Shaky Ground: The Strange Saga of the U.S. Mortgage Giants

Columbia Global Reports

by Bethany McLean

In a way, the situation is ironic: housing was at the root of the financial crisis, and six years after the meltdown, housing finance is still the greatest unsolved issue. The US housing market is roughly $10 trillion, making it one of the largest segments of the bond market. Roughly 70% of the American population has a mortgage, and for most people, the mortgage is the most important financial instrument in their lives. But until the financial crisis, few people knew the essential role that Fannie Mae and Freddie Mac play in their mortgages. Given the $188 billion government bailout of the two firms -- the most expensive bailout in history -- the politics surrounding housing are worse than they've ever been, and the two gigantic firms sit in limbo. Investigative journalist Bethany McLean, the co-author of The Smartest Guys in the Room and All the Devils are Here, explains why the situation is dangerous and unsustainable, and proposes a few solutions -- from the perfect, but politically unfeasible to the doable, but ugly.

Genres: Business, Nonfiction, Finance, Economics, History, Politics, Audiobook

160 pages, Paperback

First published September 8, 2015

About the author

Bethany McLean is a contributing editor to Vanity Fair magazine, and known for her work on the Enron scandal. She had been an editor at large and columnist for Fortune magazine.

McLean grew up in Hibbing and received her BA in English and mathematics at Williams College in 1992. After college and prior to joining Fortune, she worked as an investment banker for Goldman Sachs.

Reviews

[Athan Tolis · Rating 4 out of 5]

I took five single-spaced pages of notes from this tiny little book, that’s how tightly packed it is with the parallel history of (and strong opinion on) the US housing market and the GSEs.

Bethany McLean has done it again, basically. And she makes it all feel like a short story.

I’m still in awe at how much was made to fit into this pocket book without making it at all feel like the Cliff Notes for a much bigger opus. In fact, when I finished it I thought to myself “wow, this was nice and sweet.” Only when I went back to summarize my findings did I realize what a feat the author has accomplished.

That said, her analysis has two HUMONGOUS gaps. Let’s get them out of the way:

1. All countries in the world automatically favor owning versus renting, because my rent is someone else’s income on which he pays income tax. Elementary understanding of the distinction between the formal and effective incidence of tax shows renters pay tax that owners don’t. They pay it indirectly (via the landlord) but they pay it all the same. The American system’s additional support of owning versus renting (via tax deductibility of mortgage debt, via the creation of the market for 30yr mortgage debt etc.) is merely the American cherry on a worldwide cake.

Rent means tax. Ergo, if you can own, you should own, unless you think you’ll be moving soon or if you think prices are falling. Worldwide, this is one of the ways the poor stay poor, and they are not stupid for wanting to own like everyone else; it is uninformed (or worse) to look down on them for taking on subprime loan. Their (perhaps unrealistic) aim is to duck that tax like you and I can (though I’d recommend a book called “House of Debt” by Mian and Sufi to anyone who cares to see how this totally backfired in the 2008 crisis). Conversely, any government attempt to further tilt things in favor of homeowners is in rather poor taste if your leanings are egalitarian.

2. Fannie and Freddie did not survive the crisis because of the 400 billion commitment from the Treasury and are not crazy profitable at the moment because they are naturally set up to make money. They owe their existence and profitability to the fact that the Fed has throughout the crisis bought staggering amounts of their debt at pretty much flat price to the safest investment on earth, US Treasuries.

If you can always borrow, then you will never die. If you can always borrow for free from someone with infinite pockets (2.8 trillion and counting, with the Fed still as of October 2015, as I’m writing this, replacing maturing GSE debt it holds from QE1,QE2 and QE3). This argument alone is enough to make a total joke of any claim from any hedge fund regarding how capitalism should work.

Claims on Fannie and Freddie are contingent claims on the mindblowing and continuing largesse from the part of government called the Fed. If, for argument’s sake, the Fed has paid 100 cents on the dollar for 2.8 trillion of debt that would otherwise trade at 99 cents on the dollar, that’s an 28 billion gift right there. If the debt should trade at 90 cents on the dollar, then that part of the gift is worth 280 billion. If it would not trade at all (which it didn’t during the crisis)…… you get the picture.

The geniuses who invested in Fannie and Freddie stock in 2011 did not spot some amazing free-market company with undervalued stock. They took a bet that they could benefit enormously (something like 30:1) from a government subsidy that was meant for people other than themselves.

