We all knew Fannie’s collapse was coming. Right?
Fan and Fred had to re-state their books years ago. They were propped up by a generous lobbying campaign. And their capital requirements were less than one third that of normal banks. So why didn’t everyone see this coming?
Part of the answer lies in the high level of uncertainty associated with Fan and Fred’s business. While combined they own about 1.7 trillion in assets, their guarantee business is more than 3 times that. Most people have no idea how much money this generates, and whether it covers their risk.
A bigger issue is the triumph of hope over experience. We all want to hope for the best. We’ve met perma-bears: they’re unpleasant, they’re usually wrong, and we don’t want to be like them. So we often hope for the best–even when the object of our hope is demonstrably shady.
When the Treasury took over the Agencies, they threw everyone’s hope to the winds. Now everybody wants to know who’s next. It’s reasonable to look for another shoe to drop–we’re living through historic volatility. But if it’s anything like what’s already come, it won’t hit us where we’re looking.
Douglas R. Tengdin, CFA
Chief Investment Officer
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