• You use this phrase twice, here and in the preceding graf. It's awkward and it doesn't tell us anything.

• What's the paradox?

• Sure. That's how negotiable instruments work. And so?

As a government sponsored enterprise, it is articulated in Fannie Mae’s charter that it must provide a certain number of loans to lower income (and higher risk) families as a service to the public. Abiding by its charter, Fannie Mae’s con included the securitization of loans for low income families who would almost certainly default, unable to meet the conditions of their mortgages . As we’ve seen, too much risk was taken, too many families had their homes foreclosed upon, and the housing market has been in crisis ever since. So where Fannie Mae stood to make or lose a large profit like any conman, it also ran the risks it did in order to serve a higher purpose of public good. Thus Fannie Mae’s business served both financial and social ends.

• No. FNMA was just doing what it was supposed to do, buying the loans made by lenders who were supposed to be finding people to lend to who would not default. Banks and FNMA had been cooperating for two generations, as you point out. Banks made loans that they regarded as good, reliable loans, and FNMA assumed the risks based on their business judgments. FNMA wasn't running a con. FNMA was gorged with risks by bankers who had stopped writing loans responsibly, because an immense private securitization industry had grown up which was willing to assume insane risks because it had found a way to sell those insane risks to fools. FNMA should have refused to play in the new world, but it couldn't do so without abandoning its charter, which you are right politics didn't want, so it gave up on caution, paid itself handsomely, and assumed they would have full faith and credit backing if the house of cards collapsed. On this last point, FNMA was right. But its sister agency's CFO committed suicide, not because he had been stealing, but because he couldn't deal with the pressure and the constant unrelentingly aggressive and morally condescending criticism.

• What changed in FNMA's structure? Nothing. What changed was the capitalist securities market, not the socialist housing finance insurance market.

• More relevantly, we are a nation of real estate speculators, which has been going through boom and bust, sell and swindle cycles, converting the continent from wilderness to crabgrass, making a fortune out of buying cheap and selling to the newcomers dear, for half a millennium.

• Why are we talking about what Veblen would say? At this stage in the draft, we need to be hearing about the implications of your idea. Instead we are hearing about the theories of somebody else.

• This conclusion depends on a proposition not proven, and which is wrong. There's no "inherent paradox" in the mutualization of risk. Life, disability and casualty insurance aren't cons: we can spread all the losses in the community so that reasonable contributions by everyone reduce the shock of catastrophe to the portion of the community that is fated to suffer one. Socialism is particularly effective at mutualization, but so is anarchism. Capitalism is partially hospitable to mutualization, as long as enough inefficiency exists to create a profit, and enough inequality exists for wealth to exercise political power. What went wrong just now was that capitalism also creates certain forms of criminal behavior (though in capitalist societies, of course, the behavior isn't criminal). Irresponsible parties knowingly create large societal risks in order to achieve large personal rewards. This is like knowingly operating an unsafe nuclear reactor near a city in order to make personal profit as the CEO of the company by selling cheap electricity, cornering the market, and then jacking up prices, operating unsafely all the while. But in general it's okay to do this in capitalism, unless you work alone. Madoff goes to jail, Angelo Mozillo may or may not do so, but Sandy Weill, Jimmy Cayne, Dick Fuld and--of course--Robert Rubin and Henry Paulson will be in no worse trouble than the harsh judgments of history may constitute. Madoff committed crimes; Mozillo was a manipulator; the others were captains of industry and wise public servants.

• So why all the concern for the federal mortgage guarantors? They were weak, they were unprepared, they were comfortable and a little corruptible, and they accumulated more risk than the society intended for them to run. Those are serious problems, but they aren't "inherent paradoxes." They're a minor scandal at the corner of yet another major proof that capitalism isn't healthy for people, and this is what we should be concerned about?

Fannie Mae and Our Social Psychology

I. Introduction

II. Leff and Fannie Mae

A. Fannie Mae’s Business

B. The Sale/Con

III. Social Implications

A. Home Ownership

B. What Would Veblen Say?

IV. Conclusion

• Leff's point having been that it is not analytically possible to differentiate sales from swindles in the fullest sense, it's not clear to me why you are attracted to the idea of the "con" as a relevant vehicle for analyzing the fates of Fannie Mae and Freddie Mac.

• Nor is it clear to me whether you can do what you intend here, because I cannot see how you stop the analysis before all those mortgages are further securitized. A market in which the other participants weren't building all those houses of cards atop the waterfall of money coming from people paying their mortgages would have been easier to unwind when the inevitable contraction came: the US govt as de facto guarantor of the national mortgage companies would have had some mess to clean up, but nothing on the scale of the present global panic.

• So to say that political pressure on the national mortgage companies to lend more to poor people is what caused the present problem seems more a political position than an analytic conclusion. Obviously we would not have had a bust without a boom, and in the boom times people further down the scale get credit. So the poor have always borrowed more than usual before the roof falls in, which doesn't mean it's the spendthrift irresponsibility of the destitute that causes the collapse.

