Economics

Barney Frank: We've Already Fixed Fannie and Freddie

|

Rest assured, the cover story was still "Cate Blanchett Only Looks Like a Drama Queen"

New York Times "Dealbook" columnist Andrew Ross Sorkin was on TV recently complaining about the federal government's ongoing inaction with the now-nationalized Fannie Mae and Freddie Mac. Afterward, his phone rang. It was Barney Frank (pictured in the rogue's gallery on your right).

"I take offense at the idea that we've done nothing," he told me. Far from dragging its feet, he insisted, the government took the bold step of putting Fannie and Freddie into conservatorship in 2008. "There was no political fear to not do it."

I asked the question that I hear from so many Americans: Why hasn't the government tried to unwind and replace Fannie and Freddie, which have so far cost taxpayers $145 billion, more than any other bailed-out firm? […]

"There is no urgency," he said.

Come again?

"We've already abolished Fannie and Freddie," he said, referring to the government takeover. "Yes, we waited too long to fix it. But the money is not being lost by anything they are doing now."

You heard it straight from the horse's mouth: If the federal government gives implicit backing to a particular business sector, and that sector goes pear-shaped (i.e., prices contract after a record run-up), then the "fix" is nationalization.

So what passes for an exit strategy, then?

"Nobody in the private market thinks we're ready," he said, adding that whatever legislation is developed, it will be "for a postrecession world."

There's your federal government of 2010: Not just socializing risks, but nationalizing losses.

Sorkin's piece ends with a great little yin-yang between Frank and the Reason Foundation's own Fannie/Freddy-phobic, Anthony Randazzo.

Intellectually pretty difficult

Mr. Randazzo, whose foundation leans toward libertarian views, takes a much bolder step. "This means that prices have not been allowed to reach their natural bottom, from which a sustainable recovery could begin." And Mr. Randazzo wants to see housing prices truly bottom out.

But allowing the housing market to collapse simply so it can rise again — a very free-market approach — is politically unpalatable, especially as the nation's unemployment number still hovers near 10 percent.

"It's intellectually pretty difficult," Mr. Frank said.

Yes, yes it is.

NEXT: The Obama Administration's "quiet but malicious campaign against the news media and their sources"

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Barney Frank is actually just a robot with malfunctioning language software that is providing even more proof of why term limits are a good idea.

    1. That is the most benign and charitable description I have ever heard appended to the annoying right dishonorable choad-huffer from Taxachusetts…

  2. politically unpalatable, especially as the nation’s unemployment number still hovers near 10 percent

    High unemployment makes every difficult choice “politically unpalatable,” except for turning unemployment compensation into an open-ended, unfunded welfare program. That one seems pretty popular.

  3. “It’s intellectually pretty difficult,” Mr. Frank said.

    Only if you’ve fallen in love with your own issues. I’ve been arguing that F&F should be killed since 2007. The smartest thing to have done would be let Fannie and Freddie go belly up and let the investors in their toxic (not my definition, the feds came up with it) MBSs eat their losses. This would have caused serious short term pain, but the housing martgage fuck story would be over by now.

    Ewww! That medicine tastes yucky. I won’t take it! I won’t! I won’t! I won’t!

    1. Precisely this. We can take the pain now, or we’ll take later anyway….and it will be worse. I’m all for “now”.

      Barney Frank is a maddeningly-stupid fuck, but not as much as his “constituency” who keep voting him into office. A disgusted nation says, “Thanks for continuing to foist unintelligent, statist pukes on the rest of us, Massachusetts. You assholes…”

      1. In retaliation, we keep firing our own douchebags right back at Massachusetts and the rest of the country. The concept of mutually assured destruction as deterrent doesn’t seem to apply to the electing of congresspersons.

      2. It would be so easy to purchase a mailing list of every resident in Frank’s district and carpet bomb them with postcards reading: IF YOU VOTE FOR BARNEY FRANK ONE MORE TIME I WILL KEEL YOU!

        1. Frank’s district looks like it’s been gerrymandered to the point of no return.

          1. That’s some serious gerrymandering when the district boundaries about to shrink to a couple feet wide at one point:

            I guess it’s pretty apt that the worst of the gerrymandering occurs near the area called “Middlesex”

            1. Almost every congressional district looks like that now.

              1. It’s all about diversity.

            2. I like what KY’s supreme court did. They basically said “gerrymander all you want but you have to minimize the number of current political boundaries that are split”.

              So, for example, when doing US races boundaries, it turns out that there can be only 1 split county – Jefferson (where Louisville is). The 3rd district can be gerrymandered around a good bit. The other districts can be too, but only by deciding which county goes in District X vs District Y.

