Washington… where ideas go to die – and then be resurrected.
My readers are, of course, familiar with Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These two Government Sponsored Agencies (GSEs) were at the heart of the financial meltdown and needed to be placed under the conservatorship of the Federal Housing Finance Administration (FHFA). At the time that the housing market went cattywampus these two GSEs had outstanding more than US$5 trillion in mortgage-backed securities and a debt portion of a mere $1.6 trillion.
At a press conference during the meltdown, then United States Treasury Secretary Henry Paulsen, advised “that conservatorship was the only form in which I would commit taxpayer money to the GSEs.” He further said that “I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure…” The US taxpayer bailed them out to the tune of $187 billion.
[Source: This Fannie-Freddie resurrection needs to die, Washington Post Editorial Board]
But, of course, Washington has a new plan. And what is that, ask you? Our stalwart leaders wish to return the two mortgage-finance giants to their pre-financial-crisis status as privately owned but “government-sponsored” enterprises, answer I.
The notion is to recreate the private-gain, public-risk conflict that helped sink them in the first place. Their income would recapitalize the entities, rather than be funneled to the treasury, as is currently the case. Then they could exit the regulatory control known as “conservatorship” that has constrained them since 2008 — and resume bundling home loans and selling them, as if the housing debacle in which they grievously participated never happened! Good thinking!
It is a rare event when the Rugged Individualist and the Washington Post Editorial Board agree, but this appears to be the moment. I don’t hate hedge funds (as does Bernie Sanders) but I also do not want US taxpayers (including myself) back on the hook to bail out these entities just so some hedge funds can turn a huge profit.
A handful of Wall Street hedge funds scooped up Fannie and Freddie’s decimated common stock for pennies on the dollar following the bailout. If the plan to resurrect Freddie and Fannie were to succeed these hedge funds would realize a massive windfall once shareholders would have access to company profits again. I am a capitalist, but am adamantly opposed to “crony capitalism.” The Washington establishment is rife with practices that favor special interests of both the Democrat and Republican Parties. This is just another flagrant example.
When hedge funds make common cause with low-income housing advocates it is time to firmly grasp your wallet because your pocket is about to be picked! Fundamental reform would be a good idea, but you already know that will NEVER HAPPEN!
My friends, Big Government is Bad Government. It’s axiomatic!