Jun 18, 2018

Nick Timiraos on the History and Economics of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are two important GSEs that have a long and controversial economic history dating back to their inception.
David Beckworth Senior Research Fellow , Nick Timiraos

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Nick Timiraos is a national economics correspondent for The Wall Street Journal and covers topics relating to the Federal Reserve. He also covered the housing bust, and the government’s response to the mortgage crisis during the financial crisis. Nick joins the Macro Musings podcast to discuss the long and controversial history of Fannie Mae and Freddie Mac.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu

David Beckworth: Nick, welcome to the show.

Nick Timiraos:  Thanks for having me, David.

Beckworth: Nick, as I do with all my guests, tell me how you got into economic journalism.

Timiraos: Well, I was always interested in journalism. I got a job at the Wall Street Journal and became interested in the economy just by virtue of working at the Wall Street Journal. As you noted, I covered the housing beat from the beginning of the blow up at the end of 2008 through 2013, 2014. So Fannie Mae, Freddie Mac, all of the housing, alphabet soup emergency relief programs. Then from there, moved to Washington to cover treasury and fiscal policy, and now the fed. So I've been a student of a lot of this. It's not something I expected to get passionate about, but I am now.

Beckworth: I'm curious. How do you get a job the Wall Street Journal? Do you just go from school and Wall Street Journal because that seemed to be a terrible plan.

Timiraos: I was lucky. I was lucky. I had applied several times for an internship with the Wall Street Journal and several times, didn't hear back. But then one summer, I had an internship with an editor who was fantastic who used to work at the Wall Street Journal. She still knew people who were at the paper. So she was able to make a few phone calls and at least make sure they would read my resume. For some reason, they were willing enough to give me a chance. So I had an internship at the paper 12 years ago, and I've never looked back.

Beckworth: All right, so there's hope for all the aspiring economic journalists who are listening to the show today.

Timiraos: There you go.

Beckworth: Nick is your role model here.

Timiraos: Even if you get rejected apply again and again, because that's what I did.

Beckworth: Very nice. Now, you covered the housing market during this crisis as you mentioned. We want to focus on that. I just want to give you a few facts about the housing market I put together for this show. This is based on the Urban Institute's Housing Finance at a Glance Monthly Chart Book, it's a report. I highly recommend it. We'll provide a link to it on the show page at SoundCloud but they provide a lot of monthly updates on housing facts.

Beckworth: So let's start off with the total size of the national mortgage debt market, there's 10.6 trillion in debt. They say the total value of housing is about 26 trillion. So there's 15 trillion in equity. Just put that in perspective, the size of the US economy is about 20 trillion right now. So US nominal GDP, the dollar size is 20 trillion. We have mortgage debt about 10.6 trillion. Maybe if it's helpful also we can compare that to the size of the marketable treasury debt which is 14.9 trillion.

Beckworth: That's the treasury debt that actually is consequential, not to be confused with I guess 20 trillion total debt. But the amount that the government actually has to pay on the outside of itself. So we've got mortgage debt about 10.6 trillion now, two-thirds of that securitized and the GSEs, the agencies run most of that which is about 6.4 trillion. So we have a large mortgage market, it's largely securitized. Fannie and Freddie are the largest players in this market. Now, maybe before we get into this, and we want to get a little bit into the history and what's happened in the crisis moving forward, maybe you can help us out with some of the definitions. I know our listeners probably know these acronyms, this alphabet soup, as you said, quite extensively. But could you go through that the important institutions, their names, and then their acronyms?

Timiraos: Yeah, so GSE stands for Government Sponsored Enterprise, which underscores kind of the murkiness of their relationship because what is a Government Sponsored Enterprise? But anyway, GSE has stuck. The important counterpart to the GSEs is the FHA, which is the Federal Housing Administration. They are similar to Fannie and Freddie, but they are different in that they are actually a government agency, the GSCS are OR used to be privately-traded companies.

Timiraos: They're still kind of notionally traded. We can talk about that. But they take mortgages, they guarantee them, they issue them as securities. So there's a large operational structure there. Then there are some mortgages they guarantee where they also have more mortgage insurance, private mortgage insurance purchased. FHA, which is about a quarter of the market today is basically a mortgage insurance, a government mortgage insurance company. FHA and VA, which also insurance mortgages, and USDA, which ensures some rural housing loans, they take their loans. They issue them through securities, Ginnie Mae, which is a government Corporation.

Timiraos: So Fannie and Freddie are technically private, though they have these government ties. Ginnie Mae, which includes FHA, VA loans and so between Fannie, Freddie and Ginnie, that's most of the mortgage market today, probably 80%. The other 20% would be bank balance sheets because we really don't have private competitors to Fannie or Freddie or Ginnie. Then you also have the federal home loan banks, which they're a source of financing for depository banks, that make mortgages.

Beckworth: Okay, so if I'm getting a mortgage, maybe to make this concrete from the consumer side, I go to my bank, maybe to a mortgage company just as mortgages. They originated, they issue the mortgage, many of them from what you're suggesting, don't actually keep those mortgages on their balance sheet. They pass them off or they sell them.

Timiraos: That's right. Yep.

Beckworth: So why do that? What's this business model?

Timiraos: That's a very important distinction. So when we talk about in the mortgage market today, we're mostly talking about the secondary mortgage market, the market for buying and selling loans that have already been made. Consumers really are never going to experience that market. The only way you might experience it is, let's say you go to Wells Fargo, or more likely a small bank, first home mortgage. You get your mortgage from them. A few weeks later in the mail, you get a letter that says, "Your mortgage has been sold to Fannie Mae or Freddie Mac."

Timiraos: If you get a conventional mortgage $450,000 or less, maybe a little bit more in high cost areas, there's a very high likelihood that's going to happen. You'll probably forget about the letter because we're going to continue to send your mortgage payments every month to a bank. The bank does not own your loan most likely, they are just a service or they're just a payment processor for the secondary market institution which is most likely Fannie Mae or Freddie Mac. So that is how the mortgage market is operated really for at least the last 30 years.

Timiraos: We kind of have this idea of like, it's a Wonderful Life. The Bailey savings and loan, I'd send my mortgage payment every month to JPMorgan Chase. They own my mortgage. No, actually they don't. Your mortgage is in some pool. The payment, a fraction of your payment is going to some bond investor or pension funds, sovereign wealth fund. It's a fascinating dynamic in that global capital is financing American mortgages which really doesn't happen in too many other countries,

Beckworth: Which is both good and bad. I mean, the good is I'm not constrained like someone in It's a Wonderful Life. They literally depended upon their community to fund their mortgages, right?

