Here is what we think happened.
Freddie and Fannie became arrogant, in that way that says: we know more that you do, we know more that you ever will, we are smarter, better paid and better looking than you. They were right, for a time. But time always runs out.
They were "socially responsible" companies of long standing, the originals, immune to either criticism or improvement. Their attitude, financial and reputational strength gave them great power, power they misused.
Deregulation supported them on the upside and failed them on the downside. They should have stopped abusive home mortgage market lending practices, as we suggested in 1995 and 2001, but found themselves turning up the heat on a housing market mania that required fraudulent practices. Generating income and increasing "shareholder value," became the order of the day. Managers at Freddie and Fannie were caught up, too. They wanted their share of the American Pie, even if that meant turning the oven up way too high. GSE managers stopped being anything other than greedy. Of course, anything smacking of long term social concern was driven out, also.
With no regulators to fear, with little competition, operating within a maniacal market that forgave all sins (except missing earnings estimates), they forgot their role in setting ethical home mortgage market lending standards.
Ironically, other, more powerful and greedier groups were angling for profit. A new set of players stood at the ready. Hedge funds, eying $5 trillion dollars of potentially distressed MBS and other debt, operating in the dark, took advantage of a lack of both GSE oversight and hedge fund regulation. Enjoying freedom from concern about society, and able to use fraudulent and unethical business practices, hedge funds may drive the companies into bankruptcy. Once there, Funds would have a field day, buying GSE debt and MBS securities for pennies on the dollar, waiting for the housing market to rebound, earning 2 and 20, easily.
Yet and still, we believe in the social mission these companies set out to achieve. The bottom line: Socially Responsible Investors might consider buying Freddie and Fannie stock at these levels.
Freddie and Fannie became arrogant, in that way that says: we know more that you do, we know more that you ever will, we are smarter, better paid and better looking than you. They were right, for a time. But time always runs out.
They were "socially responsible" companies of long standing, the originals, immune to either criticism or improvement. Their attitude, financial and reputational strength gave them great power, power they misused.
Deregulation supported them on the upside and failed them on the downside. They should have stopped abusive home mortgage market lending practices, as we suggested in 1995 and 2001, but found themselves turning up the heat on a housing market mania that required fraudulent practices. Generating income and increasing "shareholder value," became the order of the day. Managers at Freddie and Fannie were caught up, too. They wanted their share of the American Pie, even if that meant turning the oven up way too high. GSE managers stopped being anything other than greedy. Of course, anything smacking of long term social concern was driven out, also.
With no regulators to fear, with little competition, operating within a maniacal market that forgave all sins (except missing earnings estimates), they forgot their role in setting ethical home mortgage market lending standards.
Ironically, other, more powerful and greedier groups were angling for profit. A new set of players stood at the ready. Hedge funds, eying $5 trillion dollars of potentially distressed MBS and other debt, operating in the dark, took advantage of a lack of both GSE oversight and hedge fund regulation. Enjoying freedom from concern about society, and able to use fraudulent and unethical business practices, hedge funds may drive the companies into bankruptcy. Once there, Funds would have a field day, buying GSE debt and MBS securities for pennies on the dollar, waiting for the housing market to rebound, earning 2 and 20, easily.
Yet and still, we believe in the social mission these companies set out to achieve. The bottom line: Socially Responsible Investors might consider buying Freddie and Fannie stock at these levels.