Category Archives: Freddie Mac

Systemic Risk: It Was Nice Knowing You

While enjoying an episode of EconTalk, we came across the following commentary:

Russ Roberts (host): And, in the area of systemic risk, which is a term that's been used a lot recently related to the financial sector, the Crisis of 2008, the issue of Too Big to Fail--how are we doing on measuring systemic risk and quantifying it?

Lars Peter Hansen (guest): Yeah. I think there we are at the very primitive stages. I'm certainly happy--that be an example where our knowledge probably is still quite meager. The term 'systemic risk' really was not on people's radar screen prior to the financial crisis. And it only became a topic of conversation among academics and policy makers prominently, after the financial crisis. Now, systemic risk, it's had a little bit of a danger of being a buzzword.

The response by the guest Lars Peter Hansen struck us as odd.  The “financial crisis” that Hansen was referring to was from approximately 2007 t0 2009.  There are some who believe that the “crisis” still isn’t over because the government bailouts only masked the hemorrhage that will ultimately reveal itself down the road.

The challenge we have with Hansen’s statement is when he said that the term “systemic risk” was not on anyone’s radar prior to the “financial crisis.”  Looking at the New York Times an Google Trends, it seems to indicate that there were some references to the specific term “systemic risk” as early as 1988, in the case of the New York Times.

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Likewise, the data from Google Trends shows a sizable initial 2004 level (233) of references to the term “systemic risk” relative to the peak in 2009 (600).  The New York Times references jumped significantly from 3 in 2004 to 82 by the 2009 peak.  Somebody was out there concerned with the concept of “systemic risk” and they were either writing or searching on the topic.

Because Google Trends “data” begins in 2004, we have to discount that the data is skewed.  However, the peak and subsequent decline in both sources suggests that, over time, the references to the term will generally mirror each other.

So far, we have over simplified the concept of whether there was awareness of the concept of “systemic risk” as it relates to the economy and more specifically the housing environment which brought about other important discussions of concepts like “too-big-to-fail” or “too-small-to-save.”  Now we will be more specific about the idea of systemic risk through a government source (OFHEO) that had the term “systemic risk” in the title of a published paper on housing.

On the Federal Housing Finance Agency (FHFA) website (formerly Office of Federal Housing Enterprise Oversight), there is a research paper titled “Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO” which was published on February 4, 2003 (PDF here).  It is worth noting that as with all business or organization name changes, it was done in an effort to distance or disassociate the organization from previous activities.

This research paper, “Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO”, specifically commissioned in direct response to the Long-Term Capital Management debacle (PDF here), attempted to outline and identify the various stages that Fannie Mae and Freddie Mac posed systemic risk to the financial system.  The goal was to anticipate and respond when and if the potential risks materialized.

What was the response to the February 4, 2003 OFHEO report?  On February 5, 2003, the president of the United States attempted to fire the head of OFHEO, Armando Falcon, and replace him with the head of a derivatives trading firm and former managing director of J.P. Morgan, Mark C. Brickell.  The firing did not take place but Falcon was ultimately pushed aside in favor of James Lockhart.  Lockhart “…lifted the safety restraints imposed by Mr. Falcon and repeatedly assured investors the companies [Fannie Mae and Freddie Mac] were adequately capitalized.”  We hazard to say that the rest is history, but it seems this is literally what will happen. 

First, the term “systemic risk” has had multiple permutations and a different arrangement of words that cloak modern academics and policymakers in a cloud of mystery when it comes to understanding the basic history of an ongoing problem.  As we said in our December 30, 2018 “New York Times Recession/Depression Index”:

“In our modern era, the terms ‘panic’ and ‘depression’ are no longer an acceptable part of the general lexicon to denote a decline in economic activity.  However, in the late 18th and early 19th century, they told it like it was.   in the mid- to late 20th century, the word ‘recession’ replaced the word panic or depression.”

The tendency has been for the modern world to shift the nature and use of language.  However, this shift leaves important data on the cutting room floor, potentially to never be seen again.

Second, the initial reaction to the report issued by Armando Falcon and proposing to install the head of a derivative trading firm as the replacement says all that we needed to know about how policymakers respond to the slightest mention of a solution before there is a problem.  There is little incentive to openly think about and discuss a problem when the consequences mean you cannot be in the right role at the right time to explore the risks and remedies.  The report issued by Falcon could now be view as a “how to manual” rather than a “how not to manual.”

