In 1986, Steven Spielberg produced a slapstick film, “The Money Pit,” about a married couple whose efforts to renovate their home are sabotaged by costly accidents. A generation later, the American taxpayers’ efforts to resuscitate Fannie Mae and Freddie Mac dwarf the calamities of the “The Money Pit.”
Specifically, the government announced that it will remove for three years the financial cap of $400 billion for these “quasi private institutions.” They have already received $112 billion.
The Treasury said, “Unlimited access to bailout funds” through 2012 “was necessary for preserving the continued strength and stability of the mortgage market.” The willingness to allow Fannie and Freddie to borrow without limits counters the original intention to rein in the companies’ size and growth. The new strategy gives them a slam dunk to hasten purchases of delinquent loans and modify mortgages without “worrying about taking losses.”
In exchange for the funding, the Treasury has received preferred stock in the companies paying 10 percent dividends. The Treasury also has warrants to acquire nearly 80 percent of the common shares in each firm. Critics point out that the stocks of both companies are worthless. Moreover, the companies will have to borrow from the Treasury to make their dividend payments.
To add salt to the wounds, the government approved compensation for the companies’ top 12 executives of up to $42 million for their work this past year. Indeed, you have to work 24/7 to lose billions of dollars.
The pay packages, approved by the Treasury and the Federal Housing Finance Agency, which oversees Fannie and Freddie, angered Kevin Murphy, a professor at the University of Southern California who last summer advised the Treasury on pay issues. Murphy said “this seems like a devious retreat. … There’s no stock in here, there’s no stock options, there’s nothing that appears to be tied to stock prices. It should make shareholders concerned.”
In an July 28 New Yorker article, “Sponsoring Recklessness,” James Surowiecki described Fannie and Freddie as the duck-billed platypuses of the financial world. On the one hand, they are profit-driven corporations, owned by shareholders. On the other hand, they are designated “government-sponsored enterprises” because they were created by Congress. Fannie, Freddie and the platypus are among the very few mammals that can lay an egg.
When do the words “not guaranteed” actually mean “guaranteed?” Despite official protestations of “not guaranteed,” investors assumed that their obligations were guaranteed. The Treasury Department and the Federal Reserve in 2008 effectively guaranteed their obligations when they came up with an explicit bailout package to avoid a major financial crisis.
The growth of Fannie and Freddie has become a calamity:
They were restructured to save the financial system.
They guaranteed $5.3 trillion of mortgage debt, covering about half the outstanding mortgages in the U.S — thereby “crowding out” private lenders.
Foreign central banks hold about $1.5 trillion of Fannie and Freddie paper, making their potential default global.
Fannie and Freddie need a dramatic overhaul. Either they should be forced to make it as private companies or they should be nationalized. Given that their business depends on the promise of government assistance, nationalization seems more sensible. Shareholders should not profit if Fannie and Freddie are going to stick taxpayers with the bill. If they are privatized, we need to mandate a realistic timetable.
Do we need Fannie and Freddie? They have become a financial Death Valley — a bottomless money pit. Their reason for being is that their can borrow money at low rates. This reduces borrowing costs for homeowners.
But a paper by the economist Wayne Passmore of the Federal Reserve suggests that, in fact, Fannie and Freddie save homeowners less than one-tenth of a percentage point. Given everything else we could be spending taxpayer money on, does our government also need to be in the mortgage-buying business?
Originally published in the Sarasota Herald-Tribune