Bill Gross did it safer, he bought himself GSE debt at the lows, and bet the Fed would follow in his footsteps to save the Chinese. Perry Capital and friends thought they’d pull the same scam three years later, absent a crisis. Unlucky, fellows! For now, at any rate. Tomorrow, who knows? I would not bet against them eventually earning that 30:1 return. This is America!

With those two points behind us (and they do cost the book the final, fifth, star from where I stand, much as I totally loved it) here come the five pages of notes I took in my attempt to summarize this little masterpiece:

HISTORICAL PURPOSE OF (AND MOTIVATION FOR) THE GSEs

1. “Other countries chose healthcare. We chose housing”

2. “Other countries, like Germany, subsidize rents. We subsidize ownership”

3. Until very recently, the US banking system was regional, so mortgage lenders were exposed to local economy. There was a need for way to pool mortgage risk across the nation

4. 30yr mortgages are impossibly dangerous instruments. They carry three risks: credit, interest rates and prepayment (p.63) Only a government-backed scheme could hope to create a market in such instruments

5. “What the GSEs really were was a giant subsidization machine, where wealthier borrowers in desirable areas paid more than they otherwise would have, while less well-off borrowers in less desirable locations paid less than they otherwise would have” (p. 81)

PRE-CRISIS HISTORY OF THE GSEs

1. The National Housing Act (1933) provided for the creation of privately owned mortgage associations that would buy FHA-issued mortgages from lenders (p.64) but in the three years after they were authorized none were set up. So government set up Fannie Mae in 1938. Jessie Jones (chairman of the Reconstruction Finance Corporation) pledged in the NYT to match private competitors’ capital dollar-for-dollar but nobody accepted.

2. Fannie was set up as a company with shareholders much more recently, in 1968, during the Johnson administration, precisely to avoid consolidating its debt with that of the US. “It was privatized to get it out of the budget.” -Paul Volcker (p.67) The 1968 law also removed any limits in the amount of Fannie debt banks could hold on their balance. Freddie was established around that time (1970) to compete with Fannie and was “privatized” like Fannie a decade or so later, presumably for similar reasons. Originally Fannie and Freddie owned mortgages, but later they started guaranteeing them instead. In 1986, finally, restrictions were lifted on buying non-GSE guaranteed mortgages, paving the way for the creation of the private market.

3. In 1992 Congress established OFHEO to oversee Fannie and Freddie with a pitiful budget, equivalent to the pay of the top 4 Fannie executives. The same legislation (i) set tiny capital requirements for Fannie and Freddie and (ii) established affordable housing goals (originally goals that were already comfortably exceeded).

4. By 1999 Fannie Mae had become America’s 3rd largest corporation by assets (p. 74) And right about then, they started selling bonds to foreigners, stepping in where the Clinton surplus left off: in 1998 USD 198bn; in 2000, USD 348bn; in 2004, USD 875bn: foreign money was funding the most domestic asset (p. 75) “They took the worst possible investment and turned it into the second most liquid instrument on earth” (p. 75) BIS regulations assigning relatively low risk weighting to their debt contributed to this, in all probability.

5. Just as Fannie and Freddie were reaching the zenith of their powers, the private market was working hard to supplant them. “Subprime mortgages rose from 8 percent of mortgage originations in 2003 to 20 percent in 2005” (p. 28) “By 2006, private label issuance reached USD 1.15 trillion and an astonishing 71% of the mortgages were either subprime or Alt-A” (p.28) ”As the private market boomed, Fannie and Freddie were rapidly becoming irrelevant. Their market share fell from 57 percent in 2003 to 42 percent in 2004 and to 37 percent in 2006” (p. 29)

6. The choice was explicitly made not to fall behind the private market: “We face two stark choices: stay the course or meet the market where the market is” – Tom Lund (head of single-family business); “If you’re not relevant, you’re unprofitable, and you’re not serving the mission.” -CEO Dan Mudd (p.31) Ken Bacon: “It’s very hard to any one person to sit as the market moves and say ‘I’m smarter than everyone in this market.’ Everyone was getting into the market and I just can’t give you a breaking point. Over time, we started doing things we used to not do.” Ken Bacon congressional testimony (p. 53)

7. “Fannie and Freddy together purchased 3.8 percent of subprime issuance in 2001, 11.9 percent in 2002, 34.7 percent in 2003, 38.9 percent in 2004, and 28.9 percent in 2005, tapering to about 25 percent in 2006 and 2007.” Between 2005 and 2007 they also guaranteed USD 350bn of Alt-A.