Timiraos: Yes, yes.

Beckworth: Today, I can depend on some person in China, someone in Europe, somewhere in South America. Literally, as you mentioned, a little sliver of my mortgage is owned by many investors around the world, right, pieces of it. Which is nice because there's a bigger pool of funds for me to draw which means probably cheaper mortgage.

Timiraos: You pay less. Your mortgage rate is lower, and yet again back to the community funding your loan. So if you go back and look at mortgage rates in the 1950s and 60s, borrowers in Dallas could pay something different from borrowers in New York. Today, we have a nationalized mortgage market. So you're paying the same thing no matter where you are. That's probably been all to the good for the American homeowner.

Beckworth: Yes, so banks originate mortgages it sounds like just for the service fees, the business of doing that. They don't actually make their money by being in a financial intermediary, holding onto the loan. So they're getting their money that way. I guess I also have the incentive to get that mortgage off their balance sheet because it's risky. They have to have regulatory capital they have to hold for it. So they have a reason to get rid of it. We benefit from it. We'll talk about maybe in a few minutes why though this also put, create some potential dangers because if there is some kind of problem, you have this huge chain between the homeowner and the actual owner of the mortgages. But let's go back there a little bit and just do a quick history maybe. Talk about this. You mentioned we have a national market for mortgages which we didn't have in the early 1930s. It's a Wonderful Life scenario. So how do we get to this point? What's the evolution of the US housing market?

Timiraos: Well, really goes back to the Great Depression. You had before the Great Depression, you really had balloon payment loans. So a five-year mortgage and the payment would be either you'd have to refinance, roll over the debt after five years or pay it in full. You had a huge amount of foreclosures during the Great Depression. So the government in 1934 creates the Federal Housing Administration, which is created to make loans. These are government guaranteed loans, they're not originally 30 years. They would later become 30-year duration. The initial ones were closer to 20 years. So they are created to help develop a standardized mortgage market. The problem is there isn't anybody who's willing to buy these mortgages.

Timiraos: So the government decides to create another entity which is Fannie Mae. Fannie Mae comes along so that the originators of FHA mortgages can have someone that will buy them. That ends up being the mortgage market that exists for the next 30 years. You have Fannie and FHA, which are purely government entities at this point. Then S&Ls continue to finance thrift-

Beckworth: So S&Ls, what are S&Ls?

Timiraos: Savings and Loan institutions, thrifts, banks are financing a lot of mortgages. But FHA and then later the VA, after the GI Bill in 1946, we basically decided as a country, "All right, veterans are going to have access to their own FHA like mortgages today." The VA allows for 100% financing, no down payments. Even though everybody has this idea, "Geez, isn't that terrible thing, no money down?" We've decided as a society, that's something, if you've served the country and wore a uniform, we should have that. So that is the early modern US mortgage market.

Timiraos: In 1968, so politics is of course, a huge part of the story of our mortgage market. In 1968, Lyndon Johnson is trying to finance his domestic spending program, the Great Society, he's trying to pay for the Vietnam War. He's trying to come up with money somewhere to finance all of this. He sees Fannie Mae and he says, "Well, wait a minute. What is this doing here? Do we need this on the government's books? Let's privatize it." Fannie Mae over a several year period is kind of shorn of its government ties.

Timiraos: It's moved into the private sector though it still has these kind of nebulous government links that are going to exist for really the next 40 years. That's going to be Hank Paulson's problem in 2008. The government creates Ginnie Mae to play the role of purchasing FHA mortgages. Then in 1970, different housing laws passed to create a competitor for Fannie Mae which is Freddie Mac. So these are now two privately-owned government chartered companies, and they are also the act that creates Freddie Mac also allows for Fannie and Freddie to purchase conventional mortgages.

Beckworth: Okay. Well, that's interesting. I didn't realize Lyndon Johnson is the reason or the the catalyst that pushed Fannie May off the government's balance sheet. But it's interesting, all these repercussions, you have one set of policies that spills over to other policies. The Great Society leads to Fannie Mae, maybe Fannie Mae in any event would have come off at some point. But this definitely hastened it and made sure that it happened. So you have this this national mortgage market created by these government institutions that become private, as you mentioned. So that's a key part of the story. Then the other part of the story is the admin of securitization. So I know this happens in the 70s and the 80s. Can you touch on that a little bit, how that comes about?

Timiraos: Yeah. So if you talk to Lou Ranieri, who's a financier, he's considered the godfather of the mortgage backed securities market. He was somewhat vilified after the crisis because people said, "Oh, securitization was this terrible thing." Well, no, it's not a terrible thing. It's a good thing if you use it properly, right? If you put mortgages into securities that have been mispriced, then bad things are going to happen. That was what happened. But securitization itself it's not like some doomsday structure. If you look at what was happening in the United States in the 1970s, you have the baby boom coming of age. I talked to Lou about this many years ago.

Timiraos: He said, "We weren't coming up with securitization just so that we could trade some new security. We had all of these people coming of age that we're going to need to buy homes in a banking sector that didn't have enough capacity to finance all of these mortgages that were going to have to be made." So we came up with this structure that allowed for a different source of funds through capital markets to finance American mortgages. Freddie Mac is the one that first begins to issue, take loans and issue mortgage-backed securities, as well as Ginnie Mae. So Ginnie and Freddie are kind of first into the securitization game. Fannie Mae gets involved later, and that is because they nearly fail in the early 1980s.

Timiraos: The same problems that the savings and loan institutions got into trouble with kind of interest rate problems where there, the costs they are having to pay to their depositors was rising beyond what they had had planned after Volkers fighting the Great Inflation. Well, Fannie Mae gets into trouble first. I mean, they nearly they nearly blow up in 1981. So they later get into this, David Maxwell becomes the CEO of Fannie Mae, and helps them clean up their interest rate problems, and securitization becomes the vehicle to do that.

