Good Reading -- September 2010

An overdue and extra-long edition -- hope you enjoy.


Facts and Figures

  • (Part I) The average pay for hourly workers (constituting 80% of the work force) in recent recessions, adjusted for inflation:

  • mid-'70s: fell 6%

  • early-'80s: fell 3%

  • '90-'91: fell 2%

  • Dec. '07 - present: increased 5%

  • (Part II) After being acquired by Terra Networks for $12.5 billion in 2000 and then by Daum Communications in 2004 for just $95 million, Lycos has now been sold to Ybrant Digital for less than half that at $36 million.

  • (Part III) I'd like to think this email as the positive exception...

  • Email eats a quarter of the working day... "a diary study of people in various different occupations they found that on average, people spent 23% of their working day dealing with email. One study has found that workers are managing an average of 65 tasks in 10 different spheres at any one time. And we often react quickly to incoming email, almost like the phone ringing. One workplace study found that 70% of emails were reacted to within 6 seconds of their arrival, and 85% within 2 minutes. The problem is that it took participants in the same study 64 seconds to recover their train of thought after an email interruption. Add this to the fact that Gonzalez & Mark (2004) have found that people spend an average of only 3 minutes on each task before they switch to another, and it's difficult to see how anyone can achieve the psychological state of 'flow' necessary for complex tasks."


  1. "Planned Economy or Planned Distruction" -- an editorial cartoon from the Chicago 1934. History may not repeat itself, but it rhymes.

  2. "Letting Go" -- more from my favorite doctor, Atul Gawande. This isn't really relevant to investing, business or even healthcare reform, but it's excellent and thought-provoking as always. Warning: not exactly light bed-time reading.

  3. Ruane, Cunniff and Goldfarb Investor Day Transcript -- lots of worthwhile thoughts from some great value investors. (Email me if you'd like to read 2009's edition too).

  4. "The Singular Henry Singleton" -- I came across a great profile from Forbes magazine in 1979 of the brilliant engineer and investor Henry Singleton, who gets high praise from many notable people (Buffett included). A quick look at his record will reveal why. Teledyne is a tremendous case study in capital allocation, among other things.

  5. "Overview of Distressed Debt Investing" -- a helpful presentation if you're entirely new to the topic. If not, there are a lot of pretty charts. Page 18 in particular has a particularly interesting snapshot of just how little we have delevered overall (i.e., how much pain is left to go).

Special Housing Finance/GSE Section

  1. "The Future of Housing Finance" (pasted at bottom) -- I've spent a lot of time harping on the GSEs, so here is a great op-ed that actually proposes feasible, intelligent solutions. Correctly pointing to the source of the problem (HUD's affordable housing mandates of the early and mid-1990s) that mushroomed over time, the author correctly surmises: "While the road to housing hell may have been paved by the government, the road back will be built by the private sector." He adds: "The goals should be larger down payments, stricter underwriting standards...and the removal of affordable housing mandates. If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government."

  2. "Subprime 2.0 is Coming to a Neighborhood Near You" (pasted at bottom) -- a more recent column from Mr. Pinto. I love the recommedation at the end: "As a society, we have to go back to at least 20 percent down, with limited exceptions. Credit histories need to be solid. Documentation has to be iron-clad. Lender capital levels need to be raised. Here’s my proposal to bring Congress’s penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have a feeling that things would change fast."

  3. "Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study" (big file -- available upon request) -- a long but exceptionally good study conducted by Mr. Pinto. It's a big file, so I don't want to clog everyone's email, but let me know if you want a copy.

  • Note: After I wrote about the first item above, I had the pleasure of meeting Mr. Pinto in our offices a few weeks ago. Over an hour or two he expanded on these topics, and he is the real deal. Of all the reading I've done on the topic, Mr. Pinto is the only person I've found who understands the financial, policy, and mortgage- and housing-industry specific issues and how they are interconnected. A lot of people understand one or two components of the issue, but if you want the go-to source for both detailed analysis and thoughtful integration of details into the big picture, Mr. Pinto is your guy.


  1. "I Love Gold" -- a good summary of the gold market right now.

