a homeless bum. It's enough we breed hundreds of millions of them the traditional way, but let someone artificially create some, like companies, we are creating disasters waiting to happen. With companies, the creators can walk away with money in his pocket, and leave the mess to tax payers.

  • Report this Comment On September 04, 2009, at 1:42 PM, TheHonestFool wrote:

    As long as property values go down, FNM and FRE will be in trouble.The Administration's homeowners rescue plan is proceeding very slowly and encourages irresponsible behavior. A lot of homeowners attempt to be 2 payments behind in their mortgage loans in order to qualify for the rescue plan! This causes the property values to decline further, leading more homeowners to walk away from their properties, furthering the economic crisis.

    For a rapid economic recovery, the mortgage rates should go down to about 4% to increase demand for refinancing and home purchases. The declining real estate values must be stopped to decrease the foreclosures and some of the toxic assets at banks. The unemployment rates will decrease if real estate activities increase. In Canada, the recession has been avoided by lowering the mortgage interest rates to less than 4%.

    As a starting point, there should be a separate plan for those homeowners who have been responsible and paying their mortgages on time during the past 2 years. These homeowners should be given a 4% interest rate on the same amount of loan on their properties without any qualifying criteria other than a track record that shows their mortgage payments have been on time for the past 2 years. For this group of mortgage holder, there should not be a credit report, appraisal, income verification, etc. The idea is that if they could afford their present interest rate in these economic hard times, they could surely afford the lower payments with a lower interest rates. In a way this would be a stimulus plan as well; most of the money saved would be used by this class of homeowners to stimulate the economy. Also, the refinancing activities would have a positive effects on the real estate related industries and would reduce unemployment and stop the declining home values.

    To fund such a program, in addition to the traditional methods, a real estate security instrument could be created backed by the U.S. government with Tax Free status. In the current economic environment, the interest rates on banks’ saving accounts are very low and consumers are looking for safety. With the help of Congress, a U.S. government agency or a bank (through FDIC insured bank accounts) could sell (or auction) a "special TAX-FREE 15 and 30-year insured securities with 3.5% to 4.5% interest rate (or the actual auction rate) " and use the same money for lending to homeowners for about 4% for a 30-year amortized loan with at least 10-year or more fixed rate. This would create a rush in refinancing to pay off the current loans and in the process would get rid some of the toxic assets at banks. FNM and FRE will become

    solvent since the loans will become performing at a much faster pace than the present rate. The existing loans will be secure when demand for real estate is increased and prices start going up (instead of down).

  • Report this Comment On September 04, 2009, at 1:43 PM, beluga12345 wrote:

    We should consider that the financial crisis that we have been facing for the past 18 months or more demonstrates the need for a Freddie and Fannie to facilitate lending and guarantees to the American homeowner. Hank Paulson provided the American public with inaccurate information as to the financial condition of F&F last summer. He also provided inaccurate information as to the plan to use TARP to discard the toxic assets. He and others have been wanting to eliminate F&F because of the unfair competition that they perceive. But where would we be today if we were to rely on the unreliable Hank Paulsons of the world and the unreliably regulated Wall Street in general to ensure that mortgage financing is available to the American public and economy? F&F should remain in a role similar to what it had before albeit revised in order to ensure transparency and avoid runaway greed. I like the proposition that Ben Bernanke advanced recently:

    PRIVATIZATION WITH PAYMENT FOR INSURANCE

    Policy-makers might return the companies to investors and offer to insure Fannie Mae and Freddie Mac investments.

    Washington could charge the companies a fee to underwrite their debt and some of their mortgage securities as a way to nurture the housing finance sector without standing squarely behind the companies. This idea, aired by Federal Reserve Chairman Ben Bernanke, would be akin to the Federal Deposit Insurance Corporation's protection of banks.

  • Report this Comment On September 04, 2009, at 1:53 PM, rogeradhikari wrote:

    "Want to know why Fannie Mae is in trouble? It's simple enough: This company, more than any other in America, is run by, in the interests of, and with the protection from politicians, not businesspeople"

    I am sorry, do you really think people are that stupid to buy this argument anymore; aftermath of what we just went through (still going through) as a result of the the utterly incompetent business executives?

    Please don't underestimate the intelligence of the general public, just because you have a portal to express your view.

  • Report this Comment On September 04, 2009, at 3:23 PM, chanakya21 wrote:

    The main problem with our federal government and Fanny, Freddie is the quality of their financial staff and MBAs who are outsourcing the duties as well as responsibilities they are suppose to perform and then reward themselves with huge bonuses. They outsource not only the jobs but oversight responsibilities too because they cannot or are not capable of keeping up with the changes in federal rules and regulations. One contractor performs the task and other checks whether it is done correctly! Then our federal employees or government owned business get the credit and if something goes wrong they shift blame onto others. And as soon as they retire these Directors, deputy directors and other chiefs are given good jobs by the contractors. Look at the musical chair game being played by Hank Paulson, Rubin and others who think they know how to solve the problems but they did not know how they could avoid them. They had no clue how the banks and F and F were doing before all this mess was created or may be their jobs were also outsourced and they were just collecting millions in bonuses!

