I realize that this is one of Bill Poole's stock lines--that we need to figure out exactly what kind of animals Fannie Mae and Freddie Mac are, and make that clear, and that uncertainty is a potential source of vulnerability. And I realize that Bill Poole repeating one of his stock lines should not knock six percent off the equity value of these GSE's.
But this market is really weird. Perhaps this line should be rotated out of the stock speech...
Posted by DeLong at March 10, 2003 07:32 PM | TrackBack
ABCNEWS.com : Fed's Poole: Fannie Shocks Could Spread: The agencies' stock prices sank after Poole's comments, with Freddie Mac's shares falling to a new 52-week low and Fannie Mae's clinging just above its one-year low.
"Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy," Poole said at a conference on the two government-sponsored enterprises, or GSEs.
Surprises that destabilize financial markets can and do occur with some frequency, Poole said. Because of the scale of the short-term debt obligations of Fannie Mae and Freddie Mac, a problem at either company could spread quickly, he said.
"A market crisis could become acute in a matter of days, or even hours," Poole warned.
Fannie Mae shares fell nearly 6 percent to $59.50 while Freddie Mac stock slid 6.6 percent to $50.45 by late morning.
Fannie Mae was quick to dismiss Poole's comments as repetitious and off-the-mark.
"There is nothing new in the personal opinions expressed today by St. Louis Federal Reserve President William Poole regarding Government Sponsored Enterprises. He made almost identical comments last August," said Fannie Mae senior vice president Chuck Greener in a statement.
Had the misfortune of being taught introductory economics by him.
Not surprised he's capable of destroying the stock market.
Posted by: Snookerdoodle on March 10, 2003 09:09 PMYep, but they may have a problem of portfolio mismatch that needs watching. With people refinancing at record rates to reduce their interest burden and the mortagage agencies having borrowed long at higher rates. Unless interest rates start to go up some time soon they may need to be very careful.
Posted by: Edward Hugh on March 10, 2003 10:55 PMPoole is a buffoon.
Fed Chairmen and Regional Fed Presidents are supposed to "lean against the wind" in the interest of stability. What on earth is to be gained from trotting out scaremongering statements, however "stock", in a time of stock market nervousness?
Besides, it's a given: if major financial institutions, whether Citigroup, American Express, Fannie Mae, Freddie Mac or even GE CANNOT ROLL THEIR COMMERCIAL PAPER, then they're dead dead dead dead. Why should Poole contributed to a possible run on the bank?
Posted by: Anarchus on March 11, 2003 04:51 AMPoole may be staking out policy territory. Remember when Lindsey shocked everybody by taking on racism in mortgage lending? McDonough has been the systemic risk guy for years (any idea who will replace him in that function?). Poole will have a political ally in Louisiana Rep Baker, for what that's worth.
Haven't Freddie and Fannie just been through a paper "shock test" to help answer just the sort of scares Poole is suggesting? I understood they came through with flying colors.
Posted by: K Harris on March 11, 2003 06:17 AM"Besides, it's a given: if major
financial institutions, whether
Citigroup, American Express, Fannie
Mae, Freddie Mac or even GE CANNOT
ROLL THEIR COMMERCIAL PAPER, then
they're dead dead dead dead."
The market perceives that Fannie Mae and Freddie Mac are different from GE or Citigroup. They are not just huge, they are government-sponsored and often appear to be fudging the public-private line. This prompts a suspicion that they may be "too big to fail." As long as that suspicion is exerting pressure on investing decisions, it creates a potential problem because investors may not be correctly evaluating risk.
The better question is, if Poole's statements are just the same thing he routinely says, why is the market reacting now? Perhaps too many folks have been treating Fannie and Freddie as impervious to broader market forces, a safe haven in the strmy sea. Deflating that kind of silliness isn't always a bad thing.
Posted by: Ethan on March 11, 2003 06:26 AMthe reason the market is reacting to old information on Freddie and Fannie is that most investors are extremely anxious because the stock market has gone down for three calendar years in a row and isn't off to a good start in 2003 and there's lots of boogiemen out in the bushes, such as war with Iraq, war with North Korea, terrorist attacks in the United States, and a few other things.
Posted by: Anarchus on March 11, 2003 06:30 AMFannie in particular is growing its balance sheet at an unsustainable rate Its hedge book/need to hedge can't be paper-trade "stress tested" because its sheer size dwarfs potential counter-party capital.
Fannie is moral hazard on Wisconsin Avenue: Heads, its officers and shareholders get rich, tails, Uncle Sam picks up the tab.
Poole is right on all accounts, and none of this is "new news", but the TIMING of the speech could not have been worse from a capital markets pricing standpoint.
Freddie, BTW, is run much more conservatively.
Posted by: Bucky Dent on March 11, 2003 06:57 AMBD, we agree completely. Mr. Poole should know that the time to trim the sails and plug the leaks is BEFORE the storm hits.
Posted by: Anarchus on March 11, 2003 07:00 AMFannie in particular is growing its balance sheet at an unsustainable rate Its hedge book/need to hedge can't be paper-trade "stress tested" because its sheer size dwarfs potential counter-party capital.
Fannie is moral hazard on Wisconsin Avenue: Heads, its officers and shareholders get rich, tails, Uncle Sam picks up the tab.
Poole is right on all accounts, and none of this is "new news", but the TIMING of the speech could not have been worse from a capital markets pricing standpoint.
Freddie, BTW, is run much more conservatively.
Posted by: Bucky Dent on March 11, 2003 07:02 AMInterestingly, Warren Buffett sold Freddie Mac about 12 to 24 months ago after holding it for 15 years or more. I have often wondered why.
What will rising interest rates mean for Fannie and Freddie? What will rising interest rates mean for all of us when the turn comes?
Why is Warren Buffett still so cautious on stocks in general after this horrid bear market? Perhaps Fannie and Freddie are in need of balance sheet fixing?
Posted by: rm on March 11, 2003 10:39 AMI only have a slight idea what Fannie Mae does and none at all about Freddie Mac.
Anyone have a link to a good introduction to these creatures?
Posted by: biz on March 11, 2003 10:46 AMThey are functionally identical enterprises that guarantee payment of securitized mortgages, and purchase mortgages for their own portfolios.
Posted by: George Zachar on March 11, 2003 10:56 AM