6 ms·

The Fannie and Freddie trade is back

90 points by ioblomov 2y ago

nayuki 2y ago
Relevant quotes from the article: > 2. Banks lend people the money to buy houses, but the government encourages them to do so by guaranteeing the loans. > 3. Banks lend people the money to buy houses, but someone else guarantees the loans. There’s a big Mortgage Guarantee Company ... Mortgage Guarantee Company is a regular public company, owned by shareholders, but it is a large good safe company with sterling credit. And the Mortgage Guarantee Company is carefully regulated by the US government to make sure that it is well capitalized and safe, so banks will happily rely on its guarantees. They’re not government guarantees, but they’re AAA-rated, government-regulated guarantees, almost as good as the government. The government, in this approach, is not providing a financial guarantee, but it is putting its seal of approval on the Mortgage Guarantee Company’s guarantee, saying “you should trust this guarantee almost as much as you would trust our guarantee, because we endorse this company and regulate it carefully. > The approach that the government settled on for many decades was “mostly 2, but kind of really 3.” I like Matt Levine explicitly spelling out these details. Why? Because many people in the general public, especially leftists and socialists, believe that the 2008 Great Financial Crisis was caused by greedy US banks lending out money to unworthy people who had no ability to pay back loans, and take a profit from each transaction, and sell the toxic debt to other parties. It's a story directly attacking the greed and corruption in capitalism. While those 3 points in the story are true, what this ever-popular narrative misses out is that the banks were motivated to make these loans because someone else - FMAC and FMAE - guaranteed them. And FMAC and FMAE basically have the full backing of the US government. The banks weren't risking their own money if loans fail; they were risking someone else's money. If the banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money. So in the end, this is more a story about socialism and government interference that underlies the capitalistic greed. The bad loans were subsidized by the public at large, and that is a good example of socialism in practice.
- alangibson 2y ago
  > what this ever-popular narrative misses out Straw man. Left commenters know perfectly well about the roles of Fannie and Freddy. The left critique is not just greedy banks. It's also government collision in pumping property values, as well as interest and fees banks make, via Fanny and Freddy. If your opinion is that using government policy to enrich property owners and banks is socialist, then you have a very unorthodox view of socialism.
  - jfengel 2y ago
    I got a mortgage. I had to sign a vast pile of paperwork. There was one person in the room who had done it before, and it wasn't me. The idea that this was all about devious consumers taking advantage of poor innocent banks is laughable.
    - NickC25 2y ago
      Seriously. The narrative that the banks had no incentive to be intelligent about who they lent money to is absolutely true because good credit bad credit no credit, the banks didn't care - the bank's money was backed by the Feds, and that was it. The banks got their cut, and made off like bandits. They knew what was going on.
      - K0balt 2y ago
        In many cases it wasn’t backed at all, they then bundled those garbage loans up with backed ones and sold them as solid investments out the door as fast as possible. It was fraud, plain and simple.
- NomDePlum 2y ago
  A good example of socialism in practice would have been to give the defaulted housing stock to people to stay-in surely? As opposed to underwriting the debt loaned by purely capitalist companies? I'm not an expert in socialism but governments underwriting a capitalist housing market does not appear close or aligned with socialism at all. I will say I've never associated the US government with socialism, at any level, so perhaps this bias is part of why I find a difficult argument to envisage.
great_psy 2y ago
I think a lot of conspiracies people have are out in the open, it’s just that they are hidden behind articles that take 30 minutes to read and understand.
- WorkerBee28474 2y ago
  As they say, the devil is in the details.
AnotherGoodName 2y ago
Note that the majority of bad 2008 loans were from a spike in financial business lending not personal lending. https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/media/File%3AUS_Private_Debt_to_GDP_by_Sector.png https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/me... You’ve probably heard of private equity buying companies, loading them with debt, transferring money to the parent and bankrupting the company and wondering why banks give loans to private equity when we know this playbook. Well the bank loans are guaranteed ultimately by Freddie/Fannie. There’s no risk here and everyone but productive members of society win here. It’s still ongoing too.
- kasey_junk 2y ago
  What are you talking about? Fannie and Freddie don’t buy loans for businesses other than some commercial real estate. They certainly don’t back most private equity plays.
- downrightmike 2y ago
  I've heard about it because that's how we lost American Manufacturing like SunBeam, sold off for parts. But hey deregulation and greed was good in the 80's, and no one who should have stopped it, did.
  - parineum 2y ago
    Do you think greedy people would sell off a companies' assets for parts if that company was profitable? They don't buy healthy companies, the people that do that are looking for failing companies that they can buy for pess than their assets are worth.
    - c6400sc 2y ago
      The question is not profitable. The question is can they be MORE PROFITABLE than they currently are. Some companies are unprofitable and easy targets. Others are mildly profitable, but PE can lever up their investments to goose MORE out of them, resilience and survivability be damned.
alecco 2y ago
Maybe it's a good trade. But if it's not, Ackman and all the other snakes will get out of the trade well before you. Stay in safe money markets with decent yields. Don't swim with sharks.
- Mistletoe 2y ago
  Money markets don’t remotely have enough gains to keep a retirement portfolio going. https://www.firecalc.com/ https://www.firecalc.com/
  - alecco 2y ago
    My point is that doing risky stuff as a small investor in an unfair market with high risks is even worse.
    - downrightmike 2y ago
      That's how I read it
- everybodyknows 2y ago
  Some history may be useful here. In the first weeks after the 2016 election, on similar speculation, FNMA doubled in price. A few months into 2017, it crashed back down. https://www.cnbc.com/quotes/FNMA?qsearchterm=fnma https://www.cnbc.com/quotes/FNMA?qsearchterm=fnma
jarsin 2y ago
I encourage anyone thinking of following Ackman to look up all the shenanigans he played on investors with his Spac. He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund. Leaving the Spac investors high and dry with no ownership. He keeps making those investors empty promises about some future deal to this day years after the Spac folded. Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has.
- dehrmann 2y ago
  > Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has. Replace "Ackman" with "Any major investor" except for maybe Warren Buffett.
- WorkerBee28474 2y ago
  > He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund...He keeps making those investors empty promises about some future deal to this day years after the Spac folded. The UMG purchase did not happen. The SPA(R)C money was returned to investors in 2022.
  - jarsin 2y ago
    He used the SPAC to get UMG to the table then purposely structured the deal in a way that if SEC did not approve he would have to buy it with his fund. Thus leveraging the spac and all the hype around it to get what he really wanted, UMG in his fund. Ackman's fund is now the second largest owner of UMG, and spac investors have worthless sparcs waiting for sec approval years later. If you follow Ackman you will see his m.o. plays out like this over and over on every deal and boardroom he is a part of. Edit: Also a large amount of retailers were in warrants and got $0 back.
muglug 2y ago
I hope Matt Levine is well-capitalised because he’s pretty-much the only reason I subscribe to Bloomberg
- otherjason 2y ago
  If you or anyone else are interested, his newsletter is available by email for free!
  - ioblomov 2y ago
    100% As far as Levine’s column and I are concerned, the only value the subscription provides is that the footnotes are hyperlinked.
TheRealPomax 2y ago
Ah the modern internet. https://i.imgur.com/3c5nQ8J.png https://i.imgur.com/3c5nQ8J.png
- akutlay 2y ago
  Bloomberg may be the last company to be concerned about free information, thinking about their five digit annual fees for the terminal.
ioblomov 2y ago
https://archive.ph/AyyVE https://archive.ph/AyyVE

