Showing posts with label Freddie Mac. Show all posts
Showing posts with label Freddie Mac. Show all posts

Monday, September 22, 2008

OCM: Other Countries' Money

Despite the failure of several financial institutions, the decline in worldwide stock markets, and unprecedented foreclosure activity, the average American still has no idea how much trouble we're in. America has become beholden to the international community’s willingness to lend us money. I haven’t seen anyone coin “OCM” as a phrase, but whenever you see someone using their credit card, mention OCM—Other Countries’ Money. OCM means realizing our money isn’t ours because of the massive deficits our government has incurred through its spending. Having a deficit means we are borrowing other countries’ money through the form of Treasury and bond sales. By running deficits and spending more than we make/collect, each cent we make no longer belongs to us—it belongs to our international creditors. As a result, we have lost financial control of our own country. If we had a surplus, for example, national healthcare would be a no-brainer. But after Iraq and the bailouts, we are now a nation of beggars. As the old saying goes, “beggars can’t be choosers.”

How did we get to this point? Less than a decade ago, we had a surplus. In 2001, President Bush inherited a 128 billion dollar surplus. Now, we have almost a half a trillion dollar deficit—and that’s just for the year 2009.

http://www.cnn.com/2008/POLITICS/07/28/2009.deficit/index.html

It gets worse. Overall, people agree we have a debt of at least 9 trillion dollars, although some entities, like the Peter G. Peterson Foundation, peg our national debt at an even higher number, 52.7 trillion dollars--see http://www.pgpf.org. The numbers have gotten so large, they seem almost imaginary, like Monopoly money, and that’s the danger—at a certain debt and spending level, the American dollar will lack credibility against the Euro, yen, and Swiss franc, not to mention gold. If the American dollar loses credibility, the entire worldwide financial system will be at risk. If that sounds too “Mad Max” for you, you just need to understand this key concept: we are debtors, and debtors don’t get to make the rules. When I hear people say they want to tie restrictions and regulations on AIG, Merrill Lynch, Fannie Mae, and Freddie Mac in exchange for taxpayer money, I cringe. It’s not “taxpayer” money, any more than the money given to you by your credit card company is “your” money. The money belongs mostly to the Japanese and Chinese, who have lent us trillions of dollars by buying up U.S. debt, bonds, and preferred shares. If we want them to continue financing our lifestyle—which they will do, because few other places contain citizens so willing to spend—they set the terms of the bailouts, not us. Thus, I have no interest whatsoever in what regulations and rules Americans believe should be passed prior to doling out the money to AIG et al. It’s not our money we’re giving to AIG et al—it’s the creditors’ money, and creditors make the rules because they hold the purse.

I am far more interested in what the Japanese and Chinese think about the bailouts. The fact that they are not demanding major restrictions is a pleasant surprise. Singapore and other sovereign wealth funds have lost billions of dollars loaning money to MGM Grand and other American companies. It’s a miracle they are not demanding more concessions or protection for loaning us money. The equivalent of what just happened—especially with Japan's Mitsubishi recently willing to buy up to 20 percent of Morgan Stanley—is like you and me going on a shopping spree, running up 1000 dollars in debt while unemployed, and coming close to declaring bankruptcy—only to have our credit card company reward us with a higher credit line and no punishment.

In large part, international investors are willing to forgive our transgressions because of the bailouts. The bailouts wiped out stockholders (held mainly by Americans and non-Asian investors) and preserved Fannie Mae’s and Freddie Mac’s bonds (held mainly by Asian and international investors). Thus, the bailouts were designed to convince our creditors America was a safe place to invest.

From March 2019
Only as a secondary effect might the government intervention, using taxpayer money, help American homeowners by increasing liquidity (“liquidity” being dependent on Japan and China continuing to put us in more debt by giving us more of their money). Government intervention worked—Asian markets recently swung back from double-digit declines, and liquidity is being restored to the worldwide economy. Some Americans have used this increased stability post-government-intervention to believe that deregulation itself was a bust or the cause of our financial collapse. Nothing could be further from the truth.

No rule or law could have saved us from ourselves and our greed. Remember that Warren Buffett himself called financial derivatives “weapons of financial mass destruction” in early 2003—over five years ago. See

http://news.bbc.co.uk/2/hi/business/2817995.stm

If someone with Mr. Buffett’s profile pointed out financial problems using language signifying the severity of a nuclear bomb and was unable to get anyone to take him seriously, what hope would a law have against this kind of indifference?

