US Treasury Takes Over Fannie and Freddie

The Bush administration has nationalized the government sponsored enterprises [GSE], Federal National Mortgage Association (stupidly dubbed Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac, equally stupid). Naturally, the Republicans have avoided calling a spade a spade here, and say the two government sponsored enterprises have gone into conservatorship. A rose by any other name . . . .

Treasury Secretary Henry Paulson announced yesterday “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance.” In other words, they were too big to let fail.

The terms of the arrangement turn on four points. First under Treasury guidance, both will increase their portfolios of mortgage-backed securities (MBS, the instruments backed by mortgage payment revenue streams) to make mortgages easier to secure for now. The Treasury has also entered into a preferred stock purchase agreement with the GSEs to ensure they have the capital needed to continue their work. It is also provided them with new secured lines of credit. Finally, the Treasury is going to buy MBS instruments directly.

The boards of both companies are going to be replaced, and it appears that the owners of FNMA and FHLMC common stock are going to take some losses. That’s as it should be. The US taxpayer is going to get stuck with tens of billions in losses as well, and if the housing market doesn’t turn around in the next year or so, those losses could be in the hundreds of billions. That is the price of having entities that are too big to fail.

The Treasury has made it clear, however, that the government doesn’t need to be in the real estate business, and it probably shouldn’t be. That will be a matter for the next president to decide. This journal has said repeatedly that the feds needed to nationalize these GSEs, and when they are cleaned up, they should be broken up into entities that aren’t too big to fail. Those should then be sold off to the private sector with a firm declaration that they are not backed by the US government.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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