WSJ on Aussie Mac

I’ve been a little busy so haven’t had time to comment on the Government’s ramping up of its residential mortgage-backed securities intervention of last week. Chris Joye has done an excellent job of laying out the pros and cons of that intervention. The pro being that it is a necessary intervention especially given the Governments other guarantees in this sector and the cons being that it is hardly a long-term solution.

Anyway, four days after the Government’s moved, the Wall Street Journal finally popped its head up to condemn it. This is the speed that you will be paying good money for soon. Their contention is that the Government’s intervention looked like “Aussie Mac in the making” and that if you think about “Mac” then you are thinking Fannie and Freddie and that was terrible so the Australian Government learned nothing. Let me just spell out that an intervention into the RMBS market by a branch of the Treasury is not the same as a privatised and obscurely guaranteed and largely unregulated couple of firms dominating the market. The fact that the Government is not doing that and moving more cautiously is an indicator that it is learned from the spectacular US regulatory errors here. Indeed, it may look further north to Canada to see how a “Mac” institution should really work (for some references see here).

But in reading the WSJ article, there is a derisive sense against securitisation as if no one sensible does that anymore. I don’t have the numbers but it was my impression that most new mortgages in US are still securitised and I think there is underlying government backing there. If someone has those numbers, please share.

An expanded version of this post appeared in Crikey today (over the fold).

WSJ weighs in with ‘Aussie Mac’ in the making

Joshua Gans, Crikey, 16 October 2009.

Four days after the Treasurer announced a further $8 billion of Government purchases of residential mortgage-backed securities through the Australian Office of Financial Management (AOFM), the Wall Street Journal decided the weigh in calling it an “Aussie Mac in the making.”

And they mean this as a derisive term. The WSJ states that most borrowers have ‘naturally migrated’ to the big four banks. I guess it is natural when there has been a drying up through acquisition and scaling back of other options. It seems hardly an exercise in consumer choice as opposed to consumer compulsion. Nonetheless, the WSJ see Australia’s lack of securitised mortgages these days as a good thing.

But their criticisms are weak. For starters, they argue that these moves are not creating a market as much as filling a cap. “Every deal done so far has relied on the government backstop.” That may be the case but they do not point out that the US government (and many others, including Canada) are doing exactly the same thing and have done so for decades. Most US mortgages remained securitised with government backing.

Second, they allude to the notion that Australia is somehow repeating US mistakes.

Nowhere in this discussion is risk that this venture poses to the taxpayer. Fannie Mae also boasted about its exposure to “AAA-rated” securities. Most investors know the denouement of that story. Canberra may be taking smaller risks because the country’s subprime market is smaller. But it’s still a risk that wasn’t there before, and needn’t be there now.

They go on.

Washington meddled in private-market mortgages and brought the world the financial crisis. It would be a shame if Australia didn’t learn from that experience.

You mean, learn from the experience of taking a solid government-owned institution and privatising it without complementary regulations and then being surprised that it has the same incentives as private firms to write extraordinary sub-prime loans and disguise it in securities? Seems like the Government has learned that lesson well and is proceeding cautiously.

The issue here is the quality of financial reporting and commentary regarding what happens in Australia. The WSJ’s argument is that this looks ‘Mac’ like and that is bad so the Government should just stop. A real analysis would have pointed out that the main issue facing Australian financial regulation is that the Government extols the rhetoric and belief that financial markets do not work efficiently and yet has failed to consider that what that implies is that Australia needs to carefully review its financial regulations and work out if it will be robust to future GFCs.

Ian Harper, who was a member of the 1990s Wallis Committee, has explicitly acknowledged that their recommendations were based on an assumption of efficiently working markets in this area. An assumption proved false in the last couple of years. What is more, our current system – seemingly endorsed by the Government through continual support – remains based on those outdated assumptions.

The current RMBS intervention, while welcome in the circumstances, remains crisis-driven and reactionary. It is not a long-term based for financial stability and, indeed, competition in banking. The risk we are taking is not that we lose money on those interventions but that we are failing to do the hard analysis to ensure a robust financial system.

Joshua Gans is an economics professor at Melbourne Business School. For more of his writings in this area visit

2 thoughts on “WSJ on Aussie Mac”

  1. When I was in the US in February the govt told me that 95% of all new home loans were being funded by government agencies: Fannie, Freddie and the FHA. This is basically a public securitisation since Fannie and Freddie have been put in conservatorship and are now effectively owned by the government. This places them in a much more comparable position with the very successful CMHC in Canada. In Canada, the securitisation markets have remained open and fully functional throughout the GFC precisely because of the support offered by the CMHC. Canada has, as a result, avoided the massive competitive consolidation/concentration that we saw in Australia as a consequence of the closure of our securitisation market.


  2. I guess what was surprising is that this came just as things started looking much more promising for non-bank lenders. ME has managed to get away two issues in recent weeks, the second one being upped to $1.2bn with zilch investment from the AOFM and 16% coming from “European accounts”. Liberty have also had success lately without help from the AOFM. Macquarie issued an auto-loan backed ABS. Signs were local securitisation markets were lookking better.

    Given ME can pull together $1.2bn, it just didn’t seem necessary for the gov’t to offer up another $8bn overall.


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