What Went Wrong?

So what happened?

Fannie Mae and Freddie Mac were supposed to do well by doing good. Since increasing homeownership facilitates hard work, community, and respect for property, why not charter a private company to facilitate financing? Use an implicit government guarantee to lower financing rates. Harness the profit motive to meet a social objective.

But the more I look at it, the more Fannie and Freddie resemble the old British East India Company. They have an effective monopoly on the US mortgage market, and this has emboldened them to take on more risk with their capital through leverage, loan size, and guarantees.

Over its 250 year history the East India Company overreached and had to be taken over. Fannie and Freddie’s tenuous position has led many to question whether they can survive, or whether the taxpayers will have to bail them out.

It’s hard to do well. It’s hard to do good. When someone suggests combining the two, it’s a smart idea to reach for your wallet.

Douglas R. Tengdin, CFA
Chief Investment Officer
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