Finally, in looking at the “data” on the word “systemic risk,” we find that the risk of it become a “buzzword” is only relative to the times and will morph and fade with all other references to the same concept with a new permutation as we have noted with the use of the word “recession” replacing the word “panic” or “depression.”

sources:

  • Roberts, Russ. EconTalk. Hansen on Risk, Ambiguity, and Measurement. June 30, 2014. link. accessed April 8, 2019.
  • Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO. Federal Housing Finance Agency. February 4, 2003. link. accessed February 2003.
  • Jo Becker, Sheryl Gay Stolberg, and Stephen Labaton. “White House Philosophy Stoked Mortgage Bonfire: The Reckoning”. New York Times. December 21, 2008. page 1. accessed April 9, 2019.
  • New York Times. “Black Chief to Oversee Fannie Mae and Freddie Mac”. February 5, 2003. page C4. accessed April 9, 2019.
  • Google Trends.  trends.google.com. “systemic risk” (United States). link. accessed April 9, 2019.

  • Proquest. New York Times Historical Database 1851-2015. “systemic risk”. accessed April 9, 2019.

  • New York Times Recession/Depression Index. December 30, 2018. New Low Observer. link.

Chart of the Day: Federal Home Loan Mortgage Corporation

According to Yahoo!Finance, Federal Home Loan Corporation (FMCC), “…operates in the secondary mortgage market in the United States. The company purchases residential mortgage loans originated by lenders, as well as invests in mortgage loans and mortgage-related securities. It operates in three segments: Single-family Guarantee, Multifamily, and Capital Markets.”

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Many claim that the financial crisis of 2008 was unforeseeable.  Others claim they knew about it but weren’t specific about where the carnage would occur.  Robert Rodriguez was clear and specific about the company formerly known as Freddie Mac.  FMCC is down –97.82% since the comments made by Rodriguez.

Quote of the Day: Robert Rodriguez

“The problems of tomorrow are being created today as we write this letter. Furthermore, there are risks in the balance sheets that we cannot see. Companies such as Fannie Mae (FNM), Freddie Mac (FRE) and American International Group (AIG) are now showing financial strains from previous actions taken to enhance the look of their financial reports. We are also concerned that many of these companies have used financial derivatives that are totally unanalyzable by outsiders, since there is insufficient information disclosed in their financial statements for a risk assessment.”

Robert L. Rodriguez. Letter to Shareholders. April 16, 2005. Page 4.

  • Fannie Mae: Bailed Out/Bankrupt 2008
  • Freddie Mac: Bailed Out/Bankrupt 2008
  • AIG: Bailed Out 2008

A Point Worth Making

The following is a comment made by Pecede on the Seeking Alpha financial forum regarding my latest article on Fannie and Freddie.

While I respect and agree with much of your logic, let's not forget that it is the people who borrowed the money to pay for property they can no longer afford that are sticking it to the taxpayer by reneging on their promises.


My response is as follows and is relevant to the topic:

Your point is well taken. However, a financial institution should always be held to a higher standard. Therefore, while a consumer signed on the dotted line, the lender was willing to let the loan go through even though it was clear that the client couldn't survive financially in the short and long term.

All consumers, if given the opportunity, will borrow to the max. It is the responsibility of the lender to make the decision not to give the loan. While working for Fannie and Freddie from 2001 to 2006, I would contact the loss mitigation unit of the banks and the response was always the same from the loss mit team inside the bank, "why in the world did the bank give out the loan to this individual?"

The point being, it was abundantly clear from the initial loan docs that were approved, that the individual couldn't maintain the mortgage from the very beginning. You can't expect the public, who is more versed in the art of voting for American Idol contestants, to understand or care about the terms of a document. Most Americans routinely sign legal contracts without faking that they've read the terms beforehand. This puts the responsibility back on the banks.

By no means does my position support the belief that the consumer isn't to blame somehow. Instead, the banks should have been concerned about doing due diligence and determine the long term financial viability while remaining profitable. Such a stance may mean sacrificing short term competitiveness in order to avoid the pending train wreck. Or, you could at least sell out at the top like Golden West Financial did (my favorite financial institution, former Dividend Achiever and a real success story for a bank) when they got bought by Wachovia (WB).

Unfortunately, Fannie and Freddie fanned the flames which encouraged banks to take on more risk than was prudently acceptable. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Fannie Mae (FNM) and Freddie Mac (FRE) Fraud

In my article titled "Delisting of GSEs Looms Large" published on February 21, 2009, I discussed the fact that as Fannie Mae (FNM) and Freddie Mac (FRE) remained under $1, the prospects were that we'd either see the companies delisted from the NYSE or that the price would skyrocket. Not long after writing the article, the stock of FNM and FRE fell as low as $0.35 on March 9th. In that February article, I said the following:

"Look for a boosting of the share price to ridiculous levels (anything above $1) or go literally to zero in the next delisting notification process."