    Follow the path some of these retirees have taken and you'll see that these people were working NOT for the government or government backed organizations but were bribed or bought by the contractors. Show me one CEO or CFO or Directors of these failed agencies who was ethical and competent or who was not blinded by the huge bonuses and future career plans. If they were competent this would have not happened. We reward incompetence, unethical behavior. These people can sell the country also. They already did that by bringing it to its knees and bankrupting it.

  • Report this Comment On September 04, 2009, at 4:43 PM, DownEscalator wrote:

    "...AIG (which is mostly an excellent company)..."

    That's like saying the Nazis mostly ran an excellent government.

  • Report this Comment On September 04, 2009, at 5:33 PM, Netteligent09 wrote:

    Fannie and Freedie have a great value and excellent mission. As long as there is no hidden agenda, they are the backbone of our country.

    Thank you to Republican President George W. Bush, Wizard Alan Greenspan, and reckless policies brought America down to its knees.

    Like Madoff, past management should bring to justice, if find guilty, prosecute them to full extent of the laws.

  • Report this Comment On September 04, 2009, at 6:09 PM, NoMoeMoney wrote:

    Its all just a big game of MONOPOLY, fake houses, fake real estate, fake money. Just wait tell the games over, and the loser has a temper tantrom and flips the board...

  • Report this Comment On September 04, 2009, at 6:09 PM, Dupedbyfandf wrote:

    Nobody is talking about how thousands of investors were duped into buying Preferred Shares of Fannie and Freddie just weeks before the collapse. The people running Freddie and Fannie duped all of us by representing that they were solvent and that we should buy their preferred stock. If you or I did this we would go to jail, they basically walked away with golden parachutes from our hard earned money that we invested in good faith. They are no different than a Bernie Madoff, where were the disclosures and representations that they were on the brink of insolvency???

  • Report this Comment On September 04, 2009, at 6:30 PM, warrenrial wrote:

    I think you mean Obama has braught the country down.

    I guess some of you guys learn the hard way, or maybe never do.

  • Report this Comment On September 04, 2009, at 6:43 PM, dc46and2 wrote:

    Kill 'em once and for all. Establish a monetary system aimed at constant value. Require 100% bank reserves. Let the market decide the interest rates and who will be able to pay back their loans. Let broke businesses go broke. Corporate officers who steal or cook the books go to jail. Laissez faire.

    "Want to know why Fannie Mae is in trouble? It's simple enough: This company, more than any other in America, is run by, in the interests of, and with the protection from politicians, not businesspeople"

    I couldn't agree more.

    Freddie and Fannie are the backbone of our country?! ROFL

    Greenspan was a Wizard? Harry Potter save us all!

  • Report this Comment On September 04, 2009, at 7:02 PM, Coreygranny wrote:

    Freddie and Fannie should be allowed to fail. Private industry is better at running profitable businesses, and the government should get out of all businesses, especially the banks, and we should get rid of the International Monetary Fund, the Federal Reserve and the Central Bank. We should leave the government to protect our borders. Period.

  • Report this Comment On September 04, 2009, at 7:04 PM, jrc1944 wrote:

    I dont know why they didnt let these two go down the tube. Why are they different to you and me. I tried to get the make a home affordable loan (refinance beause I am current with my ;oan but am having trouble making payments) they say I cant qualify because freddie mac bought out my loan from Bank of America and they dont let this happen. If the thing is run by the government who in the heck come up with the make a home affordable program. Our lovely Pres.

  • Report this Comment On September 04, 2009, at 7:09 PM, njdo wrote:

    The government should get out of housing market completely. At this point congress is simply trying to protect the investors and banks who are holding bad paper and they are shifting the cost to the taxpayers.

    The politicians job is to convince taxpayers that it's a good investment that will return real value to the taxpayers.

    The problem with the government being involved in any program is that Congress is always beholden to the industries who contribute to their campaigns. "Democratic" logic doesn't apply at all to what is purely a business transaction between a congressman and a lobbyist. It costs millions to run a congressinal campaign and keep an office open in Washington. Just ask Chris Dodd. So, if you're seeing laws passed and programs enabled that really don't make sense... like %125 LTV loans or government bailouts for Freddy and Fannie, just apply the principle "cui bono".

    Other examples are already existing health care programs like medicare and medicaid and social security, which always expand to exceed their budgets. THERE IS NO LIMIT because congress can always RAISE TAXES or just BORROW MORE MONEY. Have you forgotten that the fed is a private bank and collects interest on money it loans to the government (which we pay). A quarter of a percent on 12 trillion is a lot of dough.

    It's so sad to see fellow Fools chiming in about how expansion of the governments role in ANYTHING could possible benefit the economy at this point. It's like poking a hole in a sinking boat to let the water out. Better idea is to just plug the leak. If you want to now what America's going to look like 2 or 3 years from now, just check out Detroit or El Paso. You can't make money fast enough to satisfy this whore!

