The Economist

(P.S. I wrote this a couple of days back but didn't post it
cos I was trying to find more things that I disagreed with.
Turns out they're hard to find. It's the Economist after all)


I dun like it when I disagree with the Economist.
After all, they are "The Economist".
I'm just a nobody.
But I can't agree with some things.


July 2008 - on FNM and FRE
"Howard Shapiro, an analyst at Fox-Pitt, an investment bank,
says [Freddie and Fannie's] average loan-to-value ratio at the end of 2007 was 68%;
in other words, they could survive a 30% fall in house prices."

Not that I wanna poke holes in his analysis.
BUT, this is merely an average. We dunno the distribution.
Ie, the majority cld be bad loans LTVs are 80%
offset by a few very good loans with LTVs say in their 20% - 40%.
Which can give u a not so bad looking number of 68%.
(and this is not far from the actual case, recall tt Fannie held close to some $300b Alt-A mortgages out of an overall portfolio of say $700b, Alt-A being a euphemism for near junk.
we dun even have to talk abt subprime here.)
Ie, wad I'm saying is that for a given 30% drop in housing prices, the loan pool as a whole is likely to be under-collateralized.

Sadly, in it is the nature of the crisis that the bad loans go bad first (duh!).
And they have gone rather bad.
Home prices had gone under more than 30% and some pools were just way way way under-collateralized.

F&F's high gearing made it much worse.
And looking thru the rear-view mirror we know those 2 got screwed.
So dun be fooled by numbers so easily.