Fannie, Freddie, and Doomsday

fannie mae financed all of my stafford loans.

good times.

me thinks jonathan is thinking about fannie's cousin sallie?

Arnold

After reading the WSJ editorial the failure of Fannie and Freddie seem like a very plausible mini-doomsday financial scenario. With your experience working for Freddie and your economics training you would seem to be a gold mine of thought and insight into their impacts on the financial industry and likelihood of systemic feedback problems on the economy. I would hope you would share your thoughts on these issues with your readers in the future. I know I would look forward to your insights!

Former STL FED President Poole ripped em up in a Bloomberg article...

I'm looking for a final nice pop up to short FRE, FNM, LEH and GM into oblivion. . .

Assets: $843B
Liab: $804
Market Equity: $14B
If equity is the call option on a firm, this company should be worth 10x this. Buy buy buy.

eric, the firms have already stated that they have avoided writing down asset values because they believe the assets will rebound. I forget which one it was, but they said that if they used market prices for the asset values they would be left with a net worth of negative $5.6B.

This speaks to Arnold's point that the assets are not transparent, they can't be easily liquidated and still retain anything like the value that they are being carried on the books for. You may want to reconsider your recommendation. Unless of course you were telling people to buy, so you could sell them your shares. Or if you were recommending that they buy buy buy put options.

There has been an arbitrary element in this crisis, the move by the FASB to impose Basel II accounting standards on the FMs. These demand that they revalue their assets according to current market values and then adjust them to be within guidelines. This would entail them having to sell off all kinds of stuff, triggering, yes, all kinds of nightmare scenarios. But this is one of those goverment regs gone bad.

These Basel II standards in general are now recognized by many to have unpleasant procyclical aspects. So, financial markets fall, devaluing the assets of financial institutions. This forces them under these standards to liquidate, thereby further forcing down the markets. Is the "transparency" gain worth it?

This stuff is all the more inappropriate for the FMs, although many on this list probably think that fully privatizing them was a great idea. But they were created as semi-government entities to play a backup role in the mortgage markets. During the period when those were all just humming along hunky dory, thank you, it may well have been fine and good to "privatize" them.

Of course the markets never really quite bought that, always believing that they had this implicit government backing (and, indeed, Bernanke has just said they can "discount" their paper at the Fed). For those who think that implicit backing was/is a bad thing, I note that they would have stopped operating in the mortgage markets almost entirely months ago if people had not believed that. Things would be a whole lot worse now if that had happened.

Anyway, the FASB rules do not seem to me to be appropriate to entities that are actually government-linked backstops. Their rules are for entities that are indeed strictly private. Would we impose FASB rules on the Fed because it is technically privately owned? That would be insane, and this is not much better.