How do you turn a supertanker?  According to justanswer.com, the technique for turning a loaded supertanker involves shutting down the main engines 25 kilometers (about 15 miles) before reaching the actual turning point.  This is because the huge vehicle has so much momentum that it takes that long just to slow down to turning speed.  Of course it also takes 25 kilometers or more to get up to cruising speed.  But what if the various parts of the supertanker are travelling at different speeds or – shudder – even in different directions?  Well then you’d be looking at the U.S. economic bureaucracy at work.  Because when it comes to efficiently running this economy, we are often our own worst enemy.

 Look at Fannie Mae and Freddie Mac, the two federally chartered purchasers of home mortgages taken under government conservatorship last summer.  The reason Fannie and Freddie were taken over by the government is that they were suspected of having too little capital to cover the potential demands made on the two companies as hundreds of thousands of mortgages failed or might fail.  The worry was that lax lending policies n the part of mortgage lenders and equally lax oversight on the part of Fannie and Freddie had placed the organizations in peril.  And then there’s the mark-to-market rule that forced the companies to write down billions in mortgages that weren’t in arrears but MIGHT HAVE BECOME SO.  Mark-to-market, which has since been conveniently suspended, was the neutron bomb of home finance regulation, intended solely to destroy the value of mortgages and lenders without any other impact or, frankly, without even logical reason.

 So Fannie and Freddie made some mistakes, the rules were changed under them, they went from fat to flat almost overnight, and the feds in their infinite wisdom took over.

 Now the game changes again.  Under federal conservatorship Fannie and Freddie suddenly had unlimited borrowing power with the Fed.  They could buy mortgages like crazy with little thought to whether or not doing so would be profitable.  Heck, their common shareholders were already figuring to have lost 100 percent of their investment.  At this point Fannie and Freddie were simply tools for government management of the economy, their goal being to make more and easier lending.  Yes, this is the exact opposite of what the government might have demanded six months earlier, but in the new reality it is what Fannie and Freddie were supposed to do.

 But of course they didn’t.

 When mark-to-market came on the horizon both companies started to cut back on purchasing loans and securitizing them, trying to reduce their exposure.  And even though it was the government’s policy that these activities expand, they contracted and continued to contract, instead.

 Why?  Because that’s how it is turning a supertanker.

 Where one might have expected the good men and women of Fannie and Freddie would go in the very next day after being put under conservatorship and start buying mortgages right and left they did just the opposite.  And as of December 1^st they raised their requirements for mortgages both companies would buy making sure that they’d buy fewer and fewer, rejecting especially the most troubled loans that in the current climate probably most need to be purchased.

 This is, of course, insane.  But it is also the way bureaucracies work.  The new Fannie/Freddie qualification guidelines were announced in August to be applied December 1.  To have been announced in August they had to have been written in March – eight months before going into effect.  THAT’S how long it takes to turn THIS supertanker even a little.

 The new qualifi9cation guidelines went into effect December 1 even though everyone at Fannie and Freddie knew three months before that the new guidelines were contrary to the new policy of both organizations. 

 So they’ll get reversed, right, just like mark-to-market was? Maybe.  Mark-to-market was a hypersonic reversal in terms of financial regulations.  Don’t expect Fannie or Freddie to be nearly so nimble.  Right now it is suddenly becoming clear to the incoming Obama administration that these new rules don’t make any sense.  So they’ll move to change them absolutely as soon as possible.

 Eight months from now.

 

 

Tags: fannie mae, freddie mac, regulations

Posted by cringely / Semi-coherent Rambling