Danny ChaiPreface: as I frequently say, I took zero econ classes in college. So this may be completely ignorant.
No one cares, but all of our retirement savings are in index funds, and all of our other savings are in short term bonds and money market accounts, since we’re still (maybe vainly) hoping to use it relatively soon. I have a tiny little bit in an eTrade account I’ve had since before we were married that I never replenish, it’s kind of to play around with.
In late 2005, I took a short position on Fannie Mae when it was at $47. I did the analysis, and what they were doing made no sense; they were basically lending to anyone. It was only sustainable if housing prices kept going up. If they dropped, everything would collapse. For conforming loans, the banks were just middle men, and it made sense that Fannie Mae would bear the brunt of the pain from defaults. I guessed then that housing prices would be dropping soon, so I shorted them.
My timing was way off. Their stock price didn’t drop at all, it kept going up and up and up (along with housing prices in general), for years. I finally got sick of it last summer and covered my position when it was at $64, just to be done with it. I still knew it was going to fall eventually, but I was tired of waiting, and wanted to use. Whoops. Shortly thereafter, the housing bubble peaked, and FNM’s share price started it’s crazy descent until, as of now, it’s at around $10.
The lesson: when you’re an amateur (like I am), don’t mess around with timing markets. Especially when it comes to shorting stocks. My reasoning was absolutely sound, but that doesn’t matter. Leave timing to the experts.
But my reasoning was sound, and to be honest, this whole Fannie Mae / Freddie Mac things upsets me. I’m not a financial whiz; I don’t spend enough time reading about it, and I frankly don’t really care enough. But smart people were criticizing them long ago. Like read this CNN article from 2005, where Greenspan harshly criticizes their business practices. That article is worth reading because everything Greenspan said is basically happening now. The writing was on the wall long ago. (SN for the zero people who are still reading – I did some research and found that the majority of bond funds, especially conservative ones, are dominated by GSE-backed bonds. I’ve been so bearish on them for so long that I moved all of the retirement savings we have in bonds to GSE-free ones long ago.)
What gets my goat is, they long chafed against government regulation of their practices, partly with the claim that “its financial prospectuses ‘clearly state that the U.S. government does not back the company’s debt instruments.'” Except that everyone had the implicit understanding that if they did fail, the government would bail them out. And that’s pretty much what’s going to happen.
That’s what gets me. If they don’t want to be regulated, fine, as long as when they fail, they only hurt themselves. But I’m going to be affected as a taxpayer when they get bailed out, and that sucks. Furthermore, they built up their portfolios so large that a government bailout is necessary – they’re too big to just fail, it would devastate the whole system.
And that’s what I feel is another thing that’s naive about the libertarian view against all regulation. At a certain point, when financial institutions get too powerful, their failure doesn’t affect just them, but the whole system. So it makes no sense that they’re not regulated. Like if Fannie Mae and Freddie Mac were given much lower portfolio limits and not allowed to make the risky loans it did, things the Fed recommended long ago, it wouldn’t necessarily have prevented the housing bubble, but it might have made it less severe and certainly have limited the extent of government intervention now.
On a related note, it’s crazy to me how hedge funds are largely unregulated. Again, if their failure only affected themselves and their investors, I’d have no problem with it. But they have crazy power that can even affect nations: Krugman says it’s almost certain that there was a financial conspiracy by hedge funds against Hong Kong, Australia, and Iceland. I’m sorry, but when you’re influence is that broad, there needs to be some regulation. For Iceland. Iceland!
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