  • Report this Comment On September 04, 2009, at 7:19 PM, ecstuff wrote:

    Kill Fannie and Freddie once and for all. Arrest the two swindling CEO thieves that swindled multi-million dollar bonuses/salaries, get this money out of their 'freezers' and put them in jail on public display

  • Report this Comment On September 04, 2009, at 7:21 PM, fordmaan wrote:

    Excuse my ignorance please but if i bought feddie mac preffered shares before the collapse do I still own them or are they invalid so to say. I see the value is down but I don't understand how the governent take over affected me. They still show on my Scott trade account so i assume I still own them, am I right?

  • Report this Comment On September 04, 2009, at 8:59 PM, showmegw wrote:

    It isn't likely that it is going to matter much what you do with F&F if the appraisal system in the country stays broken. There is a real problem out there that allowed the overvaluing of property values leading up to the system failure. Now the problem has reversed itself to the extreme the other way and is causing another problem related to under valuing real estate. There is an enormous level of ignorance and incompetency in the apprasial world. The people at F&F are not the ones that can know that, even if they didn't have other problems. So when they thought they were making a 100% loan (which may not have been such a great idea) they may really have been making a 115% or 125% or more loan because the value was distorted by the appraiser to the loan originator. This had been going on for a long time and it wasn't created by F&F. Now we have the same bunch of people running around scared of the level of what will happen if they happen to appraise something too high, screwing up the values again. Only this time they are understating everything way to the extreme and doing all nature of stupid stuff. The object now seems to be to try to justify just how low the value can get. They are using foreclosures and short sales as comps. They are using $20 and $30 adjustment factors for differences in square footage sizes. On top of this there is so much volume of appraisal work with all the refinancing that they are causing a big delay in the process. This is adding to the woes of the people trying to refinance. Fannie and Fredie were government owned entities in years past and eventually were moved to the open market. They served well for years. Then there were too many changes made by different governing bodies and things were allowed to get out of hand with relation to value versus loan amounts. They can still recover if things are handled right. It will take years to absorb the losses. These losses are going to have to be worked out they are not going to just evaporate and the taxpayers should not be made to swallow it. Panic will not solve the problem. Some of the problem will correct itself if we can get back to a sensible level of confidence in the system that values the underlying property.

  • Report this Comment On September 04, 2009, at 10:05 PM, drericrasmussen wrote:

    Before F & F were allowed to go public they stuck with their program of supporting home finance. Then the executives of this firms realized that they salaries were far less than those of the private sector. So they persuaded Congress to let them go public pointing out that this would provide access to a far larger pool of capital. But it created mission confusion. Is the mission to support home ownership or become a market leader, a hot stock and stuff our pockets with bonuses and options? Guess which path they took! Even before 2000 they were fudging the books to "make the numbers" and keep Wall Street happy.

    The US can keep the preferred shares operating (basically a bond anyway) but we should not issue common shares again. We should keep F & F as a support for the housing finance market but not allow it to become the dominant player again.

  • Report this Comment On September 04, 2009, at 10:19 PM, ozzfan1317 wrote:

    Fordmaan at thwe moment the company is still public so yes as far as I know ou still own them but at a fraction most likely of what you paid.

  • Report this Comment On September 04, 2009, at 10:19 PM, ozzfan1317 wrote:

    I mean they are worth a fraction of that

  • Report this Comment On September 04, 2009, at 10:23 PM, buntyp wrote:

    Whatever will eventually happen with F & F is anybody's guess, because the musical chairs bizness is seemingly on a self-perpetuating path.

    What must be of real concern to Foreign Creditors, is who or what to take seriously in the U.S. anymore.

    The Financial melt-down which happened as a direct result of the whole Housing bizness, affected Foreign Banks, & other Investors with an initial lick of approx. 3.5 Trillion $ U.S.

    When they, the Foreign Creditors, are trying to figure out how much more should they cough-up to keep the U.S. viable, they are now hearing every kind of gobbly-gook explantion as to how the problem came about, & followed by all kinds of gook-gobbly analysis of what next to do,

    They have nothing to gain by the 'Crash' of the U.S. Dollar, so they are treading very carefully, but watching the largest & most influential Economy on the Planet, being attended to by the 'Keystone Cops'.

    There is Nothing very funny about any of this, & the Un-intended conseqencies are already showing up.

    What to do about F& F, is already a consequence.

    Time is on nobodys side at this juncture, & the U.S. Govt. is steadily losing Credibility, as this kind of 'Rabid Elephant' is loose in the 'China Shop'.

    Pun Intended.

  • Report this Comment On September 04, 2009, at 11:24 PM, 1winter80 wrote:

    I think the only choice is to nurse them back to an acceptable level. I lost a lot of money on those two invesments, because what they were doing toward education, and finance was very worthwhile.

  • Report this Comment On September 04, 2009, at 11:34 PM, HENRYMCLIV wrote:

    Yes, yes I (and my wife) bought preferred stock in F&F just weeks before the fall, at the urging of our broker, who is normally conservative. We also lost our money in Thornberg mortages. He also was duped into buying Thornberg. I have a degree in macro economics, she is mensa material and he is also bright, but none of that counts if the balance sheets and other disclosures are created to deceive and evoke a sene of confidence that is a gross fabrication. Cereative accounting artists will face the fireing squad when I am dictator.

