Freddie, Fannie to stay nationalized?
In a follow up to Monday’s post on why bank nationalization is a bad idea by any name, Monday’s New York Times had an article that indicates that Freddie and Fannie will probably stay in government control. If you think a bank nationalization will necessarily need to reprivatization, it looks like that sentiment is in question.
Despite assurances that the takeover of Fannie Mae and Freddie Macwould be temporary, the giant mortgage companies will most likely never fully return to private hands, lawmakers and company executives are beginning to quietly acknowledge.
The possibility that these companies — which together touch over half of all mortgages in the United States — could remain under tight government control is shaping the broader debate over the future of the financial industry. The worry is that if the government cannot or will not extricate itself from Fannie and Freddie, it will face similar problems should it eventually nationalize large banks.
Part of the reason is that as implicitly government-backed entities, Fannie and Freddie are where a significant part of the home mortgage mischief took place. If we think that private banks at a 30:1 leverage ratio were acting recklessly, what does that say about a 1000:1 leverage ratio over at Freddie/Fannie?
Labels: mortgage
Previous to the September takeovers of Freddie and Fannie, as GSEs, more than half of their boards were appointed by the U.S. President and confirmed by the Senate. The role these board members played in directing private capital to achieve social ends presages the disastrous impact that the federal government as a voting shareholder can have on banks and the other shareholders who do not abandon ship.
With a board controlled by the government, I think Fannie and Freddie were better viewed as always being government entities, in which private capital was allow to invest alongside the government. Even without the so-called "implicit" government guarantee of their bonds, they were still government-controlled.
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