Soon after falling t0 $0.35, Fannie Mae and Freddie Mac briefly, on a closing and intraday basis, went above $1 on March 19th and then promptly fell from there. According to the New York Stock Exchange, spend six months under $1 and you get delisted. As strange as it may seem, September is exactly six months away from the month of March.

One reader of this blog, Ron, poignantly remarked, "...it seems to me the exchanges are constantly bending their own rules about delisting, extending grace periods, etc. Especially in this case the govt will probably be leaning on the exchanges not to delist." My response was, "...there is little need to do this (bend the rules.) If you're the government, and you don't know anything about fiscal responsibility, you'll more than likely feel compelled to waste the money and artificially inflate the stock price." Furthermore, I specifically stated that this was going to be "one of the biggest speculations in history."

Well, as promised, the U.S. government proved to be as gullibull as has been the case since the beginning of time. In an article titled "Fannie, Freddie Avoid Delisting as Price Triple" published by Bloomberg.com, you get the sense that there is a collective exhaling about the notification that the companies would not be delisted. Strangely, FBR Capital Market's Paul Miller seemed indignant at the thought that the Fannie and Freddie stock price went up. Miller, a banking analyst, said that the rise was "unjustified" and that there was "no fundamental value remaining" in the two GSEs.

I say to Mr. Miller (with tongue firmly in cheek), the threat of being delisted was a completely justifiable reason for Fannie and Freddie stock to go up in value. The government had already gamed the markets by reverse splitting AIG, so it would be challenging to commit the same fraud twice on the investing public in such a short time.

Also Mr. Miller, if Fannie and Freddie are delisted, the market for all bad mortgages cannot be absorbed by the taxpaying public through the GSE conduit. That means these two companies are incredibly valuable. Mr. Miller, maybe Fannie and Freddie are not valuable to you but they are definitely valuable to the banks that are receiving bailouts in the front door and dumping their trash on the taxpayer through the back door. Silly Mr. Miller, still talking about notions like fundamental values and such.

We have witnessed the all too familiar quality known as predictably irrational behavior of the government and the financial markets. In many respects, Ron was right, the rules were bent to favor those in powerful positions. When the NYSE says "The World Put Its Stock in Us," they should have also added that it is the best exchange that money can buy. After all, the NYSE should be held criminally for allowing such blatant fraud to reign on their exchange. Instead, they looked the other way in the face of clear manipulation and malfeasance.

It is just our luck that history repeats so well and so often in financial markets. This is the reason why the addressing of this matter of the delisting of the GSEs was so predictable. The maneuvers that I've described have happened so many times in the remote and distant past with far more inferior technology that it's laughable. The more things change the more they remain the same...and that ain't no cliche in the financial markets. Touc.

related articles:


Please revisit Dividend Inc. for editing and revisions to this post.

Freddie Mac (FRE) Trading Notes

When it comes to the cornering of a stock there are two kinds, those that fail and those that succeed. The essential element that causes the failure is the inability to get the public to "buy in" to the market action. The movement of Freddie Mac (FRE) today appears to be on the side of those who are behind the cornering of the stock.

Market activity for Freddie Mac (FRE) was off the charts today, rising $0.49 or 66% in the pre-market session on almost 18 million shares and rising another 37% on 391 million in the regular hours of trading. This equals a combined increase, from Friday's closing price of $0.74, of 128%. (pre-market data below)

Chart Source: Nasdaq.com

There is a distinction between the price movement of FRE and AIG. Although both are moving on syndicates' pre-market prompting, the FRE cornering of the stock may have the ability to succeed at keeping the price high for an extended period of time. Notice in the chart below that the accumulation/distribution of the stock had gone from the extremely negative low of -319 million (red arrow at point A) to a positive figure (green arrow at point A) based on the activity of today's trading.

Chart Source: Schwab.com
Contrast the movement of FRE's accumulation/distribution with the that of AIG. While both accumulation lines hit their lowest point on July 24th, the day after the Dow Theory bull market confirmation, AIG has not yet broken above the accumulation line (red circle.) Additionally, as AIG has gone up in price the volume has trended down.

Chart Source: Schwab.com
The AIG run does not look "sustainable" over the long term unless the accumulation/distribution improves along with a rising price and rising volume. For traders, it is expected that FRE will have a pullback, however there may be legs on this speculation as compared to AIG.
Because we're in a cyclical bull market within an even larger bear market I would consider these stocks as pure speculation regardless of the "potential" upside. Let's see which of the syndicates that are running these stocks up in pre/post market activity comes out the winner. From what I can tell, the FRE gang is miles ahead of the AIG crew in this race. This should be interesting to watch. Touc.

related articles:

Please revisit Dividend Inc. for editing and revisions to this post.