Timiraos: So what is securitization? You're taking a pool of mortgages. In the case today, the way this works with Fannie Mae and Freddie Mac is Fannie Mae and Freddie Mac provide a credit guarantee. So there's two types of risks that you're taking on when you invest in a mortgage. One is that the borrower is not going to make their payment and the other one is that interest rate volatility is going to change the value of the income stream that you're depending on, there's kind of a third risk. If you buy a corporate bond, you still have interest rate risk, you still have the credit risk, but you have a different prepayment risk with mortgages, this idea that if rates drop, all the loans are going to refinance. So you're going to have your money back when interest rates, you're not going to have as much yield anymore.

Timiraos: So that's kind of where securitization comes in. Fannie Mae and Freddie Mac provide a credit guarantee. They say that if this loan defaults within 120 days, we will buy the loan out of the pool. They bake the investor hole on the underlying mortgage. What that has enabled is there are a lot of investors out there that are willing to take on interest rate risk. We know it. We can price it, we can model it. We know what prepays are. You make your assumptions about how many borrowers are going to refinance if rates fall and if rates rise, you know what your returns are going to be. But they're going to have to charge even more to assess the credit risk.

Timiraos: So by taking the credit risk away, Fannie Mae and Freddie Mac enable a much larger pool of potential buyers, foreign investors, pension funds that are, "Hey, we know interest rate risk, we can do that." So that's kind of the role that Fannie Mae and Freddie Mac play. They have this plumbing that takes the loans, pools them, securitizes them, issues them as securities, and then they're also just giant mortgage insurance companies because they're taking on the credit risk. In addition to the credit risk, I'd say that the other important and often ignored function they play which makes mortgages much cheaper for Americans is they have standards. So everybody who invests in an agency mortgages it's known, they know what the rules are going to be if the borrower defaults, all of the different standards are homogeneous.

Timiraos: So investors Of course like that, right? They like having certainty. The rules are going to be enforced. There's this master servicer in Fannie and Freddie that's going to make sure that everything performs the way the contract says it does. If you look through the crisis we had in 2008, the private competitors to Fannie Mae and Freddie Mac, pools issued by countrywide or Lehman, that market is still dead, it has not come back. The reason it hasn't come back is because investors are on strike. They do not trust that the contracts are going to be enforced the right way because every contract was a little bit different. Fannie and Freddie standardized this and that, in addition to guaranteeing the loans, but just having kind of a standardization, it created a dividend for the American homeowner.

Beckworth: All right. Just to summarize, there's a lot of interesting information packed in there. But just to maybe keep it simple. The reason an investor likes these mortgage-backed securities, they're standardized is one thing you mentioned. But it's a debt instrument that has behind it ... I don't know that lots of mortgage payments feeding into it. If I buy a mortgage-backed security, this bond, I'm guaranteed a little part of everyone's mortgage payment. The idea is it's diversified.

Beckworth: So one person goes under, there's someone who's doing better. I've diversified away all this idiosyncratic risk. Right? Now, systemic risk, the whole country goes down, we learned 2008. There's no guarantee. But it's an attractive asset for an investor because it's a diversified stream of payments from all these homeowners. So I want this and that's a great thing. Now you mentioned something else that was interesting about it, there is this prepayment risk. So if I have a mortgage now, as a household, and I do. I have a mortgage. If I decided to refinance it because there's better interest rates available, I can do that without being penalized. Is that is that the concern?

Timiraos: That's right, there is no prepayment penalty on a Fannie Mae guaranteed mortgage. Right?

Beckworth: That hurts the investor because the investor thought they'd locked in this great deal.

Timiraos: Exactly. That is the risk they're taking on. Because otherwise, a Fannie Mae MBS is basically like a treasury bond. It's effectively guaranteed by the US government. It's got an income stream behind it. The difference with the treasury is you know what the maturity is when you buy it, you know that's a two month or a 10-year, but a Fannie Mae MBS, it could pay off at any time, right? The life cycle is normal, I mean, five to seven years. But if interest rates were to go down by a percentage point, a bunch of these loans are going to pay off early. That's what happened earlier this decade as the Fed pushed mortgage rates, long-term rates down.

Beckworth: So that's the big difference between a treasury and an agency.

Timiraos: That's the extra risk that you're taking on, the extra premium you're getting. Yeah.

Beckworth: So that's why it's not completely the same as a treasury even though it's very safe. It's not completely safe. Okay. Just on that point that the prepayment risk, that is something unique to the United States, right. I'm interested in, is in other countries, if you do the pre repayment, then you you actually get penalized as a homeowner. Is that right?

Timiraos: Yeah. Other countries have prepayment penalties. The United States is is unique in that not very many other countries use these securitization markets to finance their mortgage market. So a lot of times, you'll say, "Well, why don't we just do what Canada has? Canada doesn't have this 30 year mortgage." Because again, by separating the credit risk from the interest rate risk, you're enabling this 30 year mortgage to become the North Star of our mortgage market. I should have mentioned that earlier.

Timiraos: What makes the US market unique is that you have these I mean, a 30-year mortgage is a Frankenstein product, right? A bank doesn't want to have to hold a 30-year 5% mortgage with the credit risk and the prepayment risk that we've talked about, and now it's for 30 years. The S&L has got in trouble in 1980s because for this very reason. In fact, if you look at how Fannie and Freddie really got big, it happens in the 1980s because the S&Ls fail and Fannie and Freddie because they're now securitizing more mortgages, they really begin to take market share. But back to other countries, Canada, most of their mortgages are made and held by five different banks, right? These are kind of these are too big to fail institutions, but they're heavily regulated by the state. So the US is very different from most other countries.

Beckworth: Yeah, just to stress that point, the 30-year mortgage, most mortgages in the US are 30 year mortgages. So that Urban Institute Report, they have a nice chart showing all originations. The 30-year mortgages close to 80%.

Timiraos: 15-year mortgages are really the next most popular product

Beckworth: Yeah, and they're a small sliver. It's striking what's so common, so pervasive in the US, which we just assume as normal is actually very abnormal anywhere else in the world.

Timiraos: Right, right. The reason we have Fannie and Freddie playing such a large role even today is because Americans just ... They like the 30-year mortgage. If you look back over where interest rates have gone, or last 30 years, you might say, "Well, wait a minute, why were we so fixated on 30-year mortgages, right?" If you got a mortgage 30 years ago, you had 10% or higher interest rate. You would basically be writing down this bull market and bonds if you'd had adjustable rates. But Americans just have migrated towards this product. They like it. They like the certainty of it. Even though we move more often, we get divorced more than we used to. For whatever reason, the 30 year mortgages just proved to be very popular.