  2. "The 20 Richest People of All Time" -- I can't vouch for completeness or accuracy, but this is an intersting attempt to rank the 20 richest people in history in inflation-adjusted dollars. Certainly there is a bias toward past few centuries (money was pretty hard to measure/compare in the pharoahs' days), but with all of the deserved talk of income inequality lately, I think it's interesting to note how much comparative wealth was concentrated in so few (mostly monopolistic hands) in prior generations, particularly in the late 19th and early 20th century. Of this list, only Carlos Slim (#20), Buffett (#19) and Gates (#6) are still alive. Also note that Buffett and Gates are giving away essentiallyall of their money during their lifetimes, and that if this were adjusted from peak to current wealth, Gates would be down near the bottom with Buffett.

  3. "The Bears and the State of Housing" -- NYT columnist David Leonhardt raises a good question here: Do you see housing as a luxury good or a staple? Obviously the answer is somewhere in between (except for those who are super rich or very poor), but it's a useful way of framing the outlook for housing. (And I do think the question is whether to be more bearish or less bearish.) I also agree that the housing market ranks behind (un)employment, budget deficits, trade deficits, consumer debt, and several other problems (education and health care, to name two) that deserve national policy attention. Either way, I will always argue to individuals that housing is a relatively poor investment; a home is primarily a place to live, not a wealth generator.

  • The graphic charting expenditures as a per cent of households' budgets since 1930 is also very interesting. Is it any wonder we're fat? And wow, scary to think about quickly health care has gone from the bottom to the top of the list.

  1. Burry, Predictor of Mortgage Collapse, Bets on Farmland, Gold -- I agree that:

  • there is a disturbing and complete lack of accountability for the housing crisis from top to bottom;

  • that the current housing market is artificially propped up;

  • that sustainable agricultural properties might be a good allocation of capital in coming years and decades;

  • that past and present policies are not useful in preventing the next catastrophe;

  • that Fannie and Freddie have been co-opted as special purpose vehicles used to implement [futile, possibly counterproductive] government policy

  • that we would be best served if the government (gradually) got out of the housing market entirely;

  • and that the current Wall Street model of proprietary trading/investing is rife with conflicts of interest and should be severely curtailed.

But I still disagree about gold's usefulness for anything other than jewelry.

Copied Below

  1. "How Will You Measure Your Life" -- great thoughts on thinking about "resource allocation" from a personal perspective.

  2. "For Fannie Stock, Even Betting Pennies is a Risk" -- please forward this to any remaining proponents of the Efficient Markets Hypothesis.

  3. "You Made More This Year than Fannie Made Since 1970" -- note that 1970 marked Fannie's IPO, and its loss of $58 billion in 2008 more than erased its cumulative profits from 1970 through 2007. "Chart of the Day" is attached.

  4. "Bad Debts Rise As Bust Erodes Home Equity" -- anybody else interested in restoring the concept of debtors' prison? Obviously "it's not the homeowner's fault that the value of the collateral drops," but then it can't be the banks' fault either. And it is the homeowner's fault for signing his name to a ridiculous loan he couldn't possibly afford and using the proceeds to buy cars and boats and flat screen TVs. I don't buy the "predatory lender" angle in home equity loans in the vast majority of cases -- these people were outspendig their means, pure and simple. This supposedly professional real estate agent who "doesn't want to be a slave to the bank" wants a pity party because his massively levered bet on multiple properties blew up in his face? This false sense of entitlement just has to end if we're ever going to get out of this whole mess...

  5. "Physics Envy in Finance" -- excellent points on the intrinsic weaknesses of financial modeling and risk management from Rick Bookstaber, of all people.

  6. "Lou Simpson Retiring from Geico" -- his age was the only thing keeping him from being named the outright successor to Buffett as CIO.

How Will You Measure Your Life?

by Clayton M. Christensen

Don’t reserve your best business thinking for your career.

Editor’s Note: When the members of the class of 2010 entered business school, the economy was strong and their post-graduation ambitions could be limitless. Just a few weeks later, the economy went into a tailspin. They’ve spent the past two years recalibrating their worldview and their definition of success.

