Bye, Bye Freddie and Fannie, Hello New Guy

Posted by Ray on August 4, 2009 under Main | Be the First to Comment

Since Freddie and Fannie’s demise in September of 2008 Congress has been trying to figure out what went wrong. I guess they forgot how regulators in 2003 said there were significant problems with how they ran their books, but Barney Frank, Maxine Waters and others said that there were no problems and they were financially sound. It is funny how government always forgets how they screwed up, but punishes other companies endlessly on their missteps, especially when they do not donate to their campaigns.

Regardless, we all remember that shareholders were wiped out and the government threw them hundreds of billions in lifelines as the firms were officially insolvent or close to it. Bother firms are still very active in the mortgage market and guarantee $5.3 trillion of the $12 trillion US mortgage market. The primary function of these firms was to make homeownership affordable apparently at any cost.

Unfortunately we are now all paying for those guarantees mostly because of their inability to manage risk, but more because Congress kept pushing them to make riskier loans. At this point arguing who exactly is at fault is irrelevant as these firms are owned by the government and will be, according to Moody’s, in the future.

Here is the good news, these firms did so well that it is likely that another agency will replace them. I assume it is under the same type of quasi government guarantee system that Freddie and Fannie had, but who knows at this stage. This is why government should have no ties with private business because at the end of the day it doesn’t matter if that business was a complete failure since they can just fund, with our tax dollars, another attempt at the same mistake.

It is just unbelievable that the government would be allowed to engineer a replacement for these failed institutions. The reason why the government will not place either of them back in business is because their names are tarnished. I realize that many Americans will have forgotten about the previous failed institutions by the time they re-launch the new entity or entities, but that is still no excuse. I am even willing to bet that they bring back the same management teams because they will have the depth of knowledge and experience they need to run such a large operation.

In a nutshell, we can start over again, take them public and then watch them fail only to have more shareholders wiped out again. I know I am presuming a failure before the endeavor is even tried, but think of it this way, look at all the warnings Congress had and then look at what they did, even after Freddie and Fannie got caught, and then tell me what you think will happen. I can hardly wait for Freddie and Fannie 2.0, it should be a fun ride.