Friday, April 9. 2010

FCIC - Fannie Mae: "200:1 Leverage Was Fine"

Amazing BS: ... 2010-04-09

"Few if any predicted the unusual and rapid destruction of real-estate values that occurred," Robert Levin, former executive vice president and chief business officer of Fannie Mae told a financial-crisis inquiry panel.

"In hindsight, if we and the industry as a whole had been able to appreciate the nature and extent of the crisis, it is clear we all would have conducted our business differently during this period, but we like everyone else were surprised by the unprecedented extent of the economic crisis."

Like hell.

I and many others said for quite a long time that this was a train wreck that never should have happened.

There is no business that makes sense with leverage ratios of either 80:1 or 200:1 (depending on if you're using Fannie's "on balance sheet" or their "entire amount at risk, including guaranteed pass-throughs" number) irrespective of what line of business you are in.

This was simply and utterly indefensible, and it was both the malfeasance and misfeasance - all intentional - by both the company executives and Federal Regulators that allowed this to happen.

Phil Angelides, chairman of the crisis panel and formerly California state treasurer, expressed concern about the level of leverage Fannie Mae had accumulated during the buildup to the financial crisis. He specified that at one point Fannie Mae had a leverage debt-to-equity ratio of 62 to 1.

It wasn't 62:1, it was 80:1, and that was using only the on-sheet direct liabilities.

IF you looked at the entire picture Fannie and Freddie had forty basis points of capital behind their entire book, which is almost 200:1 leverage as of March 2008. ... redit.html

What could possibly go wrong when you allow leverage to expand to that sort of extent?