Why did it take so long to look at Fannie/Freddie's books?

Posted Jul 22nd 2008 11:11AM by Peter Cohan
Filed under: Federal Natl Mtge (FNM), Economic Data, Federal Reserve, Recession

The New York Times reports that as the White House pushes Congress to fund its bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), it is finally getting around to scrutinizing their financial condition. Is there any chance that the inspection will NOT reveal a critical need for the Congressional bailout? No. That investigation is guaranteed to support the White House's case.

The Times reports that the Federal Reserve and the Office of the Comptroller of the Currency (OCC) will be inspecting Fannie and Freddie's books. This comes at a time when the Office of Federal Housing Oversight (OFHEO), which should have been tracking their condition, is due to be wiped out.

Meanwhile, the Times reports that Fannie and Freddie are on the hook for some big obligations. They owe $1.5 trillion; they "own or guarantee more than $5 trillion in mortgages"; and they have derivative contracts to hedge $2 trillion worth of mortgage risks. I am curious what else the Fed and the OCC will be looking for as they inspect the books. I hope they can figure out how much cash Fannie and Freddie have available to pay off their obligations over time. But why doesn't the government know this already?

But I don't think that's the purpose of the scrutiny. I think it's confirmation bias -- the tendency of decision makers to seek out data that supports the outcome they desire and ignore the rest. So the latest inspection of their books will yield a sales pitch to support the White House's bailout.

Of course that bailout must be different than the one established by the first president Bush -- the $200 billion S&L bailout that involved buying up massive numbers of houses. That's why the White House will veto the Congressional bill if it contains a "$4 billion block grant program for states to buy foreclosed homes."

Politics really is personal. And we are paying the price for the unresolved conflict between King George I and King George II.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Tags: fannie mae, FannieMae, fnm, fre, freddie mac, FreddieMac, Inthenews, ofheo

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Reader Comments (Page 1 of 1)

7-22-2008 @ 12:38PM

william lindblad said...

Beats me and a host of others also.
(the below is a copy of my post-similar subject)

"This is a hot one - the government is investigating themselves. For anyone that is interested, go put OFHEO in search, open the site and read the mission statement. This is the agency that oversees the two F's.
Makes good reading and I did this over a month ago.
Seems to me that if directives were followed there is virtually no way that these two entities could be in any substantial trouble. As it stands I know that I posted a statement calling for all of the leadership involved to have their butts in front of a Congressional committee to explain WHY there is a problem. I may get my wish. Unless all have good explanations I think that everyone involved should get fired - less any big perks that generally go along with this type of bad management."

Peter - FYI - Do NOT compare the present with the RTC era. I know quite about it and I can safely say that it had a good deal of corruption - that's for starters. In that fiasco the cost to the taxpayer (on books) is about 200 billion, adjusted for inflation, thats about 600 billion today. As most of the properties did get sold at discounts and some required investment to complete, the real cost of probably in the 100-120, 1990 dollars.
The main difference is that the majority of the properties were of investment nature and not single family residences. While there is in today's market an abundant amount of the investment properties out there, there potential default is months away. In short, this is a long way from over. While government is it's usual slow cumbersome self, the recent actions are welcome
are are having a postive effect. Although I sound like the voice of doom, I do hope that the economy can be turned around. However, I am not optimistic as the amount of damage is extensive.

8-03-2008 @ 4:12PM

hazeleyes said...

You asked "Why did it take so long to look at Fannie/Freddie's books?"

That might have attracted the attention of the media, which might have attracted the attention of the public, who might have figured out that the US government is about to rob every citizen blind. It'll be the biggest transfer of private property to a government, ever. The value of our investments, the value of our homes, the value of the dollar... gone, and now the pigs in government want to grab all our future earnings in a "innocent pay the guilty" con game. The monumental arrogance is astounding but not surprising. They got away with it before - S&L, Enron, etc. - and nothing happened. Now here they are again -- they caused it to happen, and here comes the biggest rape of all.

What, me bitter?