I have read and heard the news of the impending government takeover or bailout of mortgage giants Fannie Mae and Freddie Mac. There are people applauding the move and those who feel otherwise. To the vast majority of Americans, we have very little understanding of how subprime mortgages and Collateralized Debt Obligations (CDOs) affected Fannie Mae and Freddie Mac to the extreme that it has, but fear not as we all can somewhat remember U.S. geography. Here’s the scene: I’m a Jeopardy! contestant and we’re playing the Double Jeopardy round. Host Alex Trebek asks for my next choice from the board. I see:
“Oh, My Fannie Hurts”
“Right Said Fred”
“A River Runs Through It”
I choose “A River Runs Through It” for $600……boop..boop…boop. “The answer is: 40% of the country’s watershed drains into this river.” I click away feverishly and my buzzer sounds first… boop…boop…boop… “What is the Mississippi River?” Whew.. I got it right. Then it dawned on me that the Mississippi River is not only the answer to that trivia question, but also — metaphorically — the answer to the problems with Fannie Mae and Freddie Mac.
To best illustrate this analogy between geography and mortgages, think of the Gulf of Mexico as the U.S. Government and its taxpayers, and the Mississippi River as Fannie Mae and Freddie Mac combined. Fannie and Freddie control or guarantee about 50% of the mortgage market and have numerous feeding rivers, streams and lakes (see accompanying map). Some are larger than others.
To begin our journey, the Mississippi River actually starts as a small stream flowing from Lake Itasca, Minnesota. The river initially flows north and then east as the means of connecting several lakes in northern Minnesota. Other larger rivers that empty into it are: The Red, Illinois, Arkansas, Minnesota and Iowa rivers, just to name a few. Let’s think of each river as a large regional or national bank and the feeder streams as risky mortgage instruments. The rivers empty into the Mississippi and into the Gulf, just as banks empty loans onto Fannie Mae and Freddie Mac (and now the U.S. Government). We also have polluted streams (risky mortgages) leading into the smaller rivers (banks). Now the rivers are polluted, but they empty into the Mississippi (Fannie and Freddie) and it brings the silt and dirt and sediment into the Gulf of Mexico (U.S. Government) for its final destination.
As with any river system, there are levee breaches and breaks along the way causing major, local flooding. A great correlation is the seizure of Indymac Bank. This was like the levee system breaching in an area and caused major — but, localized — flooding and billions of dollars to FEMA and the taxpayers. When Indymac collapsed, the FDIC stepped in and it cost billions of dollars to them and the taxpayers. Unfortunately, many “spin doctors” in NYC and D.C. could not correlate such a simple line-drawing exercise of polluting the streams, the rivers, and the Gulf. We have all heard the “too big to fail” rhetoric for years, but there is no such thing as too big to fail.
We may not all be stock and financial wizards, but a simple map of the U.S. and a little geography goes a long way in understanding why our financial system is so polluted. Remember Iron Eyes Cody crying on the TV ad, looking at a piece of paper floating in the stream? He was really looking at a subprime mortgage note and he was forewarning us 37 years ago.