Beckworth: Okay. Now, you mentioned in a nice segue point there, that is the GSC, Fannie and Freddie, they begin to make gain market share at the cost of the savings and loans. So you have the savings and loan crisis in the 80s. They begin to lose mortgage market, GSCs begin to pick up during that time.

Timiraos: Yeah, I wouldn't put it that they took market. I mean, they took market share because these entities were failing.

Beckworth: Okay, so they picked up the slack of that.

Timiraos: Exactly. If you hadn't had Fannie and Freddie, you probably would have had to create something else.

Beckworth: Okay. Their market share, I'm looking at a chart here, we'll try to put it on the SoundCloud page. Their share continues to grow. Then you get into the the 2000s. There's still the traditional banks that hold some mortgages, but they hold the line share of new mortgage origination replacing the savings and loans until you get to the 2000s. That's when you begin to see private label securitization. So you mentioned Morrow, who are the big private label ones?

Timiraos: Right. Well, I mean, countrywide was very big. You'd think of any of the big players from the early 2000s, Ameriquest, New Century and they were Largely Wall Street banks that were that were facilitating these financings. So Bear Stearns was a big player.

Beckworth: Was Lehman a part of this?

Timiraos: Lehman, of course, and the difference there is that the entities issuing the securities Bear, Lehman, Merrill, they were just a middleman. They were not like Fannie Mae and Freddie Mac taking on the credit risk, but they did invest in some of these bonds. But these were bonds that were being ... Really what happens is in the in the late 1990s, Wall Street banks look at what Fannie Mae and Freddie Mac are doing. They're saying, "Wait, wait a minute. Why don't we do this? Why can't we compete with Fannie and Freddie?"

Timiraos: So they start doing it in relatively small doses. You have a subprime mortgage market in the mid 1990s. That's just beginning to come online. The Russian debt crisis in 1998 kind of blows up let's call a subprime 1.0 or subprime RMBS, residential mortgage backed securities 1.0. But after a few years, investor appetite comes back. You begin to see more of these private label securitizations being issued. The other important thing that happens in the 1990s is that Fannie Mae and Freddie Mac begin to really become much more ... They've already taken on the market shares as you've noted.

Timiraos: They now begin to amass considerably more market power and political power. So Freddie Mac was initially owned by the thrifts. They were cooperatively owned by the savings and loans, and they go public in the early 1990s. Fannie Mae has shareholders as well. So now these are shareholder-owned companies and they become growth stocks in the 1990s. You have David Maxwell is replaced at Fannie Mae by Jim Johnson. Then later by Franklin Rains, and these are CEOs that are getting very generous pay packages, these are companies that they are treated as growth stocks. One of the ways they really boost their returns is even though they are doing all the securitization, boring, plumbing, they have investment portfolios.

Timiraos: They really begin to grow the size of those investment portfolios from $100 billion in early 1990s. By the very end of the whole period, the boom period, they're close to a trillion dollars each in these investment portfolios. They're almost hedge funds attached to this boring securitization conduit insurer. Well, why do they have these portfolios? Why are they growing their portfolio so much? It's because the companies are perceived as being implicitly backed by the US government. They have a lower cost of borrowing. So they're able to leverage their lower debt fund and corporate debt funding costs.

Timiraos: Then they're putting into their portfolio these higher yielding securities, some of them are their own MBS. But they begin to buy in the early 2000s, the private label securities, some subprime, some Alt A, Alt A is considered low documentation. They weren't quite subprime. subprime is weaker credit scores, lower credit scores. Alt A was traditionally not quite a paper, so alternative to a paper. But you think of decent credit scores, but less documentation on the borrower's incomes. In fact, that's where Fannie and Freddie end up getting into much more trouble than with subprime. But they're growing their portfolios, their growth stocks, Wall Street loves these guys. They're sending off good returns to shareholders, huge paydays to their executives. The President of the United States gets to appoint their board members. So you see people when they leave The White House, they get on the Freddie Mac board, run a manual, goes on to the Freddie Mac board. I mean, both parties are doing it.

Timiraos: At the same time that all this is happening in the 1990s, we decide we want to make home ownership. We begin to really push home ownership, both parties do it, Clinton does it. George W. Bush does it with his Ownership Society. Now you kind of have this, Fannie and Freddie are just standing there saying, "Hey, we can help with this." So all of this is happening at a time when Wall Street is beginning to dip its toe into, "Hey, well wait a minute, maybe we can do this." These securities that are privately issued are getting triple A ratings from the ratings agencies, which is really important because now, investors basically see these subprime securities as having the same risk characteristics as a Fannie Mae or Freddie Mac security.

Beckworth: That's amazing that you had Triple A rated mortgage-backed security backed by subprime mortgages that were rated the same as even treasuries, right? I mean, the Triple A ratings. I mean.

Timiraos: That's right, that's right. If you look at the Basel Capital Standards, it wasn't quite as risk free as a treasury, but it was pretty close to it. If you held them, the actual mortgages on your books, the risk waiting for the banks was considerably higher. I'd have to go look up the numbers. But if you basically cleansed it through a security, if you held it in a security, well now it's triple A. It's because the ratings agencies believed that well, as you were saying before, if one of these loans default, well, there's there's a pool. So there's others and we've never had a national housing downturn, home prices don't go down everywhere. We've had regional recessions, Alaska oil patch bust.

Timiraos: Everybody kind of gets that wrong. Then what happened, a couple of things then happened in the middle 2000s. First is Fannie Mae and Freddie Mac which are getting some more opposition from the market. There are competitors, whether it's AIG or Wells Fargo, there's a group actually called FM Watch, Fannie Mae Watch. It's a group of kind of potential private competitors to Fannie Mae and Freddie Mac. They're beginning to get worried about these guys getting so much market power. You begin to hear about concerns or Fannie Mae and Freddie Mac getting too big. They're kind of throwing around their lobbying muscle here in Washington. Then you remember kind of the Enron accounting scam as well?

Beckworth: Right.

Timiraos: Freddie Mac has some accounting problems. That's when kind of the political opponents of these companies can say, "Hey, wait a minute. We told you things weren't quite right here." Freddie Mac has an accounting scandal. The regulator of Fannie and Freddie, which at the time is called a fail the Office of Federal Housing Enterprise Oversight. His kind of misses the Freddie Mac account scandal. So now they're looking at Fannie Mae. They are able to find something at Fannie Mae that they don't like.

