Board-Ansicht
Mix-Ansicht- Freddie's, Fannie's or are we Bunnies? - Emerald, 18.10.2003, 19:14
Freddie's, Fannie's or are we Bunnies?
-->Where's the Market Discipline?
The problem with Long Term Capital Management (LTCM) was that there were no market restraints or market discipline on the firm. Greed drove all those investment banks to lend LTCM money in the lust for commissions, and LTCM refused to show any of the firms their"hedge book." You can bet if the investment banks had seen their total exposure, they would have reined the Nobel Prize management team in, in very short order.
But who is looking over Fannie's shoulder?"Don't micro-manage us," say Raines. Translation: don't mess up our gravy train.
Everyone seems to acknowledge that federal oversight is weak. There is now a bill in Congress to move the oversight to the Treasury Department, but Fannie and Freddie lobbyists have so watered down the bill that it is worse than the current situation. If oversight goes to the Treasury under the current guidelines, that increases the implicit government guarantee and US taxpayer exposure. But if creates no real controls.
If Fannie and Freddie want the advantage of an all but explicit government guarantee, they should open their hedge book to complete scrutiny and be subject to leverage curbs. At a minimum, they should be made to shorten their duration risk exposure (another risk which I will not take the space to go into, but which is real enough).
Yes, under such a situation they will not make as much profit as they do today. But so what? Why should a small group place the rest of us with a large risk, even if it is thought to be remote?
We would scream if a Morgan or a Citigroup or some other private firm would be allowed to put US taxpayers at risk for private gain. What is the difference with Fannie or Freddie?
Alan Greenspan argues, and I think rightly, that the Fed should manage not for the more likely of problems, but for the possible problems which would cause the most harm. It is better to tolerate some problems than to experience a problem which could lead to disaster.
The mortgage debt market is now larger than the government debt market. One can make an argument it is the most significant piece of the US economy. Why take any risk at all?
Yet, if Bianco is right, the bond market sees more than a little risk, and that is why interest rate futures are priced so high in the face of the Fed telling us rates are going nowhere. If there were no risk to this trade, there would not be such high risk premiums.
Congress needs to shorten the leash on Fannie and Freddie. Public or private. In or out. But not both. Perhaps Fannie and Freddie are right. Maybe the risk is low. But so was the risk to Long Term Capital. It is a risk that US tax-payers should not take, are not paid to take, yet Congress has let the lobbyists convince them otherwise.
More Contradictions.
How can we once again be in Bubble valuations? Amazon at a P/E 0f 151, Priceline at 220 and the list goes on and on. Caroline Baum points out the China has lost 10,000,000 manufacturing jobs in the last few years due to productivity increases. Who do the Chinese politicians blame? Who is their currency scapegoat? Our politicians on both sides of the aisle pander to our nationalistic tendencies, as do politicians world-wide. Do we really want China to risk major turmoil and a reactionary return to a nationalistic world. Think Germany in 1932.
What of the clear contradiction between the argument for free trade and the seeming arrival of protectionist sentiment upon every shore throughout the world?
Enough. There are just too many, and it is time to go home.
Let me suggest that the hedge funds and major traders who read me might go to Greg Weldon's web site mentioned above and contact him directly. He has a rather pricey (several thousand a year) service in addition to his less expensive retail letters. I am sure he will send you a few weeks' samples. They are worth every penny if you are"working the markets."
If you would like to meet in New Orleans October 29-31, please let my office know. If you have already written about getting together, you should have been contacted by now. Have yourself a great week.
Your almost ready to finish his book analyst,
John Mauldin
Frontlinethoughts.com
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