The students seem highly aware of how the world has changed (as the sampling of views in this article shows). In the spring, Harvard Business School’s graduating class asked HBS professor Clay Christensen to address them—but not on how to apply his principles and thinking to their post-HBS careers. The students wanted to know how to apply them to their personal lives. He shared with them a set of guidelines that have helped him find meaning in his own life. Though Christensen’s thinking comes from his deep religious faith, we believe that these are strategies anyone can use. And so we asked him to share them with the readers of HBR.

Before I published The Innovator’s Dilemma, I got a call from Andrew Grove, then the chairman of Intel. He had read one of my early papers about disruptive technology, and he asked if I could talk to his direct reports and explain my research and what it implied for Intel. Excited, I flew to Silicon Valley and showed up at the appointed time, only to have Grove say, “Look, stuff has happened. We have only 10 minutes for you. Tell us what your model of disruption means for Intel.” I said that I couldn’t—that I needed a full 30 minutes to explain the model, because only with it as context would any comments about Intel make sense. Ten minutes into my explanation, Grove interrupted: “Look, I’ve got your model. Just tell us what it means for Intel.”

I insisted that I needed 10 more minutes to describe how the process of disruption had worked its way through a very different industry, steel, so that he and his team could understand how disruption worked. I told the story of how Nucor and other steel minimills had begun by attacking the lowest end of the market—steel reinforcing bars, or rebar—and later moved up toward the high end, undercutting the traditional steel mills.

When I finished the minimill story, Grove said, “OK, I get it. What it means for Intel is...,” and then went on to articulate what would become the company’s strategy for going to the bottom of the market to launch the Celeron processor.

I’ve thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I’d have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

That experience had a profound influence on me. When people ask what I think they should do, I rarely answer their question directly. Instead, I run the question aloud through one of my models. I’ll describe how the process in the model worked its way through an industry quite different from their own. And then, more often than not, they’ll say, “OK, I get it.” And they’ll answer their own question more insightfully than I could have.

My class at HBS is structured to help my students understand what good management theory is and how it is built. To that backbone I attach different models or theories that help students think about the various dimensions of a general manager’s job in stimulating innovation and growth. In each session we look at one company through the lenses of those theories—using them to explain how the company got into its situation and to examine what managerial actions will yield the needed results.

On the last day of class, I ask my students to turn those theoretical lenses on themselves, to find cogent answers to three questions: First, how can I be sure that I’ll be happy in my career? Second, how can I be sure that my relationships with my spouse and my family become an enduring source of happiness? Third, how can I be sure I’ll stay out of jail? Though the last question sounds lighthearted, it’s not. Two of the 32 people in my Rhodes scholar class spent time in jail. Jeff Skilling of Enron fame was a classmate of mine at HBS. These were good guys—but something in their lives sent them off in the wrong direction.

As the students discuss the answers to these questions, I open my own life to them as a case study of sorts, to illustrate how they can use the theories from our course to guide their life decisions.

One of the theories that gives great insight on the first question—how to be sure we find happiness in our careers—is from Frederick Herzberg, who asserts that the powerful motivator in our lives isn’t money; it’s the opportunity to learn, grow in responsibilities, contribute to others, and be recognized for achievements. I tell the students about a vision of sorts I had while I was running the company I founded before becoming an academic. In my mind’s eye I saw one of my managers leave for work one morning with a relatively strong level of self-esteem. Then I pictured her driving home to her family 10 hours later, feeling unappreciated, frustrated, underutilized, and demeaned. I imagined how profoundly her lowered self-esteem affected the way she interacted with her children. The vision in my mind then fast-forwarded to another day, when she drove home with greater self-esteem—feeling that she had learned a lot, been recognized for achieving valuable things, and played a significant role in the success of some important initiatives. I then imagined how positively that affected her as a spouse and a parent. My conclusion: Management is the most noble of professions if it’s practiced well. No other occupation offers as many ways to help others learn and grow, take responsibility and be recognized for achievement, and contribute to the success of a team. More and more MBA students come to school thinking that a career in business means buying, selling, and investing in companies. That’s unfortunate. Doing deals doesn’t yield the deep rewards that come from building up people.

