A good thing the GSEs now have that Federal Reserve and Treasury backstop: They keep losing money. It’s hard to tell who had a harder week. Fannie Mae posted the bigger loss, coming in at $2.3 billion for the second quarter. Freddie Mac suffered a relatively more modest $821-million setback, but was socked by press reports that a former chief risk officer had warned chairman and CEO Richard F. Syron to stay away from the complex instruments and easy lending terms that purportedly brought both GSEs nearly to the point of extinction before their weekend rescue in July. Syron’s response fell in the ‘I had to do what I had to do, if I only knew then what I know now, and there was so much pressure,’ chapters of the excuse book.
Then there’s the annoyance on Capitol Hill and Wall Street over Freddie’s failure to raise some fresh capital. "We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate," Syron said last week. There is speculation that Syron is waiting for Freddie’s shares to get back to their pre-near-disaster level. Share prices for the company closed at $5.90 on August 8, compared to the low of $3.89 on July 11 and the close of $14.50 on July 3.
Both GSEs insist they have billions of dollars in excess of statutory minimum requirements, but the Treasury Department is clearly skeptical, and has hired Morgan Stanley for $95,000 to assess Fannie and Freddie’s true positions. "Morgan Stanley and many other Wall Street firms have a long and fairly substantial relationships advising Freddie on many issues, including investment banking," says Doug Duvall, Freddie’s spokesman. Interestingly, Morgan Stanley probably won’t base its operations at the GSEs, but rather at OFHEO and Treasury—an unusually arms-length way to conduct an in-depth financial review.
On yet another GSE front, some lawmakers, who must have missed out on the GSE party tents and campaign contributions, now want to prohibit Fannie and Freddie from lobbying. Syron is aghast at the prospect. "We have well organized and well funded critics,” he argues. “We have every right to protect shareholder interests and advocate our positions, particularly given the critical role Freddie Mac plays in housing finance." What rights do taxpayers have, sir?