Fannie and Freddie: A Case Study in Failure

Posted by courage On May - 25 - 2010

Yes Congress has passed the financial “reform” bill, it now moves to committee to reconcile the two Congressional versions.  The puzzling aspect of this bill is that both the House and Senate version fail to address the catalysis for the housing meltdown, Fannie Mae and Freddie Mac.  In fact, late last year Congress opened, what can be described as an open line of credit for these institutions, creating agencies which have NO incentive to make  prudent loans based on sound financial principles.  Instead the underwater and deep red financial sheet of these agencies is sure to plunge deeper in to an abyss of waste and irresponsible lending, needn’t worry though our tax dollars will prop of this agencies which display government irresponsibility at its highest.

Take a look at the dismal shape of these agencies, courtesy of the Heritage Foundation:

  • Titanic FailureMarket Movers: Fannie Mae and Freddie Mac both played a major role in the housing boom that preceded the economic meltdown of 2008, controlling as much as half of the nation’s residential mortgage market. And that role has grown: Last year, these two government-sponsored enterprises (GSEs) financed or backed about 70 percent of single-family mortgage loans. They hold about $5 trillion in their investment portfolios.
  • Ignoring the Problem: Yet the legislation Congress is considering to reform the financial industry would do nothing to fix the problems associated with Fannie and Freddie. Some lawmakers have attempted to ensure that the current reform effort addresses the problems created by both entities—to no avail.
  • Taxpayers Foot the Bill: Fannie and Freddie are losing money fast, and their losses are being covered by taxpayers—the same taxpayers whom lawmakers say they want to protect from footing the bill for future bailouts.
  • Wanting Even More Money: For the first quarter of 2010, Freddie Mac announced losses of $8 billion and said it would be asking for another $10.6 billion in taxpayer help. Fannie Mae, meanwhile, announced an $11.5 billion loss and asked for another $8.4 billion. This is on top of the nearly $145 billion in taxpayer dollars
  • A Running and Endless Tab: This total, unfortunately, is sure to go higher. Last December, the Obama Administration lifted caps on how much total bailout money Fannie and Freddie can receive. The limits have gone from $200 billion each to however much they say they need.

Trouble Then, Trouble Now

  • Courting Trouble for a Long Time: Experts have warned for decades that Fannie and Freddie lacked sufficient capital—made up of both investors’ money and retained earnings—to protect against losses.
  • Lawmakers Look the Other Way: Back when they were privately owned, Fannie and Freddie had only $1 in capital for every $20 in assets; most banks had $1 in capital for every $12 in assets. Congress did consider higher standards in the 1990s, but many of the same lawmakers who head the oversight committees for Fannie and Freddie today bowed to a high-powered lobbying campaign that derailed reform.
  • Kicking the Can: According to Senator Mark Warner (D–VA) and the Obama Administration, a plan to tame these two GSEs will have to wait until at least next year. An effort by John McCain to amend the pending financial regulation bill to address the problem was defeated recently and replaced by a call for a “study” of the issue. 
  • Fixing Fannie and Freddie
  • Stop Perpetuating the Problem: Fannie Mae and Freddie Mac have posed a risk to the financial system and the taxpayer for long enough. They need to be put on a path to genuine resolution. Fannie and Freddie should be partly wound down, the rest broken up and sold off—not replaced, reformed, or rejuvenated.
  • Don’t Let It Happen Again: Congress should also ensure that no successor institution be provided with the implicit guarantees that allowed these two to play h

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