  • Report this Comment On September 04, 2009, at 11:37 PM, gmcgfool wrote:

    Please read the earlier comment by TheHonestFool. There are hundreds of thousands of us who pay our mortgages on homes we can afford and are not "under water". We then also are taxed to pay for the multitude of mismanagements by government, including but not exclusive to F & F, and the greed of lending institutions that got us where we are today. There is no remedy for us -- or our children, grandchildren, great-grandchildren, great-great-grandchildren. We are the innocents in the current financial devastation and then the financial burdens are placed on the lives of our descendents yet to be born. THAT IS THE PRICE WE ARE ASKED TO PAY FOR HANDLING OUR PERSONAL FINANCES RESPONSIBILY.

  • Report this Comment On September 04, 2009, at 11:52 PM, spiralclimb wrote:

    It doesn't really matter. I've sold real estate for 34 years. Nothing resembles the way real estate was finaced 34 years ago and I don't think we would recognize the same landscape 34 years from now.

    The population is expanding, folks need a place to live and politicians wanting to be re-elected know that. Some folks will win, some folks will lose. The markets will adopt and guys like me will still make a living.

  • Report this Comment On September 05, 2009, at 2:16 AM, IRONRHINO333 wrote:

    Ok, let’s see sell the loans to banks and other institutions and let the two companies go under. Hold the CEO's accountable for the problem. Why should the tax payers money be used to bail out a company! Let it go! Let pure capitalism prevail let someone who wants to succeed and get their hands dirty do the job that Freddie and Fannie can’t do.

  • Report this Comment On September 05, 2009, at 7:58 AM, tomd728 wrote:

    Alexis,

    Will 1 trillion do it ? I don't read much in here about the worsening real estate scenario.There are too many reasons to list why "performing" and "prime"

    mortgages are heading south as well.

    I'm not here to make a point that's been missed or sound real bright by offering solutions.Why ? The

    cows are not home yet.

    GNMA could follow this debacle regardless of the "appearance" of it's holdings.

    Once the spectre of doubt rises, funding from the

    public dries up quickly as we have seen with other

    quasi agencies.

    We'll see how it plays out but the missing ingredient,

    honesty, is under the rug.

    Tom

  • Report this Comment On September 05, 2009, at 10:40 AM, sumthinfishy wrote:

    Folks:

    Very few of the replies I have seen actually speak about the real issues plaguing the "too big for their britches"......I mean "too big to fail" financial companies. Please do not forget that the real issue is why was the entire derivative and subsequent credit default swap financial tools allowed to exist without any meaningful regulations. This is by far stupider than the phony baloney home loans that were used as the underpinning for almost all of the failed securities that are the root cause for what may be the global failure of all of the world's business, and has more relavence than all the white noise we have endured about some rather unimportant millions larded on to the well placed idiots that are still working for any of these gigantic financial belly flop companies.

    As far as I can tell there is plenty of blame to go around, so even after our current politicians try to dodge and parry and push others to the front of the line and shove others under the bus, there will be a bunch of blame left over for all that were involved in making or approving or allowing these occurrences, which in a perfect world would include past politicians that have rendered such bad service to the people who have elected them and expected them to uphold their oaths of office they took to protect this country.

    Here is some information about "the beginning of the end" from a prior post.....

    "At the end of the day we see that J P Morgan Chase created these instruments of money destruction, (they have been allowed to continue living so far as I know, they should really be killed soon!); were hustled into law by the Texas crony of GWB, Phil Gramm, (R-Texas), (Between 1995 and 2000, Gramm was the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. During that time he spearheaded efforts to pass banking deregulation laws, including the landmark Gramm-Leach-Bliley Act in 1999, {http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=10...}, which removed Depression-era laws separating banking, insurance and brokerage activities), and then signed by Bill Clinton over Christmas about a month before he left office, without review or oversight by any body with any party affiliation as an attachment to the overall spending bill for the country, (not a nice thing to do, Bill, you should have noticed the dog poop smell!). What a mess!"

    Credit Default Swaps were invented in 1997 by a team working for JPMorgan Chase. They were designed to shift the risk of default to a third-party, and were therefore less punitive in terms of regulatory capital.

    Credit Default Swaps became exempt from regulation with the Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole. U.S. Sen. Phil Gramm (R-TX) introduced the Act on behalf of financial industry lobbyists. The Modernization Act was rushed through Congress as a companion bill to the omnibus spending bill, the last day before the Christmas holiday. It by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes. The omnibus spending bill, which was 11,000 pages long, is the financial plan the government requires for everyday operations. President Clinton signed the bill into Public Law (106-554) on December 21, 2000.

    For your continued amusement and disgust here is the Gramm-Leach-Bliley Act of 1999:

    http://banking.senate.gov/docs/reports/s900sum.htm

    This is the stinker that undid our country!

