Robert Reich, When I Love Him, I Really Love Him!

Now I don’t always agree with him but his opinions are hard to dismiss. So, here he is on the totally predictable Fannie Mae and Freddie Mac (see my post) situation.

Sunday, September 07, 2008

Fannie and Freddie, as Predicted

A reprise of what I wrote August 25: Any day now -- perhaps any hour -- the plug will be pulled on Fannie Mae and Freddie Mac, and a massive government bailout will ensue. Together, they'll become the largest government-owned entities in American history, and, once again, taxpayers will pay the bill, which could come to $25 billion or more.

One question is how did we ever get to this? The Savings and Loan Bailout of the late 1980s should have taught us that when government guarantees the downside of risks and private investors reap the upside gains, there's hell to pay. The risks Fannie and Freddie took on weren't officially guaranteed by the government -- that is, by you and me -- but investors assumed they were. And so did Fannie's and Freddie's executives, who reaped a bonanza with bonuses in the tens of millions each year.

Apologists will say that Fannie and Freddie exist to make housing loans to low-income Americans, so it was inevitable that the two giants would get caught in the quagmire of the housing burst. But the fact is, Fannie and Freddie -- and the executives who ran them and still run them -- have been out to maximize profits. Period. Just the same as every other mortgage and investment bank. High-risk sub-prime loans offered a higher rate of return, so Fannie and Freddie went into them big time. And because of the implicit government guarantee, Fannie and Freddie could take on even more risks and make even more money. Until now.

It's another case of socialized capitalism, folks. The largest, yet. Along with making lots of money for investors and their executives, Fannie and Freddie corrupted our political process. They blocked any attempt to reign in the risks. Their lobbyists were and are the most sophisticated and among the most ubiquitous in Washington.

What to do now? Hope that, like the S&L fiasco, taxpayers can get back a fair portion of our dollars. But unlike the S&L fiasco, this time we should make sure we bury socialized capitalism for good.

Now the thing that makes me crazy is that back in the day when I was involved in banking with all this Fannie Mae and Freddie Mac stuff we had ledger cards which laid out the actual borrower, address of the property, mortgage amount, interest rate and mortgage status. So how is it that in this day of computers that we can’t figure out this information on each and every mortgage in each and every tranche of this debacle so as to figure out which loans are okay and which are in trouble? You know, so we could actually figure out the mark-to-market value of the tranche? It seems clear to me that if we could use individual typed ledger cards back in the day to figure this out we should be able to, using computer records, have a record of this today. I am shocked that the Masters of the Universe are so “Stupid” that they are unable to do this really simple analysis.

This said, in the last few years I have had to deal with many accountants who couldn’t do any forensic analysis if their lives depended on it. It appears that computerization has dumbed-down and crippled our professionals.

May be we should go back to the old paper and typed ledger card days? Not to mention the days when the entity that made the mortgage held the mortgage and risk. I know that I am so Old School.

JMHO!