The Biggest Losers: Fannie, Freddie, Greece, The Euro and the Markets

By Dr. Craig Pirrong
Freddie Mac (FRE) has just gone back to the Federal trough for $10.6 billion. And it and Fannie (FNM) will be back for more–lots more–in the months and years to come.

The F&F losses are the biggest suffered by any firms as the result of the real estate crash, dwarfing AIG’s losses, for instance.

The fact that F&F’s losses were bigger than anybody’s demonstrates, quite clearly, that their exposures were probably the biggest as well. Although many, including many liberal-leaning economists, defend the firms from charges that they were culpable for the real estate bubble and subsequent crash, their outsized losses indicate that they were certainly a major contributor, if not the sole cause.

They need to be put out of their misery. Razed, and the ground sown with salt. The entire model must be so discredited that no one ever even dreams of resurrecting it. It is the most classic example of how implicit guarantees reduce funding costs and permit leveraging up to massive size while taking on massive risks.

But Congress appears to have little appetite for putting the Biggest Losers on a path to extinction. There is a Republican bill floating around that would have that effect, but its prospects are dim at present. Outrageously, the Dodd bill, like the Frank bill before it, does absolutely nothing to rein in their Frankensteins. (Or would that be Frankendodds?)

Given what happened in the market yesterday, “Biggest Losers” has other meaning too.

First, the market crash and rebound. Too early to tell yet, although initial reporting suggests that huge moves in P&G (PG) and Accenture (ACN), perhaps due to mistaken trades or mistaken quotes or mistaken prints, touched off a panic; the market was already as jumpy as a cat on coke given the European tumult, and this was sufficient to set off a collapse. No doubt that computerized trading contributed to the precipitous drop, but I would also surmise that the near immediate rebound (which brought us back to a mere 4 percent loss on the day, up from 9 percent) was computer driven too. I am sure that the quant signals indicated that the market was mispriced and this triggered a flood of automated buy orders. We’ll see how this plays out.

Second, Greece. I personally think the Europeans are crazy to bail out the Greeks. It will not address the long term problems that Greece, and the other PIIGs face. Indeed, given asynchronous performance required–the Greeks get the money today, and have to promise to go on a really, really strict diet tomorrow–it is a recipe for a repeat performance in months or years. Yes, I understand that a Greek default or restructuring would impose serious hurt on French and German banks, but it is better for the governments of those countries to deal with that fallout directly rather than taking actions that will at best delay the reckoning, and make it worse when it comes.

Insofar as the euro is concerned–another Big Loser in the short run and the long. It is down to around $1.26 right now. (It’s an ill wind that blows nobody good: I’m short the euro because I’m traveling to euroland next month.) But the entire Greek fiasco, and the looming threat of similar problems in Italy, Spain, and Portugal, put the long run viability of the entire project in jeopardy. I don’t think it is salvageable, or worth saving.