In a recommended diary today, DailyKos resident economic expert bonddad says Hank Paulson is "screwing the taxpayer" with his latest plan, which is "one of the worst bills to ever be proposed", and that Paulson has been surprised by this crisis and that "everyone who is surprised by what happened over the last few weeks (which is damn well near everybody) should sit down and not even get involved in solving the current problem." But the fact is that bonddad has not held himself to a similar standard as he has weighed in several times recently on the Fannie and Freddie bailouts and the greater financial crisis-- without referencing his misguided prior support for the status quo for Fannie Mae and Freddie Mac in 2005.
At the peak of the housing bubble in 2005, bonddad characterized Fannie and Freddie as "success stories":
In my opinion, the bottom line is [Fannie Mae and Freddie Mac] are true success stories.
...
In my opinion, GSE's are a true success story of the government working with the private sector to help everybody involved.
As we have seen, these institutions have been failures, not successes. They used to be success stories, back when they stuck to their mission in the secondary mortgage market and weren't run like hedge funds. But that time had long since passed when Bonddad wrote this in 2005. At that time, the executives of Fannie and Freddie were pursuing their own narrow objective of engineering maximum bottom-line profits, and had been doing so for years.
Furthermore, the government's regulation and oversight of these institutions was also an abject failure. At the same time bonddad was defending the GSEs as they were, Chuck Hagel introduced a strong reform bill that would have created much stricter regulation of Fannie and Freddie. The bill would have allowed the new regulator to limit the size of their portfolios and place restrictions on any derivatives or other non-mortgage related assets they could hold. But not a single Democrat voted for it. Like bonddad, they wanted Fannie and Freddie to be able to maintain their trillion dollar hedge funds-- and this is even after significant accounting irregularities had been discovered at both Fannie and Freddie.
Finally, as we have seen, many poeople involved were not helped, especially the new homeowners who bought in at the top of the bubble-- a bubble which was created in part by the unchecked expansion of Fannie and Freddie, and the artificially low interest rates which made possible by that implicit government guarantee, underwritten by our tax dollars. Many of these "homeowners" are underwater, are in default, have walked away from their mortgage, or have been foreclosed on.
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Bonddad also defended Fannie Mae's huge investment portfolios, and derided Congressional concerns about the size and makeup of these portfolios, including the use of derivatives in complex hedging strategies:
At the size of the GSE's, the portfolio managers will use credit derivatives to ameliorate risk. Frankly, these are beyond the understanding of most Congressmen. As soon as you say future to most, their eyes glaze over. What they don't understand, they assume is bad. When used properly, these risk management tools are invaluable.
Of course Fannie Mae and Freddie Mac have now collapsed under the weight of those huge investment portfolios, as their fancy hedging strategies using complex derivatives failed to work as advertised when their debt-financed portfolios turned against them. The Congressmen with the glazed-over eyes may not have understood the byzantine hedging strategies of Fannie and Freddie, but they were right to be concerned.
In fact, that Fannie and Freddie were engaged in such hedges at all should have been concerning on its face. After all, were not Fannie and Freddie created specifically to conduct the relatively simple, safe, fee-based business of securitizing mortgages and selling the securities? Warren Buffet had dumped his investment in Freddie Mac years before this, precicely because of investments Freddie Mac had made unrelated to its business, and beacuse of hedging strategies used to "smooth out" earnings. And were not many experts warning about systemic risks from these huge portfolios? If Fannie and Freddie weren't "getting high on their own supply" by keeping so many of their securities in their own portfolios for their own profit, they would have had no need for any hedges whatsoever.
But despite the fact that a savvy investor like Warren Buffett had walked away from Freddie Mac for hedging and engaging in non-core investments, bonddad claimed that Fannie and Freddie had to operate their portfolios like hedge funds, why? Because everybody else was doing it:
Do the GSE's use exotic tools to manage risk? Yes. So does Citibank, Morgan Stanley and everybody else on Wall Street. Welcome to the modern world of finance.
In another diary, bonddad seemed to claim that those who did not understand these complex hedging strategies had no business commenting on the mortgage market at all:
When you can demonstrate that you understand how to hedge a multi-billion dollar mortgage portfolio using treasury futures and interest rate derivatives, feel free to comment on the mortgage market. Until then, stick to your simplistic view of other issues.
But as it turned out, apparently even Fannie and Freddie's financial wizards did not fully understand their hedging strategies. Bonddad's faith in the portfolio managers of Fannie and Freddie was misplaced, and again, the critics who wanted to limit the size of Fannie and Freddie's portfolios and put an end to all the financial engineering have been proved to be right.