    So we may find that the hubbub about the "retention bonuses" and high compensation packages for senior banking employees is interesting; and the call to beat up anyone involved with any miscues related to the bailouts are unanimous; and the work to stabilize the finances of Planet Earth may make us feel warm and fuzzy at this second; and that the current changes in personal spending behavior, which is a lot like "being saved" may feel like the right thing to do; and the certainty that we will not trod down this muddy path again is resolute....it still does not answer the big question which is "WHY DID THIS HAPPEN?"

    The Gramm-Leach-Blily Act needs to immediately be revoked. The markets spawned from this misdirected piece of.......legislation needs to be reviewed for legality. If this dangerous business is found legal it must be rescinded, forgiven and any untoward profiting from this stupid business must be reversed in order to save the rest of the financial well being of our planet.

    The current fear is that the size of this money bomb is 600 to 700 trillion dollars. It obviously is a fabrication and a con scheme of some type as that amount of money does not exist on this planet. This is some type of theoretical, financial nightmare.

    It is time to act to halt all business involved with credit default swaps and derivatives based upon unsubstantial debt that was packaged as AAA rated and insurable financial instruments, (thanks to AIG).

    I hope this will lead to the time when we root out the frauds and their flunkies and their paid politicians and punish them.

    I'm getting pretty sick of this crap. Where is the investigation and where will they hang the criminals who are terrorizing everyone in the world with these financial flubs? So far the only prosecutions have been for the very obvious Ponzi scheme artists, when will get to the big fish in the pond!!!

    Good Luck!

  • Report this Comment On September 05, 2009, at 10:53 AM, MORK000 wrote:

    WE NEEDTO THROW OUT AT LEASE 400 OF OUR REPRESENTATIVES & SENATORS. ESPECIALLY THOSE THAT HAVE MORE THAN TWO TERMS IN OFFICE.

  • Report this Comment On September 05, 2009, at 12:11 PM, Howard1ii wrote:

    First, control must be taken out of the hands of politicians "The other wanted to make people happy, put everyone in a home, and get reelected." Especially since congressmen like Barney Frank, have NO financial experience, and clearly have no understanding of what they are "managing" and are still in denial that their policies help create this mess in the first place. I would vote for someone out of FDIC or some other government agency to oversee and manage the risk they take on.

  • Report this Comment On September 05, 2009, at 12:23 PM, wiseclack wrote:

    F&FM are not too big to fail.

    Yes, government should not be in the business of housing,but since they are elected officials shoud see to the orderly beakup of this monstrositiedOoops I assume too much.

    wiseclack

  • Report this Comment On September 05, 2009, at 3:30 PM, x1x2x3x4444 wrote:

    First of all, a lot of people need to go to jail. You will accomplish nothing, anywhere, if the thousands of people responsible for this fiasco are not held accountable. This was a gigantic criminal enterprise involving real estate, banking, mortgage, construction businesses and others. Who is being held accountable? No one.

    Second and lastly, you can never have a for-profit company whose losses are guaranteed by taxpayers without creating a disaster. It's apparent no one learned anything from the S&L collapse of the 1980s when the government allowed S&Ls to invest in practically anything riskier than its traditional home loans while allowing the government (i.e. taxpayer) guarantee on despositors' money to stay in place. This is essentially what happened with the so-called mortgage crisis. Yet, as I said earlier, no one is going to jail.

    It doesn't matter what we say here. There are ways out of this mess, I am sure. But what I am equally sure of is that we will take some other, more expensive path that will only lead to another multi-trillion dollar fiasco with everyone walking around wondering what hit them.

    Happy Labor Day.

  • Report this Comment On September 05, 2009, at 5:37 PM, cvmatheo wrote:

    Greed is a great motivator .When you have something great you want more.When you are above the fray it becomes a must have.So if you or I can make a lot of money of from another's foolisness we will do so without blinking an eye.We will stop when we are caught if,you take everything we have and give it to all that lost through our actions,not there own.Put them in jail and take everything they have.

  • Report this Comment On September 05, 2009, at 6:48 PM, dibo528 wrote:

    Fannie and Freddie were not the culprits of the mortgage meltdown, they were the victims. The real culprits were the predatory lenders, like Ameriquest, which donated $7.8 million to Bush's reelection campaign. In 2005, at the same time that Bush appointed the owner of Ameriquest as ambassador to the Netherlands, Ameriquest was being investigated for fraudulent lending practices. People went bankrupt because of Ameriquest.

  • Report this Comment On September 05, 2009, at 6:58 PM, xetn wrote:

    I completely disagree that it was the "right thing to do" bailing both of these "companies" out of their problems. It has exacerbated the problem and they should have declared bankruptcy. In fact, they should never have been created.

  • Report this Comment On September 05, 2009, at 7:17 PM, Vesta108 wrote:

    I agree with gmcgfool. Whenever my (taxpayer) money is involved in subsidizing government-backed organizations, we need to have more accountability and not less. In private sector performance is rewarded based on merit and not the right (so is the right to keep your job). We should level the playing field for all : let the failures fail, and sound business succeed. How else will you encourage fair practices? I don't want to pay higher taxes to reward greedy, dishonest CEOs wasting my money on personal short term gains. We are already paying too much in various taxes. Government and publicly traded companies should reward all management on merit, after enough time had passed to show the effectiveness of their strategy. Bonus should be conditional upon proof of their performance in the future date.

