Fannie Mae renounces its government charter

April 1, 2007 | Fannie Mae, GSEs, Humor, Subprime

In a bold stroke that caught the financial world by surprise, Fannie Mae today announced that it had canceled its government charter.





“Ever since we reported multi-billion-dollar writedowns,” said CEO Daniel Mudd, “we’ve been under a cloud with Congress.  We’ve been on our best behavior, not misbehaving at all, but despite two years of contrition, we still cannot produce an audited financial statement.  Allegations of ‘false signatures’ persist, the government is suing our former CEO, he’s suing us for wrongful termination and back pay, and suing our regulator too — and we’re paying his lawyers to do so!we are suing our former auditors for not having stopped our former CEO from smoothing earnings with financial tricks, and our stock has taken a pounding.  Congress has been endlessly debating what to do about us: whether to limit our balance sheet, impose a strong regulator, strengthen OFHEO powers and its funding,  or do something else.  Others question why we fund subprime lenders instead of competing with them.”



One wonders


“Many people, including former Fed chairman Alan Greenspan and his successor Ben Bernanke, have pointed out that having the GSE’s linked with the Federal government, even if only implicitly, poses substantial systemic risk to the Federal government.  What do taxpayers get for this huge risk and the annual subsidy we receive?  Do we meet our fundamental value equation?  HUD says that we do not even buy more low-income mortgages than the market average.” 



HUD Secretary Alphonso Jackson’s scratch pad calculation of our value


“In the thirty years since we’ve been privatized, we’ve done great things for American homeownership.  Things are different now: today’s housing finance ecosystem is incredibly different and richer than it was back then.  Back then there was no securitization; there were no conduits.  The Low Income Housing Tax Credit did not exist.  State housing finance agencies were in their infancy.  There was no Community Reinvestment Act.  Banks lacked community development subsidiaries.  The cities were in decline, not roaring back as they are now.  In short, our success has stimulated the housing financial ecosystem to grow up around us.”



We think it’s getting better all the time


“Besides, this will let us close all those unnecessary partnership offices that we’ve maintained in important Congressional districts around the country.  What do we need them for?  We operate only in the secondary market, and we only buy mortgages that others originate for us under DUS (Delegated Underwriting and Services) — a market-changing innovation that lets us buy trillions of mortgages that other entities originate.  We’d rather do without that half-tithing Affordable Housing Fund Congressman Frank has advocated, even though, at $500 million or so a year, it may seem small compared with our awfully big advantages such as the several billion annually we receive in direct and implicit Federal benefits.  As our little effort toward reducing the Federal deficit, we’ll give back the taxpayers’ money; it can be better spent than on us.”



Click here to cut the deficit


“Many commentators have worried that a protracted interval of debate regarding our status could destabilize the market.  Since markets can move much faster than government, we’ve decided that the least painful way of extricating the government from this bind is simply to do it ourselves.  Academics have pointed out that such a ‘big bang’ approach is legally and financially feasible.”



You don’t know the answer until you push the button


Asked about Fannie Mae’s move, a Freddie Mac spokesman said, “We are absolutely not a duopoly.  We’re canceling our charter too.” 


Upon hearing the news, President Bush exclaimed, “Dang!  And after leaving them vacant throughout my Presidency, I was just getting ready to select the Presidential nominees for Fannie Mae’s board.”


The charter cancellation is effective on this first day of the second quarter of 2007



AHI’s humble blogger fully endorses our strategy