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| Irrational Ennui or a Vast Conspiracy? |
| Written by Jonathan Smoke | |
| 07.14.2008 | |
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Discuss this article on the forums. (0 posts) Last week the stock prices of the GSEs—the Government Sponsored Entities of Fannie Mae and Freddie Mac fell 45%. On Friday the business media outlets were awash in analysts and experts extolling the damage that would be done if Fannie and Freddie’s so called “financial trouble” resulted in their failures. As a result of the height of this irrational ennui, the Treasury and Fed have developed a plan to support the mortgage giants and to prove the government won’t let them fail.  This crisis has not made sense to me as it began to unfold last week. Many implied that the falling stock prices meant the two firms were losing capital. As long as the two didn’t need to raise new capital with depressed stock prices, the current price wasn’t a big problem. There was a planned $3 billion debt auction by Freddie that may not have gone well because of the perceived capital crisis, but on Friday both Fannie and Freddie made public announcements that they were well capitalized and were not having financial difficulties. This debt auction wasn’t considered big.Regardless of the need of intervention, we got it. If Congress approves the Treasury and Fed plan, Fannie and Freddie will have increased lines of credit, the government’s “back stop” of buying equity in the companies if the need arises, and additional oversight from the Fed. What was the crisis that precipitated this? If there were no current capital issues, the best that could be said would be that investors feared additional capital would be needed to cover losses caused by subsequently failed mortgages the GSE’s held or guaranteed. Where’s the evidence of that being so large it would exceed their reserves that are in place for precisely that reason? Fannie and Freddie guarantee conforming prime mortgages—i.e., the least risky of all mortgages. Barring some cascading financial crisis leading to massive personal bankruptcies and accelerating foreclosures in the prime mortgage arena, the likelihood of a massive problem is unlikely. Remember, the latest foreclosure data revealed that the pace of new foreclosures was decelerating. But instead of calling this a crisis of perception—which is what it likely is—the Treasury, Fed and Congress are rushing to appear to be the heroes. Which makes me wonder, who gains from this? Could the stock declines last week have been manipulated? Looking at the one-year price charts for the GSEs, thanks to last week’s steep decline, the homebuilders look much better, or should I say much less worse? Furthermore, were the GSE’s truly too big or too important to fail? I heard some lament that mortgage rates would double without Fannie and Freddie. Oh really? Are mortgages rates that much higher outside the U.S.? Are non-conforming rates, even in this current crisis, that much higher than those backed by the GSEs? The sky isn’t falling and Fannie and Freddie aren’t failing. And even if they were, life would go on in a potentially more innovative and less bureaucratic way. But thanks to political maneuvering to take advantage of irrational fears, we will end up with more bureaucracy and less efficiency. 
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