When PrezBo shows up to introduce an event, we figure that event is deserves some attention. When the event is full several days before it happens, we start to wonder if it could possibly be a better way to spend our Tuesday evening than reading “The Illiad” for the third time. And when the event’s moderator describes it as, “more interesting than Lady Gaga or whatever” – well, we definitely want to drop that slice of pizza, grab an antisocial roommate, and run over to the Low Library to check it out. Incoming Bwog Daily Betsy Ladyzhets brings you all of the facts of the Wall Street Journal with none of the nauseating scrambling for prose of the Wall Street Journal.
Last night’s panel on Fannie Mae and Freddie Mac, entitled “The Big Problem from the Financial Crisis that Still Isn’t Fixed,” while not more aesthetically intriguing than Lady Gaga’s most recent fashion choice, was both interesting and informative. The event had a dual purpose: first, to educate Columbia students on the importance of government-sponsored enterprises in our current economy, and second, to promote “Shaky Ground,” Bethany McLean’s new book on the subject, released today by Columbia Global Reports.
Before we go any further, allow me to introduce the main players in this drama:
- Nicholas Lemann: the discussion’s moderator; one of Columbia’s deans; a professor of journalism; and the director of Columbia Global Reports (a Columbia-run publishing house that aims to produce nonfiction novellas on important global topics that the news doesn’t cover)
- Bethany McLean: an investigative financial journalist; the author of three books on the subject (including her newest, the one introduced at this panel)
- Franklin Raines: the former chairman and chief financial officer of Fannie Mae; the former White House budget director (under Bill Clinton); once was featured on political advertisements alongside old women cowering at the concept of his financial power
- William Ackman: a hedge fund investor and analyst; currently holds a significant amount of Fannie and Freddie stock because he believes this stock will go up; loves hearing himself talk
- Fannie Mae and Freddie Mac: very large government-sponsored enterprises (GSE’s) responsible for controlling America’s housing market; essentially, big companies with a lot of revenue and practically no capital; currently controlled directly by the US government; together, they make up the largest financial institution in the world
- Brad and Angelina: alternative names for Fannie and Freddie, suggested at one point in the discussion by Mr. Raines (Personally, I would have gone with Alexander and Elizabeth, but Raines’ choice does have a certain pop-cultural appeal)
- The US Government: very bad at handling money
Now, the situation, as I gathered from the discussion, is as follows: several decades ago, the US government created Fannie Mae and Freddie Mac with the intention of making homeownership more accessible for average, middle-class Americans. The companies were government-sponsored, but privately owned by millions of shareholders. They sponsored something called the “thirty-year pre-payable fixed rate mortgage,” which enables homeowners to pay off their mortgages over the course of thirty years with fixed interest. This all worked fairly well for a while, with the companies slowly gaining credit both internationally and domestically – and then, the financial crisis hit like a truckload of elephants. As you might infer, financial crises are not good for housing markets, and not good for housing markets is definitely not good for companies that run housing markets.
The US government decided to help Fannie and Freddie out using a tactic that worked for other large companies in the past: it made Fannie and Freddie into conservatorships. Usually, a conservatorship is a failing company briefly controlled by government officials until it can recover and run by itself, the investors get their money back, and all is well. However, when the government took over Fannie and Freddie, it seized all of the company’s stocks and claimed all of its revenue for itself.
So, Fannie and Freddie have been conservatorships for seven years, and all of the companies’ investors lost all of their shares. Yeah. Mr. Ackman called this government act, “the most illegal act of scale I’ve ever seen the US government do.”
Currently, the companies are still controlled by the US government, and much of their revenue goes into federal projects, such as decreasing the deficit. Plus, since most of this revenue comes from homeowners, the government is essentially collecting additional taxes without officially calling them taxes. Meanwhile, the companies themselves are run by complex, slow-moving bureaucracies that can’t easily compete with aggressive Wall Street corporations. And the government is unwilling to change its policy, because getting Congress to agree on anything these days is harder than getting two two-year-olds to share a single homemade chocolate chip cookie. And, as though that isn’t enough, the current dialogue in Washington blames the recent recession solely on these two companies, so mentioning them in a positive light is akin to drinking political poison.
Basically, this issue is incredibly messy and incredibly important to the US economy, but none of the current presidential candidates have even mentioned it yet. Most Americans barely know that the issue exists, let alone why and how it’s an issue. There’s a not insignificant chance that this is another big thing us millennials will be saddled with – add it to the list, right beneath global warming, budget deficit, and paying for wifi.
But don’t call your mom wailing about the imminent degradation of the American housing market just yet – it’s not all bad! There’s hope! The panelists discussed a variety of possible solutions to our current problem, from negotiating a deal with investors that makes Frannie and Freddie once again privately owned to, well, re-branding the companies as “Brad and Angelina.” Although they didn’t agree on many ideas, they all seemed optimistic that this issue is something the new administration could be able to handle successfully. Surely the housing market will be running smoothly sometime in the next hundred years or so.
This panel aimed to educate Columbia students on a major problem in the US economy, and it certainly did that. I, for one, went into the Low Library with no knowledge of what Frannie and Freddie even were, and left convinced that this is one of the most important financial issues of the day. However, I think the panelists could have done a lot more in terms of making their discussion more accessible to the average Columbia student. They mentioned many important financial concepts without pausing to define them, seemingly automatically assuming that everyone in the audience knew what they were talking about. For example, when Ms. McLean said that GSE’s are “strange mixture of Monty Python and Shakespeare,” I was definitely intrigued, but I had no idea that GSE stands for government-sponsored entity until I Googled it later.
The panel’s secondary goal, which it also achieved effectively, was to promote Ms. McLean’s new book: “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants.” It describes this issue in much more detail and in a way that’s understandable without a degree in finance, and is recommended reading for any Americans who hope to buy a house at some point in their lives. Go check it out sometime in between doing your thousand pages of reading for class.
And finally, one additional message of hope from Mr. Ackman: “Don’t worry, you guys won’t have to pay back any of these student loans … Because when you start protesting that you can’t afford the interest they’re charging you, the loans will be forgiven!” Oh, Mr. Ackman. If only it were that simple.
Portrait of our parent’s fears, via Shutterstock