8. What’s more, they “conned” the Department of Housing and Urban Development into allowing these loans to count toward the congressionally mandated goals to provide affordable housing that Fannie and Freddie had had to meet since 1992. Wall Street even began designing a special product just for Fannie and Freddie that was packed with loans that satisfied the goals.

9. It’s very difficult to argue that in embracing subprime they were actually promoting affordable housing. Subprime was chiefly to take money out of your home, not to help you buy it in the first place: by 1999 a staggering 82% of subprime were refinancings. (p. 27) “Between 2003 and 2007, homeowners cashed out approximately $966 billion in home equity from Freddie Mac. In 2006, cash-out refinancings accounted for nearly 30 percent of all refinances at Freddie Mac.” (p.28) “One could argue that refinancing worked to undermine, not strengthen homeowners, by generating a lot of overextended homeowners who couldn’t make their mortgage payments.”

10. One thing they may have achieved is to “crowd out” the private sector. Ed Pinto, a former chief credit officer of Fannie May who left the firm in the 1980’s argues that “Fannie and Freddie drove the private issuers further out on the risk curve.” (p. 54)

FLAWS OF THE GSE MODEL

Michael Stegman: “The critical flaws in the legacy system that allowed private shareholders and senior employees of the GSEs to reap substantial profits while leaving taxpayers to shoulder enormous losses cannot be fixed by a regulator or conservator because they are intrinsic to the GSEs’ congressional charters.” (p. 141)

“The CBO produced study after study showing that the subsidy was not going to homebuyers. It was going to shareholders and executives” (p. 80)

Larry Summers: “The absolutely best way to mine money out of government” (p. 76)
1. Non-transparent (implicit guarantee)
2. Staple the rents to a broad middle-class subsidy (so you can’t attack the rents without attacking the middle class)
3. A source of positive opportunity for opportunistic politicians

Austan Goolsbee: “whatever safeguards you put in, the flawed nature of the structure –having any kind of government subsidy that isn’t fully paid for- means it will inevitably go bad… Even if the government guarantee is priced appropriately initially, meaning that it covers the risk, the pricing will inevitably become politicized by the housing industrial complex. And it may not be possible to price it appropriately. If you do, those who can opt out will do so, leaving the weaker credits to the government, which actually magnifies the problem (p. 148)

HOW IT ALL WENT WRONG

1. The GSEs became the epicenter of the “Housing Industrial Complex.” Under leaders such as Jim Johnson they became the biggest lobbyists in Washington, established foundations such as the Fannie Mae Foundation and established “revolving door” hiring practices with Congress. Also they traded enough derivatives with Wall Street (ostensibly to manage the prepayment risk of the mortgages they held) to make Greenspan worry (p. 86) Such is still their clout, that despite the humiliation of having to restate their earnings in post-Enron 2003, the disaster of 2008, the establishment of conservatorship status and the curtailment of their lobbying budget they have seen off three attempts to shut them down: (i) Shelby and Calabria, (ii) Jon Hensarling’s PATH and (iii) the Obama-endorsed Corker and Warner bill.

2. By the turn of the millennium they had become the embodiment of “private profits and public losses” with their management mis-stating profits by up to USD 9bn to smooth earnings and maximize personal compensation, but also deciding to protect market share in order to “stay relevant” rather than focusing on their public mission of supporting the market for 30yr mortgages, cross-subsidizing mortgages at less desirable zip codes and promoting affordable housing.

3. And then in 2006 house prices started going down and the GSEs’ goose was cooked. The roughly USD 64bn in cash losses they accumulated ended up exceeding their very slim capital buffer. That said, Fannie and Freddie resolutely did not create the crisis:
• Subprime was not invented by Fannie and Freddie. Entrepreneurs started the subprime lenders, to make money.
• Fannie and Freddie bought mortgage insurance on all the loans with less than 20% down. The private sector took this risk!
• Landesbanken, IKB, New Century, Bear Sterns funds and BNP funds took the first hits, not Fannie and Freddie
• Fannie and Freddie did not bring down Lehman or AIG
Regardless, Fannie and Freddie’s mortgage exposure and their foray into subprime and Alt-A in particular drove them to bankruptcy in all but name as they were forced into conservatorship (a fact that among other things (i) robbed them of their lobbying budget (ii) robbed them of their deferred tax assets and (iii) forced them to pay a 10% of their future profits to the Treasury).