90 points by ioblomov 2y ago

Relevant quotes from the article: > 2. Banks lend people the money to buy houses, but the government encourages them to do so by guaranteeing the loans. > 3. Banks lend people the money to buy houses, but someone else guarantees the loans. There’s a big Mortgage Guarantee Company ... Mortgage Guarantee Company is a regular public company, owned by shareholders, but it is a large good safe company with sterling credit. And the Mortgage Guarantee Company is carefully regulated by the US government to make sure that it is well capitalized and safe, so banks will happily rely on its guarantees. They’re not government guarantees, but they’re AAA-rated, government-regulated guarantees, almost as good as the government. The government, in this approach, is not providing a financial guarantee, but it is putting its seal of approval on the Mortgage Guarantee Company’s guarantee, saying “you should trust this guarantee almost as much as you would trust our guarantee, because we endorse this company and regulate it carefully. > The approach that the government settled on for many decades was “mostly 2, but kind of really 3.” I like Matt Levine explicitly spelling out these details. Why? Because many people in the general public, especially leftists and socialists, believe that the 2008 Great Financial Crisis was caused by greedy US banks lending out money to unworthy people who had no ability to pay back loans, and take a profit from each transaction, and sell the toxic debt to other parties. It's a story directly attacking the greed and corruption in capitalism. While those 3 points in the story are true, what this ever-popular narrative misses out is that the banks were motivated to make these loans because someone else - FMAC and FMAE - guaranteed them. And FMAC and FMAE basically have the full backing of the US government. The banks weren't risking their own money if loans fail; they were risking someone else's money. If the banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money. So in the end, this is more a story about socialism and government interference that underlies the capitalistic greed. The bad loans were subsidized by the public at large, and that is a good example of socialism in practice.

