World Clock

Sunday, 29 August 2010

Gillian Tett Presents the Case to Stress Test America's GSE's

Gillian Tett presents a telling argument as to why the America’s huge Government Sponsored Enterprises should themselves be stress testes.

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• First she highlights that in the entire 2,300 page document relating to the recent financial reform bill there is unbelievably little detail of the mortgage giants Fannie Mae & Freddie Mac.
  • This demonstrates a woeful lack of understanding around the origins of the financial crisis itself, but more specifically the US mortgage market, of which Fannie Mae and Freddie Mac make up a staggering $5,500bn of outstanding mortgages in US or approximately 50%.
• Since the 2008 nationalisation of these two institutions, $145bn of taxpayers’ money has gone into propping the GSEs up.
  • However these could rise dramatically from this figure with estimates varying from $390bn to a whopping $1trn, which as Gillian Tett puts it makes the “woes of the Spanish savings banks seem almost tame”.
• Doubts remain as to whether there will ever be a stress test for these GSEs , due to fact that they are the only thing keeping the US mortgage market afloat.
  • This is highlighted by the fact that 9/10 mortgages last year were underwritten by Fannie Mae and Freddie Mac
  • Additionally if the Obama administration were to embark on a radical reform programme, this would inevitably lead to huge conflict between the government and Federal Reserve given the size of their holdings of mortgage backed bonds.
However despite all this, there is momentum building behind the scenes both in Washington and on Wall Street for overhaul of GSEs. With calls for banks to organise a mutual, private sector insurance scheme to guarantee mortgages without state support. However there remains a huge stumbling block, which is that any type of reform at present given the fragility of the US housing market may tip the country back into recession (just look at last week’s housing sales figures, which showed a huge 27% drop in July – a 10 year low)

Given the fact it was the markets that forced austerity on Greece and the Bank Stress Test in Europe, it may again decide the fate of the GSEs and the US mortgage market should the markets repeat the events of May this year.

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