We had and have numerous laws to prevent financial and mortgage fraud. Laws against fraud exist in every state, and even if no express state statute exists, common law fraud can be pled in any county courthouse. Also, if you live in a company-friendly town, you can bypass your local state court judge and go to federal court under a 1968 federal law, the Truth in Lending Act (TILA). Thus, state and federal laws already exist to prevent financial fraud against consumers and homebuyers. Yet, no law could have prevented a bank from having lax standards for granting loans. Even if such a law existed, it may have forced a working class family to become permanent renters by requiring excessive upfront capital. In other words, laws don’t fix problems—they just arbitrarily create winners and losers. Furthermore, no law could have changed the common practice of mortgage brokers and real estate agents falsifying loan applications. Even if every D.A. in every county had dropped homicide cases in favor of prosecuting mortgage fraud, there would have been plenty of fraud to go around.

The problem wasn’t and isn’t a lack of regulation, but a lack of ethics and honesty. Unfortunately, there is no law that can curb the human appetite for greed when everyone is seemingly making money. Even a casual student of economics has heard of “tulip mania,” which took place in the year 1637. Back then, the price of a tulip contract sold for more than 20 times the annual income of a skilled craftsman; in other words, people were happy to exchange 41,600 hours of hard labor for a flower that you can now get for a buck at Home Depot. Financial bubbles happen, and then they pop. Unless a law can remove humanity’s attraction to getting rich, another bubble will occur, and more people who bought late in the game will be wiped out.

Overall, deregulation has helped the American consumer. Just twenty five years ago, the idea of an average college student being able to fly to Iceland and back was laughable. But the government deregulated airlines, and consumers have received low prices—just check out Southwest Airline’s deals. And that cell phone you have, with the cheap 1000 minutes a month? If the government hadn’t broken up Ma Bell in order to deregulate the telephone industry, you’d be paying twenty cents a minute because of regulations designed to help AT&T maintain a monopoly. The list goes on.

Deregulation is devastating only when unethical people are involved. For example, energy deregulation in California was working initially, until Enron decided to actively steal from Californians and intentionally increase the price of electricity through various shenanigans. The common factor in any bubble’s existence and inevitable collapse isn’t deregulation, but a lack of ethics. Stories from yesteryear indicate that local bankers knew more about their debtors than the local church. Whether apocryphal or not, the very idea that a banker today knows all of his debtors’ financial situations intimately is amusing—and that kind of ignorance should scare all of us.

It wasn’t just leverage that caused this financial collapse—it was the attenuated way in which various people could make money. For example, a mortgage broker could loan hundreds of thousands of dollars over the phone to an applicant or after meeting him for half an hour and filling out some forms. After this initial contact, the broker had no interest whatsoever in the applicant/debtor. The broker received a fee from the bank for giving it the loan, and the bank sold the loan it generated to other investors as part of a larger package. The story is old now, but deserves to be told, because too many people miss its crucial point: attenuation leads to irresponsibility.

The financial debacle had nothing to do with regulations, or lack thereof. It had to do with our society itself, and how year after year, cities get larger, neighbors rarely see each other, and no one can reasonably promulgate a set of core principles each and every American believes in. We have become so reliant on laws rather than personal trust that we've had to pass laws to protect people when they help others. Many states have passed laws protecting Good Samaritans from being sued for helping others if their assistance unintentionally results in further injury. In other words, in some states, if you help a woman on the street replace a tire, and her tire happens to blow up in the middle of the street through no fault of your own, you can be sued for negligence and lose your life’s savings as a result. When a law has to be passed to counteract other laws that discourage others from lending a helping hand, something is deeply wrong, and the absence of laws is clearly not the problem.

I wish I knew the solution to our modern economic problems. I am too pessimistic to decree an amorphous form of morality as the solution—morality is so vague and subjective, it can masquerade as homophobia, Jim Crow, anti-Mormonism, or anti-whatever-the-minority-is. But capitalism, we too often forget, relies on mutual trust. I trust that when I make a loan, it will be paid back. I trust that when I give you a dollar, the paper will be honored by the next establishment when I want to buy something. I trust that a mechanic won’t rip me off if I go to get my car fixed—and if I don’t trust any mechanics, that means I have to do it myself and not spend any money, which restricts the economy. As another writer once pointed out, currency has value because it flows, like a current. Value is created when money moves from person to person and is worth nothing standing still.

