At least that’s what Paul K. and Company surmise regarding the recent announcement of mass mortgage modification by the dynamic duo Fannie Mae and Freddie Mac. Only one segment of commentary in the otherwise fine discussion struck me as odd (emphasis mine)…

“Heidi” - Lowering the principal amount is unethical. If they lower the principal amount for people who made poor decisions regarding what they can afford to pay for a home then the government would in essence be rewarding moronic behavior. Should I be refunded for all of the losses in my investments?

My query: when does the government do anything but “reward moronic behaviour?”

SIDE NOTE: Mass Mortgage Modification will hereafter be referred to simply as MMM or ThreeM, but no rights are reserved. Dynamic Duo is taken by some comic book characters, and we already know the shoe fits.

You lost me at hello

R. Glenn Hubbard and Chris Mayer, via WSJ (emphasis mine):

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac.

What a novel approach (notwithstanding the fact that Fannie and Freddie were recently nationalized because they were spiraling down the rabbit hole).

(h/t Calculated Risk)

A comprehensive look at coverage of the weekend’s Fannie Mae/Freddie Mac story, compliments of The Big Picture.

According to The Wall Street Journal the winners are homeowners, Hank Paulson, short-sellers, Bill Gross, and the Republican Party, and the losers are lobbyists, Congress, management, and value investors.

The short-sellers bit is indisputable, and I think the WSJ missed one loser, taxpayers.

Can’t bear to watch, but you do get some choice quotes…

The understatement of the day, from The Independent:

The US Treasury is close to a deal to prop up the mortgage finance giants Fannie Mae and Freddie Mac, whose crumbling finances have put the US housing market in jeopardy and threatened to turn an economic slowdown into a deep recession.

Prop up? Just a few months ago Congress was trying to use the GSEs to “prop” everyone else up. As for the housing market “being in jeopardy” I’m speechless.

Jim “Beach Oil Barron” Cramer says ‘stop the madness‘:

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

I can’t figure out if he is eluding to the fact that GSE paper is underwater along with so many homeowners, or that Conoco-Phillips should immediately start doing energy exploration in everyone’s backyard.

But Blogging Stocks got the headline spot on - Government to wipe out Fannie/Freddie shareholders by Sunday:

And now what could become history’s biggest transfer of tax dollars to bail out bad lending begins.

Yep.

Bill Gross of bond fame has been whining for some time. Reason: his portfolio at the PIMCO Total Return Fund is full of GSE bonds and he knows it’s going down, down, down.

His latest blathering is veiled in an attempt at humor (more like an inane distraction, but bear with me) - the entree is some ludicrous poll comparing Louis Rukeyser with Jim Cramer. I don’t much care for “investment media”, mostly because I believe they are nothing but stock shills being compensated somewhere, someplace. In other words, a lot are frauds, skirting securities law for the dis-benefit of the gullible investing public. Added…Gross thinks Cramer is a daring pundit (because he was once a money manager himself). Sure - and a money manager that blew up (but saved his own ass via his oft-touted ‘trust’) just like Bill Gross will probably do. But Cramer does have a house on the beach with oil under it - some are impressed so I guess that makes him okay.

Bottom line - Fannie Mae and Freddie Mac were the closest thing to socialized medicine for the housing sickness of the late 80’s/early 90’s as anyone could imagine who lived through the New Deal Era. Gross became the famed bond investor while riding the wave of easy money - now management ineptitude (and basic economics) are coming back to haunt the GSEs and their investors, and Gross is begging for the US Treasury to bail him out.

If I was the CIO of an insurer or pension fund, I’d be running from the GSE-overweighted bond portfolios like you might if approached at a cocktail party by someone that was recently busted cheating on their spouse with a farm animal.

And after reading Bill Gross’s diatribe, which at once beckoned for a new bull market in bonds while simultaneously putting the onus on the Fed to make it happen, maybe he should think about a new poll - that which decides whether investing in GSE paper is more like running with bulls…or sleeping with sheep.

MORE: Barry Ritholtz asks “WTF is up with PIMCO?” and notes that the “quasi-homage to Cramer” was just plain “weird”.

Daniel Mudd wanted the loans to “optimize the business“…

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Hmm. Just a few weeks back, Paul Krugman said (emphasis mine)…

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

You’d think a professor of economics (at Princeton University no less) might have some idea what he is talking about, particularly when allowed to regularly op-ed at the New York Times. Note that this wasn’t supposition - it was an attempt to relay facts well after the events.

Even though they’ve long been THE largest purchaser of mortgages, maybe the fact that Fannie Mae didn’t originate the pile of bad loans equates to “had nothing to do with”? I wish I knew the answer, but I’m no famed academic.

UPDATE: Oops…h/t to Paul Kedrosky on the Post story.

Via The Wall Street Journal:

Trying to defend the mortgage giants, Paul Krugman of the New York Times recently wrote, “What you need to know here is that the right — the WSJ editorial page, Heritage, etc. — hates, hates, hates Fannie and Freddie. Why? Because they don’t want quasi-public entities competing with Angelo Mozilo.”

That’s a howler even by Mr. Krugman’s standards. Fannie Mae and Mr. Mozilo weren’t competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk.

And cracks are appearing that show this to be true.

From the Economist (emphasis mine):

After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.

The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.

That would certainly solve the problem of fewer open-market buyers for the GSEs’ paper.

This question posted on LinkedIn was too good to pass up:

Does anyone else think Fanny May and Freddie Mac sound more like cartoon characters than finance companies?

I’m thinking Wile E. Coyote and Homer Simpson, only not quite as funny.

Your thoughts?