I want students to leave my classroom knowing that.

Create a Strategy for Your Life

A theory that is helpful in answering the second question—How can I ensure that my relationship with my family proves to be an enduring source of happiness?—concerns how strategy is defined and implemented. Its primary insight is that a company’s strategy is determined by the types of initiatives that management invests in. If a company’s resource allocation process is not managed masterfully, what emerges from it can be very different from what management intended. Because companies’ decision-making systems are designed to steer investments to initiatives that offer the most tangible and immediate returns, companies shortchange investments in initiatives that are crucial to their long-term strategies.

Over the years I’ve watched the fates of my HBS classmates from 1979 unfold; I’ve seen more and more of them come to reunions unhappy, divorced, and alienated from their children. I can guarantee you that not a single one of them graduated with the deliberate strategy of getting divorced and raising children who would become estranged from them. And yet a shocking number of them implemented that strategy. The reason? They didn’t keep the purpose of their lives front and center as they decided how to spend their time, talents, and energy.

It’s quite startling that a significant fraction of the 900 students that HBS draws each year from the world’s best have given little thought to the purpose of their lives. I tell the students that HBS might be one of their last chances to reflect deeply on that question. If they think that they’ll have more time and energy to reflect later, they’re nuts, because life only gets more demanding: You take on a mortgage; you’re working 70 hours a week; you have a spouse and children.

For me, having a clear purpose in my life has been essential. But it was something I had to think long and hard about before I understood it. When I was a Rhodes scholar, I was in a very demanding academic program, trying to cram an extra year’s worth of work into my time at Oxford. I decided to spend an hour every night reading, thinking, and praying about why God put me on this earth. That was a very challenging commitment to keep, because every hour I spent doing that, I wasn’t studying applied econometrics. I was conflicted about whether I could really afford to take that time away from my studies, but I stuck with it—and ultimately figured out the purpose of my life.

Had I instead spent that hour each day learning the latest techniques for mastering the problems of autocorrelation in regression analysis, I would have badly misspent my life. I apply the tools of econometrics a few times a year, but I apply my knowledge of the purpose of my life every day. It’s the single most useful thing I’ve ever learned. I promise my students that if they take the time to figure out their life purpose, they’ll look back on it as the most important thing they discovered at HBS. If they don’t figure it out, they will just sail off without a rudder and get buffeted in the very rough seas of life. Clarity about their purpose will trump knowledge of activity-based costing, balanced scorecards, core competence, disruptive innovation, the four Ps, and the five forces.

My purpose grew out of my religious faith, but faith isn’t the only thing that gives people direction. For example, one of my former students decided that his purpose was to bring honesty and economic prosperity to his country and to raise children who were as capably committed to this cause, and to each other, as he was. His purpose is focused on family and others—as mine is.

The choice and successful pursuit of a profession is but one tool for achieving your purpose. But without a purpose, life can become hollow.

Allocate Your Resources

Your decisions about allocating your personal time, energy, and talent ultimately shape your life’s strategy.

I have a bunch of “businesses” that compete for these resources: I’m trying to have a rewarding relationship with my wife, raise great kids, contribute to my community, succeed in my career, contribute to my church, and so on. And I have exactly the same problem that a corporation does. I have a limited amount of time and energy and talent. How much do I devote to each of these pursuits?

Allocation choices can make your life turn out to be very different from what you intended. Sometimes that’s good: Opportunities that you never planned for emerge. But if you misinvest your resources, the outcome can be bad. As I think about my former classmates who inadvertently invested for lives of hollow unhappiness, I can’t help believing that their troubles relate right back to a short-term perspective.

When people who have a high need for achievement—and that includes all Harvard Business School graduates—have an extra half hour of time or an extra ounce of energy, they’ll unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, teach a class, publish a paper, get paid, get promoted. In contrast, investing time and energy in your relationship with your spouse and children typically doesn’t offer that same immediate sense of achievement. Kids misbehave every day. It’s really not until 20 years down the road that you can put your hands on your hips and say, “I raised a good son or a good daughter.” You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to underinvest in their families and overinvest in their careers—even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.

