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10 dried up in late 2007 after the revelations of all

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10 dried up in late 2007, after the revelations of all of the “private-label” sub-prime related securities that had gone south, the federal government naturally pushed Fannie and Freddie and the FHA forward to fill the gap – including a near-doubling of the size of mortgage (in some parts of the U.S.) that would qualify for their support. Now that they are heavily entrenched in a much wider swath of the mortgage market, their government backing means that they have lower costs and are thus subsidizing mortgages. This makes it difficult, or perhaps impossible, for private-label securitization to be re-established. Accordingly, the heavy presence of Fannie and Freddie and the FHA currently may not be indicative of the private sector’s disinterest in reviving private-label securitization but simply the private sector’s inability to compete against the subsidies. This conundrum too calls for the radical restructuring of Fannie and Freddie that we advocate in this book.
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11 Chapter 1: Feeding the Beast “..the GSEs play an extraordinarily successful double game…[telling] Congress and the news media, ‘Don’t worry, the government is not on the hook’ – and then turn around and tell Wall Street, ‘Don’t worry, the government really is on the hook.” - Richard Carnell (Fordham University Law Professor and former Assistant Secretary of the Treasury), Senate testimony, February 10, 2004 In 1818, a nineteen-year old English girl, Mary Shelley, published her first novel. The novel tells the story of a young, talented scientist who discovers how to create life from the inanimate. Collecting old human bones and tissue, the scientist constructs a man from scratch and brings him to life, only to be disgusted by his appearance and shape, calling him the Monster. The scientist deserts the monster, and, left to his own devices, his creation causes havoc and mayhem. In the finale of the story, as the scientist confronts the monster, the monster eventually destroys his creator, and stricken with grief takes his own life. Shelley decided that the name of the talented scientist should be the title for the novel: Frankenstein . Former executives of Fannie and Freddie, members of Congress, and past administration officials all talk about the good work of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac; and, they will add, if it were not for the equivalent of an economic asteroid hitting the markets, all would be fine. They will point to affordable housing goals and the benefits to the underprivileged. We are skeptics. If the government was Doctor Frankenstein, surely the GSEs were its monster. Born of a well-intentioned and economically efficient goal of creating liquidity in the secondary mortgage market, these institutions morphed into profit-taking firms that had the majority of their risks being backstopped by the government. While the majority of the government subsidies went to CEOs, shareholders, and wealthier homeowners, the costs were borne by society as a whole. As
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