If I had to venture a guess about to increase trust and ethics, I’d try to fix two problems: one, a non-stop treadmill of working hours that takes people away from their loved ones and their friends, creating higher living expenses and less time for parents to teach their children anything; and two, a lack of corporate responsibility to long-term shareholders and customers. As more people change residences and products more often, corporations become disinclined to foster long-term relationships and instead chase the bottom line, knowing they might never see a particular customer or resident again.

How do we fix these problems in an era of increasing competition? That’s the trillion dollar question. Unfortunately, we won’t get an answer if we wrongly frame the debate in terms of what laws to pass and how to increase regulation. The debate should be about OCM and realizing we are debtors who have made our children beggars because of our fiscal irresponsibility. It’s a painful truth to admit, but admit it we must—the first step to overcoming addiction to OCM is admitting we have a problem.

© Matthew Mehdi Rafat

Update on 2/28/2009: more on local bankers, from Warren Brussee's The Great Depression of Debt:

In the past, local banks gave mortgages to area home buyers, and the banks kept those mortgages. That was a big source of the bank's income, so they were careful about who got those mortgages. Banks verified income, employment, and past payment history. And they did their best to make sure that people did not get over their heads on the amount of their mortgages because they realized the high costs of foreclosures even if homes could be sold at their current market prices. There even seemed to be a morality involved, and bankers were looked up to in their communities as conservative protectors of wealth. [page 40]


Update on 8/13/2010, from Niall Ferguson's The Ascent of Money, page 262, Penguin, 2008-9:

"Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart [in It's a Wonderful Life] knew both the depositors and the debtors. By contrast, in a securitized market (just like in space) no one can hear you scream--because the interest you pay on your mortgage is ultimately going to someone who has no idea you exist."

Update: if you want to make the above issues very simple, focus on leverage. Leverage continues to be the major catalyst of financial collapse, along with a lack of diversification. In 2004, the SEC exempted investment firms with a market capitalization of over $5 billion from the net capital rule. Thus, Goldman Sachs, Lehman, Bear Stearns, and Morgan Stanley were no longer governed by the 12 to 1 leverage limit. These investment firms promptly increased leverage dramatically, sometimes up to a 40 to 1 ratio. The stock market soon became a casino instead of an efficient place to start up or evaluate companies. Not surprisingly, several firms collapsed or had to change their corporate structure. The exact same thing happened before, in 1998, with the most famous hedge fund at the time, LTCM:

"At the end of August 1997 [prior to the its collapse in August 1998] the [LTCM] fund's capital was $6.7 billion, but the debt-financed assets on its balance sheet amounted to $126.4 billion, a ratio of assets to capital of 19 to 1...On Friday 21 August 1998, it lost 550 million--15 per cent of its entire capital, driving its leverage up to 42:1." (Niall Ferguson's The Ascent of Money, pages 324, 327, Penguin, 2008-9)

Bonus: "In 2007, the United States needed to borrow around $800 billion from the rest of the world; more than $4 billion every working day. China, by contrast, ran a current account surplus of $262 billion, equivalent to more than a quarter of the U.S. deficit." (Niall Ferguson's The Ascent of Money, page 355,
Penguin, 2008-9)

Update and counterargument on 5/25/12, from The Atlantic Monthly (June 2012), by William Cohan ("How We Got the Crash Wrong"): 

"[T]he truth is that in recent decades, Wall Street firms have almost always been highly leveraged. For instance, according to a 1992 study by the U.S. General Accounting Office (now the Government Accountability Office), the average leverage ratio for the top 13 investment banks was 27-to-1 midway through 1991 (up from 18-to-1 in 1990). A subsequent GAO report, in 2009, noted that the big Wall Street investment banks had higher leverage in 1998 than in 2006. According to SEC filings, in 1998, the year before it went public, Goldman Sachs was leveraged at nearly 32-to-1, while in 2006 it was leveraged at 22-to-1. In 1998, Bear Stearns’s leverage was 35-to-1; in 2006, its leverage was 28-to-1. Similar patterns applied at Merrill Lynch and Lehman Brothers. To be sure, leverage has fluctuated over time: In the early 1970s, for instance, it was generally below 8-to-1. But in the 1950s, it sometimes exceeded 35-to-1. Of course, even a dollar of debt is too much if you are clueless about how to manage risk..." 

