As we review the GSEs’ 4Q earnings, we reiterate our prior conclusion: for all of the efforts of the firms’ boards and management, they cannot control their destiny but only do the best they can with the magical construct demanded for U.S. mortgage securitization following eight years of inaction on substantive reform. Some quarters, things will go well when all is right with the GSEs’ derivatives books; some quarters it won’t. At no time will the GSEs have a sustainable business model since there are neither sufficient operating earnings nor a robust capital base. Without these, the GSEs can do nothing but generate still more risk given the continuing dependence of the entire economy on agency securitization.
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