You just can’t make this stuff up.
Fannie Mae posted a $25.2B Q4 loss, full year loss of $58.7B. Freddie Mac is expected to post a similar, if not greater loss.
In response, Freddie Mac’s Chief Executive David M. Moffett said that they would take steps to “rebuild our house” including … efforts to reduce foreclosures and boost financing of affordable mortgages. This is social engineering, not rebuilding the balance sheets and income statements of a public company.
These organization were once implicit political beasts that made money by borrowing cheaply as “government-sponsored entities” and leading in the housing market. The tax on these entities for this implicit guarantee was excess lobbying donations to both Democrats and Republicans, and the use of the profits to fund “affordable mortgages”, i.e. sub-prime mortgages.
Now the gloves are off and they are explicitly owned by the government under conservatorship, with the backing of $400B since September of last year. Their new goals are to stabilize the housing market by making mortgages more affordable and forestalling foreclosures.
According to the Wall Street Journal -
Fannie’s government-appointed CEO, Herbert Allison, said: “It’s not about maximizing returns on equity or profits. It’s really about being of use to the country during this very difficult period.”
The administration is taking the approach that slowly pulling the band-aid off the patient (i.e. the housing market) will reduce the likelihood of shock. In the process they are pumping the patient full of expensive life-support drugs (capital injections and regulatory “cram-down” contract changes) that are doing great damage to the vital organs (i.e. our financial, credit, and legal systems).
For those of us who lived through the eighties and nineties and got to watch the Japanese government try to spend their way out of a balance sheet recession, this path seems to be a poor approach to our problems. The Japanese Nikkei average peaked at 38,916 in December, 1989. Yesterday it closed at 7,510. A -80% return over 20 years. This period in the Japan was replete with “zombie” banks, zero federal reserve interest rates, and huge government deficit spending. I don’t think this is the model we want to follow.
My choice – pull the band-aid off as quickly as possible. Have the FDIC take over the zombie banks, what assets can’t be priced, put onto the government books to collect the interest until they can be sold. Foreclose on the homes that need to be foreclosed. I feel for the people that can not afford their homes anymore. However, renting may be a better option. It will probably be cheaper in terms of their cash flow, allowing those individuals to repair their balance sheets until they can accumulate a sufficient down payment for a new home. A new home that can probably be purchased at a better basis than the home they are in at the moment.
This approach will probably cost about the same in the short term, but in the long term be much cheaper because a floor will be established in the asset market. This will reduce the current deficit financing being used to flood the mortgage market with cash. Once established, the asset floor will provide a level of certainty to the financial markets that will release the credit markets, and allow individual optimism to drive new wealth creation.
Without wealth creation, the hole we are in gets deeper and darker. If I was leading the current administration, I would want every decision to be colored by this thought, “how do we get people to create more than they consume?”. It’s that simple. If you are not creating more than you consume, you will have to be supported by someone, somewhere, at sometime. Any “investment” by the government in any activity or enterprise should be focused on getting people to create more than they consume.
Giving money to support mortgages and assets values to individuals via a nationalized mortgage market is not creating wealth, it is transferring it. In the end, you will run out of money.