"The problem on Wall Street has never been about the absolute amount of leverage, but rather about whether financiers have the right incentives to properly manage the risks they are taking. During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation--and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses.  People are pretty simple: they do what they are rewarded for doing." More here

From Nader A, on 5/26/12: "Leverage is not new--applying it to complex derivatives is over the last 15 years is. The LTCM group used to arbitrage penny differences on equity and fixed income markets, but with leverage, they could profit in the millions, until everything turned (mostly because short term liquidity changed). Someone once said of LTCM, "You guys are picking up nickels in front of steamrollers," meaning they were scooping up small differences but with large amounts of leverage.The real changes in Wall Street are "Off the balance sheet obligations." Balance sheets, income statements and cash flows do a poor job showing what a company potentially owes, which could change drastically over time.  For example, Enron used Special Purposes Vehicles to stash debt from their balance sheets, but did not show their financial obligations when the SPVs soured. Lehman used repos to transfer debts before quarter ends. CDSes sold by banks started to increase in balance sheet obligations as debts widened. The problem in Wall Street today is that the current financial reporting does not reflect future obligations when "things change"; instead, it reflects current, optimistic, and biased asset values, which is okay until you have a "black swan" event.  The other thing about [complex] derivatives is that it obfuscates the problem. The recent JP Morgan trade that went bad was a derivative based on a derivative based on a derivative. Once you apply leverage to complex, multi-level derivatives, then the problems become systemic. So with respect to the sovereign debt problems in Europe, it's not as much the problem of Greece defaulting, as it is the banks holding the debt falling into insolvency and triggering a cascade of derivative swaps." 

Update on 6/3/12: from Sebastian Mallaby's 2010 book, More Money than God: "Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on.  When banks can pocket the upside while spreading the cost of their failures, failure is almost certain." (pp 13, hardcover, Penguin Press)

Re: the difficulties regulating leverage: "In the wake of LTCM's failure, Greenspan and his fellow regulators could see that the real challenge was the leverage in the financial system writ large.  Ironically, this was what Soros had tried to explain to Congress in his testimony four years earlier. Sure enough, the culprits in the crisis of 2007– 2009 were leveraged off-balance-sheet vehicles owned by banks (known as conduits or structured investment vehicles, SIVs), leveraged broker-dealers, and a leveraged insurer. Hedge funds were not the villains.

If hedge funds were only part of the challenge, why didn't regulators clamp down on the wider universe of leveraged investors? Again, the answer echoes 1994: The regulators believed they lacked a good way of doing so. They could not simply announce a cap on leverage: The ratio of borrowing to capital was an almost meaningless number, since it failed to capture whether a portfolio was hedged and whether it was exposed to risks via derivatives positions. Regulators could not simply cap hedge funds’ value at risk, either: LTCM’s collapse had shown that this measure could be misleading. The frustrating truth was that the risks in a portfolio depended on constantly changing conditions: whether other players were mimicking its trades, how liquid markets were, whether banks and brokerages were suffering from compromised immune systems. The Fed’s Peter Fisher, who was at the center of the regulatory brainstorming following LTCM, could see the theoretical case for government controls on hedge funds and other leveraged players. But it seemed so unlikely that the government would get the details right that he never pushed for action." (pp. 245-246)

Update on 6/24/13: Michael Lewis warned about collateralized mortgage obligations back in November 1989: "The CMO stands for collateralized mortgage obligations, but bond salesmen call it 'toxic waste.'"  (originally published in November 1989 in Manhattan, Inc.; re-published in Michael Lewis' The Money Culture, paperback, W.W. Norton and Company, pp. 105 (1991))

Update on 11/0/14:"Although they are established to protect both the security of ownership and that of transactions, it is obvious that Western systems emphasize the latter.  Security is principally focused on producing trust in transactions so that people can more easily make their assets lead a parallel life as capital." -- Hernando de Soto, The Mystery of Capital (2000), paperback, pp. 62. 

Update on July 2017: "As a man who did business with other people's money, the banker had to be intensely respectable... 'The function of bankers is to be trusted, not to be liked.' 'Adventure is the life of commerce,' wrote Walter Bagehot, first editor of The Economist, 'but caution, I had almost said timidity, is the life of banking.'" -- from The Bankers: the Next Generation (1997), by Martin Mayer, hardcover, pp. 5.