Institutions that should have acted as a bulwark against panic required massive bailouts themselves. As the crisis got worse, in early 2009, the funding made available from the Treasury to Fannie and Freddie was doubled from 200bn to 400bn (half of the 10yr Obamacare projection) and even that cap was removed on Christmas Eve of 2009 (p. 95)

Meantime, however, as part of Quantitative Easing, Bernanke’s Fed started buying billions of Fannie and Freddie paper every month. The purpose, of course, was to restore confidence in the mortgage market and the housing market, thereby bringing back down mortgage borrowing rates. A side effect would prove to be to restore the profitability of the GSEs when the market for mortgages eventually took off again.

According to Paul Willen, a senior economist at the Boston Fed, between 2008 and 2014 the Fed purchased $2.8 trillion of agency mortgage-backed securities. (p. 95)

WHY THE GSEs AND THEIR BONDHOLDERS WERE BAILED OUT

1. Private flows to the mortgage market had disappeared. By the end of 2009, Fannie and Freddie, along with Ginnie Mae, accounted for 97 percent of mortgage-backed securities issuance, according to the GAO. In the absence of Fannie and Freddie. housing would have collapsed “they have to be used to keep the flow of capital going to the housing market” –Larry Summers (p.42)

2. Foreign institutions, mainly central banks, owned around $1 trillion of agency debt and mortgage-backed securities. China and Japan also owned almost half of the U.S. Treasury debt in foreign hands at the time. (p. 43)

3. A Fannie and Freddie failure “would have taken down the whole financial system. It would have been worse than the Great Depression” (Paulson, p. 44)

4. If you were to abolish Fannie and Freddie, what would happen to the existing $5 trillion of GSE-backed securities? (p. 103) 2009 was a very bad time to consolidate that debt into the US government debt (and, politically, there is no such thing as a good time to do so, besides)

WHAT HAPPENED NEXT + HEDGE FUND OPPORTUNISM

1. The fate of Fannie and Freddie was then left to Ed DeMarco, provisional chair at the FHFA, who was not provisional at all and ran the FHFA for six years after the bailout. The way he put it, “there’s no one making policy; I’ll make policy” (p. 100)
• De Marco fought all principal-forgiveness schemes tooth and nail to protect the one remaining shareholder, the government, from strategic defaults (p.99)
• De Marco also sued 18 banks seeking to recover USD 200 billion in losses from mis-sold private-label mortgage product. Nomura and RBS foolishly did not settle and lost in court.
• Under De Marco’s prodding, GSEs steadily increased their guarantee fees for new mortgages. Fannie Mae’s average effective guarantee fee on new loans tripled from 21bp in the first quarter of 2009 to 63bp in the first quarter of 2014. He also began charging extra fees for riskier mortgages in order to decrease the amount of cross-subsidization in the system.
• The whole idea was that as the cost of Fannie and Freddie’s insurance policy rose, the private sector would see an opportunity to make money, and come back into the market (p. 101)

2. “When almost everyone was gnashing his teeth about the apparently mounting losses at the GSEs, some investors began to do the math, and they found that Fannie and Freddie weren’t doing nearly as poorly as it seemed.” (p.111) Many hedge funds slowly started snapping up Fannie and Freddie

3. In a particularly bold move, on June 13, 2011 Skadden Arps and Blackstone pitched to the government on how to deal with Fannie and Freddie: build up fresh capital through their earnings and make sure investors are paid. “private capital will not make any substantial commitment to a solution in the absence of any likelihood of a meaningful return on capital” (p. 114)

After the meeting, Blackstone loaded up on Fannie and Freddie securities. (I view this as blackmail, basically, but the author never calls it that)

4. The government took about a year to respond, and it was not what the hedge funds were expecting: August 17, 2012, the Third Amendment of the conservatorship’s rules requires Fannie and Freddie to send every penny to the government, not just 10%. The government is doing itself the trade the hedge funds had been eyeing for themselves.
• This has turned the GSEs into the “piggy bank” for the government, helping it circumvent the annual debt ceiling stalemate. In the words of Jack Lew “as a practical matter, it’s what has helped us reduce our overall deficit” (p. 117)
• “Thanks to the GSE’s profits, federal spending was under-reported by a combined $178 billion in 2013 and 2014, according to a paper by the Heritage Foundation.” (p. 118)
• Not incidentally, there is no accountability for how the profits from Fannie and Freddie are spent; and once the money is spent, it’s gone and cannot be used to buffer any losses they might suffer again or used to capitalize a new house financing system.” (p. 118)

5. In defiance of the Third Amendment of the conservatorship, and in a strategy that in the business we call “get long and get loud,” hedge fund Pershing Square (i) bought in the open market 13% of the 20% of Fannie Mae stock still in circulation and (ii) released a report entitled “It’s Time to Get off our Fannie” invoking the Fifth Amendment of the US Constitution (against the confiscation of private property ) and advocating that Fannie and Freddie should go back to where they were.

