Cassandra's Reward

Via Dealbreaker and Alea, a fascinating look at Freddie Mac’s contribution to the housing bubble:

For two years, Mr. Mudd operated without a permanent chief risk officer to guard against unhealthy hazards. When Enrico Dallavecchia was hired for that position in 2006, he told Mr. Mudd that the company should be charging more to handle risky loans.

In the following months to come, Mr. Dallavecchia warned that some markets were becoming overheated and argued that a housing bubble had formed, according to a person with knowledge of the conversations. But many of the warnings were rebuffed.

Mr. Mudd told Mr. Dallavecchia that the market, shareholders and Congress all thought the companies should be taking more risks, not fewer, according to a person who observed the conversation. “Who am I supposed to fight with first?” Mr. Mudd asked.

In the interview, Mr. Mudd said he never made those comments. Mr. Dallavecchia was among those whom Mr. Mudd forced out of the company during a reorganization in August.

Well … who knows who said what to whom when. But I’ll bet that all the internal memoranda are made public with the next few years and will be very interesting.

Another revealing quote from the article is:

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

Um … demand destruction is the market’s role. Once a government gets into the business of distorting a market’s price signals, watch out! A recent example of the US government getting it right was leaving oil prices alone … they fell quickly enough when it became clear that US consumers were adjusting their behaviour to use less.

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