If you study the root causes of business disasters, over and over you’ll find this predisposition toward endeavors that offer immediate gratification. If you look at personal lives through that lens, you’ll see the same stunning and sobering pattern: people allocating fewer and fewer resources to the things they would have once said mattered most.

Create a Culture

There’s an important model in our class called the Tools of Cooperation, which basically says that being a visionary manager isn’t all it’s cracked up to be. It’s one thing to see into the foggy future with acuity and chart the course corrections that the company must make. But it’s quite another to persuade employees who might not see the changes ahead to line up and work cooperatively to take the company in that new direction. Knowing what tools to wield to elicit the needed cooperation is a critical managerial skill.

The theory arrays these tools along two dimensions—the extent to which members of the organization agree on what they want from their participation in the enterprise, and the extent to which they agree on what actions will produce the desired results. When there is little agreement on both axes, you have to use “power tools”—coercion, threats, punishment, and so on—to secure cooperation. Many companies start in this quadrant, which is why the founding executive team must play such an assertive role in defining what must be done and how. If employees’ ways of working together to address those tasks succeed over and over, consensus begins to form. MIT’s Edgar Schein has described this process as the mechanism by which a culture is built. Ultimately, people don’t even think about whether their way of doing things yields success. They embrace priorities and follow procedures by instinct and assumption rather than by explicit decision—which means that they’ve created a culture. Culture, in compelling but unspoken ways, dictates the proven, acceptable methods by which members of the group address recurrent problems. And culture defines the priority given to different types of problems. It can be a powerful management tool.

In using this model to address the question, How can I be sure that my family becomes an enduring source of happiness?, my students quickly see that the simplest tools that parents can wield to elicit cooperation from children are power tools. But there comes a point during the teen years when power tools no longer work. At that point parents start wishing that they had begun working with their children at a very young age to build a culture at home in which children instinctively behave respectfully toward one another, obey their parents, and choose the right thing to do. Families have cultures, just as companies do. Those cultures can be built consciously or evolve inadvertently.

If you want your kids to have strong self-esteem and confidence that they can solve hard problems, those qualities won’t magically materialize in high school. You have to design them into your family’s culture—and you have to think about this very early on. Like employees, children build self-esteem by doing things that are hard and learning what works.

Avoid the “Marginal Costs” Mistake

We’re taught in finance and economics that in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and marginal revenues that each alternative entails. We learn in our course that this doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. If we knew the future would be exactly the same as the past, that approach would be fine. But if the future’s different—and it almost always is—then it’s the wrong thing to do.

This theory addresses the third question I discuss with my students—how to live a life of integrity (stay out of jail). Unconsciously, we often employ the marginal cost doctrine in our personal lives when we choose between right and wrong. A voice in our head says, “Look, I know that as a general rule, most people shouldn’t do this. But in this particular extenuating circumstance, just this once, it’s OK.” The marginal cost of doing something wrong “just this once” always seems alluringly low. It suckers you in, and you don’t ever look at where that path ultimately is headed and at the full costs that the choice entails. Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.”

I’d like to share a story about how I came to understand the potential damage of “just this once” in my own life. I played on the Oxford University varsity basketball team. We worked our tails off and finished the season undefeated. The guys on the team were the best friends I’ve ever had in my life. We got to the British equivalent of the NCAA tournament—and made it to the final four. It turned out the championship game was scheduled to be played on a Sunday. I had made a personal commitment to God at age 16 that I would never play ball on Sunday. So I went to the coach and explained my problem. He was incredulous. My teammates were, too, because I was the starting center. Every one of the guys on the team came to me and said, “You’ve got to play. Can’t you break the rule just this one time?”

I’m a deeply religious man, so I went away and prayed about what I should do. I got a very clear feeling that I shouldn’t break my commitment—so I didn’t play in the championship game.

In many ways that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, resisting the temptation whose logic was “In this extenuating circumstance, just this once, it’s OK” has proven to be one of the most important decisions of my life. Why? My life has been one unending stream of extenuating circumstances. Had I crossed the line that one time, I would have done it over and over in the years that followed.