WHERE THAT LEAVES US THE GSEs TODAY

The GSEs are woefully undercapitalized zombies

The GSEs are 85% of the mortgage market in the US

15% of GSE paper is still owned by foreigners

Half of GSE paper is owned by the branch of government called the Fed

The government is refusing to nationalize the GSEs because it would have to consolidate their 5.8 billion of debt into its own debt

The government is refusing to privatize the GSEs because that would amount to going back to private profits and public losses

The government won’t let the GSEs’ current profits accrue to them for two reasons:
• The practical reason is that the government is using the GSEs to pad its own budget by hundreds and billions of dollars
• The ideological reason is that if they were building back their capital “there would be tremendous pressure on Congress to release them” (Peter Wallison p. 121)

[Jonathan · Rating 5 out of 5]

I saw the author along B. Ackmann in Charlie Rose show a few weeks ago and thought, that's important. Why? The housing market health determines the US stock market performance, due to the wealth effect that induces consumption and mainly because of the fact that the homebuilding industry provides so many jobs. Yet the US mortage insurance market is flawed.

Fanni and Freddie were created by congress but operated as private businesses with government support. The two together represent 5 trillion of debt, vs the total US debt of around 13 trillion. The two have 80 pcent of the mortgage guarantee market. There is an implicit not explicit guarantee that the governement would honour any obligations. And this creates unhealthy confusions.

They are running on no capital but no one wants to admit that they are fully government agencies because that would mean that their debt would be consolidated onto the national balance sheet and therefore that the national debt to gdp ratio would be much higher.

They must go back to private market financing. But now so many international institutions own their debt that it's difficult for the US government to fully withdraw from them.

They were created to boost first time home ownership. But they became a tool for politicians wanting to push ever more lending to boost the economy. The root of the gfc was not deregulation but dumb regulation ie pushing f and f to reduce standards and give money to lower credit people to buy home they could not afford.

The official view is still that fanni and freddi shoul not exists. But nothing happens, they remain in limbo protected by the gvt, and nationalised. For the gvt, releasing its grip on them would be equivalent to tightening credit conditions for home owners. Do they want to do that given the dull economic recovery?

I think Larry Summers has a point at the end. This system was created in the 1930s but today why do we need to support fixed long term ownership when the workforce is going to have to be more geographically flexible in the future ? We are now in a world of renters right ? Should we not subsidise first time home buyers only ? Or subsidise something else like health care ? The US is trapped. Housing has become the backbone of the economy.

[Moira Elise · Rating 4 out of 5]

I think I finally get what bonds in the stock market are.

[Michael Cabus · Rating 4 out of 5]

“We live in a world of limited resources. Why should we put the governments weight behind home ownership of all things. Why not subsidise medical research, for instance?”

McClean offers here innovative questions after providing the complicated history of two quasi- US government agencies whose novel mission (to provide a path to homeownership to those who would be denied by the private mortgage industry) was clouded by its almost impossible status. At once held accountable to take risky mortgages and create profit; at once backed by the US government and also abandoned when convenient (or used when convenient, ie to play fuzzy math with the budget).

McClean also dispels the myth that these agencies caused the financial crises indicating that (once again) these agencies became convenient to blame.

A large question of the adaptability of the US to the future is how well it can support its society in changing and challenging times. This book indicates possibility but also challenge: the US seems adverse to nationalised services and their creation almost seems akin to a bad romance. McClean hold out hope though for a younger generation that may be able to shake off the older ideas of homeownership and forge a new path.

[Filip Milosavljevic · Rating 4 out of 5]

A good book with no fluff. Outlines the problems faced/facing the two giant companies and why the problems seem so intractable to solve. Very balanced- does not push one view but presents multiple sides to the story.

[Darren · Rating 5 out of 5]

What made America’s housing market shudder and shake during and after the 2008 financial crisis? Why is homeownership finance on such shaky ground and why are things still not really back on an even keel?

