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  • http://DavieGnoreply@blogger.com Davie G

    >I generally agree with this posting by blogger extraordinaire, Isaac Gradman, however, I have a few points I’d like to add. First of all, I think that a liquid mortgage market is a good thing and helps banks remain flexible if they need to reposition and makes ownership of real estate more affordable. However, I agree that the Public-Private nature of Fannie and Freddie has basically led to complete havoc in today’s financial world because they were allowed to remain in existence after the private sector fulfilled their public purpose. Fannie and Freddie’s debt and equity were highly rated in large part because of the market’s perception that they were backed by the full faith and credit of the US government and too big to fail. This perception was widely held amongst those in the financial world which in many ways tied the hands of the current administration to intervene. My question is, who is at fault for creating this too big to fail perception? Is it Fannie and Freddie for whispering this in the ear of credit rating agencies or whoever gave them quasi-public status to begin with, or is it the credit agencies themselves? I imagine any public-private partnership needs to have strict rules at the inception from the public side that say, hey Mr. Private Co, if you start to squander away the business, the public is pulling the plug on you and will have someone else handle things. The fact that so many competitors entered the secondary mortgage market forced Fannie/Freddie to lower their standards to stay competitive. To make matters worse, the securities these competitors were selling were rated as if they TOO were backed by the full faith and credit of the US government. The problem really probably lies in the conflict of interest inherent in the GSE’s. They owed their shareholders the obligation of growing earnings, but they owed the government the obligation of not getting into risky loans. If they were truly government entities, and the government had control, the treasury department could have said, hey there are plenty of other companies providing the needed liquity to the secondary mortgage market, so let’s force Fannie and Freddie to pack their bags and go home before lending standards go down. But the government didn’t control them, the shareholders did! Which meant the inmates were running the asylum and lending standards went out the window. But, because they still had this quasi public status (without any real government oversight), the GSE’s got into subprime market and still held onto those AAA ratings. Also at fault are the rating agencies for treating Fannie/Freddie’s private competitors as if they too were backed by the government. And now, our government is bailing everyone out and basically rewarding everyone who sold junk to the uninformed public. I hope that Fannie and Freddie are chopped up and re-privatized and there are NO MORE BAIL OUTS OF PRIVATE COMPANIES so that the next wave of dealers of secondary mortgage is responsible for their actions. It wouldn’t hurt if these credit agencies had a brain and some critical independent thought before giving every mortgage backed security a AAA rating next time as well. The problem isn’t liquidity in the mortgage market, the problem is the public involvement without oversight and inaccurate ratings of securitized loan portfolios.