Timiraos: So now both of these companies are kind of on the defensive, which is important as we get through this story because now they're facing more political pressures. Oh, they're getting beat up over their accounting scandals. You have Alan Greenspan, the Fed Chairman saying, "We think Fannie Mae and Freddie Mac are going to have problems because of interest rate risk." So Greenspan is testifying on the hill, raising more concerns about Fannie Mae and Freddie Mac, the Clinton administration in its final years, had begun to raise concerns about what was happening at Fannie Mae and Freddie Mac. Now, the Bush administration, after some of the Enron and WorldCom scandals begins to go there as well.

Timiraos: So you have these companies that are now kind of politically on the defensive. You have Wall Street coming along and taking their lunch. Wall Street is taking market share away from Fannie Mae and Freddie Mac. If you think of 2004 and 2005, which is really when things began to go bad in the mortgage market, you have these companies that feel all of these different pressures. They begin to make, when in hindsight, are some very dumb decisions. There are meetings happening at Fannie Mae and Freddie Mac during this period where the executives are saying, "We don't quite understand why the mortgage market is going this way."

Timiraos: Freddie Mac had actually gotten burned in the early 1990s on low doc auto loans. So there was some meetings where in their memos that say, "We got our faces ripped off in the early 1990s doing some of these loans." Why are we so much smarter now? But again, the shareholders are beating them up saying, "How come you're no longer just go have a growth stock as you used to be?" So there's pressure from market share. There's political pressure because there are people on Capitol Hill now saying, "Wait a minute, we don't need you guys anymore. Countrywide can do this. Ameriquest can do this. Wall Street, Bear and Lehman can do this maybe we don't need Fannie Mae and Freddie Mac anymore. Maybe we can privatize your ... Get rid of your charter." So Fannie Mae and Freddie Mac make these fateful decisions in 2005 to what they call meet the market, to go down the credit spectrum. Yes, they had been they had been experimenting with easing credit standards in the 1990s. But Wall Street comes along and just loosens the dials way more.

Beckworth: So they are both maybe a victim and an amplifier of the crisis.

Timiraos: Yes.

Beckworth: They feel the pressure from the private label securitization, Wall Street who's gaining market share on them. Given all this other political pressure you mentioned, it makes them more open to going down to the bottom of the barrel, getting the the less favorable types of mortgages, and it makes their balance sheet more susceptible to shock. So they're both responding to the changing environment that's around them. There's just housing boom, they're losing market share.

Beckworth: They're getting pressure from the outside. Then you mentioned they also just made some bad choices on their own. So one of the questions that come up is how consequential to the housing boom bust were Fannie and Freddie? What is your takeaway from this? Would the housing boom bust have occurred in their absence? I know it's kind of hard to say.

Timiraos: Yeah, it's very hard.

Beckworth: Because they're such an important part. But I guess my question is, can you really put the blame just on them? My sense is no, but I would like to hear what you say.

Timiraos: Well, and the answer to that question, is really important in terms of figuring out what we're going to do going forward, right?What you believe caused the crash is going to inform. So this is actually the most important question I think there is. As kind of an objective reporter, I don't really want to ... I try not to take opinions, but let's look at some of the facts. Let's look at some of the facts. There's data that show the performance of GSC mortgages versus private label mortgages. They do it at every credit score cut off and loan to value. I mean, at every dimension, the GSE loans performed better, the private label securities performed worse.

Timiraos: Now, part of that is because Fannie Mae and Freddie Mac sat in the center of the market, kind of the plain vanilla conventional market. So they were able to take on the safest borrowers. But nevertheless, their loans did perform better objectively. Now, how much did their purchases of the Alt A securities for their portfolio legitimize this kind of new market of private label mortgage bonds? I just don't know. I think to the extent that you want to fault the GCSEs for causing the crisis, you can look at some of those activities.

Timiraos: We also haven't talked about the house and goals which get a lot of attention. In addition to all these other things that Fannie Mae and Freddie Mac were set up to do in 1992, there's legislation passed after the S&L crisis because someone says, "Well, wait a minute, Fannie Mae nearly failed. We have these two companies, and we don't really know what they are. So we should regulate them." One of the things that is agreed to is that they should have to target a certain share of their housing purchases towards meeting underserved groups.

Timiraos: It's a little bit like the Community Reinvestment Act, CRA. So you also have some people who say, "Well, during the 1990s, they're facing political pressures to make riskier loans." Now, if you look at the housing goals, they were set at such low levels that it's hard for me to take the argument that is really what caused the problems. They were set at such low levels, you could fall and still clear the bar. But the Bush Administration does increase The housing goal mandates in the early 2000s. I think at the margins, you could say that even if that wasn't the reason they were taking on more risk, they were really taking on the risk because they were losing market share, and they were getting beat up from their shareholders for it, it at least gave them an excuse to do some of these riskier activities. Well, we have to satisfy these housing goals.

Beckworth: Yeah, I think it's an important point to highlight, to stress again, is that they lost market share. Just to put some concrete numbers, in 2003, they had about 50, around 50% of the mortgages outstanding. It fell down to about 37% right before the housing bust collapsed.

Timiraos: Right, the worst years of the bubble, they were the least involved in the mortgage market, they had been. It's hard to get past that fact if you're arguing that they were the primary cause of the crisis. Did they do things they shouldn't have done? Of course. We should go through those things. You should make a list of those things if you're a lawmaker that has decide what to do next, because you don't want to do those things again, you can talk about, do you want to have privately shareholder owned companies that create these market pressures to do the things that Fannie and Freddie did? But the charts show pretty convincingly that they were less involved in the market when the market went off the rails.

Beckworth: They were following the crowd, they were losing market share. It was the private label security Wall Street, that thing.

Timiraos: One other important thing happened that maybe has a corollary to today we'll see is in 2003, you recall the fed has interest rates at very low levels historically. The 10 year falls to 3%. The 30-year fixed rate mortgage falls to 5%, which is the lowest it's been in 50 years. It ignites a huge surge of refinancing. For several years, 2001, 2002, 2003 mortgage lenders are fat and happy because they've got more refinancing business than they can handle. When the fed begins to raise interest rates in 2004, now, there are fewer refinancings to be had. There's this whole mortgage market that's kind of grown up overnight to meet all this demand for refinancings.