The lesson I learned from this is that it’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. If you give in to “just this once,” based on a marginal cost analysis, as some of my former classmates have done, you’ll regret where you end up. You’ve got to define for yourself what you stand for and draw the line in a safe place.

Remember the Importance of Humility

I got this insight when I was asked to teach a class on humility at Harvard College. I asked all the students to describe the most humble person they knew. One characteristic of these humble people stood out: They had a high level of self-esteem. They knew who they were, and they felt good about who they were. We also decided that humility was defined not by self-deprecating behavior or attitudes but by the esteem with which you regard others. Good behavior flows naturally from that kind of humility. For example, you would never steal from someone, because you respect that person too much. You’d never lie to someone, either.

It’s crucial to take a sense of humility into the world. By the time you make it to a top graduate school, almost all your learning has come from people who are smarter and more experienced than you: parents, teachers, bosses. But once you’ve finished at Harvard Business School or any other top academic institution, the vast majority of people you’ll interact with on a day-to-day basis may not be smarter than you. And if your attitude is that only smarter people have something to teach you, your learning opportunities will be very limited. But if you have a humble eagerness to learn something from everybody, your learning opportunities will be unlimited. Generally, you can be humble only if you feel really good about yourself—and you want to help those around you feel really good about themselves, too. When we see people acting in an abusive, arrogant, or demeaning manner toward others, their behavior almost always is a symptom of their lack of self-esteem. They need to put someone else down to feel good about themselves.

Choose the Right Yardstick

This past year I was diagnosed with cancer and faced the possibility that my life would end sooner than I’d planned. Thankfully, it now looks as if I’ll be spared. But the experience has given me important insight into my life.

I have a pretty clear idea of how my ideas have generated enormous revenue for companies that have used my research; I know I’ve had a substantial impact. But as I’ve confronted this disease, it’s been interesting to see how unimportant that impact is to me now. I’ve concluded that the metric by which God will assess my life isn’t dollars but the individual people whose lives I’ve touched.

I think that’s the way it will work for us all. Don’t worry about the level of individual prominence you have achieved; worry about the individuals you have helped become better people. This is my final recommendation: Think about the metric by which your life will be judged, and make a resolution to live every day so that in the end, your life will be judged a success. > July–August 2010

For Fannie Stock, Even Betting Pennies Is a Risk

August 4, 2010, 6:04 pm

It is flotsam of the housing wreck, a stock no longer worthy of the Big Board. But penny by penny, the mortgage giant Fannie Mae is being salvaged in the stock market, The New York Times’s David Gillenreports.

Nearly two years after it was effectively nationalized, Fannie Mae has become the nation’s hottest penny stock — and, perhaps, its most dangerous. Even though the shares are almost worthless, they are changing hands at a furious pace. Since June, about 31 million of them have been traded on a typical day, more than triple the average for Goldman Sachs shares.

All those Fannie Mae shares do not add up to much money. The stock closed at 40 cents on Wednesday, about the cost of a first-class postage stamp. In mid-2007, before the housing market deflated, it fetched nearly $85.

“The volumes are astonishing,” said Bose T. George, a financial analyst at Keefe Bruyette & Woods “It’s like a casino.”

The knockdown price partly explains why Fannie Mae typically ranks among the liveliest financial shares in the market: It doesn’t cost much to take a flier on Fannie.

But the Lilliputian price also explains why Fannie Mae might have buy-and-hold types feeling queasy. A penny or two change in the price translates into a big move in percentage terms. Last week, for instance, Fannie Mae’s shares jumped 47 percent one day, only to sink 14 percent the next.

Behind all of this commotion are day traders, those creatures of the dot-com era. Mutual funds and other institutions have mostly abandoned Fannie Mae, as well as shares of its cousin Freddie Mac. The big money has ceded the marketplace to individuals who are bold enough, or perhaps foolish enough, to gamble on these stocks for a few hours.

Just don’t hold Fannie Mae too long, Mr. George advised. He predicted the stock would eventually fall to zero. It is difficult to know what other analysts think, since Mr. George is just about the only one who still covers Fannie Mae’s stock. His recommendation is an understated “underperform” — Wall Street code for sell.

