A First Class Ticket on the Titanic

A First Class Ticket on the Titanic

As I mentioned in my return post, I have now taken a full-time job at Fannie Mae.  When I tell people this, I usually get a queer look and a question.  My favorite of these questions is, “Isn’t that a little like buying a ticket on the Titanic AFTER it hit the iceberg?”  It’s a great analogy, but one that needs a little background.

What Was The Iceberg?

Fannie Mae (like most of the Mortgage Financing Industry) was built on the assumption that few houses, if any, ever fell in value and that most people who took mortgages paid them off.  When those assumptions proved incredibly false, we lost a LOT of money.  In fact, only twice has a US company has ever lost more in a year than Fannie Mae did in 2009.  There is a lot of blame to go around here; Congress had been unclear for years on whether or not they guaranteed Fannies debt, we had government mandated restrictions on who we could lend to and how much, banks were doing a horrible job vetting creditors, etc… Ultimately though, we had promised more money than we could pay and that left the company on the verge of bankruptcy.

It Didn’t Sink Because You Got a Bailout, Right?

The short answer is yes.  The longer answer is that the government took about 80% ownership of Fannie Mae in 2009 and allowed us to dip in to the Treasury to remain solvent.  At the end of the day we pulled nearly $117B out of the Treasury just to remain afloat.  In 2012 (as Fannie was becoming profitable), the government put in place rules that require us to send nearly all of our profits directly to the government in the form of a dividend.  We’re also under conservatorship, which means that a government regulator monitors our every action.  So we may not be actively sinking, but we’re floating around with no power and no water.

You Can’t Just Float Around Forever, What Happens Next?

Isn’t that the $117B question!  Fannie Mae is profitable today.  Last quarter we made more money than we ever have.  In fact, if you count the $40B+ of accounting income that we stated in Q1, we had the largest quarterly income by any company, ever.  To date, we have paid over $90B to the government in the form of dividends and sometime next year we’ll likely have paid them an amount equal to the $117B we had to draw.  Remember it’s not a loan though, if nothing changes, we will continue to pay the government nearly every penny we make in to perpetuity regardless of how it compares to $117B.  That’s not likely though, our government isn’t in the business of running businesses.

There are a bunch of things that could happen to Fannie Mae.  It could exit conservatorship and become a private company again (interestingly, some shareholders of Fannie have sued the Treasury, asking that Fannie begin returning profits to investors).  This is unlikely for a variety of reasons, the most glaring of which is that we are still susceptible to a catastrophe like 2008 and without Federal Backing we are probably not a company many people will want to capitalize.  The government could just pull the plug on Fannie.  That’s unlikely because of the effects it would have on the housing market.  The most likely scenario is that Fannie Mae begins to break up with portions of the company going in to the private sector (either by being acquired or spun off) and portions becoming government services (primarily a guarantor function similar to the FDIC).  This approach was outlined in a government white paper back in 2011.

So It Is Like Buying a Ticket on the Titanic?

Yes, in that Fannie isn’t likely to be what it is today in 5-10 years.  No, in that this fact does NOT doom me to freezing to death while I hold on to a piece of drift wood.  If Fannie Mae is going to change forms without causing the housing industry to collapse, there is a LOT of work to be done.  We need to modernize our IT systems so that they have more value.  We need to build new systems and modify old ones to match the new model.  We need to rationalize our organization, our processes, and our technology to meet the challenges that await us.  It’s not unlike working for a startup that you expect to pivot or be acquired.

Much like working for a startup that gets acquired, there will be opportunities all over the place.  There will (very likely) be parts of the organization that get spun off or sold with all of their employees gainfully employed at the new adventure of setting up a new company or merging with an existing one.  There will be new firms that startup to compete in these spaces and old firms that add divisions to compete and they will need knowledgeable employees.  There will be firms that are established to provide services to those firms.  And, as always, there will be firms that can use the technical skills I’m leveraging here at Fannie as a consultant or as an employee.

Overall, I believe the opportunity that Fannie gave me and the opportunities I expect to get out of my time here are exciting, even if I might get a little wet before I get to the promised land.