  • Report this Comment On September 05, 2009, at 7:52 PM, 123spot wrote:

    sumthinfishy, you are on target like a heat guided missile. I hope you have some influence and ambition worthy of your grasp of this issue, for the sake of our country and our world.

    You may be interested to learn that one of the reasons why the Financial Services Modernization Act was passed, deregulating the banking industry, was to allow U.S. banks to compete with E.U. banks which were similarly deregulated by the 1989 E.U. Second Banking Directive. See Congressional recor d on G-L-B Act). Although jumping off of a cliff to compete with a prior jumper, as our mothers told us, may break our necks (and did), that has not kept the world/ the President/ or Geitner from accepting U.S. blame as we followed Europe's leap into deregulation of banks in order not to be left behind. As long as we have a global economy, we will need global solutions.

  • Report this Comment On September 06, 2009, at 4:24 PM, armdable wrote:

    It seems F & F helped the housing crisis to recover. Maybe, the present situation is analogous to the proverbial "one hand washing the other". What may help is for the regulators to learn avoid repeating past mistakes; plug corruption as much as possible, etc.

    armdable

  • Report this Comment On September 07, 2009, at 11:41 AM, ongdynasty wrote:

    To have a system for those on housing loan, for their employer to deduct a percentage of their salaries monthly and pay their lender through a government body.

  • Report this Comment On September 07, 2009, at 12:18 PM, Chrisp812 wrote:

    The Govt should take Fannie and Freddie from conservatorship into receivership. This will prevent FnF from having a dual conflicting mission. The mission to earn money vs the mission to put people into homes got both of them in trouble. Even the exeutives are finding themselves either at odds with their Congressional "bosses" or at odds with their shareholders.

    The best solution is to make them have one boss - the Treasury. Private mortgage can still exist and compete and we hopefully avoid the meltdown of 125% financings.

    This should be decided before giving FnF any more money, not delayed as the situation is bound to happen again if this underlying structure continues.

    I feel bad for shareholders as they will be wiped out, but the same happened to Lehman a year ago with a much higher market cap.

  • Report this Comment On September 07, 2009, at 5:10 PM, NFLNostradamus wrote:

    There will be nothing effectively done to extract the greed from this systemic failure. It will merely be reconstituted to the continued detriment of many and the benefit of few. I'd be against private equity interests prevailing here just as much as I would be against private equity prevailing in an equally bad disaster as what's happening with the FDIC and it's imminent reliance on Treasury credit if/when smaller banks start to fail in epidemic proportions. Best scenario would be to immediately eliminate all interest on Fannie/Freddie mortgages and reduce current valuation by 75-percent. This should all be done without investor inclusion...period....refi everybody in the system now and sell off the foreclosed inventory only to homebuyers buying their primary residence in this way for however long it takes.

  • Report this Comment On September 07, 2009, at 7:42 PM, harrytong76228 wrote:

    FNM, FRE, AND AIG COMMON STOCK WILL SKYROCKET WILL THE SMOKE CLEARS.

    HERES WHY:

    GOVERNMENT PLEDGED TO INJECT UP TO $400 BILLION TO KEEP THE GSE'S SOLVENT.

    GOVERNMENT ALREADY INJECTED OVER $180 BILLION TO KEEP AIG SOLVENT.

    GOVERNMENT WILL MAKE SURE THEY GET THEIR MONEY BACK, THE ONLY WAY TO DO IS IS NOT BY MAKING THE GSE'S AND AIG PAY THEM BACK, BUT BY CONVERTING THEIR WARRANTS INTO COMMON STOCK AND SELL THEM AT A MUCH HIGHER PRICE.

    DO NOT BE FOOLED BY THESE STUPID FINANCIAL ANALYST SAYING THAT GSE'S AND AIG IS DOOMED TO FAIL AND IS WORTH NOTHING.

    THE COMMON STOCK MUST GO UP FOR THE GOVERNMENT TO GET THEIR MONEY BACK!

    THIS IS YOUR CHANCE TO GET IN BEFORE IT IS TOO LATE.

    -LONG FNM, FRE, AND AIG

  • Report this Comment On September 07, 2009, at 7:43 PM, harrytong76228 wrote:

    FNM, FRE, AND AIG COMMON STOCK WILL SKYROCKET WHEN THE SMOKE CLEARS.

    HERES WHY:

    GOVERNMENT PLEDGED TO INJECT UP TO $400 BILLION TO KEEP THE GSE'S SOLVENT.

    GOVERNMENT ALREADY INJECTED OVER $180 BILLION TO KEEP AIG SOLVENT.

    GOVERNMENT WILL MAKE SURE THEY GET THEIR MONEY BACK, THE ONLY WAY TO DO IS IS NOT BY MAKING THE GSE'S AND AIG PAY THEM BACK, BUT BY CONVERTING THEIR WARRANTS INTO COMMON STOCK AND SELL THEM AT A MUCH HIGHER PRICE.

