The Wall Street Journal reports that economists are divided on what to do about Fannie Mae and Freddie Mac: nationalize them, or privatise them? One thing that doesn't seem to be in question is that we should do one or the other; as it is they are neither fish nor fowl nor good red herring.
My preference is for privatisation, probably with a breakup first. The deepening of credit markets over the last thirty years has made their role less than vital, while their government guarantee has dangerously concentrated mortgage risk.
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I was thoroughly fascinated and a bit stuffed to see uber-free marketer Amity Shlaes write a while back that she thought that they should be nationalized (granted, with hopes that, after radical surgery, parts could be privated a year or two down the road).
Without the implicit (now explicit) government backing, they actually have no purpose. It was their ability to borrow short at the very best terms available that gave them any purpose. They should be closed down, otherwise you will just be bailing them out time after time if privatized, and, if nationalized, they will just be losing money constantly as a direct subsidy to home buying/selling.
I think you'll have to nationalize in order to privatize. Probably even if you are going to break them up. And if you can see how to shut them down without bailing them out, let's hear it.
Hmmm, sounds like you favor McCain's position: they should become purely private. Sure, there's the minor question of how to transition from where we are now to where we want to be (which McCain details in his proposal), but you both agree on the desired outcome. So do I.
Yikes - you know that Fannie and Freddie bonds are used as collateral in numerous structured and other financings, and that such use is predicated on the implicit guarantee from the Feds? I'm not saying that's a good reason to privatize them or not, just that it will be a massive goat-screw if it happens - oh well, more work for the lawyers.
Not to be too snarky, but does the fact that economists are divided actually provide any information about the situation? Aren't economists divided over practically everything?
What should be done? Nationalize? Privatize and make competitive? Well, economists think...
Hey, forget what "should" be done.
What the new law actually did -- by carefully considered legislation, yes -- was protect the dividends these things pay to their shareholders while they collect a bailout from the government and all us taxpayers. So as taxpayer bailout money is being shoveled in the front door it is going to be shoveled out the back door as profits to investors.
And the law did a lot worse than that.
Forget what should be done. Interest group politics determines what will be done -- and this new housing law is a pretty good indicator of what we can expect in the way of future "reform". Expect "fish-fowl" or "fowlfish" (foulfish? foulishnish?) forever.
Gosh, I can't wait for this Congress to deliver unto us an equally well considered nationalized health care program! ;-)
1) Nationalize 'em.
2) Announce, at the nationalization, that they will stop buying mortgages effective twenty-four months from the day of the nationalization.
3) Manage the mortgages on the books until they're all gone; then fold up shop.
If you "privatize" them, even as ten little Baby Maes, there's no stopping the same belief that they're just as implicitly government-backed as before. Removing them entirely from the business and leaving the field clear for entirely private capital solves that. Two years is enough lead time for everybody to get ready for the switch.
Re: Manage the mortgages on the books until they're all gone; then fold up shop.
That could easily be 30 years.
The investors in these things should be given zero on the dollar and they should be shut down.
It doesn't matter what you think.
Countrywide (now Bank of America) gave Senator Chris Dodd $75,000 in discounts on the life of his mortgage, then sent him the legislation in the exact form it was passed. Acting as the Chairman of the Banking Committee, Senator Dodd then dropped the bill they paid him to. The Democratic Senate passed the bill, and sent it to Bush with the understanding that it was "this bill or nothing."
Unless you have the cash and willingness to BRIBE Senator Dodd and the Democrats to reverse their previous corrupted efforts, your ideas amount to nothing.
"The deepening of credit markets over the last thirty years has made their role less than vital, while their government guarantee has dangerously concentrated mortgage risk."
They are deep all right. Deep enough to swallow up a good many hedge funds and smaller banks, with a dealer-brokers tossed in for measure.
Now that we have knocked down almost every safeguard, who will stand when the cold winds blow across the credit markets?
Ben Bernanke and the NY Fed with Ah! bright wings!
The GSEs currently have an implicit guarantee from the government, but so far (even after the so-called bailout) haven't used a single dime of federal money in their lifetimes. The discount window that has been opened to them is still higher rate than they can borrow at by issuing agency bonds, so they have no need to use it as yet. As far as "saving stockholder's dividends" alleged above, both GSEs have cut their dividends from $.25 and $.35 to $.05. And no action has done anything to rescue the companies' stock price.
I suppose my point is to ask whether anything at all should be done. Currently they are private companies with a federal charter and a federal agency to regulate them. There are two of them, so there isn't exactly a monopoly taking place, and the large banks, in good times, are able to compete directly against them (They lost market share during the RE bubble due to the popularity of Jumbo, Alt-A, and Subprime.)
