Fannie and Freddie...Too Big To Understand

Fannie Mae and Freddie Mac. Sounds like your typical eccentric lovable aunt and uncle from the country. Hardly. These two notorious names are avuncular in tone only. You see these two cutesy names, Freddie and Fannie, formally known as Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHMLMC) respectively, were stationed at ground zero of the 2008 near global financial collapse.

A little background is in order...ole Fannie and Freddie were government sponsored enterprises (GSE) whose sole purpose was to expand the market for mortgages in the United States. Through some arcane "financial engineering" they created a calculus from which the money supply for mortgages was increased and loaned to credit unworthy citizens who wanted housing. Was this risky? Very. Was it understandable? No. Yet, all of this was sanctioned by the US government with minimal oversight.

By the year 2008, F&F owned or guaranteed half of the US $12 TRILLION mortgage market. Their favorite seller mortgage instrument was the now infamous "subprime loan". Subprime loans were loans that carried an adjustable loan rate below the standing mortgage rate. Thus, named subprime. They were easy loans to get for almost anybody who could sign a loan doc. Banks, with the blessing of F&F, took on huge risks and signed up en masse for underwriting the profitable subprime business while the public lined up and dreamed of owning their first home. Affordable housing was now available for everyone. Minorities and low-income buyers became home owners for the first time. A noble cause indeed. Big money was made by all involved and homes were built and purchased. A win for all. Not so fast...

In late 2007, the housing appreciation bubble started to deflate. Home values started to drop precipitously across the country. The rates on the subprime loan began to rise. The first time homeowner already financially strapped to make payments, tried to refinance the loan. Suddenly, re-financing became difficult almost impossible for the homeowner. In many cases, the standing loan on the property exceeded the value of the real estate. Defaults on loans escalated by the thousands per week. Securities backed by sub-prime mortgages lost most of their value with no buyers. Lenders didn't have a clue of how to value these "assets". By 2008, a full out panic which started on main street spread to Wall Street and into the corridors of Washington. Everybody in the big time financial world was in on this. The enmeshed global melt down was on.

How could this happen? Maybe leadership or lack thereof had something to do with this inexplicably rare "perfect storm" event. Christopher Dodd, Senator from Connecticut and head of the Senate Banking Committee which oversaw F&F dealings, said in 2008 F&F were "financially strong." Barney Frank, congressman from Massachusetts, then head of the House Banking Committee, said early on that F&F "should roll the dice" in the name of providing affordable housing for low income folks. Franklin Raines, CEO of Fannie May in the '90s and early 2000s, reaped $100 million in bonuses based on "fabulous" returns and took early retirement in 2004. But, upon closer review, it became crystal clear that F&F was "cooking the books". And the power brokers in charge in Washington looked the other way.

Because of risky loans and the cavalier approach by those in charge as echoed by Frank to "roll the dice", the bailout of F&F alone is expected to cost the US tax payers $400 BILLION over the next few years.

However, all of above aside, I sure learned alot of new words and catchy phrases during the last 18 months of this financial hemorrhaging.

Although I lost alot of money during this tumult, my main street understanding of the Wall Street lexicon expanded my word reservoir greatly. Which reminds me of an old saying, "there are no free lunches in this world".

How can one not be in ecstasy over the discovery of such sexy terms as: moral hazard, systemic risk, sovereign debt, too big to fail, black swans, decoupling, clawback, broke the buck, collateralized debt obligations, credit default swaps, short sellers, and last but certainly not the least, subprime loans. Isn't this a thrilling time to be alive? And as an added bonus, if not for this financial calamity, we would not have intimately known what the following allegedly did for a living: Frank, Raines, Dodd, Chuck Shurmer, Angelo Mozilo, Paul Krugman, Joe Cassano, Dick Fuld, Jimmy Cayne, The Sandlers, Timothy Geithner, Hank Paulson, Ben Bernanke, Lloyd Blankfein, John Thain, Ken Lewis, Christopher Cox, and last but certainly the most notorious, Bernie Madoff.

Over time I'll try to forget about Fannie and Freddie and focus on a healthier visual and remember my two favorite great Aunts, Tessie and Nell. They were happy, lovable and simple spinsters who lived in the Missouri farm country. They fed the chickens, tilled the soil, followed their Cardinals in the summer and hunkered down in the winter. Tessie and Nell didn't know a thing about toxic assets. Unless you consider chicken manure a toxic asset.