Also, if FNMA and FRE backed off significantly in 2003 and 2004 and didn’t “participate” much in this subprime stuff, then why did we end up having to to nationalize them? Were they that poorly run that even w/out participating much in the “causes” (CDO and CDS) of the bubble, they still fail?
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AN,
Yes, they were that poorly run. See my comments about conservatorship (actually, receivership) in 2003/2004. They had major accounting problems and would have been de-listed if not for the “GSE” status they carried.
Here’s what I was referencing about their market share:
6. See OFHEO (2006) and Inside Mortgage Finance Publications (2006). I should also note that in 2003, Fannie and Freddie together accounted for almost 70 percent of all mortgage securitizations and about 75 percent of all mortgage-backed securities outstanding. The GSEs’ market shares of mortgage securitizations and outstanding MBS have fallen since 2003, reflecting the growth of private securitizations. Return to text
April: The Administration’s FY02 budget declares that the size of Fannie Mae and Freddie Mac is “a potential problem,” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.” (2002 Budget Analytic Perspectives, pg. 142)
2002
May: The Office of Management and Budget (OMB) calls for the disclosure and corporate governance principles contained in the President’s 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
2003
February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.
September: Then-Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements.
September: Then-House Financial Services Committee Ranking Member Barney Frank (D-MA) strongly disagrees with the Administration’s assessment, saying “these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” (Stephen Labaton, “New Agency Proposed To Oversee Freddie Mac And Fannie Mae,” The New York Times, 9/11/03)
October: Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying “if it ain’t broke, don’t fix it.” (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03)
November: Then-Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any “legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk.” To reduce the potential for systemic instability, the regulator would have “broad authority to set both risk-based and minimum capital standards” and “receivership powers necessary to wind down the affairs of a troubled GSE.” (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
[check the links for more info…there’s lots of juicy bits]