Now that credit markets on the ropes, we should avoid kicking it while it's down. Let the GSEs operate business-as-usual until their competition is strong again, then look at alternatives.
Don't buy the hype that the GSEs have themselves gone into foreclosure. The accounting looks like hell because the assets they hold, mortgages, have lost considerable value, and they are also insurers against foreclosure experiencing their own troubles of Hurricane-Andrew proportions. But they continue to operate even in difficult times, when a mortgage from the private banks is getting increasingly rare prime mortgage rates have only increased somewhat.
The main regulation we need going forward is forbidding any financial institution, public, private or in-between, from becoming "too big to fail", and break up any that are already too big. Seems simple enough, no?
What, specifically, did Freddie and Fannie do that they should not have done?
Will a private-sector company be more or less likely to make that same or a similar mistake in the future?
Will a government agency be more or less likely to make that same or a similar mistake in the future?
What purpose does Freddie and Fannie serve in their current incarnations?
Can that purpose be served by a private-sector entity?
Can that purpose be served by a government agency?
I suppose Sanjay thought he was being clever, but yes, you'd have to nationalize them to privatize them.
This quasi-private "GSE" will not be easily unwound. You can't tell them stop taking new business and wind down your affairs
I'd suggest
1) put them in conservatorship (without bankruptcy)
2) force them to raise equity capital to be the level of a well-capitalized bank holding company- however high the cost or how much it would dilute (not bankrupt) their existing shareholders
3) Re charter them to make them operate as bank holding companies with similar capital rules and FED oversight so they would not longer have their own unique regulator
4) Cut the cords with the executive branch of the US Government - they become full federal and state tax payers; they pay full freight on SEC registrations; they play by all the rules, with no special backup Treasury liquidity, etc. other than what the Fed may choose to offer any large financial institution
that seems the least disruptive and fairest way to back away from this tar baby
Shut them down. Mortgage rates will go up as the risk of failure is priced into every mortgage, and prices will go down to something in proportion to incomes. Everybody wins except for late entries into the housing market, and most of them are screwed already, anyway.
While some mortgages will last 30 years, only a relatively few will last past 10 years, and those can be sold off at the ten year mark as Fannie and Freddie are wound down.
Could someone in the finance business comment on if it would it work to:
1. Nationalize them - paying their shareholders a dollar a share (the companies being insolvent);
2. Auction off their portfolio of mortgages to the remaining firms in the secondary market;
3. The auction proceeds being X, swap the outstanding Freddie and Fannie bonds (value = Y) for a bloc of Treasury bills of value X.
--The shareholders lose ca. 97% of their investment, the bondholders are out Y-X, and the taxpayer is out the administrative costs plus the interest paid during the interim on the outstanding Fannie and Freddie bonds.
and
4. Can some enterprising prosecutor secure an indictment agains Messrs. Dodd, Johnson, et al.??? At the very least, this whole mess sounds like a situation where the biggest scandal is what's legal.
I'll try to respond to Art Deco's bizarre suggestion
1) Nationalize then, pay their shareholders a 1$ a share - not clear who has the authority to do this, but if congress passed a law allowing this, they'd I'm sure consider sonething more constructive
2) "Auction off their portfolio of mortgages" - er..Art, we're in a credit crunch, where would this money come from to buy >$1 trillion of mortgage securities? or do you thing they should be sold to your Uncle fred for, say 5 buck? Are you serious? let's follow your logic though (BTW - their "portfolio" is not the same thing as the additional >$1.5 trillion Fannie and Freddie "guaranteed" MBS floating around out there
3) Swap the outstanding F&F bonds for Treasuries - whose Treasuries? Should the government create new Treasuries to swap for F&F debentures (not MBS)? Don't the people who bought those bonds from F&F have any rights?
You haven't thought this through very well, and NO, Dodd, etc. al haven't done anything illegal, and what you are describing is a
fiasco that is unparalleled - not even Ceasar Chavez or Boris Yeltsin would think of something so cocakamamie. Whatever fix there is - if you are serious about a fix - has to respect the rights of F&F shareholders, bond holders, and the mortgagees whose loans they bought
Maybe your were just making a bad joke
3)
Recind congrssional authority to Federal Reserve to buy FNM & FRE securities. Recind "blank check" lending provision.
Level the playing field.
a. FNM & FRE treated the same as all other financials: Capital reserve requirements & they pay same rate as others.
b. On equal footing they will have to work to survive & prosper or go bankrupt.