The biggest risk to the global financial system post-2008 crisis? It’s right here in D.C.
Sep 15, 2015, 2:34pm EDT
INDUSTRIES & TAGS Banking & Financial Services, Bankruptcy
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Robert J. Terry
Managing Editor
Washington Business Journal
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This week marks the seven-year anniversary (I can’t believe it’s been that long) of the global economy’s implosion, sparked by the massive Lehman Brothers bankruptcy filed on Sept. 14, 2008. Business journalist Bethany McLean has pinpointed a “festering problem” left over from that crisis, and it resides here in town.
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It’s Fannie Mae and Freddie Mac, the D.C.-based mortgage giants that went into federal “conservatorship” in 2008 at the brink of bankruptcy. McLean — the Vanity Fair writer who uncovered the accounting shenanigans at Enron Corp. that led to the book, “The Smartest Guys in the Room” — has a new book, called “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants,” which is about “the tangled history and very messed-up present of these two companies, which impact the lives of a lot of Americans, whether they realize it or not.”
The Fannie Mae headquarters stands in Washington, D.C., U.S., on Monday, March 14, 2011. Fannie Mae and McLean, Virginia-based Freddie Mac were seized and placed under U.S. control in 2008 as losses on soured loans pushed them to the brink of insolvency. The two government-sponsored enterprises have been sustained by more than $150 billion in U.S. aid.
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The Fannie Mae headquarters stands in Washington, D.C., U.S., on Monday, March 14, 2011.… more
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She lays it out in a new LinkedIn post that digs into some of the nuances of these so-called government-sponsored enterprises, or GSEs, where “strange is actually normal,” she writes.
As in: “[A]lmost every American who has a mortgage and even many who rent—they determine who gets mortgage credit and at what price, especially today—very few people understand what they do.”
And: “[W]hile homes are the most domestic asset possible, Fannie and Freddie are global, because through their securities, foreign investors, including China’s central bank, finance the purchase of Americans’ homes. This seems like a good thing—it’s globalization at work!—but, as the story of Fannie and Freddie shows, it has also tied the hands of the government at critical times.”
From the archives: How the financial crisis changed three Washingtonians forever
“You can’t make this stuff up,” McLean quotes a longtime lobbyist saying about Fannie and Freddie. “The GSE world is a cross between Monty Python and Shakespeare.”
Fannie and Freddie are still in conservatorship, supported by a line of credit from the U.S. Treasury. It’s been plowing dividends to the Treasury — $138.2 billion, at last count— but no one seems able to figure out, should the feds get out of backstopping mortgages? Are they still too big to fail?
The post poses more questions about what to do with Fannie and Freddie than answers, which I suppose is to be expected when you’re talking about opaque institutions likened to “mythical beasts.” Perhaps the answers are in her book. If it’s at all like “All the Devils Are Here”(her 2010 collaboration on the financial crisis written with the New York Times’ Joe Nocera) it will both illuminate and frighten.