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Subprime Mortgage Crisis

FNM and FRE Statistics You Should Know

Submitted by njvoter on Tue, 10/14/2008 - 22:50
in

 

FNM and FRE had outstanding liabilities of 5.4 Trillion (yes with a T) dollars, at the time they were seized.   This is the eqivalent of the total outstanding public debt of our entire country.   OK, so one cannot underestimate how big the GSE's were. 

The immediate unadvertised action necessary of the treasury was an infusion of $100 billion.   Which is the tip of the iceburg.    It is easily going to be well over the 700 billion figure to shore them up ongoing.   The democrats and MSM are deflecting that....

Much has been said about the use of leverage on Wall Street....yes it's true Goldman and Lehman were levered up somewhere between 32 and 40 to 1.   Bad judgement, they deserved their fates.   No one ever mentions that the GSE's were levered 2x that amount!!! Between 60 to 80 to 1 depending on which entity and which assets you include in the calculation.   FAR MORE LEVERAGE THAN THE INVESTMENT BANKS!   And they got away with it.  

The management of FRE and FNM have no obligation to repay the huge salaries and bonuses they received over the past few years, unlike the bailout package requirement for the banks.  
 
FRE and FNM have two businesses.
  1. They purchase mortgages and resell them as mortgage bonds.
  2. They borrow from the Federal Reserve and buy back their own bonds.

These two businesses place FRE and FNM in a conflict of interest position.

FRE and FNM have their debt backed by the Federal Government. This means they can borrow at the Fed Funds Rate or Treasury Rate, plus a negligible premium. This makes it very lucrative for FRE and FNM to buy back their own bonds. The Fed Funds Rate is currently 2% and mortgages yield approximately 6%. This means that FRE and FNM can make 4% times their leverage ratio. A few years ago, FRE and FNM successfully lobbied for permission to use more aggressive ratios.  Raising their leverage to the rates discussed at the top.

 
Talk about greed on wall-street???  (not denying that, but hey people in glass houses shouldn't throw stones...)
 
FNM execs had targets to double earnings in 5 years....they did it, in a very dangerous manner.  
 
By the way Morningstar had a very good piece on their website on CDO's and CDX (swaps) today.   Go read it,  very plain english, and then you'll understand why that market is necessary and why some of what is said about the vehicles is inflammatory.   Certainly there are problems which need correcting...but these vehicles facilitate alot of good for market participants as well.  

 

 

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