kent nickell
Well-known member
This article relates back to the Charlie Rose interview with Taleb below.... Taleb thinks we need to go through an extensive stage of deleveraging to reach a more stable society. In his vision of this 'Capitalism 2' he sees banks more as highly regulated utilities purely in the business of giving out loans under reasonable conditions under which they expect to be paid back. He doesn't see them being invested in all the risky types of investments that got us into this mess requiring literally hundreds of billions of taxpayer dollars to be bailed out. He sees these types of investments still being made but by organizations that are capable of absorbing all of the downside risks as well as the upside rewards...
The danger right now is that since Freddie and Fannie are in government hands that housing becomes too political rather than governed by the financial realities. There is some damage mitigation going on right now which I think is ok but we need to make sure that credit doesn't get crazy again and that the mortgage industry becomes more simplistic and tied to reality.....
http://www.nytimes.com/2009/03/03/business/03mortgage.html?_r=1&ref=business
U.S. Likely to Keep the Reins on Fannie and Freddie
By CHARLES DUHIGG
Published: March 2, 2009
Despite assurances that the takeover of Fannie Mae and Freddie Mac would be temporary, the giant mortgage companies will most likely never fully return to private hands, lawmakers and company executives are beginning to quietly acknowledge.
David M. Moffett, who resigned Monday as chief executive of Freddie Mac, headed the company for less than six months.
The possibility that these companies — which together touch over half of all mortgages in the United States — could remain under tight government control is shaping the broader debate over the future of the financial industry. The worry is that if the government cannot or will not extricate itself from Fannie and Freddie, it will face similar problems should it eventually nationalize some large banks.
The lesson, many fear, is that a takeover so hobbles a company’s finances and decision making that independence may be nearly impossible.
In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.
Lawmakers have given the companies access to as much as $400 billion in taxpayer dollars, a sum more than twice as large as the pledges to Citigroup, Bank of America, JPMorgan Chase, General Motors, Wells Fargo, Goldman Sachs and Morgan Stanley combined.
Regulators defend those actions as essential to battling the economic crisis. Indeed, Fannie and Freddie are basically the only lubricants in the housing market at this point.
But those actions have caused collateral damage at the companies. On Monday, Freddie Mac’s chief executive, David M. Moffett, unexpectedly resigned less than six months after he was recruited by regulators, having chafed at low pay and the burdens of second-guessing by government officials, according to people with knowledge of the situation.
Fannie Mae has also experienced a wave of defections as people leave for better-paying and less scrutinized jobs.
Last week, Fannie Mae announced that it lost $58.7 billion in 2008, more than all its net profits since 1992. Freddie Mac is also expected to reveal record losses in coming days.
Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.
“Once government gets a new tool, it’s virtually impossible to take it away,” said Representative Scott Garrett, a Republican of New Jersey and member of the Financial Services banking subcommittee. “And Fannie and Freddie are now tools of the government.”
One reason that Fannie and Freddie will never return to their earlier forms is simple mathematics: to become independent, Fannie Mae and Freddie Mac must repay the taxpayer dollars invested in the companies, plus interest. Even if the firms achieve profitability, it could take them as long as 100 years — or longer — to pay back the government. And almost no one expects the companies to return to profitability anytime soon.
Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.
“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”
Republican lawmakers — many of whom believe the federal government should not be involved in the mortgage business at all — have signaled they will try to end the government’s involvement with Fannie and Freddie, even as they acknowledge that effort is likely to fail.
And lawmakers of all stripes are quietly voicing worries that government involvement in the mortgage industry could lead to the very problems that caused the current crisis.
“When you use mortgage companies for political purposes, such as helping low-income borrowers or expanding homeownership, you make bad economic decisions,” said Mr. Garrett, the Republican congressman. “And bad economic decisions are why we’re in this trouble right now.”
Analysts say that one reason Fannie Mae and Freddie Mac were privatized in the first place was to prevent political whims from dominating the mortgage marketplace. The companies were founded by the government but sold to investors decades ago.
