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Smith
Faculty Opinion Article
The 30
Seconds Outlook
October 1, 2008
“Fannie Mae and
Freddie Mac, those two wild and
crazy kids who partied on Uncle
Sam’s dime, finally have been sent
to the ‘time out’ corner.” --
Jonathan R. Laing, Barron’s,
September 15, 2008.
The huge problems with Fannie Mae
and Freddie Mac that led to Federal
bailouts did not begin recently, but
rather at their inception as
quasi-public and quasi-private
entities, with built-in conflicts of
interest. As organized, the taxpayer
stands 100% behind their financial
obligations to prevent defaults.
This guarantee has allowed
management to take risks they would
not have been able to take as
private organizations, while
borrowing at near-Treasury rates.
Managements of Fannie Mae and
Freddie Mac have been paid huge
(even for the private sector)
compensation while lobbying Congress
and regulatory agencies not to
impose higher (appropriate) capital
requirements, even as sub-prime
mortgages increasingly threatened.
Over the last 10 years, Fannie Mae
and Freddie Mac have spent $174
million to lobby Congress and
federal agencies. They have also
paid candidates $947,000 during the
current election cycle.
Given this unseemly history, it
would seem imprudent to repeat it
once the dust has settled on the
current financial crisis. In spite
of their huge sizes, Fannie Mae and
Freddie Mac are not essential to the
mortgage market. They essentially
exist to provide guarantees for
mortgage-backed securities. Over
time, regulators should break these
now technically insolvent
organizations into marketable sizes
to foster increased competition and
sell them to private firms. The
unintended consequences of creating
Fannie Mae and Freddie Mac as hybrid
organizations should not be
repeated.
(to be continued)
John A. Haslem
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