Fall of 2002 to mid summer of 2003 I worked for a small (less than $200 Mill assets) community bank. I consulted with them on wholesale sub-prime lending, set up a top notch HELOC program, advised on financial structuring of the holding company and additional related business lines I thought should be acquired. I also managed a branch office so they could move out a manager to a different position. I believe it was in the January officers meeting I made the suggestion that the bank should divest its self of 100% of the Freddie Mac stock in our portfolio.
I was openly ridiculed in that meeting.
My reason for my advice was: 1.) Freddie Mac had advised us that they would be offering additional shares in place of cash dividends. 2.) Fannie May was involved in accounting scandals and it was rumored that one of their defenses was going to be that they had copied Freddie's valuation of earnings technique. No dividends and a good chance the stock was going to take a dive, motivated my sell recommendation.
Reason number 1 had a couple of substantiating points, one since the stock wasn't providing us with dividend payments it failed to meet an established investment criteria of the bank and two the bank had never in the 30 some years Freddie Mac had been in existence sold a loan to them. That last point is a little know banking trivia fact. Most banks own a chunk of Freddie Mac stock because stock ownership is a requirement for the bank to be able to sell loans to Freddie. There is a formula that is used that works out a ratio of stock shares owned to the dollar amount of mortgage loans Freddie will buy.
Unknown to the general public is the fact your local community bank does this so they can sell loans to raise cash on short notice. This is unknown because the local bank normally keeps the servicing rights to those mortgages, and collects about 25bps for servicing the loan.
Freddie is in the crapper and most people have no idea why that is a bad thing. If Freddie goes its going to put the hurt on a lot of little community banks that people think are safe. Oh and the FDIC that susposadly insures your deposits, they have $53 billion in cash to pay claims. There are over $6.84 trillion in deposits and the Indy Mac bail out is going to need $8 billion. Most of those deposits are at risk for a variety of different reasons. For more reasons why the US banking system is on the verge of a big melt down read Mish.
If you want a non-acedemic explaination of whats gong on, I suggest you buy a copy of the Pheromones "Yuppie Drone" ablum and listen to Money Go Round.
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