Timiraos: If you're a mortgage company, you can either lay people off and do less business or you can say, "You know what, let's get into the purchase market. Let's make some loans that maybe we wouldn't have made before. Let's open the credit box up." Well, that's what happens. In 2004 and 2005, credit standards just deteriorate. It's largely because the refi gravy train is over. So now, you have this private label mortgage market that's saying "Hey, yeah, sure, we'll buy all this stuff, no job, don't want to document your income, that's fine. Home prices don't go down."

Beckworth: The ninja loans, right?

Timiraos: The ninja loans, these adjustable rate mortgages that have low fixed costs initially, but then they then they go up, the rate adjusts, the teaser goes away. In these nice markets that are getting increasingly more affordable, California and some of these sunbelt metros, well, don't worry about it. Home prices always go up, you can refinance if you get into trouble. We're giving now mortgages to people that probably have no business. I would argue that even the bigger problem is not in the purchase market.

Timiraos: It's in the refi market because now, you have a bunch of people who've been homeowners for a long time. They're being told, "Your home is worth so much more. You can take cash out. Wouldn't you like to spruce up your countertops? Wouldn't you like a new car?" So you have a lot of equity extraction that's happening at these increasingly inflated home values. So if you look at what got into trouble, people got into trouble on, it wasn't necessarily that they purchased a house in 2004 and 2005. Though if you did that, you did have some bad timing. But you had people who had been ... They'd own homes since 1997. Maybe some people had even paid off their mortgage, but now they were taking equity out. That would cause a huge amount of problems later on.

Beckworth: Yeah, I think a book I read, Confessions of a Subprime Lender. Stories from that book and other accounts of how they had an incentive to take these folks who own the home and talk them into these crazy mortgages.

Timiraos: Because they got paid just when they made the loan.

Beckworth: The fees exactly.

Timiraos: Yeah. The fees were very good for them. I remember I interviewed a lot of people who got into trouble after the crisis. A lot of times, their memory, their recall wasn't the best. But a lot of times, the stuff is in the public record. So I would go. I'd look up their mortgage record. Gee, they refinanced every year. It was almost like the same guy or girl was calling them every July and saying, "Hey, your home was gone up another $30,000 would you like $30,000?"

Timiraos: They would take it. I'd visit with some of these people and they had these beautiful houses. They were in over their heads not because they had made a bad decision to buy a house. But because someone had come along and said "Hey, there's free money in your house, take it." I think a lot of times people thought the mortgage broker is like a fiduciary responsibility. The bank wouldn't possibly give me something that's bad for me. Right? They thought it was like a doctor who's not going to prescribe you medicine that ... But there's no Hippocratic oath in mortgage lending. So in a lot of cases, people thought, "Well, the bank couldn't possibly do something, give me something that I couldn't pay," when in fact, they would and they did.

Beckworth: I also think it's important to recognize when you're in a bubble environment, you kind of throw all your standards, all your natural safeguards out the window. I remember during a time listening to an AM radio talk show on real estate and flipping and they kept stressing this point, "We've never had a national housing crisis crash since the Great Depression. It's not going to happen again." Maybe people who you did no better. They kind of they begin to believe the lie that housing prices will continue to go up. If they had to continued gone up, that could refinance, they could flip this, this the cycle could have gone on.

Timiraos: That's right. I think that mindset also prevailed again back in the boardrooms of the GSEs. Because they're saying in 2003, wait a minute, these mortgages don't make a lot of sense. We know that's not going to end well. Then 2004, 2005, I mean, you can only hold off for so long before you say, "Well, gee, maybe the markets figured out something that we don't know, maybe the market has changed." The other thing that's happening in these companies, which I'm sure there's a Harvard business case study is that a lot of the risk management people, the conservative, the people who say no, are getting forced out. The people who are taking on more are willing to take on more of the risks are getting promoted up into the company. So Freddie Mac, the chief risk officer's fired. That's often a warning sign, right, when those people get shown the door, but it takes a while sometimes for those decisions to catch up.

Beckworth: Yeah, I think in summary, that the housing boom was a perfect storm of many things coming together. We've talked about I think monetary policy on the margin played a role too, the savings, all these things coming together.

Timiraos: There's no regulation or a lot of mortgages are regulated by states. The fed chose not for whatever reason to really get involved in kind of consumer finance regulation. So you have a gap there. There are a lot of people who probably knew better, but just for whatever reason ...

Beckworth: Well, it's the bubble mentality. You want to play it. So we have the perfect storm, okay, the housing boom bust. So it causes problems for the GSEs as we talked about, they go into receivership

Timiraos: Conservatorship.

Beckworth: I'm sorry, conservatorship, right.

Timiraos: Which is basically the same thing, but it's more of ... Receivership is like bankruptcy. The company is going to come out the other end and no longer exist in its current form, good bank, bad bank. Conservatorship, which has never been attempted with companies of this size is more of well, we're here 10 years later. They're still in, right? That kind of tells you what conservatorship is.

Beckworth: Yes, the 10 years. It's been interesting to see this, I was reading up on some of the recent developments. So Treasury gets all the dividends, all the money that that Fannie and Freddie make that they would otherwise send out to their shareholders. They're sending it to treasury. I read an account of some of these hedge funds who bought the GSE stocks really, really cheap, you might call the vulture funds have gone in. In 2014, I believe they're trying to make a case that they should be getting some of that.

Timiraos: Right. There's still litigation pending, I think the ... So you go back to 2008. There's some people who say the conservatorships weren't necessary. This was a plot. They always wanted, the critics of the GSEs always wanted to get these companies. Here, they had their chance and they went for it. The other interesting thing that's happening in 2008, I mean, this is when the wheels are really coming off the bus, right, in the mortgage market in the economy.

Timiraos: So now Fannie and Freddie, which had kind of been pariahs, now, people are looking at them saying, "Well wait, you guys need to get out there and make more loans. We want you to make jumbo loans now with your loans larger than the conventional cap at the time 417,000." I wouldn't say 2008 was the worst year, maybe 2007 was the worst year. But now, 2008 as lenders are pulling back, the private label mortgage market dies in August of 2007 when the credit markets just closed. So now, you have FHA exploding, taking on much more business because they do 3.5% down payments, which all of a sudden, that had been seen as just ridiculously conservative in 2005 and 2006.

