Reform Fannie!

Larry Summers says that mortgage giants Fannie and Freddie are feeding off the public trough. He has a good point: some changes are needed.

Fannie and Freddie buy up mortgages, pool them, and issue securities that pay in line with the mortgages. The implicit backing of the Fed is critical to them.  Banks and others buy almost all the “Agency” bonds they want. This keeps the mortgage rates low.

Without the government’s approval, Fannie and Freddie are just more players in the financial markets. Most mortgage rates would rise. And that wouldn’t be good for anyone.

But there’s a catch. If the agencies mess up, we’re on the hook. Summers therefore thinks that dividends should be suspended and other shareholder perks should go away. Maybe that’s a little draconian. But why not treat them like any other regulated monopoly? Monitor their returns, and evaluate their business practices. Limit them, like we do utilities. But also guarantee a return.

No question, things have to change. But destroying shareholder rights is not where we want to go.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-03T17:53:08+00:00 April 2nd, 2008|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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