“The theory was that if Fannie and Freddie were private, they would only be interested in profits, and so they wouldn’t take too many risks,” said Thomas A. Lawler, an economist who worked at Fannie Mae for more than two decades before leaving in 2006 to become a consultant. “If the government owns Fannie and Freddie, politicians will make choices that make voters happy, but may not be wise from an economic standpoint.
“Of course, the past year has proved that focusing on profits alone doesn’t protect you from bad choices, either,” Mr. Lawler added.
Lawmakers are quietly discussing a handful of possible proposals for Fannie and Freddie. They range from outright nationalization, in which the government would formally absorb the companies and guarantee millions of new home loans, to public-private hybrids, in which lawmakers would explicitly backstop part of the mortgage industry if economic catastrophe strikes, and would dissolve Fannie and Freddie into smaller, private companies that would handle the day-to-day business of mortgage finance, but be heavily regulated.
Lawmakers say they are unlikely to begin serious discussion about the companies’ futures until this fall.
--
Dec 12, 2008
Always interesting to hear Nicolas Taleb's (author of the Black Swan) take on events..
http://www.charlierose.com/view/interview/9713
some excerpts from this 20 minute video....
Taleb feels that Nouriel Roubini (Dr. Doom) is an optimist. " I've been waiting for this crisis since 2003."
"Today when you cancel a Christmas order here...a factory closes in China hours later....Things are going to happen quickly and its going to be a lot worse."
Society should increase redundancy..
Moving into 'Capitalism 2'.. Banks will turn into highly regulated utilities as the public won't tolerate again these entities paying out very high bonuses year after year and then being bailed out by public funds when they fail. Future risk taking (speculative investments) will be much less debt financed and not subject to bailouts. Markets are horrible at predicting rare events. Ponzi schemes of buying stocks are over as people re-understand the risks...
Huge amount of deleveraging necessary to reach a more stable society..
One of the more interesting things to me in this video is that he is predicting massive deflation for the foreseeable future as hedge funds continue to deleverage causing stock prices to further fall and a future that will be much less debt oriented....
Interestingly only about 4 pages of his Black Swan book are devoted to financial matters, the rest is devoted to the general process of thinking outside the bell shaped curve to appreciate rare but high impact events such as computers, the internet, Google, pandemic disease etc
The danger right now is that since Freddie and Fannie are in government hands that housing becomes too political rather than governed by the financial realities. There is some damage mitigation going on right now which I think is ok but we need to make sure that credit doesn't get crazy again and that the mortgage industry becomes more simplistic and tied to reality.....
http://www.nytimes.com/2009/03/03/business/03mortgage.html?_r=1&ref=business
U.S. Likely to Keep the Reins on Fannie and Freddie
By CHARLES DUHIGG
Published: March 2, 2009
Despite assurances that the takeover of Fannie Mae and Freddie Mac would be temporary, the giant mortgage companies will most likely never fully return to private hands, lawmakers and company executives are beginning to quietly acknowledge.
David M. Moffett, who resigned Monday as chief executive of Freddie Mac, headed the company for less than six months.
The possibility that these companies — which together touch over half of all mortgages in the United States — could remain under tight government control is shaping the broader debate over the future of the financial industry. The worry is that if the government cannot or will not extricate itself from Fannie and Freddie, it will face similar problems should it eventually nationalize some large banks.
The lesson, many fear, is that a takeover so hobbles a company’s finances and decision making that independence may be nearly impossible.
In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.
Lawmakers have given the companies access to as much as $400 billion in taxpayer dollars, a sum more than twice as large as the pledges to Citigroup, Bank of America, JPMorgan Chase, General Motors, Wells Fargo, Goldman Sachs and Morgan Stanley combined.
Regulators defend those actions as essential to battling the economic crisis. Indeed, Fannie and Freddie are basically the only lubricants in the housing market at this point.
But those actions have caused collateral damage at the companies. On Monday, Freddie Mac’s chief executive, David M. Moffett, unexpectedly resigned less than six months after he was recruited by regulators, having chafed at low pay and the burdens of second-guessing by government officials, according to people with knowledge of the situation.
