Research Zeitgeist: Farewell Fannie and Freddie?
How quickly things change in the current volatile financial markets. In little more than a week, the discussion over Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) has moved from temporary measures to shore up their capital bases to serious consideration of how to dismantle them.
Long a critic of the GSE’s “deeply flawed” private/public structure, The Economist leads the charge for privatization:
…now that the guarantee is explicit, Mr Paulson should seek to secure the gains for taxpayers and treat Fannie and Freddie like one of their own mortgages, by nationalising them, breaking them up and selling them on.
Former Treasury Secretary Larry Summers told NPR he would not be surprised if the government has to take an equity position in Fannie and/or Freddie at some point. In a new report, Oxford Analytica says “political support will grow for a major overhaul of the GSE system under the next administration.”
The irony of the situation is that arguably the most free-market administration in living memory is once again forced to resort to government intervention to save the day.
It’s also hard to make sense of the varying fortunes of the major financial insitutions, with JPMorgan Chase (NYSE: JPM)and Wells Fargo (NYSE: WFC) outperforming expectations, and Merrill Lynch (NYSE: MER) again disappointing. Citigroup’s $2.5-billion quarterly loss announced today also was better than expected, but another $7 billion in writedowns is nothing to be proud of. The diverging fortunes do drive home the point that while the credit crunch affects virtually all financial institutions, superior management can make the difference in how they navigate the stormy waters.
Still, Merrill chief John Thain was admiraby forthright in summing up the current situation, as the FT reports:
We continue to be in a difficult period. House prices are still falling. You have rising energy prices, rising food prices and rising unemployment. All those are going to drag on the economy and that’s not good for business or for asset prices.
Subrime fallout again topped the Research Recap charts, with NERA Economic Consulting’s analysis of the rise in subprime-related litigation our most popular post by a wide margin. This was the third in a series of reports from NERA, all of which have proved immensely popular with our visitors.
Also highly read was Fitch’s report on the worsening troubles of US mortgage insurers as was an earlier report on the same topic from CreditSights.
The Center for Economic Policy and Research’s calculation that the US housing crash is eliminating 20 years of increases in wealth drew strong interest, as did Moody’s guide to interpreting mark-to-market losses of monoline insurers.
Research Recap Quote of the Week:
Current biofuel support measures alone are estimated to increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years. - OECD
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