The Affordable Mortgage Depression framework of economic understanding facilitated the conclusion that Fannie Mae and Freddie Mac would inevitably fail over a reasonable period of time.



Historical Predictive Post:

11/30/2007  -  “Global depression driven by collapsing availability of credit.  Actually a ton of money to be made.  Bankruptcies, foreclosures, default services, loss mitigation, shorting Fannie and Freddie, insurers, leveraged builders, lenders, banks, materials and service providers, shorting the dollar, going long commodities, buying puts on housing futures.

Anyone want to contribute $5 million to my hedge fund?” 


Definitive Declaration

On March 19th, 2008, while in London meeting with Hedge Funds I definitively stated that both Fannie Mae and Freddie Mac would fail on an accelerated timetable as the direct result of grossly inappropriate and disastrous Congressional manipulation of both company’s operations.

It was inevitable that Fannie and Freddie would eventually collapse, but the timing was unknown and each might have obfuscated their mortal deterioration from the public markets for some time had Congress not intervened.

In February and March of 2008 irresponsible and incompetent politicians exercised their influence over the Government Sponsored Entities to disastrous effect.  Congress overtly used Fannie and Freddie in a naïve and futile attempt to prop up the collapsing housing market.

Any other responsible company confronted with deteriorating fundamentals and financials would have responded by reducing risk, cutting overhead and eliminating unprofitable operations in the interest of self-preservation.  At Congress’ direction, Fannie and Freddie were forced to accelerate in the opposite direction.

The Economic Stimulus Act of 2008, passed in February, reset the maximum loan Fannie and Freddie could insure/purchase from $417,000 to $625,500 and established exceptions for high cost home loans in certain areas up to $729,750.  This was done in an attempt to prop up wildly overvalued housing prices in places like California and Florida that had appreciated to unsustainable valuations.

In March both Fannie and Freddie were rapidly approaching their required capital reserve ratios as their financial situations deteriorated, and institutional investors were becoming nervous.  These minimal capital requirements exist to keep financial firms out of trouble and to act as a warning or circuit breaker in the event of financial distress.  Instead of requiring a reduction in risk as Fannie/Freddie approached insolvency, Congress and the Bush Administration arbitrarily reduced these requirements so that the GSE’s could be better used to prop up the housing market.

“March 19 (Bloomberg) -- Fannie Mae and Freddie Mac agreed to expand their purchases of U.S. mortgages and related securities after the Bush administration reduced the amount of capital the companies are required to hold as a cushion against losses.

The government-sponsored enterprises had their biggest two-day gains on record in New York Stock Exchange trading as their surplus capital requirement was cut to 20 percent from 30 percent by the Office of Federal Housing Enterprise Oversight.”

Despite the stock market’s enthusiastic response to this dangerous Government manipulation, both Fannie Mae and Freddie Mac failed less than six months later.  The timing of this correlated failure was the direct result of extraordinary and irresponsible political intervention.