15 July 2008 | Forecasts proved right

Freddie Mac – when are you coming back?

What my book Why is construction so backward?, written with Ian Abley, said four years ago about today's financial crisis in the US

’In the second quarter of 2003, General Motors earned three times as much from selling mortgages as it did from selling cars. [1] And over the much longer period 1995-2003, America’s 50 top banks raised the share of their portfolios held in mortgage-backed securities from 47 per cent to 62 per cent. In so doing, they exposed themselves to the dangers of what Business Week called ‘refi-madness’ –– US consumers’ willingness to refinance their affairs by borrowing more on their homes with the help of declining interest rates. [2]

‘Those financial institutions that have offered cheap loans on property have received an enormous and much-needed boost to profits. In June 2003 it was revealed that one of the largest of such institutions in the US, the Federal Home Loan Mortgage Corporation, popularly known as Freddie Mac, had indeed deliberately understated its profits by billions of dollars. Why? It wanted to keep profit levels smooth beyond the early years of the new millennium –– so fearful was it of the risk of a later property crash and ensuing profits collapse.’

[1] Dan Roberts, ‘Depressed profits, flat demand and growing pension liabilities: the era of cheap money takes its toll on business’, Financial Times, 21 July 2003, p15.

[2] ‘High anxiety for banks’, Business Week, 9 June 2003, pp48 -49.