• Seems to me what this draft needs is a clear objective. Teaching the fundamentals of FNMA to the street seems like the wrong aim, to me. So what is the point? If to prove that their over-aggressive guaranteeing of subprime and liar's loans caused the collapse of capitalism, hadn't we better define some terms and show the proximity of the causation? If to say something else about FNMA and FHLMC, what's the something?

Fannie Mae: The Con that Conned Itself?

-- By CarolineElkin - 27 Feb 2009

Section I: A Risky Business Example

Subsection A: Introduction

Government policies, like those carried out at Fannie Mae, were partially responsible for the mortgage crisis, contributing in no small way to the current economic downturn. And yet, Fannie Mae was created in the wake of the Great Depression to perform a public good, by increasing liquidity in the mortgage market and thereby enabling low income families to purchase homes. Later, it became a publicly traded company with a governmental mandate to serve the public. So the question arises: why would Fannie Mae participate in the dangerous subprime mortgage market and jeopardize the economy?

Subsection B: The Business Model, or the Fannie Mae Con

Leff says that the homo economicus requires that a con appear rational. Indeed, the lending model that (the government-sponsored) Fannie Mae operates seems a rational one: the mortgage lenders (let’s use Countrywide for this example) grant loans to families to buy houses. Depending on a family’s financial situation, there is more or less of a chance that they will default on the loan. Countrywide, not wanting to take that risk, sells the loan to Fannie Mae, who buys it at a discount for assuming the risk. This is profitable for Fannie Mae, Countrywide gets more money to lend, and other families can receive loans.

This is a similar script to the one in which Leff describes negotiable promissory notes. Nadir Notions buys its widgets from Acme Widgets and promises to pay later. Acme, wanting its money now, then sells Nadir’s promissory note to the bank. According to Leff, “[t]he bank takes over only one risk – insolvency of the borrower – and thus has no duty to learn anything about the honesty of those with whom their borrowers deal, or the quality of the things they sell” (p. 93). Fannie Mae’s profit depended on both its lender customers, as well as on the customers of the lenders, the families themselves. If Fannie Mae could examine the financial situations of the families whose mortgages it was securitizing, then presumably it could control its risk exposure.

Subsection C: Perpetuating the Risk to Serve the Public

In Fannie Mae’s case, it had a duty to learn about the risk involved in dealing with the lenders and new homeowners. As a government sponsored enterprise, it is articulated in Fannie Mae's charter that it must provide a certain number of loans to lower income (and higher risk) families as a service to the public. In 1999, the government urged Fannie Mae to securitize more loans for subprime (riskier) borrowers. Under pressure to more actively serve the public per their charter, Fannie Mae increased its subprime mortgage business. It was noted then that this practice may be safe during times of economic stability, but might not be so should there be an economic downturn. Unfortunately, that prediction came true.

Thus by abiding by its charter, Fannie Mae securitized loans that it knew would default. Like the Seller Misfortunes of forced bargaining that Leff discusses (p. 130), Fannie Mae operated a portion of intentionally unprofitable business. Like the misfortunate seller, however, this move also enhanced their profitability, since it came with the benefit of government sponsorship. So then in securitizing more loans certain to default, did the conman become a mark? If it was the mark, then was the government the conman?

Section II: Mark or Conman?

The answer to each question above is likely, no. However, thinking about Fannie Mae as a mark, and not only a conman, may help to show the potential vulnerability of a conman in such a scheme. While Fannie Mae was certainly motivated by the opportunity to make a profit like any conman, it also ran the risks it did in order to serve a higher purpose of public good. In that way, it bought into the scheme much like a mark would.

Subsection A: A Greater Good

We discussed in class that cons work because the conman makes its mark want to be a part of something larger. This con consisted of securitizing loans for low income families who would almost certainly not be able to meet the conditions their mortgages. But done in the light of making housing more affordable, it appealed to a sense of public good. It checked out for the homo economicus as well, in its rationally profitable operational scheme described above. I do not mean to portray Fannie Mae as a victim of its own script, I only seek to point out the ambiguity of the roles it played for our social and governmental system.

Subsection B: Consequences

The Leff reading shows us that there is no real way to know if something is a con or an honest business. If you cannot tell if you are playing the role of con or mark, then how do you know if you are fooling yourself into creating a new greater good to justify your choices? In Fannie Mae’s case, we as a society favored fueling the housing boom with risky investments, and as a result the con failed with widespread damaging consequences for our economy. It is troubling to me to think that our society did not foresee the harm that ensued to prevent it. What does this mean about our potential to repeat our past mistakes? Personally, we can attempt to avoid the cons through self-awareness and vigilance, but how can we organize our society to do the same? Frustratingly, I do not think we have an answer.

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