Fannie Mae has also experienced a wave of defections as people leave for better-paying and less scrutinized jobs.
Last week, Fannie Mae announced that it lost $58.7 billion in 2008, more than all its net profits since 1992. Freddie Mac is also expected to reveal record losses in coming days.
Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.
“Once government gets a new tool, it’s virtually impossible to take it away,” said Representative Scott Garrett, a Republican of New Jersey and member of the Financial Services banking subcommittee. “And Fannie and Freddie are now tools of the government.”
One reason that Fannie and Freddie will never return to their earlier forms is simple mathematics: to become independent, Fannie Mae and Freddie Mac must repay the taxpayer dollars invested in the companies, plus interest. Even if the firms achieve profitability, it could take them as long as 100 years — or longer — to pay back the government. And almost no one expects the companies to return to profitability anytime soon.
Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.
“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”
Republican lawmakers — many of whom believe the federal government should not be involved in the mortgage business at all — have signaled they will try to end the government’s involvement with Fannie and Freddie, even as they acknowledge that effort is likely to fail.
And lawmakers of all stripes are quietly voicing worries that government involvement in the mortgage industry could lead to the very problems that caused the current crisis.
“When you use mortgage companies for political purposes, such as helping low-income borrowers or expanding homeownership, you make bad economic decisions,” said Mr. Garrett, the Republican congressman. “And bad economic decisions are why we’re in this trouble right now.”
Analysts say that one reason Fannie Mae and Freddie Mac were privatized in the first place was to prevent political whims from dominating the mortgage marketplace. The companies were founded by the government but sold to investors decades ago.
“The theory was that if Fannie and Freddie were private, they would only be interested in profits, and so they wouldn’t take too many risks,” said Thomas A. Lawler, an economist who worked at Fannie Mae for more than two decades before leaving in 2006 to become a consultant. “If the government owns Fannie and Freddie, politicians will make choices that make voters happy, but may not be wise from an economic standpoint.
“Of course, the past year has proved that focusing on profits alone doesn’t protect you from bad choices, either,” Mr. Lawler added.
Lawmakers are quietly discussing a handful of possible proposals for Fannie and Freddie. They range from outright nationalization, in which the government would formally absorb the companies and guarantee millions of new home loans, to public-private hybrids, in which lawmakers would explicitly backstop part of the mortgage industry if economic catastrophe strikes, and would dissolve Fannie and Freddie into smaller, private companies that would handle the day-to-day business of mortgage finance, but be heavily regulated.
Lawmakers say they are unlikely to begin serious discussion about the companies’ futures until this fall.
--
Dec 12, 2008
Always interesting to hear Nicolas Taleb's (author of the Black Swan) take on events..
http://www.charlierose.com/view/interview/9713
some excerpts from this 20 minute video....
Taleb feels that Nouriel Roubini (Dr. Doom) is an optimist. " I've been waiting for this crisis since 2003."
"Today when you cancel a Christmas order here...a factory closes in China hours later....Things are going to happen quickly and its going to be a lot worse."
Society should increase redundancy..
Moving into 'Capitalism 2'.. Banks will turn into highly regulated utilities as the public won't tolerate again these entities paying out very high bonuses year after year and then being bailed out by public funds when they fail. Future risk taking (speculative investments) will be much less debt financed and not subject to bailouts. Markets are horrible at predicting rare events. Ponzi schemes of buying stocks are over as people re-understand the risks...
Huge amount of deleveraging necessary to reach a more stable society..
One of the more interesting things to me in this video is that he is predicting massive deflation for the foreseeable future as hedge funds continue to deleverage causing stock prices to further fall and a future that will be much less debt oriented....
Interestingly only about 4 pages of his Black Swan book are devoted to financial matters, the rest is devoted to the general process of thinking outside the bell shaped curve to appreciate rare but high impact events such as computers, the internet, Google, pandemic disease etc
