Barney on Fannie and Freddie: No Clue How the System Works

Barney Frank (D. Mass) is head of the very powerful House Financial Services Committee. Barney is the Rainmaker for the country’s mortgage agencies, Fannie (FNM) and Freddie (FRE). He was the Don that blessed everything that happened for years. Without him these two dead ducks would not be the disaster they are today. And Barney Frank has no clue how our system works. He proved it several times on Friday. He started with a stupid comment in the WaPo: People who own Fannie and Freddie debt are not in the same legal position [as those who own] Treasury and I don’t want them to be. During the day he tried to backpedal away from this dangerous assertion. But he really stuck his foot in his mouth in an interview with Maria Bartiromo. At several points in the interview Frank makes clear his view that mortgage securities issued by either Fannie and Freddie prior to the September 2008 (conservatorship) were tainted and there was no certainty that these would be paid in full. [Read the full article]

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You’ve no doubt seen the large number of opportunistic and/or distressed asset specialists enter the mortgage REIT market. Despite not having the burden of a sizable and underperforming legacy portfolio, I have avoided most of these new issues as both unproven and untested. My focus for outperformance in the mortgage REIT market is on seasoned companies in the sector who have slowly and strategically added credit risk as the financial crisis has subsided. (Note that I have excluded groups that invest solely in agency-backed MBS from this article because these groups manage interest rate risk, not credit risk. The run-up in price for agency securities over the past few months has eliminated much of the opportunity for these names to capitalize further on the shape of yield curve. [Read the full article]

When former Morgan Stanley chief Asian economist Andy Xie comments on the United States, he focuses on a bailout nation keen on perpetuating a bubble economy predicated on malinvestment and overconsumption. In this he sees parallels with Japan and its long malaise. Japan has experienced two decades of economic stagnation since the collapse of the infamous bubble it suffered in the 1980s. The most popular explanations are that Tokyo wasn’t aggressive enough in stimulating the economy after the bubble burst, or that it withdrew its stimulus too early or both. This line of thinking is popular among elite economists in the US, where it is rarely challenged. But few Japanese analysts buy it… The argument to stimulate until prosperity returns" is popular because it doesnt hurt anyone in the short term. When a central bank prints money, its nasty consequence inflation takes time to show up. [Read the full article]

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