Thursday, June 4, 2009

Seeking Alpha Blog Comment On Barney Frank And Regulation

My comment to a Seeking Alpha Blog, "Will Congress Try to Dictate Better Market Outcomes with Regulation?" by Jeffrey Korzenik.

For some reason, Barney Frank is overly protective of Fannie Mae and Freddie Mac. He was instrumental as chair of the House Financial Services Committee, in preventing direct oversight by Treasury of these two GSE's in 2003. Greenspan and many others at the time testified that the GSE's needed stronger oversight. In 2003 and prior, many in and outside of government recognized that the GSE's had become too big and were reaching beyond their housing mandate by directly investing in mortgages to increase their size, income, and executive bonuses instead of facilitating home ownership by guaranteeing the mortgages.

Frank was also very protective and supportive of Frank Raines, the Fannie Mae CEO who resigned due to accounting irregularities to increase Fannie Mae's income and his bonuses. See the March 31, 2005, The Washington Post article, "Study of Fannie Mae Cites 'Perverse' Executive-Pay Policy."

Any product, including securitized mortgages, relies on a sufficient supply and a sufficient demand for it to be successful in the marketplace. The GSE's in 2000 through 2007 were major purchasers of securitized mortgages of all types and the GSE's purchases of securitized mortgages in the years leading up to the financial crisis are a contributing factor to the housing bubble and banking crisis.

The GSE's had the ability to borrow in the market at rates significantly below those of other mortgage buyers due to the implicit government backing of the GSE's. Without GSE purchases, the originators of the securitized mortgages products would have found it much more difficult to find a sufficient number of buyers for all the mortgage securities that they could produce.. Without sufficient buyers, prices of the mortgage products would have had to decrease, which increases the yield, to attract more buyers into the marketplace. Mortgage originator profits would have declined because of the lower prices, which would have forced some originators out of the business. Additionally, the remaining producers would have had to increase the cost to borrowers through higher interest rates or points to remain profitable, which also would have had the effect of decreasing the number of borrowers and the number of mortgages originated.

While not the sole cause of our current financial malaise, Barney Frank certainly is an important contributor to the banking crisis.

1 comment :

  1. Financial stability counts on each and every aspect of life.