alangibson 2y ago
> what this ever-popular narrative misses out Straw man. Left commenters know perfectly well about the roles of Fannie and Freddy. The left critique is not just greedy banks. It's also government collision in pumping property values, as well as interest and fees banks make, via Fanny and Freddy. If your opinion is that using government policy to enrich property owners and banks is socialist, then you have a very unorthodox view of socialism.
- jfengel 2y ago
  I got a mortgage. I had to sign a vast pile of paperwork. There was one person in the room who had done it before, and it wasn't me. The idea that this was all about devious consumers taking advantage of poor innocent banks is laughable.
  - NickC25 2y ago
    Seriously. The narrative that the banks had no incentive to be intelligent about who they lent money to is absolutely true because good credit bad credit no credit, the banks didn't care - the bank's money was backed by the Feds, and that was it. The banks got their cut, and made off like bandits. They knew what was going on.
    - K0balt 2y ago
      In many cases it wasn’t backed at all, they then bundled those garbage loans up with backed ones and sold them as solid investments out the door as fast as possible. It was fraud, plain and simple.
NomDePlum 2y ago
A good example of socialism in practice would have been to give the defaulted housing stock to people to stay-in surely? As opposed to underwriting the debt loaned by purely capitalist companies? I'm not an expert in socialism but governments underwriting a capitalist housing market does not appear close or aligned with socialism at all. I will say I've never associated the US government with socialism, at any level, so perhaps this bias is part of why I find a difficult argument to envisage.

great_psy 2y ago

I think a lot of conspiracies people have are out in the open, it’s just that they are hidden behind articles that take 30 minutes to read and understand.

WorkerBee28474 2y ago
As they say, the devil is in the details.

AnotherGoodName 2y ago

Note that the majority of bad 2008 loans were from a spike in financial business lending not personal lending. https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/media/File%3AUS_Private_Debt_to_GDP_by_Sector.png https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/me... You’ve probably heard of private equity buying companies, loading them with debt, transferring money to the parent and bankrupting the company and wondering why banks give loans to private equity when we know this playbook. Well the bank loans are guaranteed ultimately by Freddie/Fannie. There’s no risk here and everyone but productive members of society win here. It’s still ongoing too.

kasey_junk 2y ago
What are you talking about? Fannie and Freddie don’t buy loans for businesses other than some commercial real estate. They certainly don’t back most private equity plays.
downrightmike 2y ago
I've heard about it because that's how we lost American Manufacturing like SunBeam, sold off for parts. But hey deregulation and greed was good in the 80's, and no one who should have stopped it, did.
- parineum 2y ago
  Do you think greedy people would sell off a companies' assets for parts if that company was profitable? They don't buy healthy companies, the people that do that are looking for failing companies that they can buy for pess than their assets are worth.
  - c6400sc 2y ago
    The question is not profitable. The question is can they be MORE PROFITABLE than they currently are. Some companies are unprofitable and easy targets. Others are mildly profitable, but PE can lever up their investments to goose MORE out of them, resilience and survivability be damned.

alecco 2y ago

Maybe it's a good trade. But if it's not, Ackman and all the other snakes will get out of the trade well before you. Stay in safe money markets with decent yields. Don't swim with sharks.

Mistletoe 2y ago
Money markets don’t remotely have enough gains to keep a retirement portfolio going. https://www.firecalc.com/ https://www.firecalc.com/
- alecco 2y ago
  My point is that doing risky stuff as a small investor in an unfair market with high risks is even worse.
  - downrightmike 2y ago
    That's how I read it
everybodyknows 2y ago
Some history may be useful here. In the first weeks after the 2016 election, on similar speculation, FNMA doubled in price. A few months into 2017, it crashed back down. https://www.cnbc.com/quotes/FNMA?qsearchterm=fnma https://www.cnbc.com/quotes/FNMA?qsearchterm=fnma

jarsin 2y ago

I encourage anyone thinking of following Ackman to look up all the shenanigans he played on investors with his Spac. He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund. Leaving the Spac investors high and dry with no ownership. He keeps making those investors empty promises about some future deal to this day years after the Spac folded. Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has.

dehrmann 2y ago
> Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has. Replace "Ackman" with "Any major investor" except for maybe Warren Buffett.
WorkerBee28474 2y ago
> He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund...He keeps making those investors empty promises about some future deal to this day years after the Spac folded. The UMG purchase did not happen. The SPA(R)C money was returned to investors in 2022.
- jarsin 2y ago
  He used the SPAC to get UMG to the table then purposely structured the deal in a way that if SEC did not approve he would have to buy it with his fund. Thus leveraging the spac and all the hype around it to get what he really wanted, UMG in his fund. Ackman's fund is now the second largest owner of UMG, and spac investors have worthless sparcs waiting for sec approval years later. If you follow Ackman you will see his m.o. plays out like this over and over on every deal and boardroom he is a part of. Edit: Also a large amount of retailers were in warrants and got $0 back.

muglug 2y ago

I hope Matt Levine is well-capitalised because he’s pretty-much the only reason I subscribe to Bloomberg

otherjason 2y ago
If you or anyone else are interested, his newsletter is available by email for free!
- ioblomov 2y ago
  100% As far as Levine’s column and I are concerned, the only value the subscription provides is that the footnotes are hyperlinked.

TheRealPomax 2y ago

Ah the modern internet. https://i.imgur.com/3c5nQ8J.png https://i.imgur.com/3c5nQ8J.png

akutlay 2y ago
Bloomberg may be the last company to be concerned about free information, thinking about their five digit annual fees for the terminal.

ioblomov 2y ago

https://archive.ph/AyyVE https://archive.ph/AyyVE