Timiraos: Well, now it's the only place you can get low money down. But then the GCEs, the government begins to say, "Hey, wait, we think we want to use these companies to try to soak up some of this stuff to cushion what we know is going to be bad." Well, in the summer of 2008, Fannie and Freddie's regulator has been going out there and saying, "These companies are adequately capitalized." Hank Paulson has been begging the CEOs to go raise capital. He knows, he's up A former CEO of Goldman Sachs, he knows you need to try to raise capital when the going is good. The going is not going to be good much longer.

Timiraos: Fannie Mae is able to, Freddie Mac is not able to. In summer 2008, congress passes emergency legislation. Hank Paulson calls it a bazooka. He says, "If the market knows I have this bazooka, I won't need to use it." So they get this emergency legislation to take over Fannie Mae and Freddie Mac, put them into conservatorship or receivership, if need should be. They also create a new regulator for the companies. There had been a push to have GSE reform for several years.

Timiraos:  Finally, it took a crisis. They get these new authorities in July of 2008. Just a few weeks later, things are looking even more grim in the capital markets. Hank paulson later tell me that he became concerned that if Fannie and Freddie had tried to roll over their debt and they'd had a failed debt auction, that would have just been a terrible thing for the market, so would have created a panic, a run on every market. Treasury decides, "We need to move before that can even happen." So he goes to the boards after Labor Day in September 2008 and says, "We're taking you over, you don't really have a choice. If you fight this, then your regular will declare you inadequately capitalized."

Timiraos: Freddie Mac immediately agrees. Fannie thinks about putting up a fight, but they realize this is the US government, you're not going to win that fight. The CEOs are replaced on the Monday after the conservatorship happens. Now, eyou get these kind of companies that used to be notionally government-backed but really private. They'd always said we're not really government-backed. Well, now they are formally government backed. The dividends you were talking about, the company's arrangement works initially like this. That is the government says we will inject initially up to 100 billion dollars in each company. It's later increased to $200 billion. It's later increase to an unlimited amount of money.

Timiraos: So Tim Geithner in 2009 says, "We will put unlimited amounts of money into these companies to keep them solvent. In exchange, we will be paid a 10% dividend on these new senior preferred shares that we're going to take." So they end up putting $188 billion into the companies.

Beckworth: Wow.

Timiraos: In part, it's because they had all of these assets that were kind of fluky. They had to write them down right away. So they took big accounting charges. They weren't real losses, they were counting losses. But in any event, now, the government is getting a 10% dividend on the senior preferred shares that they own. Basically, what has happened is the government has come in and said in every way they possibly can, "We will backstop these companies." But they don't want to take them over or formerly nationalize them because then they would have to bring the $5 trillion of assets and liabilities of the companies on to the books. You probably don't want to do that in the middle of the great financial crisis.

Timiraos: So that is what happens. The government decides to change, the Obama administration changes those terms in 2012. They say, "Instead of a 10% dividend," because now there are periods where the companies are actually borrowing from the treasury just to pay that 10% dividend because the 10% dividend is getting to be larger than the earnings that the companies have ever had, right? They're having to pay $10 billion a year in dividends. They don't make $10 billion a year in normal time.

Timiraos: So the government says, "Don't pay us a dividend when you don't have any money. When you report a loss, you owe us nothing. But when you have a profit, we get everything because we are the ones that basically are taking all of the risk. It's not just $180 billion. We even agreed to stand behind $5 trillion in assets and liabilities." So that kind of gets us up to today where the companies are still in purgatory. The other thing I should add is-

Beckworth: I like that, purgatory.

Timiraos: Is that remember, the fed is purchasing mortgage backed securities issued by Fannie Mae and Freddie Mac through their quantitative easing programs. So when people kind of say, "Oh, well, we can just privatize the companies again." Well, you really think the world's largest central bank is going to purchase the the debt of a private company that has no ... I don't think so. Right? So because the government takes a number of steps to really support the housing market.

Timiraos: Fannie and Freddie Mac, they are mono lines, right. They are exposed to one asset, they can't go and make car loans, they can't go and make business loans. So they are exposed to the housing market. When the housing went down, they lost a lot of money. By 2013, when the housing market turns, now, they're making a lot of money. In fact, they've paid more money to the US under this new arrangement than they borrowed. That's just because they are so exposed to the market. When the market does well, they do it.

Beckworth: It's doing well now. So more payments go into the government.

Timiraos: Yep.

Beckworth: Since you were there in the heat of the crisis, you were embedded, so to speak, in the trenches, in the warfare of the financial crisis. I gotta ask a question about this story that was reported on Bloomberg. It said I believe was Hank Paulson received a phone call from someone in China that said, "We have all of these agencies, you better be sure that Fannie and Freddie do not go belly up." So that the point is there's this political pressure from your biggest creditor. I mean, what's what's the story behind it, any truth to that?

Timiraos: Yeah, I mean, So Hank Paulson is in China for the Olympics in August 2008. He was definitely hearing from the Chinese, possibly the Russians. They're saying, "What are you going to do with this stuff?" Right, because they believe it's full faith and credit. I don't think anybody in Washington really wanted to test that. In the middle of a crisis, do you really want to say, "Oh, yeah, we always said this wasn't backed by the government and we mean it." Just let the chips fall where they may. Home prices were already a 30% decline nationally. So yes, it's true. There were conversations with foreign capitals over well, what exactly do you intend to do with these companies because we own some of this pay right?

Beckworth: I guess my my pushback would be that wasn't the reason they went after Fannie and Freddie. They were going after many debts.

Timiraos: I mean, these companies were so integral to the functioning of a housing market during a housing crisis. Again, if you look at some of the stuff the fed was able to do, I have doubts that the fed would have been able to do it or would have been willing to do it if they were taking on credit risk, right? They don't technically take on credit risk when they buy a Fannie Mae security, just like any investor doesn't because Fannie Mae is guaranteeing it and the treasury has this backstop effectively behind Fannie Mae.

Beckworth: Okay. Well, let's talk about steps moving forward. Current Treasury Secretary Steve Mnuchin, he had talked about late last year about putting GSE reform on the table in 2018. He recently said, "No, we'll kick the can down the road a little bit longer." So tell us what what are some of the proposals from public option to privatizing? What are the some options and what do you see is the actual future over that?

Timiraos: Well, just to put a point on that, I mean, Mnuchin kicked the can down the road, the Obama administration inherited this. Right? They come into office in 2009. Everybody thinks they're going to have to be the ones to fix it. Eight years go by nothing happens, right? I think what we've learned is that, look, you can get a mortgage today for under 5%. Rates are up right now. But four and three-quarters is still a very good ... No one really wants to mess with something that appears to be working.

