The Fed, Frannie and Freddie

What is it like to sit on a land mine? That is precisely the feeling that I have had of late. For the past half-year, we have been walking through land mines.

Two recent events combined to make an ominous click:

  1. The Fed is now accepting wider collateral: Bonds backed by auto loans and credit cards (cf Rdan’s piece below)
  2. Fannie Mae and Freddie Mac are playing hardball with regulators

    The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year. Fannie Mae is to release its latest financial results on Tuesday and Freddie Mac is to report earnings next week.
    The companies are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.
    And if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.

The problem with the last is that Fannie’s and Freddie’s financial “cushion may be too thin.” Additionally, the interests of those running them may not coincide with national interests:

Moreover, the companies are using their newfound clout to push Congress and their regulator to roll back the limits that were imposed after recent scandals over accounting and executive pay, according to participants in those conversations.

Because of the widespread perception that the government would intervene if either company failed, they can borrow money at lower interest rates than their competitors. As a result, they have earned enormous profits that have enriched shareholders and managers alike: from 1990 to 2000, each company’s stock grew more than 500 percent and top executives were paid tens of millions of dollars.

In a March meeting, Freddie Mac’s chairman, Richard F. Syron, bolstered those fears by saying the company would put shareholders’ interests first.

Maybe it is just me, but I am having a harder and harder time reading the news. I just don’t want to look…or hear an ominous click, click. Wake me when it is over, please.