    DO NOT BE FOOLED BY THESE STUPID FINANCIAL ANALYST SAYING THAT GSE'S AND AIG IS DOOMED TO FAIL AND IS WORTH NOTHING.

    THE COMMON STOCK MUST GO UP FOR THE GOVERNMENT TO GET THEIR MONEY BACK!

    THIS IS YOUR CHANCE TO GET IN BEFORE IT IS TOO LATE.

    -LONG FNM, FRE, AND AIG

  • Report this Comment On September 07, 2009, at 7:44 PM, harrytong76228 wrote:

    FNM, FRE, AND AIG COMMON STOCK WILL SKYROCKET WHEN THE SMOKE CLEARS.

    HERES WHY:

    GOVERNMENT PLEDGED TO INJECT UP TO $400 BILLION TO KEEP THE GSE'S SOLVENT.

    GOVERNMENT ALREADY INJECTED OVER $180 BILLION TO KEEP AIG SOLVENT.

    GOVERNMENT WILL MAKE SURE THEY GET THEIR MONEY BACK, THE ONLY WAY TO DO IS IS NOT BY MAKING THE GSE'S AND AIG PAY THEM BACK, BUT BY CONVERTING THEIR WARRANTS INTO COMMON STOCK AND SELL THEM AT A MUCH HIGHER PRICE.

    DO NOT BE FOOLED BY THESE STUPID FINANCIAL ANALYST SAYING THAT GSE'S AND AIG IS DOOMED TO FAIL AND IS WORTH NOTHING.

    THE COMMON STOCK MUST GO UP FOR THE GOVERNMENT TO GET THEIR MONEY BACK!

    THIS IS YOUR CHANCE TO GET IN BEFORE IT IS TOO LATE.

    -LONG FNM, FRE, AND AIG

  • Report this Comment On September 07, 2009, at 7:44 PM, harrytong76228 wrote:

    FNM, FRE, AND AIG COMMON STOCK WILL SKYROCKET WHEN THE SMOKE CLEARS.

    HERES WHY:

    GOVERNMENT PLEDGED TO INJECT UP TO $400 BILLION TO KEEP THE GSE'S SOLVENT.

    GOVERNMENT ALREADY INJECTED OVER $180 BILLION TO KEEP AIG SOLVENT.

    GOVERNMENT WILL MAKE SURE THEY GET THEIR MONEY BACK, THE ONLY WAY TO DO IS IS NOT BY MAKING THE GSE'S AND AIG PAY THEM BACK, BUT BY CONVERTING THEIR WARRANTS INTO COMMON STOCK AND SELL THEM AT A MUCH HIGHER PRICE.

    DO NOT BE FOOLED BY THESE STUPID FINANCIAL ANALYST SAYING THAT GSE'S AND AIG IS DOOMED TO FAIL AND IS WORTH NOTHING.

    THE COMMON STOCK MUST GO UP FOR THE GOVERNMENT TO GET THEIR MONEY BACK!

    THIS IS YOUR CHANCE TO GET IN BEFORE IT IS TOO LATE.

    -LONG FNM, FRE, AND AIG

  • Report this Comment On September 07, 2009, at 10:52 PM, kkennedy02 wrote:

    The Brokerage World kills me. Freddie and Fannie are not the culprits here. The lack of oversight by POLITICAL leaders of W's administration were. Now the safest investments for short term profits are companies like Freddie and Fannie. At least they've got the government propping them up. Why are we demonizing POLITICAL action here? THE free market ran us into the ground. Don't cry "socialism" at this administration. The socialist protection of the wealthy was well in place by a FREE MARKET BUSH crowd. I'll continue to trade "protected" stocks...safe bet if you get in and out. Can you say "A I G?"

  • Report this Comment On September 08, 2009, at 9:43 AM, BWoodsmall wrote:

    I still don't see why the government needs to supply liquidity to the housing market. It makes loans available, but the availability of all those loans just drives up the price of a home! So who does it really help? Without the artificial liquidity, people would not be able to borrow nearly as much, but they wouldn't need to borrow as much, because the prices would be lower.

    I recognize that interest rates would be higher, making monthly payments higher, and this would probably (at least in some parts of the country) more than offset the benefit of lower home prices. So it would take additional years of scrimping and saving for a middle class family to save enough for a down payment, since they would need a higher percentage down payment, because of less money available to borrow. The interest rates would be higher, and they wouldn't be able to borrow at a low rate for 30 years. Maybe 10 years would become the norm, with a higher interest rate than today. People would scrimp and save for 3 to 4 years longer than they do now, just to get the down payment. Then they would buy a smaller house, then they would continue to scrimp to accellerate paying off the house in 8 years instead of 10.

    But then they would have a PAID FOR HOUSE, which they could sell and make a down payment on a bigger house, if they wanted to. If you think this seems unworkable at today's home prices, remember that today's home prices are still artificially high, held up by fannie and freddy. Without this non-market based liquidity, prices would be lower. People would still have to settle for a smaller house, I believe, but what would be so wrong with that?