              For state house, with 100 districts, there were more splits allowed, but computer models limited it to some single digit number (it was either 4 or 8, forget which). Jefferson Co has 18 state house seats and they can be gerrymandered a good bit, but within it, city boundaries have to be respected when possible (and Jefferson Co has a huge number of mini-cities).

              1. I’ve always thought a law saying all districts must be convex, when drawn on a mercator map, unless the state border prevents such a thing for a particular district would go a long ways to reducing gerrymandering.

                Good luck explaining “convex” to one of our pussbag law-school-graduate politicians though. It’s not that you couldn’t explain it to them, it’s that they’d refuse to admit they understood the concept, because that’d be easier than having to defend gerrymandering.

  4. Is Bahnie Fwank the man we want messing around with our fannie?

    1. Speaking of southern hemispheres

      “You heard it straight from the horse’s mouth”

      “You heard it straight from the horse’s ass”

      There – fixed it.

    2. Yes, I want the government out of our fannie.

  5. There’s nothing wrong with Fannie and Freddie that a good dose of Barney Frank won’t prolong indefinitely.

  6. By fixed, I hope he means prevented them from reproducing in the future.

    1. I think he meant that they’ll be able to funnel hundreds of billions into the corpses of these outfits without a lot of additional hurly-burly, thus keeping people like Frank Raines and Jamie Gorelick farting through silk for the foreseeable future.

  7. The consensus was that neither Democrats nor Republicans wanted to touch an issue that would dredge up decisions made by both parties over the last decade that looked bad in light of the financial crisis.

    This consensus was apparently reached on Morning Joe; could there be hope for us?

  8. “We’ve already abolished Fannie and Freddie,” he said, referring to the government takeover.

    What? Aren’t they still there, doing what they’ve always done, only more so and this time with a more explicit government guarantee?

    1. Yeah, but they’re no longer evil corporations, so that’s an improvement.

      We’re fucking doomed, aren’t we?

  9. You heard it straight from the horse’s mouth: If the federal government gives implicit backing to a particular business sector, and that sector goes pear-shaped (i.e., prices contract after a record run-up), then the “fix” is nationalization.

    This is a complete missrepresentation of what he was saying. In terms of losses, the government already took Freddie/Fannie into conservatorship and the mtgs they gauranteed are already a liability of the government. He’s referring to taxpayer losses on the GSEs and their guarantees, saying that we already face the old liabilities and that their current business isn’t what’s causing the losses… and hence there is no ‘urgency’ to unwind their books. This sentiment was also expressed by Gietner this morning.

    Despite all that, the only thing I like about Frank is his stance on gambling.

    1. My view of what he meant by ‘fix’ is that we fixed the situation where we’re taking on significant risk from Fannie/Freddie. If you listened to any of his committee hearings you’d know that he has repeatedly talked about a need for GSE reform. Your reading of his statement is incongruous with a plethora of other statements of his, and is sloppy.

      1. Except F&F are continuing to take on more risk, so they have fixed nothing.

      2. Who are you, one of Barney Frank’s staffers? He hasn’t fixed a gotdamned thing, he’s made it worse, unless by “fixed” you mean “expanded government even more”.

      3. If you listened to any of his committee hearings you’d know that he has repeatedly talked about a need for GSE reform.

        That’s WHY he’s an idiot. GSE’s don’t need reform – they need extinction. The prior dozen “reforms” of them turned them into the horrible monsters they became.

        1. Agreed.

    2. He’s referring to taxpayer losses on the GSEs and their guarantees, saying that we already face the old liabilities and that their current business isn’t what’s causing the losses

      What utter horseshit. Fannie and Freddie are still buying low down payment loans, which are the riskiest ones. There will be losses on their current business.

      Barney Frank: Mainly just stupid, or mainly venal and malicious?

      1. Tunnel vision. He has lived in the deadly coccon of Washington so long he has no concept that there are other valid world views besides his own.

      2. What utter horseshit. Fannie and Freddie are still buying low down payment loans, which are the riskiest ones. There will be losses on their current business.

        You obviously don’t understand how Fannie and Freddie operate. Banks originate loans and through Fannie and Freddie securitize them. The GSE takes a gaurantee fee. The loans don’t come on balance sheet unless they go delinquent at which point the GSE can buy them out of the pool.

        The GSE’s do garantee (and continue to garuntee) high LTV loans, but if it’s above 80 LTV it is required to have mortgage insurance. The real risk taker in today’s environment is the FHA which is providing public MI. Given the housing decline there will be continued significant losses on the legacy books that the GSEs gaurantee, the current books are clean [in my opinion and the opinion of every expert I’ve read or talked to].

