A friend sent me an online video showing how poor regulation of Fannie Mae and Freddie Mac is to blame for our econ mic plight. Here is my reply:
Balderdash! Yes, Fannie Mae and Freddie Mac created the bundled mortgages that we call "securitized debt" or as I call them, "mortgage based assets" but the financial groups on Wall Street raised these to a size that went well beyond what the two quasi-government companies had envisioned. Worse, they did not create a transparent market in which a price could be established for them. So when a small uptick in foreclosures occurred, the analysts panicked because they had no idea how to properly include this in the valuation of the "mortgage based assets." In their panic they valued them to whatever formula they could invent and all the inventions were overblown doomsday scenarios. Net result, an economy in a tailspin.
Get off the fake valuations. A mortgage held to maturity yields a high return. If all defaults end in foreclosures the asset base will only deteriorate by 7%, ditto for current earnings. These fake valuations have devalued these assets by as much as 90%. There can be no recovery until they regain their true value.
Leo Cecchini
January, 2009
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