This relatively small little book will give you a great bird’s eye view over proceedings, explaining along the way why the federal government is effectively owning trillions of dollars in house loans through its “conservatorship” of Freddie and Fannie Mae. The government is not rushing to get rid of these assets, that are now generating profits to help pay down the spiralling federal debt, yet they are also under-capitalised and being supported by Chinese, Russian and Japanese state investments amongst others. It only takes one key investor to have cold feet and…

The subject is fascinating and the author has done a great job to encapsulate the situation and inspire much thought! This is a clear example of a too-big-to-fail super-monster that is being supported by Uncle Sam, yet it is in many ways a hostage to self-preservation.

One great quotation jumps out of this book from the former governor of the Bank of England, Mervyn King, who described the state of the U.S. homeownership finance sector and federal government involvement thus: “Most countries have socialized health care and a free market for mortgages. You in the United States do exactly the opposite.”

There is not a lot more to say. This is a great book from a great new imprint. One hopes that the editors manage to keep up this pace, as they’ve set themselves a very high bar from the get-go.

Autamme.com

[James Loftus · Rating 4 out of 5]

The 30 year fixed rate mortgage is the lynchpin of the American Dream and it wouldn't exist without Fannie Mae and Freddie Mac, but most Americans have no idea what these companies do or why thy are so important. In this compact, but efficient, book Bethany McLean does a wonderful job of explaining the history of Fannie and Freddie, including their involvement in the sub-prime crisis and the following bailout. I felt she did a great job resisting any partisan arguments, without pulling any punches. A must read if you are interested in how the housing and mortgage market works.

[Chris B. · Rating 5 out of 5]

Concise and entertaining

Bethany McLean does an excellent job of untangling the quandary faced by the Federal Government in dealing with Fannie Mae and Freddie Mac. Her discussion of the effects of cash-out refinancing, contrasted with loans used to purchase homes, help the reader to distinguish between critiques of the GSEs that are economic versus merely political.

[Ron · Rating 4 out of 5]

An extremely dense book talking about the two US mortgage giants Fanny May and Freddie Mac.

I would argue that this is definitely not a book for people who are new to finance, as I also had to pause and look up certain terms that I was not familiar with yet. However, the writing is comprehensible and quite entertaining.

A book about this topic could easily have been bogged down in navel gazing and long, tedious discussion of the policy particulars, but the author keeps everything snappy.

Favourite quotes:

(About some Authors blaming Fannie and Freddie for the Subprime mortgage crisis)
"But Wallison’s narrative can’t be close to the entirety of the story. There is a big difference between a 30-year fixed-rate fully documented mortgage offered to a less creditworthy customer—which is the sort of riskier mortgage Fannie and Freddie mostly did in the 1990s—and the reckless loans that proliferated in the bubble, like adjustable-rate zero–down-payment mortgages where the borrower simply states his or her income; nor does the existence of the first type of loan automatically presage the second. Fannie and Freddie’s market share of mortgages that were turned into securities plunged as the second sort of mortgage took off. By the later, most dangerous years of the bubble they were not even the dominant buyers of risky private-label securities. David Fiderer, a former banker turned journalist, calculates that from 2005 to 2007, roughly $2.9 trillion of private-label first-lien single-family mortgage securities were issued, only about 15 percent of which were purchased by Fannie and Freddie, and they bought the safest possible part. That supposedly safer part of the securities—the triple-A-rated ones—became increasingly easy to sell because so many buyers around the world were looking for “safe” investments. As for the riskier pieces, it was a Wall Street invention—the collateralized debt obligation—that became the buyer. Without them, the last frenzied years of the bubble wouldn’t have been possible."

"Then, on August 17, 2012, a sleepy summer Friday, Treasury and the FHFA changed the rules of the game.

Going forward, instead of paying a 10 percent dividend, Fannie and Freddie would be required to send every penny they made to Treasury. If everything went to the government, then there was no value left for investors..... In Washington, there is a distinct lack of sympathy for the investors and for the argument about their private property rights. Berkowitz recalls complaining to one politically plugged-in person, only to be told to “grow up.” There are some in D.C. circles who believe the government only left Fannie and Freddie’s common and preferred shares in private hands because it had to do so to avoid putting their debt on the federal budget. Since everyone knew that this was a façade of convenience, the investors should have understood that what they view as their property always belonged to the government."

