Another privatization success storyThe stock market took another tumble today on the work that Fannie Mae and Freddie Mac, which guarantee a large percentage of the mortagages in the United States, are in crisis and may be nearing collapse. Word is that the Bush Administration may have to step in with a bailout plan that could compare with the massive S&L bailout of the early 1990s.
Why are the two giant corporations, without which the entire housing market could collapse, in so much trouble? Dave Iverson discussed that on forum this morning, and some interesting points came out. According to his guest, Thomas Davidoff, a business-school professor at Berkeley, Fannie Mae and Freddie Mac were doing what short-term profit-seeking companies do -- investing in instruments that do well when the economy is doing well, particularly, and ironically, in mortage-backed securities. Now that the housing markets are tanking, and those securities have fallen in value, and the two companies are facing huge liabilities for the mortgages they guaranteed, the taxpayers are going to have to step in.
But here's what a lot of people forget: Fannie Mae, the Federal National Mortgage Association, was originally a government agency, created by Roosevelt as part of the New Deal. In 1968, it was privatized. Freddie Mac, the Federal Home Loan Mortgage Corporation, was never a public entity, but was created to provide competition in the market when Fannie Mae was privatized. (By the way, these are the outfits that have made the securitization of morgtages possible.)
But of course, both have operated with what finance experts call an "implicit guarantee" of federal backing. Everyone assumes that if they screw up, Uncle Sam will come to the rescue.
So we have the worst of both worlds: A private outfit making bad investment decisions because there's no real downside fear -- and the taxpayers, who have little control over it, having to foot the bill.
Privatization has done such wonders for the mortgage-finance market, eh? Perhaps President Obama and Speaker Pelosi will have enough sense to stop bailing these companies out and turn them back into government agencies.
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Comments (4)
If they are Government Agencies, they would still need to be bailed out by Tax Payers, or do you suggest they only loan to middle class and those earning high salaries? The ability to manage and create CMOs is in large part due to advances in computer technology, so comparing the pre 1968 Fannie Mae with today’s entity is pointless.
Financial Innovation is a good thing, but not without risks. Without the ability and personalities that take risks America would not be the great country it is.
As with other financial crises we will come out of this, and I suspect that there will be more to come.
Posted by Chris P | July 13, 2008 11:58 AM
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Posted by saifulla786 | July 14, 2008 07:06 AM
Yeah, there's a lot more to come, but my point is that right now with Fannie and Freddie, the profit is privatized and the risk is public. If they make money, the shareholders (and the top execs) get it. If they make bad business decisions and lose, you and I have to pick up the tab.
Posted by Tim Redmond | July 15, 2008 02:12 PM
@chris p -- If they were government agencies, their activities would be fully transparent, executive pay and perks would be at reasonable levels, and any profits would return to the TAX PAYERS. These wonderful personalities that supposedly make America great are taking risks with other people's money. At the end of the day, no matter how badly they screw up, they come home with their 6-figure salaries and golden parachutes. American capitalism has become a racket, with no real competition, and the insiders taking care of each other. They all howl to keep government out of their business until things go sour, then they run back to government for a bailout. How long must we put up with this stinking shit?
Posted by geo eps | July 18, 2008 12:39 PM