        Furthermore the GSEs aren’t expanding their owned portfolios, and haven’t since they went into conservatorship. Therefore the only loans they’re buying are ones that they already gaurantee and are delinquent loans out of pools. Proprietary portfolio trading is for all intents and purposes done at the GSEs.

        Treasury holds a large Agency MBS portfolio (which they are now pushing the runoff from into long dated gov’t debt).

        1. To clarify, the GSE new garanteed books are clean. The FHA is F’d.

        2. The loans don’t come on balance sheet unless they go delinquent at which point the GSE can buy them out of the pool.

          The GSE’s do garantee (and continue to garuntee) high LTV loans, but if it’s above 80 LTV it is required to have mortgage insurance.

          So, the GSE’s will take onto their books delinquent loans, and some, probably most, of those loans will have insurance.

          I don’t think that means they will never take another loss. Another big downleg in the housing market or economy will load up their books with bad loans, and as we saw with AIG, insurance may or may not be there.

          1. They already gaurantee the delinquent loans they take on balance sheet. They are already a liability of the GSE’s => government => taxpayers. It’s not additional risk.

            1. Their is additional risk every day they dont remove the guarantee. If they remove the guarantee TODAY then a loan that goes delinquent tomorrow doesnt need to go on the balance sheet.

              1. They already made the gaurantee and made it explicit. Removing it now would be tantamount to defaulting on government debt.

                1. And?

                  Contracts with the government are only good until they change the law. Just like social security payments or anything else, they can alter the deal at any time.

                  And pray they dont alter it further.

                  1. I mean, really, does anyone think that Roth IRA gains wont be taxed some day?

                    1. Or, another example, does anyone think that Mickey Mouse will ever be in the public domain, despite an explicit government guarantee 80 years ago?

                    2. ho ho! settle down robc. Let me bring you a pillow. Now just relax…

                  2. Given the agency MBS market is about $5 Trillion, and that governments, insurance companies, banks etc hold Agency MBS in lieu of treasuries, I think it would be a bit more impactful and a lot more like defaulting on gov’t debt.

                    1. Im not commenting on size or scope, just saying it can be done.

          2. Thanks, MP. Seriously, this has been helpful.

            So, the GSEs are taking risk. What is the funding source for them to cover that risk? And doesn’t the adequacy of that funding source depend on whether the GSEs (which labor under a massive moral hazard) are properly evaluating the risk they take?

            1. FYI, i’m a different poste than “MP”.

              If you mean risk in terms of newly originated Agency Mtgs, then it’s pretty negligible to the GSEs (given their current standards). They fund the risk via the gov’t balance sheet and fees they take on the loans.

              The real risk taker (currently) is the FHA (hence still the gov’t and us) which is giving MI at rediculously cheap rates on high LTVs. There aren’t very many scenarios where the GSEs are taking losses (in excess of fees) on newly originated Agency Mtgs. This could change if they were mandated to lower their standards of what they gaurantee (a definite possibility). In that case it would still be the government and ultimately taxpayers on the hook for losses.

              1. So, after you boil it down and disregard the shell game, its still the taxpayers on the hook.

                1. It always was, even when it officially wasn’t.

                2. Exactly.

                  But, the GSEs & FHA are very different entities with different rolls (historically and currently). Because of the large losses taken people are focusing on the GSEs right now (there were also hearings this morning on their future).

                  The government is still taking on risk in the housing mkt, but the idea that its through the GSEs is largely false.

                  There are a lot of things to dislike Frank for, but Matt Welch’s criticism above isn’t one of them.

                  1. BS. Regardless of amount/level or risk they are now taking on, they havent FIXED the GSEs.

                    1. That’s exactly my point. Frank wasn’t saying that we’ve “fixed” the GSEs, and in fact he has multiple times said that they need to be fixed. He was saying that we’ve fixed them with regard to incurring additional risk from them.

                    2. That was my original criticism of Welch’s post. He was ignoring a position Frank has repeatedly expressed for needing GSE reform, with a position of us not incurring more GSE risk.

                      The non-applicable criticism of Frank cheapens legitimate criticisms.

                    3. No, that isnt what Frank is saying.

                      He flat outs says we waited too long but they are “fixed”. And they arent.

                    4. As you said above:

                      “The GSE’s do garantee (and continue to garuntee) high LTV loans”

                      Ignoring the johnish spelling, they are still guaranteeing new loans – even if it is much, much, much less risky than before, it is still not zero risk. They need to be ended. Even if we dont dump past guarantees, there should be NO new guarantees. Until that point, it isnt fixed.

