LESSONS LEARNED: WINKS AND GUARANTIES.

LESSONS LEARNED: WINKS AND GUARANTIES. Kids, I think one of the lessons to be learned from the financial crisis is to extra cautious with assurances that are not guaranties. Annalisa saw a draft of a post on this subject a while ago, and asked why I had used the unusual spelling for “guaranty.” I was using the spelling to demark a legally enforceable obligation, as opposed to one that takes the form of assurances (for example, “We are sponsoring this or our name is on this or our reputation is behind this”). Trouble seems to come when there is a “guarantee” that is not legally enforceable. The government intervened to salvage FNMA and Freddie Mac. Were the obligations of FNMA and Freddie Mac guaranteed by the federal government? This wikipedia article cites the statutes which said that there was no guarantee, and then cites Nobel laureate Vernon Smith, the Economist and Alan Greenspan as referring to an implicit government guarantee. Investors had a lot of money at stake on whether there was a government guarantee. When people on both sides of a transaction don’t know a contract means, look out. Jack Schafer in Slate quoted the Washington Post that FNMA had the “nearest thing to a license to print money. The companies borrowed money at below-market interest rates based on the perception that the government guaranteed repayment, and then they used the money to buy mortgages that paid market interest rates.”