This morning we learned that the government seems to have learned exactly the wrong lesson from the recent turmoil in the credit markets. Government policies to expand homeownership—remember the once-vaunted “ownership society” that President George Bush and his friends thought would make us all more responsible capitalists?—helped produce irresponsible mortgage lending, which fueled the massive build-up of securitized credit products, which unbalanced the balance sheets of our financial institutions, which…stop us if you’ve heard this one before.
Oh, right. Of course you have. Anyway, now the regulators in charge of mortgage lenders Fannie Mae and Freddie Mac have decided that what these institutions really need are less stable balance sheets and more leverage. And so they’ve decided to loosen key capital requirements that have been restraining the mortgage companies. Fannie Mae may now increase its leverage to 33-1 from about 30-1.
The move is being hailed by some as providing some additional government-backed cushion for the credit crisis. Which only confirms the fact that in the minds of many the solution to the problem of debit is always more credit. Well, looks like we’re going to get it, good and hard.
Official Statement from Office of Federal Housing Enterprise Oversight [OFHEO.gov]
Fannie, Freddie Surplus Capital Requirement Is Eased [Bloomberg]
Fannie and Freddie Get a Little Room to Breathe [Market Movers]
Posted by guest , Mar 19, 2008 2:03PM
Its ok Carney, you can just re-use all the Bear Stearns collapse posts in about 9-12 months or so. Nothing like 75:1 leverage baby...
Posted by guest , Mar 19, 2008 2:03PM
seeing as how the entire existence of these companies rests on the belief that they are government credits, you are not adding that much risk to the system here. plus these companies have not fallen below the minimum capital requirement at any time during the past several years during the worst price declines of their balance sheets.
john is this the one instance you are going to argue for more regulation instead of less?
Posted by guest , Mar 19, 2008 2:06PM
75:1? can you count?
Posted by guest , Mar 19, 2008 2:26PM
2:06 - $880 billion in assets on the balance sheet. $2.4 trillion additional off balance guarantees. $45 billion in core capital. So I'm wrong, its 73:1.
Posted by guest , Mar 19, 2008 2:31PM
the guaranty business does not work like that but nice try i can see where you were confused.
Posted by guest , Mar 19, 2008 2:33PM
2:31 - So they aren't responsible for credit losses on the off balance sheet stuff? then why do they get the G fee?
Posted by pdtrading , Mar 19, 2008 2:41PM
The stupidity of our government never ceases to amaze me.
To quote P.J. O'Rourke: "Giving money and power to government is like giving whiskey and car keys to teenage boys."
Posted by guest , Mar 19, 2008 2:41PM
I just laugh. Seriously, what else can any of us do?
Posted by guest , Mar 19, 2008 2:46PM
I dont care how the business "works" all the off b/s guaranty is the GSEs problem so it counts.
Posted by guest , Mar 19, 2008 3:58PM
off balance sheet guarantees have no liability financing associated with it.
more appropriate measure of leverage would be default rate * guaranteed base because that is the only amount they have to finance.
Posted by John Carney , Mar 19, 2008 4:36PM
Unless you take them on balance sheet. See, for instance, SIVs.