Sunday, August 10, 2008

Just thinking out loud

Wells Fargo has a market cap of about $100 billion; Freddie Mac's is under $4 billion.
Wells Fargo has been well managed for years; Freddie, not so much.
Wells Fargo has long had a higher standalone credit rating than Freddie.

Might it make sense to allow a GSE to become a subsidiary of a bank? As I said, just thinking out loud...

3 comments:

Anonymous said...

For it to become a subsidiary, and be well managed, the parent company would have to have the authority to set policy. Policy could not be imposed on them from the outside. That is, the current mission could not be continued.

Among other things, no more subsidies designed to increase prices. No well managed private loan company would follow such a strategy long term, as it is not a sustainable business strategy. Its a recipe for eventual loan default when prices get too high.

A well managed company would never loan more than could be repaid, and would not loan more than a realistic value for the product (plus a safety factor).

Felix said...

The problem is that banks need to have capital of roughly 8% of assets. Let's say Freddie has $1.5 trillion of assets, that means Wells Fargo would have to increase its capital by $120 billion. You know where it might be able to raise that sort of cash around here? 'Cos I don't.

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