Skip to comments.Privatize Fannie and Freddie
Posted on 11/11/2005 1:09:20 PM PST by EarthStomper
Privatize Fannie and Freddie Government reformers need to look toward the markets.
By Mallory Factor
Two centuries ago, Thomas Jefferson argued that private property was the touchstone of American democracy. If he were alive today I am sure he would still be making that argument, because the idea is just as valuable now as it was then. And so I dont hesitate to argue, in the spirit of Jefferson, that Congress today is jeopardizing the American Dream.
What are they doing to contravene the wishes of our third president? Confronted by a real problem related to the semi-governmental status of Fannie Mae and Freddie Mac, Congress is opting for strict new regulations that amount to a de facto nationalization of these government-sponsored enterprises.
The best solution would be precisely the opposite full privatization. Fannie Mae and Freddie Mac, were they to go private, would be normal, private companies in all respects, no longer receiving any special government benefits nor subject to special regulatory restraints.
The legislators pushing for reform have proposed the creation of a new super-regulator which couples these companies more tightly to the federal government and forces them to stop investing in mortgage-backed securities. They want to force Freddie and Fannie to divest a combined securities portfolio valued at more than $1 trillion.
These proposals would undercut Americas promise as an ownership society. The cornerstone of our democratic capitalist system is the idea that all Americans can, through hard work and initiative, make a better life for themselves and their families. In America, everyone has an opportunity to own a home or a business, and amass wealth without fear that an overzealous government can take these away.
Fannie and Freddie developed an important financial technology thats crucial to the ownership society. Before the creation of mortgage-backed securities, banks issuing mortgages held the risk of default on each loan. Mortgage-backed securities spread risk and make it possible to offer financing to home-buyers who wouldnt otherwise qualify. Fannie and Freddie together currently hold a mortgage-backed securities portfolio of over $1 trillion.
Pending legislation would stop government-sponsored enterprises (GSEs) from buying and holding mortgage-backed securities for investment purposes. The legislation would also force the divestiture of Fannies and Freddies current portfolio of mortgage-backed securities.
Because of the special GSE status of Fannie and Freddie, investors believe Congress would prevent these entities from ever failing by using taxpayer-funded bailouts. But the portfolios of Fannie and Freddie have grown because, with risk reduced by a perceived government backstop, investors accept lower interest rates. The GSEs arbitrage this interest-rate advantage to make profits while taxpayers absorb the risk. That creates a moral hazard.
But this is only half the story. A new regulator with portfolio limits would be a cure worse than the disease. The regulator would deepen the moral hazard by making the GSEs even more governmental and by setting a dangerous precedent for federal seizure of effective operational control of private corporations.
The reformers need to look in another direction toward the markets as they seek a win-win solution to the GSE problem.
Freddie and Fannie served a meaningful purpose in creating mortgage-backed securities. But this is now a mature technology that doesnt need any government subsidy. The mechanics of privatization may be tricky, but other GSEs like Sallie Mae, which handled student loans have already been sent out on their own to great success.
Those who seek to eliminate Fannies and Freddies GSE status should not be quick to join those calling for increased government regulation and forced divestiture of assets, moves in the direction of the nationalization of private companies. Dislike of Fannies and Freddies status should not be used as an excuse for arbitrary regulation including forced divestiture that offends the fundamental principles of private ownership.
The country was aghast last summer when the Supreme Court ruled that a city government could force Susette Kelo to sell her home because it knows better how to use her property. Little distinguishes New Londons action from the more nuanced, but equally objectionable, effort to force Fannie and Freddie to get out of the mortgage-investment market and sell off their assets.
Privatization is the only solution that is fair to the GSEs, their competitors, and U.S. taxpayers. This would strengthen private property rights, end the risk to U.S. taxpayers, and allow markets, not regulators, to make business decisions. Lets push Fannie and Freddie out of the federal governments nest and let them fly free.
Mallory Factor is chairman of the Free Enterprise Fund.
"What are they doing to contravene the wishes of our third president? Confronted by a real problem related to the semi-governmental status of Fannie Mae and Freddie Mac, Congress is opting for strict new regulations that amount to a de facto nationalization of these government-sponsored enterprises."
Welcome to A-Marx-ica! We're not happy unless we're controlling every facet of your life. Sure the facts tell us that private enterprise works better than statism. But our motto is, "Facts, shmacts!"
Here's the two-year chart:
Fannie is BK. Freddy is not BK; for now. Both will be officially BK next year. Watch Fannie stock go south next week. Better yet, short the stock. Soon it will be selling for about $ 3 a share. How in the world can a bankrupt company attract sufficient capital to privatize?
The problem if they are privatized is that nobody will be regulating them at all. But I guess that risk factor will be incorporated into their stock prices.
Their market share is steadily declining. The large banks are now issuing securities and are actually behind the effort in Congress to restrict Fannie and Freddie from owning securities.
Isn't or wasn't our old friend Jamie Gorelick on one of these Boards? And I seem to remember her receiving mega compensation for her services. Or am I dreaming?
How about the SEC, they regulate all public companies.
Fannie is BK? as in bankrupt? Please do illuminate us uninformed minions about how you have come to this conclusion about a company valued by the market today at $46 Billion. Not that don't I think Fannie isn't a corporate governance mess, but the hyperbole is a bit over the top, I think.
As a mortgage loan officer, I have fewer and fewer loans that I do that end up being Fannie or Freddie loans.