"Whether you like the GSEs or not, it’s about 80 years too late to have that discussion,” says a Fannie employee. “We have already built an economy around this and used this to invest in leveling the effects of capitalism. The idea of unwinding it all is crazy.” Maybe we could have, and should have, chosen jobs, or healthcare, but we didn’t. We chose housing."

[Sarah · Rating 3 out of 5]

So guys, after the financial crisis, what the heck happened to Fannie Mae and Freddie Mac? Did these massive entities go bankrupt? Did they get nationalized? What happened to the billion$ of mortgages that they hold?

A month ago, my best answer would have been a blank stare. Bethany McLean to the rescue! She explains how Fannie and Freddie went into Federal conservatorship. This conservatorship is an odd sort of purgatory in which these entities stay off the goverment's balance sheet (but the government still claims all their earnings).

3 stars for Shaky Ground, since it's such a slim, sober little volume. It lacks the juicy drama of McLean's other business books, but punches you every bit as hard with the facts. If you can't find this book at your library, do try to watch McLean explain the issues here.

Here are my two favorite nuggets of wisdom:

From the intro: The former governor of the Bank of England, Mervyn King, told me this: "Most countries have socialized health care and a free market for mortgages. You in the United States do exactly the opposite.

From the conclusion, where McLean sorts through proposals for Fannie and Freddie's ultimate fate:

A surprising number of people have begun to argue, in essence, better the devil you sort of know. If a new system is going to look somewhat like the old Fannie and Freddie anyway, with a broad government backstop, why would you start from scratch instead of fixing what we have?

The idea, which is precisely along the lines of what investors want, is that if Fannie and Freddie have much higher capital levels, more competent regulation, maybe an explicit guarantee for which they pay the government, and no portfolio business, then you have fixed many of the problems with the business model.

[Henry · Rating 5 out of 5]

- A great companion to McLean's earlier book "all the devil's are here"

- The idea that housing market, and that the subprime market has been solved has no merit: American housing market is still heavily subsidized by the GSEs. The problem with such structure is that housing price swings up and down all the time, and there's no possible way to have adequate reserve to maintain stability for 30 years (which is the most common loan type in America) simply because economy will always have cycles

- The unintended consequences of this housing policy is that American housing price will have to swing either way harshly (when borrowing cost is very low, it will swing up rapidly during up term when interest rate is low. When borrow cost is high, no one can all the sudden afford homes since everyone has to use leverage to buy, thus price will crash wildly and only cash buyer can afford anything)

- While GSEs has been around for a long time, the problem took a long time to manifest itself given how long it takes for the GSE structure to take form in America. And at this point, many believe the monster has simply grown too big to be killed (so let's just kick the can down the road and have another administration deal with it)

- Always expect government to place more laws causing more unintended consequences down the road (that's what government is for): don't ever be surprised by it

[Dick · Rating 4 out of 5]

Bethany is a very good writer. I’m pleasantly surprised to see she had written about the GSEs after finishing her Saudi America book. I read it because of work but she managed to turn a super dull topic into something readable. There are a few great lines in the books which is hard to forget: unlike other countries, America socializes housing and privatizes health care; in a way, they turn the worst investment of a 30y mortgage into the second most liquid instrument in the world; pre crisis GSEs basically privatized gains and socialized loss; everyone agrees it needs to be fixed, but with so many conflicting interests, risk of destabilizing the housing and financial market, and it’s in itself such a political not potato, it is unlikely it will ever get fixed, and it calls into question the America’s cut of homeownership. Good short read.

[Ben Peyton · Rating 3 out of 5]

I read this over the weekend and it was a pretty interesting read. It's a couple of years old right now so I don't know what the status of the GSEs are now compared to how they were when the book ended. It is a pretty detailed and fair look at the history of the GSEs and their role in the run-up to the financial crises. Like everything, it's complicated. I don't think most reasonable people would say they are responsible for the huge growth in sub-prime mortgages but aren't totally free of criticism for that either. It just seems like that we never fixed the underlying problem - the government wants these institutions to exist to promote homeownership, they want them to have the implicit guarantee from the federal government, but they don't want the risk associated with the reality of the situation and they still refuse to capitalize them properly It's a strange situation.

[Nick Sabatini · Rating 5 out of 5]

Great dive into the inner workings and happenings of the mortgage giants during the financial crisis and beyond. Great follow up to Bethany McLean’s ‘All the Devils are Here’ outlining the full story, but it was interesting to hear about Fannie and Freddie specifically. Love McLean’s writing style, well researched, readable for non financial experts, and genuinely interesting. Can’t wait for her next one!