“It’s not really a stock anymore — everyone knows this is going to zero,” he said.

Well, not everyone, at least not right away. But the running interest in Fannie Mae’s stock might seem surprising, considering that this company was the Titanic of the mortgage market. During the bubble years, Fannie Mae and Freddie Mac bought up so many toxic mortgages that the government was forced to take them over. Their stock prices promptly plunged.

The federal government today owns almost 80 percent of Fannie and Freddie, and few people, in Washington or on Wall Street, seem to know what to do with them.

Despite the trading frenzy, Fannie and Freddie have become pariahs. Most big investors won’t touch them. As of March 31, Fannie’s shareholders included two big money management companies, the Vanguard Groupand BlackRock. But together they owned a mere 1.2 percent of the company, a pittance given the size of those investment companies.

Big institutions typically sell if a stock price sinks below $5. Fannie Mae has not traded that high in two years. Last month, both Fannie Mae and Freddie Mac were ignominiously tossed off the New York Stock Exchangebecause their share prices had languished below $1 for more than 30 days straight.

And so the once-mighty Fannie Mae and Freddie Mac have been banished to OTC Bulletin Board, home to lowly penny stocks and thinly traded “microcap” companies. As the Securities and Exchange Commission says in its guide for investors: “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.”

The question of what to do with these troubled giants vexes policy makers and bankers alike. Together, Fannie Mae and Freddie Mac own or guarantee roughly half of the nation’s $11 trillion home mortgage market. The new overhaul of financial regulation did nothing to address the companies, even though they played a central role in inflating the housing bubble.

The Obama administration plans to hold a conference on the future of housing on Aug. 17 to seek advice about reforming the rules governing mortgage finance. The goal is to deliver a proposal to Congress by January.

What that proposal will say is anyone’s guess. Fannie and Freddie’s harshest critics want the companies shut down. But even banking executives concede that, for now, the federal government will probably have to play some role in mortgage finance, given the industry’s dependence on Fannie and Freddie.

“The fundamental problem with Fannie and Freddie is that no one really knows what to do with them,” said Bert Ely, a financial and monetary policy consultant based in Alexandria, Va., and a longtime critic of the companies. Until Washington comes up with answers, the day traders will no doubt try to ride the swings in Fannie Mae and pocket some more pennies while they still can.

You Made More This Year Than Fannie Since 1970: Chart of Day

2010-08-05 04:00:15.0 GMT

By Brendan Moynihan

Aug. 5 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank, who begins drafting legislation next month to overhaul Fannie Mae and Freddie Mac, said in 2003 the mortgage companies were "financially sound." How wrong was he?

The CHART OF THE DAY shows Fannie Mae’s cumulative profit since going public in 1970. In 2008 alone, the company lost $58 billion, erasing its cumulative profit as a publicly traded company. In 2009, it lost $72 billion more.

Frank’s challenge will be to create an entity that serves the goal of making housing more affordable without the conflict of interest of being driven by shareholder returns.

Republicans may highlight Frank’s past support for the government-sponsored agencies. The Massachusetts Democrat said seven years ago of Fannie Mae and Freddie Mac: "We see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . ." and ‘‘I want to roll the dice a little more in this situation towards subsidized housing.’’

The government-backed mortgage giants were placed in conservatorship in September 2008 and are now 80 percent owned by U.S. taxpayers. They own or guarantee more than half of the nation’s $11 trillion in residential mortgages. Fannie Mae and Freddie Mac have an unlimited line of credit from the government and have so far cost U.S. taxpayers $145 billion, more than American International Group Inc.

--Editors: Chris Nagi, Nick Baker

To contact the reporter on this story:

Brendan Moynihan in Brentwood, Tennessee, at +1-312-519-5372 or

To contact the editor responsible for this story:

Nick Baker at +1-212-617-5919 or

Bad Debts Rise As Bust Erodes Home Equity

2010-08-12 07:51:55.657 GMT

By DAVID STREITFELD; John Collins Rudolf contributed reporting.

Aug. 12 (New York Times) -- PHOENIX -- During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security.