The Fed's MBS Scheme Blew Up the Economy. For Reals.


Fannie Mae and Freddie Mac, the linchpins of the American housing market, continue to bedevil the U.S. financial system.

In February 2003, their regulator issued a report saying the companies were taking on too much risk by using implicit government backing to plunge deeper into the mortgage market.

The government-sponsored enterprises would pose a systemic threat to the economy in the “remote” chance that either failed, Armando Falcon told the Bond Market Association the same day. The Bush administration, considering his report a potential threat to financial markets, asked him to resign.

Five years later, regulators seized the mortgage-finance companies. Since then, leaders from former Federal Reserve Chairman Alan Greenspan to Warren Buffett have argued the companies can’t be sustained in their dual roles -- a for-profit enterprise beholden to shareholders and a tool of housing policy -- and should be nationalized or sold.

Nothing has happened. Instead, Fannie Mae and Freddie Mac, which buy home mortgages from banks and package them into bonds sold to investors, have been bailed out with $1.5 trillion in direct and indirect government aid. The Obama administration is banking on the companies to help end a three-year housing slump. The president is delaying plans to lay out a new framework for them in February, and Congress hasn’t scheduled hearings on their future.

“They’re going to get a giant pass on all of this,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia who is now a bank analyst at FBR Capital Markets in Arlington, Virginia. It’s going to be “three to five years before their fate is determined.”

Leave it to a recovering Fed bank examiner to know a giant pass when he sees one.

When we can't get progress to work, there are always threats, eh?

The approaching withdrawal of Fed support in the form of the mortgage-bond purchases risks “a very, very scary situation,” said Meredith Whitney, founder of Meredith Whitney Advisory Group LLC in New York. Mortgage rates would soar, endangering the economic recovery, if private buyers failed to step in to buy the companies’ debt, she said.

The status of Fannie Mae and Freddie Mac isn’t dealt with in the proposed overhaul of the financial regulatory system that the Senate plans to take up next year. While Treasury Secretary Timothy Geithner said in June that the companies’ future would be discussed in the president’s budget outline in February, the Treasury in its Dec. 24 statement promised only to provide a “preliminary report” by then.

Bet it's really scary for the Fed to think about a world without them as primary MBS investor, eh? PULL OUT, BOYS, PULL OUT!!!

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.