Sunday, July 15, 2007

What about Fannie Mae and its mortgage business?

Talk about the elephant standing in the middle of the room that nobody wants to talk about, what about mortgage giant Fannie Mae? Just a couple of years ago all of the talk was about how Fannie posed a "systemic threat" to the financial system. I never bought any of that crap. Sure, Fannie's accounting needed some rationalization, but basically they were a sound and conservatively run operation. The real motivation was that Fannie was doing incredibly well and greedy Wall Street wanted a piece of the action. What was the action? Simple: Buying and securitizing mortgages (MBS), exactly the kind of thing that Wall Street has made such a mash of in the past two years. Meanwhile, as far as I can tell, Fannie is still doing quite well and may in fact do even better by buying up MBS debt that Wall Street is now trying to shed. The difference is that Fannie always stayed true to its mission and never sold its soul and dove down the sub-prime rat hole.

The reason nobody talks about Fannie these days is that Fannie is a huge reminder that Fannie and its supporters were absolutely right and Fannie's critics were dead wrong, both about the so-called "systemic risk" posed by Fannie and the ability of Wall Street to successfully handle Fannie's type of business.

Three and a half years ago I recall listening to a speech by Franklin Raines, head of Fannie Mae, at the American Enterprise Institute in Washington, D.C. at which he defended Fannie and its ability to not only avoid systemic risk, but to even be able to help out if there was a financial crisis, simply because it has the financial resources, including the ability to borrow from the government at below market rates that would allow it to step in and buy up mortgage debt when investors might be seeking to dump assets in a crisis. Guess what? He was absolutely right, and we are now seeing on a small scale what Fannie is capable of doing if a true systemic crisis were to occur (which, thankfully, is not going to happen despite the chatter from some pundits.)

The whole Fannie regulation and financial stability "scandal" of just a few years ago is now just as big a black eye for Wall Street and the rest of Fannie's detractors as the so-called "Subprime Crisis" is for Wall Street today. The last thing any of these people are going to do is stand up and admit that they were wrong and that Fannie is one of the pillars of our financial system. Shame on them all.

Note: Freddie Mac has been in basically the same boat as Fannie Mae, but Fannie took most of the heat.

-- Jack Krupansky


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