[Connor Moore · Rating 4 out of 5]

This is a concise but thorough look at the GSEs (Fannie and Freddie) and how they came to be what they are today. My biggest issue with the book is that the author never took a stance on how to fix the GSEs. It was more a history of the two companies rather than a solution on what the government should do going forward.

[Richard Powers · Rating 4 out of 5]

If you aren’t terribly familiar with the role of the GSEs, this is a good place to start. It reads like a breeze. If you want real detail, graphs and charts, try Guaranteed to Fail (Archaya, Richardson, et. Al.). And note that the book stops before the 2016 election. Current (2020) discussions of privatization are not covered. But you can get that from the papers and magazines.

[Cara · Rating 4 out of 5]

This book was a quick read that covered Fannie Mae and Freddie Mac a lot more thoroughly than I’ve ever seen. I was hoping it would get more into the overall financial crisis in more detail but I guess I have to read McLean’s “All the Devils are Here” for that instead.

[HP · Rating 2 out of 5]

So much of this book is just quotes from one person or another without a clear story line. It somehow takes a hard topic and makes it harder to understand….it’s like watching a movie that never made it to the editing room.

[John McCool · Rating 4 out of 5]

Bethany McLean is quickly able to synthesize the history of Fannie Mae and Freddie Mac, how the companies are interwoven into the fabric of American Life, and the role they played in the 2008 mortgage crises. There is nothing more American than the thirty-year, fixed rate mortgage.

[Krystal · Rating 3 out of 5]

Interesting read since I just recently started working at Fannie Mae. I liked how the author examined the financial crisis from lots of angles and perspectives, including the events leading up to it.

[Justin · Rating 4 out of 5]

Thoughtful, relatively non biased, non conspiratorial and well researched.
Not much new in terms of actionable takeaways for individuals

[Clint · Rating 3 out of 5]

An interesting look at Fannie and Freddie now in the strange existence of conservatorship. I wish she would have given her opinion of what should be done.

[Lance · Rating 5 out of 5]

Very interesting topic with lots of opinions from lots of important people. McLean, as always, writes a very interesting account of a topic that most people know little about.

[P · Rating 4 out of 5]

The book is a bit too complex for the average reader but not detailed enough for anyone truly interested in the topic. It's well written and is a good 150 page summary of Fannie and Freddie.

[Stephen Kimbleton · Rating 5 out of 5]

Great Book

A very good introduction to the subprime crisis. Read it and you will have great food for thought and a good basis for reading other books on this subject.

[Maddy Barnard · Rating 3 out of 5]

I am unsure how to rate this book as it was not for beginners and I know nothing about mortgages.

[Alex Campbell · Rating 3 out of 5]

A decent little explainer of the quirks of the US mortgage market, although felt like it was written two-three years early, as it would have been better with the results of the lawsuits mentioned.

[Felix Brn]

Distortionary!! ITS ALL DISTORTIONARY!!! When will the American people learn how distorted their lives were by Freddie and Fannie!!!

[Peter Marshall · Rating 3 out of 5]

A quick read about why Fannie and Freddie are a complete mess. I loved McLean's previous books so I had high hopes for this one but maybe the topic just didn't interest me as much. Whatever the reason, I didn't enjoy this read compared to her other works.

[Deidre · Rating 4 out of 5]

Should the government be propping up the housing market? The history of Fannie Mae and Freddie Mac, the behemoths underpinning much of the mortgages in the U.S. is incredibly convoluted and the plans to resolve what role governments can and should play in housing are equally confusing. Fannie Mae and Freddie Mac have a particularly odd role in government, not quite private companies but not fully government run either. Neither side of the political fence can seem to decide what should be done with these two companies, each of which received massive bailouts in the Great Recession. Private investors who purchased preferred stock now want their profits but should companies that received taxpayer money be paying out to hedge funds?

The larger question is whether or not a 30-year-fixed mortgage, the standard underpinning of the financial market, makes sense in today's mobile, flexible and under capitalized world. One of the things that the author points out is that while the stated goal of these companies is to help more people afford housing, many of the mortgages backed are actually refinancing loans, a situation exacerbated by the fact that for many, their investment in their home is their only asset.

Does the "American dream" of home ownership still fill today's world or do their need to be more options and if so what role should the government play? McLean offers no answers but sets up the fundamental conundrum with simplicity and brevity.