| Selling Insecurities |
16 June 2003
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Freddie Mac Under Scrutiny
The COO of Freddie Mac, a too-cutely nicknamed Government Sponsored Enterprise [GSE], has been forced out, and the organization is coming under scrutiny for misbehavior. This could make Enron and HealthSouth pale in comparison because of the nature of the entity's business. Unlike other scandals, this has the capacity to severely damage the US banking system.
Freddie Mac's purpose is to purchase mortgages from banks, bundle them up and sell off the bundles as mortgage-backed securities. They are popular bond-like investment vehicles among European pension funds and such. Enjoying the backing of the US government, this publicly traded corporation helps banks remove debt from the books and replenishes the supply of loanable funds. In short, it helps grease the borrowing wheels of the mortgage market.
The facts are unclear at this stage, and the investigation is too young to discuss the details. However, if Freddie Mac has not been run in an above-board fashion, if it has lied, if it has cheated, then those the investors who put their money into its stock will pull out. The GSE will not be able to do its jobs as well as it should. And that means higher bank risk.
The one thing the US economy can do without right now is a banking problem. Unfortunately, as Lenin said, everything is connected to everything else, and if Freddie Mac coughs, the US banks may catch cold. To this economy, that could develop into a full blown case of pneumonia.