Say Goodbye to Fannie and Freddie
[...] Fannie and Freddie had a license to print money. They could borrow at an interest rate only a bit over the Treasury rate and then accumulate large portfolios of mortgages and mortgage-backed securities earning the market rate. What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies’ executives.
Fannie and Freddie’s risky policies led to their near collapse; in September 2008, the federal government brought them under federal conservatorship. Fannie and Freddie have cost taxpayers about $150 billion so far.
On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form. Some people have suggested recasting them as a single new “Fan-Fred agency” that would continue to securitize and guarantee home mortgages. It’s true that Fannie and Freddie played an important role in developing the market for mortgage-backed securities. But they have completed that work, and they should not be preserved in any form. They should be thanked for their successes and gracefully retired.
Can the home mortgage market stand on its own, without support from federally sponsored mortgage companies? Experience tells us that the answer is an unambiguous yes. [...]
Read the whole thing for the nitty gritty details. There are many reasons why they should not continue, but this administration has been supporting a lot of things that should have died a natural death. We shall have to wait until Tuesday to see what they will do. Since Fannie and Freddie are government creations, and Big Government is growing not shrinking, I'm not confident that they will be retired. If they are kept, the question will be: "At what cost?"