EconInvestor

Bullfighter Christian Hernandez runs out of ring in Mexico, arrested for breach of contract. In hindsight, some decisions look bad…such as being a bullfighter or giving Fannie Mae and Freddie Mac a government charter.

It’s Time to Nationalize Fannie and Freddie cries out Stephen A. Blumenthal in the Wall Street Journal (June 15, 2010) (subscription may be required). His argument is based on the following:

“During the recent financial crisis, the private label mortgage-backed securities market disappeared—and with it went the liquidity it provided to the mortgage market outside of Fannie and Freddie. Banks were left to take loans they made into their inventory, and assume both credit and interest-rate risk. They refused, and simply stopped lending unless the mortgages could be sold to Fannie and Freddie. To a large extent that situation still exists today, as Federal Reserve Chairman Ben Bernanke said earlier this month.”

People who want to nationalize usually are looking backwards rather than forwards. They lack vision. In this case, let bankruptcy take place.  If there is a demand for 30-year mortgages, new instruments will arise to fulfill that demand if banks don’t want to issue mortgages in their current form.

In any case, who says that all financial institutions won’t issue new mortgages if the government refuses to back them? Here’s a thrift that knows what it is doing:  A Thrift Where Being Conservative Pays Dividends.

While the US still has some free enterprise left, Fannie Mae and Freddie Mac show the problems when politicians steer companies for political purposes. Since 2002, the Wall Street Journal has pointed out the accounting and deficiency problems with both institutions. However, these were ignored due to Barney Frank (D-Rep MA) wanting to pursue his own “affordable housing” agenda through Fannie Mae and Freddie Mac.

With the collapse of both institutions, the taxpayer is still on the hook for billions. This Wall Street Journal article from May 24, 2010, spells out the problems remaining: Fannie, Freddie Fix Is Federal Hot-Potato (subscription may be required). The article points out that “Together with the Federal Housing Administration, Fannie and Freddie guaranteed 96.5% of all new home loans last quarter. “ According to the article, so far the government has injected $145 billion into the institutions. Furthermore, it is not over.

Now we move to Politicizing the Federal Reserve. Maxine Waters (D-Rep CA) wants to push her “affordable housing” agenda onto the individual 12 Federal Reserve Banks. This is after the Fannie Mae and Freddie Mac debacle.  Instead of fixing the mortgage mess, her proposal will lead the Fed down the same road as Fannie Mae and Freddie Mac.

Billionaire subordinated debt holders of Fannie and Fred will get bailed out ( Bailout for Billionaires ) in the government conservatorship. Normally, they would lose out along with the equity holders.

Who are these individuals and institutions that are going to benefit from US tax dollars? 

It seems this corrupt saga will be with us a long time.

The US government and press has been reluctant to call the Fannie Mae and Freddie Mac receivership “nationalization”.  If there is any doubt, “Peter Orszag, CBO director, said: ‘It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.’” ( Cost of US loans bail-out emerging ) This sounds like nationalization to me. Technically it is in “conservatorship”.

With the two Government Sponsored Entities (GSEs) holding one-half of US mortgages, the collapse of the companies without federal intervention would have caused collapse of the mortgage backed securities market.  After years of ignoring calls for reform, the government had to step in to keep the mortgage market liquid.

Unfortunately, there hasn’t been a policy debate yet on what the final outcome should be. 

What we need is a general policy debate on the role of government in free enterprise.  From Fannie Mae to ethanol subsidies, the federal governement is playing a greater and greater role in commerce.  Is that really desirable?

“The Fannie-Freddie bailout is one of the great political scandals of our age, all the more because it was so obviously coming for so long. Officials at the Federal Reserve warned about it for years, only to be ignored by both parties on Capitol Hill.” from the Wall Street Journal article Weekend at Henry’s.

The Wall Street has been reporting on the problem since 2002 as shown here:  Fannie Mayhem: A History

One of the politicians who has helped in this scandal is reported here:  Fannie Mae’s Patron Saint

What is disturbing about this scandal is that the press is not emphasizing the corruptness of it all. Enron wiped out $60 billion in market value and $2 billion in pension plans (Billions to be shared by Enron shareholders).  The Fannie Mae and Freddie Mac bailout could cost $200 billion (U.S. government takes control of Fannie, Freddie).