You have to be in the industry to realize what was going on, or you have to accept what many experts and I are saying. Actually you don’t have to do either but looking from the outside in, things aren’t as clear as you might think. First off, Fannie and Freddie didn’t make bad loans; they bought derivatives secured by bad loans from the peddlers on Wall Street. Why? Your guess is as good as mine. It just might be the “grass is greener” theory that has ruled and ruined many a successful plan. It could be that bonuses to the executives depended on earnings and they felt this would be an easier way to improve earnings and help themselves to a bigger piece of the pie. If you saw how much this executive group was making, then “obscene” might be the thought that runs through your mind. Whatever it took to motivate these fellows (generic and not referring just to men), it proved to be their downfall, and hopefully not ours. Time will tell.
What made it necessary to take over these two giant mortgage companies? Primarily two occurrences: the inability for Freddie Mac to raise sufficient capital and the general unrest of China, Japan and Russia. Freddie Mac’s executives apparently told Treasury Secretary Paulson that they would quickly raise $5 billion from investors and simply failed to do so. Growing very nervous about whether the United States Government would back the two Government Sponsored Enterprises (Fannie and Freddie), China as holder over $375 billion of Fannie and Freddie securities intimated they may have started selling the bonds. It was reported that Secretary Paulson stepped in to avoid a double disaster: losing Fannie and Freddie’s ability to conduct business in the mortgage arena, and having a flood of their securities hit the credit market. He had already received permission to take drastic measures with Fannie and Freddie through the bailout bill that was passed and signed into law in July of this year.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.