"[A]s Charles Rice of Florida's Barnett Banks puts it, 'The Harvard Business School never graduated an MBA that can't be hornswoggled by the businessmen of the Florida panhandle.'" -- Id. at pp. 10. 

Monday, September 8, 2008

Fannie and Freddie Bailout


The big news yesterday was the U.S. government's takeover of Fannie Mae and Freddie Mac. My response? Ho-hum. The international community holds about 5 trillion (yes, that's a "t") dollars of Fannie Mae debt, according to today's WSJ. Of course we had to bail them out, if we ever wanted to see a single yen or yuan buying American paper.

(For more on this, read http://www.blacklistednews.com/news-1459-0-13-13--.html)

In short, we didn't have a choice. What's really scary is politicians are talking about bailing out GM and Ford. I predicted a Ford and GM bankruptcy months ago, but there is no reason for the government to bail out Ford or GM--they are private companies who decided to focus on manufacturing SUVs right before oil spiked. While taxpayers may have an interest in ensuring their neighbors don't lose their homes--vacant lots of homes are terrible for cities and states--ensuring your neighbor gets service for his Hummer is a different matter entirely.

If the U.S. seriously talks about bailing out GM and Ford, the American dollar will have officially become the world's doormat. (I earlier compared the dollar to the world's prostitute, who kept servicing STD-ridden johns instead of closing the doors to them, but apparently, that analogy was too blunt.) Perhaps we've got a case of financial immaculate conception, where U.S. taxpayers who paid their mortgage bills and taxes on time, still end up with a baby on their hands to support; however, instead of a savior, U.S. taxpayers will apparently be forced to pay for Rosemary's Baby's expenses. Where are three wise men when you need them?

(One of them, Patrick Killelea, is here: http://patrick.net/housing/crash.html)

Sunday, July 13, 2008

Stock Market Week Recap: Fannie Mae and Freddie Mac

Contrary to my belief that GE's earnings would be some kind of bellwether for the overall market, Fannie Mae and Freddie Mac stole the show. GE had set expectations so low, when it beat its own lowered expectations, the market barely noticed.

Meanwhile, Fannie (FNM) and Freddie's (FRE) stock prices got cut in half after liquidity concerns arose. What are Fannie and Freddie, and why are they so important? I realized I didn't really know much about these institutions, which hold between five to six trillion dollars in debt.

According to its own website, FNM "operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates." FRE's business sounds similar:

We connect Main Street – the residential mortgage market – to Wall Street – dealers and investors – through our mortgage purchase, credit guarantee and portfolio investment activities.

Our customers are predominately lenders in the primary mortgage market. Our activity in the secondary mortgage market supports a continuous flow of funds to the primary market, which leads to consumer benefits in the form of a steady flow of low-cost mortgage funding.

What is a secondary mortgage market? It's when a bank gives you a mortgage and then wants to spread its risk around. If it holds onto your loan, and you don't pay, then it is the only entity on the hook. But if it sells the right to future interest payments and/or principal in your loan to someone else, it reduces its reliance on one source of profit. Another way to reduce risk is to have more people involved in a deal, so if one person pulls out, there are plenty left to handle the remaining issues. So most banks re-package their mortgage loans and put them into one big "debt pie" (my own term) and then instead of holding onto the pie, they sell slices to other entities. The bank cuts the "debt pie" into several pieces, some better than others, and sells off its loans at different prices to investors who want to receive the monthly mortgage payments and/or interest.

FRE and FNM get a fee for repackaging various banks' mortgage loans and shouldering the risk that the borrower might not repay the principal or the interest. By allowing banks to place everyone and their mortgages into a large pie, the banks spread their lending risks and possibly get some immediate cash back to make more loans.

The problem is that the pie slices kept getting sold off to more and more buyers through even more complex financial instruments. When the music stopped, everyone forgot that someone had to pay the original mortgages or the game couldn't continue. Ironically, by trying to reduce the risks of lending, banks and FNM/FRE actually increased overall risk, because no one had an interest in making sure the original borrower paid up. The geniuses on Wall Street created no incentive to make sure the guy at the bottom had the papers or the income or the willingness to pay his/her mortgage, because everyone assumed that the original bank checked out the papers and did the due diligence. As we know, loan agents didn't always require tight documentation before submitting loan applications, but the banks that received the applications didn't care, because they knew they could put the loan into a large pie and sell it off and get paid. In violation of the philosopher Kant's ethical guidelines, the banks treated people as a means to an end, rather than an end, knowing they could dump the loans on someone else because FNM and FRE would guarantee them.

