Morning Commentary

1. Susan E. Woodward writes,

Treasury has access to the best resources in the business for estimating the hold-to-maturity values of mortgages and mortgage-backed securities. This team is at Fannie Mae, which the government now effectively directs.

I wonder if she misspoke. I am more confident in Freddie's team than Fannie's team. And she is friends with Bob Van Order (I'm not saying they are close in any way), who was at Freddie. Did she really mean to say Fannie Mae?

Anyway, she goes on,

Some argue that Fannie is discredited for this work because it, too, has losses on riskier mortgages. But Fannie's losses arose from a failure to reserve adequately for losses that were anticipated by its models. Fannie's business people overrode the risk managers when making the decision to keep reserves too low. The models were right.

Suits vs. geeks! In a Washington Post op-ed!

As an aside, Leland Brendsel was forced out as CEO of Freddie Mac in 2003, in part because he was accused by outside accountants of setting aside too much in loss reserves. I would now like to know more about that ouster, and whether its origin can be traced to Barney Frank and the latter's desire to get Freddie more involved in "affordable housing." Certainly, Brendsel's successor, who ruined the company's finances, was much chummier with Frank.

2. Virginia Coudert and Mathieu Gex look at the problems with credit default swaps.

In practice, as most other derivative products, the huge development of the market is not to be imputed to hedging purposes, but to arbitrage and speculation.

...From the beginning, in the mid-nineties, banks have used CDSs to escape from their capital requirements.

CDS were part of the process by which high-risk loans were dressed up as AAA securities on bank balance sheets, in compliance with stupid capital regulations. Re-read The Duelling Guarantee.

They also point out the equivalence between buying CDS and short-selling. However, they do not mention the notion that sellers of CDS might be planning to hedge their positions by short-selling companies on the way down. That possibility is why I think that the systemic issue with CDS is bigger than counterparty risk.

3. Rebecca Wilder writes,

The Federal Reserve's weekly loan data shows that banks have gone back to their business roots with strong conventional mortgage loan growth. Markets spun out of control and interbank-lending came to a grinding halt, but real estate lending has commenced again.

Good. Old-fashioned, Method A lending. What I have been advocating since six weeks ago as a way to keep the mortgage securitization problem from causing harmful spillover.

4. Finally, the New York Times joins the chorus of those comparing this with the 1930's and praising bold government action.

In fact, I remain convinced that the most apt historical comparison is with August 15, 1971. The same wing of the economics profession that has been urging partial bank nationalization recently was urging wage and price controls back then. We know how that worked out, don't we?