                    5. “We’ve already abolished Fannie and Freddie”

                      is a flat out lie.

                    6. I never argued it wasn’t.

                      That said: They’re no longer public. They no longer run proprietary portfolios.

                    7. even if it is much, much, much less risky than before, it is still not zero risk.

                      The risk has not changed one bit. The only difference is the provider of the MI. If anything, the GSE’s should be running away from anything insured by the FHA – which they pretty much did until the 21st century.

                      If the GSE were indeed fixed, they’d be avoiding the FHA insured loans because they know the FHA is fucked. Saying the GSE’s have fixed their risk assessment and risk-taking since the conservatorship is nothing but a game of semantics. Day-to-day business at the GSE’s has not changed one bit. They still require insurance for high LTV loans and do not care one whit about the solvency of the insurer nor the quality of the underwiting.

                    8. High LTV loans are backed by mortgage insurance and currently about 85% of that MI is FHA provided. The government is taking the risk, yes – but not throught the GSEs.

                    9. Day to day business at the GSEs is significatly different.

                    10. My contention isn’t that the GSE’s are “fixed” are good, that Frank is an upstanding man. My contention is with this statement:

                      You heard it straight from the horse’s mouth: If the federal government gives implicit backing to a particular business sector, and that sector goes pear-shaped (i.e., prices contract after a record run-up), then the “fix” is nationalization.

                      Which simply isn’t what frank was saying. We can argue whether the GSEs are still taking on risk (which although diminished greatly they still are to a degree), and we can argue about their future (I don’t think they should be around)… but interperating Frank’s comments the way Welch does is simply wrong.

                    11. How else should Frank’s comments be interpreted.

                      “We’ve already abolished Fannie and Freddie,” he said, referring to the government takeover. “Yes, we waited too long to fix it.”

                      Welch’s interpretation seems pretty dead on to me. Nationalization == Fix in Barney’s mind.

                    12. Day to day business at the GSEs is significatly different.

                      but not risk free.

                    13. Ok – fair point.

                      That doesn’t change my view on what Frank was referring to, or that Welch missrepresents his statements.

        3. Therefore the only loans they’re buying are ones that they already gaurantee and are delinquent loans out of pools. Proprietary portfolio trading is for all intents and purposes done at the GSEs.

          So Fannie and Freddie today are basically the new version of the RTC. But that means they should eventually be wound down and disappear.

          the current books are clean [in my opinion and the opinion of every expert I’ve read or talked to].

          Sounds like two sets of books. That can’t be good. Regardless of expertness, we need audits not opinions.

          1. Sounds like two sets of books. That can’t be good. Regardless of expertness, we need audits not opinions.

            The new book I’m referring to is a book of gaurantees – the actual loans aren’t on balance sheet (just as the old loans unless delinquent aren’t). You don’t really need an audit to see what these loans are – they’re in publically marketed securitizations. The biggest risk taker in the current origination agency mkt is the FHA – not GSEs.

            I agree they should be wound down and disapear.

            1. The new book I’m referring to is a book of gaurantees – the actual loans aren’t on balance sheet (just as the old loans unless delinquent aren’t).

              So potential liabilities aren’t on the balance sheet and non-performing assets are.

              If that’s “fixed”, we aren’t speaking English anymore. All we’ve done is give Fannie and Freddie the same “pass” we’ve given to the TBTF banks only with even more taxpayer money. The fact that they haven’t explicity been folded into an RTC-like entity says volumes.

              This is why some were suspicious of nationalizing the large insolvent banks to begin with: the goal would have been to re-establish them as going concerns (a la GM and Chrysler) instead of putting them through an orderly and possibly lengthy shutdown.

              Again, no exit strategy. We may both agree that the GSE’s should be wound down and disappear, but Barney Frank does not.

              1. Good points. With regard to the use of “fixed” in the context given, it was pretty obvious to me what B.Frank meant.

                I agree that unlike us, Barney wants the GSEs around in some form in perpetuity. He doesn’t want them in their current form however, and has said as much.

  10. The fundamental problem here is not Frank’s errant belief that they’ve made changes to F&F that have eliminated the excess risk generated by their cheap money. The problem is that he still believes that Federal government price supports for housing (which is really what F&F are about) are a legitimate ongoing policy.

    1. I agree with this. I don’t think the gov’t should be involved in the housing market in the long run. But I am not convinced that the best way to that end is imediate unwinding and liquidation of GSE/Treasury/FHA portfolios.

