Tag: Housing Bubble

The Fannie and Freddie Fiasco

 

fannie-mae-freddie-macOn April 15, the United States Circuit Court of Appeals for the District of Columbia will hear a high stakes appeal from the hedge funds Perry Capital and Fairholme Capital related to the bailout of Fannie Mae and Freddie Mac. At issue in the case is the legality of an amendment made by the government in August 2012 to the original 2008 bailout. That Third Amendment, as it’s called, has caused a major violation of shareholder rights. (Full disclosure: I have worked as an advisor for a number institutional investors involved in this case and have also written a comprehensive account of all aspects of this complex litigation.)

To recap the history, both Fannie and Freddie—which are government sponsored entities, or GSEs—were under extreme stress in the fall of 2008, and in order to shore up their finances, they entered into a Senior Preferred Stock Purchase Agreement (SPSPA) with the United States Treasury. Under the SPSPA, Treasury agreed to contribute up to a combined $200 billion in cash to both companies in exchange for a senior-preferred stock that carried a 10 percent dividend. Eventually, Treasury lent about $188 billion per year, which carried a hefty $18.8 billion annual dividend payout. Under the SPSPA, both Fannie and Freddie were given the unlimited option to defer payment of the interest, which was then added to principal as an “in-kind” obligation, at a 12 percent interest rate. Unlike many private corporate bailout plans, this deferment did not call for any loss of control by Fannie and Freddie. Treasury thus held a new senior-preferred stock. The old private-preferred shareholders now held junior-preferred stock.

The negotiation over SPSPA took place in a tense financial environment. In the summer of 2008, with crisis in the air, Congress passed the Housing and Economic Recovery Act (HERA), which implemented two new statutory programs.

Fun with Bubbles: How Elon Musk and the Government are Recreating the Housing Crisis

 

BubbleFor all the arguments between liberals and conservatives on economic issues, most boil down to one core point of contention: conservatives realize that government doesn’t do a lot of things very well. One of those things government is not very good at, compared to the private sector and free individuals, is learning hard lessons. Case in point: bubbles.

The government loves blowing bubbles more than a small child. The difference is that when a child’s bubbles pop, they don’t erupt with enough force to shake the economic foundations of entire industries, regions, or the planet.

The most famous recent example is the housing crisis and subsequent “Great Recession” of 2008. While the media and Common Core-approved textbooks still blame that crisis on the “greedy bankers,” the reality is that the federal government, with some help from local governments, huffed and puffed and blew up the housing bubble through mortgage guarantees, artificially low interest rates, zoning laws, and pressure on banks to loan to people that could never afford standard 15- or 30-year fixed-rate mortgages.

Still Worth Arguing About the Financial Crisis

 

shutterstock_73682491Who controls the past controls the future. — George Orwell, 1984

The candidates who are announcing for president will be cheered to know that the Democratic Party has been hemorrhaging popularity the way the housing market lost value in 2008. In 2009, 62 percent of Americans had a favorable view of the party. In January, only 46 percent said the same.

But the Democrats’ loss has not been the Republicans’ gain. A 2015 Pew survey found that 40 percent of Americans had a favorable opinion of Republicans in 2009, and just 41 percent do today.