The U.S. government has decided that in order to encourage people to buy homes, it needs to support companies (FNM and FRE are both publicly traded and owned by shareholders, not the government) willing to buy up the "debt pies." It supports them by offering loans from the Federal Reserve's discount window, currently at 2.25%. Without this kind of support, the government believes banks would be less willing to make mortgage loans, thereby causing housing prices to decrease. Because most Americans have most of their net worth in their homes, if housing prices decrease, it would make them feel more poor and less willing to spend, causing a recession. As a result, the government has lent an implicit promise to FNM and FRE that they can make loans and will receive liquidity from the government to support American home ownership. This "promise" isn't written down anywhere, but the amount of debt pies held by FNM and FRE are staggering--again, it's around half the entire mortgage loan market, or around 5 to 6 trillion dollars. They are "too big to fail," as some might say.

Recently, the Federal Reserve, which holds taxpayer money (read: our money) refused to loan more money to FNM or FRE, causing their stock prices to decrease by around 50% [This just in: the Fed Reserve Bank of New York will lend money to FNM and FRE]. [Still,] In a worst case scenario, FNM and FRE have been guaranteeing mortgage loans that can't be repaid, in which case they have to reduce their mortgage guarantees, diminishing further demand in the housing market.

At the same time, this might be a welcome development, because by reducing the availability of mortgages, housing prices might decrease enough to allow more first time buyers to buy homes. A friend of mine reminded me not everyone should buy a home--some people are better off in apartments. This reality caused some cognitive dissonance because I am a firm believer in the American Dream including a home, but he is correct. Not everyone can afford to buy a home--some people's incomes are not steady or high enough to guarantee their ability to pay property taxes and repairs, much less the monthly payments on a home. In addition, FNM and FRE's business models work best if you assume housing prices will always increase, allowing homeowners to refinance to pay their mortgages in lean times or during a layoff. But there is no guarantee that housing prices will keep increasing, nor should the government "guarantee" infinitely increasing property prices. The problem, of course, is it looks like the government has done just that.

It appears that when the Fed lowered interest rates post-9/11, basically making money free to the public, it gave everyone a green light to buy a home. In retrospect, Mr. Greenspan didn't really have a choice--he had to open the money spigot to bring back American confidence. But neither Mr. Greenspan nor anyone else thought an Iraq war would last several years, or that oil would increase to 160 dollars a barrel. Therefore, people who blame Greenspan might want to look in the mirror first--the Iraq war, which the Democratic Congress continues to finance, has contributed to taking trillions out of the United States' economy and into non-productive areas, destroying the value of the American dollar. In time, when Iraq's oil fields are producing oil at full capacity, the war might make more sense. But for now, Congress needs to commit to a balanced budget and restore the world's faith in the American dollar. Fannie and Freddie are just symptoms of an overall refusal by our government to restrict spending.

On a personal note, I can't figure out the difference in FRE and FNM, but apparently, Congress approved FRE to counteract FNM's monopoly. If someone can explain the difference between Fannie and Freddie, please add to the comments section. In addition, I can't figure out if FNM and FRE just get paid a fee for buying the loans from the bank and then dumping them on someone else, or if they hold onto some percentage of the mortgage loans.

Also, do FNM and FRE line up a buyer for the loans in advance of buying them from the banks? If not, then they could be stuck with trillions of loans on their own books. If they do have loans on their books they can't dump on someone else, and they go bankrupt, what happens if the government doesn't bail them out? I think the banks would get screwed, but not the homeowner, as long as s/he's paying his mortgage. That means we could have major banking collapses, but that's a shareholder matter, unless the FDIC gets involved. It is also probably cheaper to pay FDIC guarantees than FNM/FRE loans. Of course, if the government doesn't support FNM/FRE, and lets the banks shoulder the risk, the entire banking system collapses, because Americans would take their money out of banks, causing an IndyMac situation (i.e., if bank deposit holders think their bank is going under, they will remove the capital the bank is using to fund other loans, causing the bank to collapse). Sigh. It really doesn't look good, folks. Any comments are appreciated.