Bailouts: Will They Be Repaid?

As President Obama today signed into law the Dodd-Frank financial regulation bill, two words were left unspoken: Fannie and Freddie. Yet they not only played a major role in creating the housing bubble that led to the meltdown of 2008, they stand today as the primary remaining bailout debtors to the U.S. treasury.

As shown in this chart, the two bankrupt mortgage giants owe almost half — 45% — of the outstanding bailout money from the federal treasury...

“The fight over the changes to U.S. financial regulation was bruising,” writes The Wall Street Journal in a July 17 editorial. “The coming debate over what to do with Fannie Mae and Freddie Mac promises to be even more contentious.” Especially if congressional leaders show no willingness to stop showering Fannie and Freddie with taxpayer funds.

source

Cartoon: Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac: Blame

Somebody asked me the other day—whose fault is it that Freddie and Fannie are on the ropes? Is it the fault of the greedy execs? Inadequate monitoring and oversight? Did Congress mess up?
I actually think this is an emergent mess that evolved out of no one's design. An alliance of bootleggers and baptists that created something that was no one's intention but that served many people well until it fell apart. It's a study in flawed incentives and institutional design. The lesson is that government agencies work best when we know what they're doing and there is some measure of accountability, even if it's only political.

read the entire post

Bootleggers and Baptists: (Pigs Don't Fly: The Economic Way of Thinking about Politics )

Cartoon: Fannie Mae and Freddie Mac

Cartoon: Government Rescue

Cartoon: Government to the Rescue

Cartoon: US Economy and Housing Market

Cartoon: Bailouts

Cartoon: Fannie Mae and Freddie Mac Bailout

Cartoon: Fannie Mae Freddie Mac Bailout

Cartoon: Fannie Mae/Freddie Mac Bailout

Calls for Resignation

`I sincerely believe that Henry Paulson and Ben Bernanke should resign,'' said Bunning, a Republican from Kentucky on the Senate Banking Committee. ``They have taken the free market out of the free market.''

Paulson and the federal regulator for Fannie and Freddie placed the two largest U.S. mortgage-finance companies in a government-operated conservatorship on Sept. 7, ousting their chief executives and eliminating their dividends. Treasury also may purchase up to $200 billion of stock in the firms to keep them solvent.

``We no longer have a free market in the United States, we have a government controlled free market,'' Bunning said in an interview. Paulson, a former chief executive officer of Goldman Sachs Group Inc., ``is acting like the minister of finance in China.''

read the article

Cartoon: Fannie Mae and Freddie Mac

Cartoon: Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac

The Fannie Mae-Freddie Mac crisis may havebeen the most avoidable financial crisis in history. Economists have long complained that therisks posed by the government-sponsored enterpriseswere large relative to any social benefits. We now realize that the overall policy of promotinghome ownership was carried to excess.

Even taking as given the goal of expanding home ownership, the public policy case for subsidizingmortgage finance was weak. The case for using the GSEs as a vehicle to subsidize mortgagefinance was weaker still. The GSE structure serves to privatize profits and socialize losses. And even if one thought that home ownership was worth encouraging, mortgage debt was worth subsidizing, and the GSE structure was viable, allowing the GSEs to assume a dominant role in mortgage finance was a mistake. The larger they grew, the more precarious our financial markets became.

Regulators should contemplate freezing the mortgage purchase activities of the GSEs while at the same time loosening the capital requirements for banks to hold low-risk mortgages.The result would almost surely be an industry much less concentrated than the current duopoly.A housing finance system that does not rely so heavily on Freddie Mac and Fannie Mae will be more robust.

We have to assume that sooner or later some of the institutions involved in mortgage financewill fail. The policy should be to promote a housing finance system where mortgage risk is spreadamong dozens of institutions. That way, the failure of some firms can be resolved through mergers and orderly restructuring, without exposing the financial system to the sort of catastrophic risk that is represented by Fannie Mae and Freddie Mac.

read the entire article

More on Fannie and Freddie

Following its knee-jerk, free-market, Milton Friedman obsessed ideology, the Bush Administration has seized control of Fannie Mae and Freddie Mac.

Joke. A bad one, really. If anything, this is just the latest evidence that it doesn't matter who's President. Is there anything this administration has done lately that reflects a free market philosophy? Yet because the administration sometimes uses the rhetoric of economic freedom, it allows people to paint the administrations policies as market-oriented.

read more

My thoughts: Roberts nailed it. Rhetoric v. reality. The Bush administration has never been a supporter of free markets.

Explaining Fannie Mae

commentary and analysis

US Seizes/Recues Fannie Mae and Freddie Mac

Federal officials unveiled an extraordinary takeover on Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, signaling the most dramatic move to date aimed at shoring up the nation's housing market.

The plan, which was delivered by Treasury Secretary Henry Paulson and James Lockhart, director of the Office of Federal Housing Enterprise, places the twin mortgage buyers into "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.

"We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," Paulson said...

The cost of the government intervention remains unclear. Experts argue that it will depend in large part on the structure of the rescue, the direction of home prices and mortgage default rates. Still it seems almost certain it will run into the billions and will most likely eclipse such other high-profile government bailouts including than the Federal Reserve's $29 billion backing of Bear Stearns assets when it was taken over by J.P. Morgan Chase.

Another unintended yet unavoidable consequence may be the impact to the nation's banks.

read the CNN story

Housing Bill Signed into Law

President Bush on Wednesday signed into law a sweeping housing bill that aims to boost the struggling housing market and bolster mortgage finance giants Fannie Mae and Freddie Mac.

The Senate voted 72-13 in favor of the bill on Saturday, after the House passed it three days earlier.

"We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac," said White House spokesman Tony Fratto. "The Federal Housing Administration will begin to implement new policies intended to keep more deserving American families in their homes."

The legislation has two principal objectives: to offer affordable government-backed mortgages to homeowners at risk of foreclosure, and to bolster Fannie and Freddie with a temporary rescue plan and a new, more stringent regulator...

The Congressional Budget Office last week estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie's and Fannie's losses could cost the government $100 billion

Cartoon: Fannie Mae and Freddie Mac