The government is opening the purse strings to prop up Fannie Mae and Freddie Mac, but obituaries may still be in order for the mortgage giants. Sunday's announcement by Treasury Secretary Hank Paulson that the feds would make easy money available to the companies and may buy a big chunk of their stock made it clear that, for now, the feds consider the housing market too fragile and Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) too important to permit them to fail. The two own or guarantee about $5 trillion in mortgages - half the U.S. market.
It's hard to argue that the companies could go under tomorrow without a major disruption in the economy. But that doesn't mean they can continue doing business as usual. Major problems, like risk-filled books and tiny capital cushions, are symptomatic of Fannie and Freddie's structure: They're both government-sponsored and publicly-traded. And that model looks broken, possibly beyond repair.
Free Market Analysis
"Too Big to Fail"
I want to stress that the “too-big-to-fail” doctrine is part and parcel of a wider system of central banking that undermines the financial condition of the banking system. The sooner we phase out this system in favor of free banking and the rule of law, the better off we will be. In other words, repealing the “too-big-to-fail” doctrine will be a good start, but it won’t go far enough in curing what really ails the banks.
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