      1. Why not? Thats the best way to handle mistakes – let the maker of the mistake fail in a fiery and spectacular manner.

        1. And without any government money involved.

          1. I honestly just don’t know the impacts of gradual vs imediate reform. It’s a lot like the still ongoing debate in the field of economics of development between shock reform vs gradual when moving from a control economy to a free[er] market. Did China do it better than Poland? [albiet China may be poised for a crash].

            I know what end result I think is desirable, I just don’t know the the path to it that incurs the least economic and human pain.

            1. The shortest path is the shortest.

  11. Except F&F are continuing to take on more risk, so they have fixed nothing.

    Exactly.

  12. As soon as Fannie and Freddie lead us out of the recession recovery with some high quality loans, then, and only then, can we address them.

  13. LOL, that dude is about as dumb as the day is long man.

    Lou
    http://www.be-anonymous.se.tc

      1. I miss Huggy Bear.

          1. Eeeewwww.

            1. I was shooting at a dog….I missed him.

          2. I miss Bear Force One

  14. As soon as Fannie and Freddie lead us out of the recession recovery with some high quality loans, then, and only then, can we address them.

  15. mainly venal and malicious?

    Don’t forget “self-aggrandizing”.

  16. the GSE new garanteed books are clean.

    But they aren’t clean; they won’t be until Barney & Co stop fighting the rationalization of prices.

  17. Seems like every single elected official in America is scared shitless to stop propping up “the American Dream” – Barney Frank is hardly alone in this.

  18. From today’s Fannie and Freddy love-in:

    BILL GROSS, CO-FOUNDER AND CO-CIO OF BOND GROUP PIMCO

    “To suggest that there’s a large place for private financing in the future of American housing finance is unrealistic. The only way to bring housing back and to create liquid, financeable mortgage finance going forward would be to provide a government guarantee. It would be provided for by adequate insurance, by sufficient down payments, and over encompassing regulatory environment that instead of allowing no docs and liar loans provides adequate supervision for any mortgage going forward.”

    “PIMCO would not buy a private or a privately insured mortgage pool unless it was accompanied by a 30 percent down payment, too high in today’s market to permit new housing or even secondary market purchase. Without government guarantees, mortgages rates would be hundreds, hundreds of basis points higher, resulting in a moribund housing market for years.”

    “Policymakers should quickly re-engineer a refinancing opportunity for all mortgagees that are current on payments and are included in GSE securitized mortgages. The American economy is approaching a cul-de-sac of stimulus, both monetarily and fiscally, which will slow it to a snails’ pace incapable of providing sufficient job growth going forward. Unemployment rates will approach and remain at double digits unless a positive fiscal stimulus is provided in the next six months. This home financing to my way of thinking, and to PIMCO’s way of thinking, where you take 5, 6, and 7 percent mortgages and turn them into 4 percent mortgages, basically will provide a crucial stimulus of $50-60 billion in consumption, as well as potential lift of 5-10 percent in terms of housing prices.”

    Shorter Bill Gross: “I want the government to guarantee me profits!”

    Fuck you, Gross.

    1. I hope his competitors smell weakness.

    2. What Gross is doing, I believe, is advocating for increased leverage (which is what got us into this mess) backed by government guarantees (which is what got us into this mess when those guarantees were much less explicit).

      This truly is what the gambling industry calls “doubling down”. In the service of what the investment industry calls “talking his book.”

    3. I’m glad I sold his fund, the under-performing piece of shit that it is.

  19. “This home financing to my way of thinking, and to PIMCO’s way of thinking, where you take 5, 6, and 7 percent mortgages and turn them into 4 percent mortgages, basically will provide a crucial stimulus of $50-60 billion in consumption, as well as potential lift of 5-10 percent in terms of housing prices.”

    It is painful reading statements like this.

    It’s like an alcoholic who’s already hammered and you tell him that you think they should stop for the evening, but the alcoholic just gets angry and pours himself another shot. Spilling booze all over himself and making a scene. At this point, a single shot isn’t going to make much of a difference to the current drunkenness. But eventually, when the guy passes out, he’ll feel worse in the morning if he just keeps drinking as opposed to quitting earlier.

    Knocking 2% off mortgage rates is meaningless as is hiking the price up 5% if the prices are already 50-75% too high(which is what it sounds like from his 30% down and hundreds of points higher mortgage rate predictions should government stop propping up prices).

  20. “Yes, we waited too long to fix it. But the money is not being lost by anything they are doing now.”

    Someone show him the numnbers.
    F&F are still racking up hundred-billion-dollar losses.

  21. The government is still taking on risk in the housing mkt, but the idea that its through the GSEs is largely false.

    Isn’t the Federal Reserve buying the toxic assets up?

    1. Technically, the Fed is private.

Please to post comments

Comments are closed.