    I know that transitioning to this would be painful, since housing prices have been inflated for so long by the government (through freddie and fannie), and even after this crash they are still inflated. I just think that sooner or later we are going to have to pay the piper, so we might as well do it now. We can get to a much better, sustainable and truly strong economy by letting the market take care of funding for home mortgages, and forcing all of us to deal with reality and make our decisions accordingly, rather than letting us pretend that we are richer than we really are by playing in Barney Frank's LaLa land.

  • Report this Comment On September 08, 2009, at 8:51 PM, Netteligent09 wrote:

    Investigate and prosecute SEC, Fannie and Freddie managements.

  • Report this Comment On September 08, 2009, at 8:57 PM, Netteligent09 wrote:

    No Job. No Document. No Down Payment. Want a Few Hundred Thousand Dollars Loan for a Little Shoebox in California. No Problem. Everybody can get a loan.

    President George W. Bush, Alan Greenspan, Crooks in Congress and Republicans: Mission Accomplished.

    Long on AIG, FNM, FRM

  • Report this Comment On September 11, 2009, at 2:30 PM, slof1955 wrote:

    Does a similar fate await Ginnie Mae?

  • Report this Comment On September 11, 2009, at 6:53 PM, venturen wrote:

    The equity in FRM FNM is zero. Real estate will not recover for more than a decade. Allowing unlimited mortgage drove hyper real estate inflation and all you people on this site may not live to see your house price go above where it was in 2005. There are so many skeletons hidden across the board that the government may go broke trying to fix them. We have promise so much and allowed housing to get so far ahead of wages we are in a no win situation. How much does your state owe you public employees in early retirement and healthcare. Who is paying for that in a down down economy. Bankruptcy is good because you get to a clean slate.

  • Report this Comment On September 14, 2009, at 10:36 AM, aposak wrote:

    The gov't needs to get back to the rule of law.

    As I understand, FNM and FRE's original mission was to free lending institutions' capital to work in the economy. It's a good mission, and the freed capital provides more opportunities for economic growth throughout the economy and lower loan rates for homebuyers.

    Because FNM and FRE are and have always been associated with the government, they need to get back to the rule of law. Set conservative terms (minimum 20% equity, no other leins on property) for loan buying that have been proven to be low risk. Let the private sector chase the subprime profits at their own risk. They may have bought a lot of bad loans this past bubble, but if the lenders had skin in the game, those loans likely would have not been offered in the first place.

  • Report this Comment On September 15, 2009, at 8:28 AM, njdo wrote:

    The integrity of any program with implicit government backing will always be subverted by industry lobbyists thus leaving taxpayers as the ultimate bagholder. There are only 100 senators and 435 representatives and they never agree on anything consequential, they also are obviously suffering from sensory overload and lack of mental processing faculties so are prone to accept instruction from dictatorial executive branch degenerates and industry people handing them money. There is only one program in Washington that really works and that is the government cranking up programs of any kind so they can increase their budgets, increase their staffs and office space and continue to prostitute themselves for campaign contributions and an increasingly large slice of whatever corruption cake is available. Since the colonies were first planted here by European corporations, the aristocracy has been consolidating their share of the economic pie by their manipulation of elected puppets and consolidation of control of the financial system via the non-Federal Reserve.

    The availabilty of high LTV loans makes it easier for people to buy houses and that pushes up demand causing higher prices so there is always the incentive for private industry to push congress for easier credit and lower loan standards. I like the idea of 80% LTV loans then using private mortgage insurance to cover the balance. Eliminate any implicit government guarantee and eliminate housing agencies. That way mortgage lenders and PMI companies are financially responsible for the loans they make. The government should also eliminate some types of derivatives and the tranching of mortgages because obviously they don't work and there doesn't appear to be any cost effective way to monitor that market. The companies have failed to regulate themselves, the SEC and CFTC have failed to regulate because of lobbyist pressure and the companies have failed to take financial responsibility for their own failures and want now taxpayer bailouts that we simply can't afford. Now the Fed has us on the hook for trillions of dollars and they're even refusing to disclose what they're doing with taxpayers money. This is a PRIVATE BUSINESS and they're raping the taxpayers and ignoring Congress. We should tell them to get lost and we're not paying them.

  • Report this Comment On September 16, 2009, at 9:01 PM, jsudol99 wrote:

    Fannie has been fine for 69 years, Freddie for 38 until their arms were twisted and they were forced to lower their loan qualification standards by Dodd and Frank, two of the biggest fools in congress ever. Don't allow congress to do anything with the GSE's that will allow congress to some how siphon off any money, hire their friends and family or create any new entities that will largely provide the same service that Fannie and Freddie have done for decades being the secondary mortgage market. Just simply make the requirements for them to purchase loans the same they were for years, 20% down or PMI, 28% of your monthly gross pays the taxes, mortgage & insurance and 33% pays taxes, mortgage, insurance and all other monthly debt payments. There is nothing to fix just make the standards what they were pre 2004 and let the bad loans go bad. These loans should have never been bought by the GSE's and if the originators had no place to sell them they would never have originated them.

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