Timiraos: It may not be perfect to have this conservatorship, purgatory is what I called it before. But it's probably better than ... People don't want to take their chances with trying to find the perfect thing, especially because it is very hard to find political consensus on this issue. So what are the options moving forward? One extreme would be full privatization, either we're going to get rid of these companies and let the private market do it. Which is sort of a straw man because you can't forget about the FHA over there, right?

Timiraos: If you were to just get rid of the GSCEs, wind them down over five or 10 years, and let the chips fall where they may well, most of that business would end up in the FHA. A lot of the free market purists who don't really want to have any GSEs would not want to see the FHA, which is even more explicitly the government become the main mortgage provider in the US. The other extreme, I guess the other end would be, let's just nationalize these things, right? You could say, "Well, we're going to reprivatize them, we're going to send them back out into the public markets. Shareholders can own them."

Timiraos: If you do that, you have to decide what are you going to do with the guarantee? It was implicit before we made it explicit in 2008. Some people say, "You can make an implicit anymore." I'm not sure how you would do that. You've already shown that when there is a crisis, we will backstop these companies. I'm just not sure how you could have a credible, no guarantee anymore. The other options then kind of fall somewhere in between. What the the Obama administration seemed most interested in and there are still a lot of people in this, policy debate today, including in the Trump Administration who feel similarly as Fannie Mae and Freddie Mac do two main things.

Timiraos: They control the plumbing, they control the access points into this mortgage market. It's called the TBA market for To Be announced securities, not only does it allow for 30-year fixed rate mortgage, but if you lock in your mortgage rate before you've actually bought your house, that is because of this market that Fannie and Freddie have created. It allows them to forward sell mortgages that haven't been delivered to them yet, because they're making a commitment to buy a homogeneous mortgage. If you want to have, Fannie and Freddie enable that.

Timiraos: Well, they control the access points into this mortgage market, into this plumbing. Think of it as almost like a grid. Right? But then they also are our insurance companies. They guarantee that credit. People in the Obama administration had said, "We need to separate these two things because reason you couldn't let Fannie Freddie fail, you couldn't let the credit guarantor fail if it got into trouble was because the access point to the entire mortgage market would go with it."

Timiraos: So can you separate the securitizing infrastructure, make that its own utility and then you could have credit entities, the people that provide the credit guarantee, which is what Fannie and Freddie also do, make that Fannie and Freddie, allow private competitors perhaps to them. So I think that's kind of where you may see this debate go is if we're going to remake the secondary market, but we don't want to just flip the switch off and see what grows in its place, can you come up with a way to have the standards that Fannie and Freddie provided for securitization?

Timiraos: Then if you want to have someone sell credit guarantees, they could purchase an explicit guarantee from the government the way that banks have FDIC insurance. So that if there's a run on a bank, well, we know the FDIC, it's supposed to be there to prevent that from happening. You can have runs in securitization markets too. Are there ways that you could have kind of a federal reinsurance of these credit entities separated from the securitizing, securitization plumbing, for lack of a better word? Those are some of the options.

Beckworth: Okay, this is interesting. I want to go back and stress this point, the horse is out of the barn already in terms of we have explicitly belled out these agencies.

Timiraos: We've socialized the risk.

Beckworth: We socialized the risk. It was always implicit, and it's been fascinating. I remember teaching back at the, when I was in university. I remember when Greg Manky, for example was CEA. He came before congress, "I will never bail them out." Every president every CA chair comes is no no we'll never about them. They're privately run, but the market, the marketplace knew better, the marketplace knew, "No, this is too big. It's so big in fact, it will finance them at a lower rate than anyone else." It came true, it came to fruition. So now, the horse is out the barn. There's no way going back I guess. It's an incredible sense to what you've at point. It seems almost impossible in my mind how could you frame this? How could you ever convince the market, convince people that we won't bail them out? We won't socialize this risk in the future. I think that probably needs to be a part of a discussion is maybe how to manage it better.

Timiraos: You could have a guarantee you make people pay for it. Then the question is, do you set the set the right price? You can underpriced insurance, you can subsidize the industry by pricing the guarantee too low. There are always going to be people, the realtors, the home builders, they have very strong lobby, and they're always going to argue, "Well, the fees should be lower, the fees should be lower." So those are tricky questions that have to get answered if you have some new government insurance program here.

Timiraos: The other question is who owns these things, right? If they are back in the private sector, are they cooperatively-owned by the institutions that sell them mortgages? I think people need to think about how do we prevent some of these things from happening again in terms of the market risks that were the pressures that built on the companies. The shareholder model had some pretty obvious flaws, because they were pro-cyclical. So everybody says, "Oh, we want more private capital in the market." But they forget that private capital tends to dial up during the riskiest periods and then pull back when it's most needed. So I think an important question for policymakers is how you can build in some counter cyclical features, so that you're actually providing credit when it's most needed. When the private market is willing to make mortgages, then they've got whatever government role can kind of pull back.

Beckworth: One of the concerns I do see with having these two behemoths is market power. In preparing for the show, I read one author, he had done some work. He mentioned something that I wasn't aware of. So my understanding it had always been, because they get cheaper financing, because of this implicit guarantee up until 2008, that meant mortgages were cheaper. This passed on to consumers. But what some studies have shown is some of that savings was not passed on to consumers. It was passed on to the entities themselves.

Timiraos: Their shareholders.

Beckworth: Their shareholders, because it's because they have market power. As you mentioned, they basically become big hedge funds, they can ...

Timiraos: Well, there's not a whole lot of appetite for the companies to have big investment portfolios again. So I think one thing we can say is if whatever happens, it's very likely that the investment portfolios will be limited really only to a warehousing function to take mortgages in the securitization process and to buy out defaulted loans. I think that's one less than everybody ... Nobody seems to have a huge appetite for, "Oh, let's attach giant hedge funds that can do mortgage arbitrage or US debt guarantee arbitrage." So if you just have kind of these boring insurance companies, mortgage insurance companies, and you figured out how the securitization plumbing is either going to be separate or not, then the question really is who owns these things? Where does the capital come from? Does it come from the government? Does it come from private investors?

Beckworth: Okay, well, on that note, our time is up. Our guest today has been Nick Timiraos. Nick, thanks for coming on the show.

Timiraos: Thanks for having me.

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