Free Markets, Free People

The Fannie And Freddy “Secret”

The Obama administration and Democrats have consistently blamed the financial problems that the country has faced on Wall Street, banks and their greed. But it has just as consistently ignored the role and cost of two quasi-governmental agencies which were also in the center of the financial storm – Freddie Mac and Fanny Mae. The Wall Street Journal points out that the cost to the government (and therefore the taxpayer) of these two institutions has been kept “off books” by the fiction that they’re “private institutions”. But, in fact, they’re really not:

As the CBO notes in a recent background paper, the standards for when to include government-sponsored entities in the budget go back to the 1960s, when a Presidential commission laid out a set of questions.

To wit: “Who owns the agency?” (In the case of Fan and Fred, taxpayers.) “Who supplies its capital?” (Taxpayers.) “Who selects its managers?” (The federal government.) And finally, “Do the Congress and the President have control over the agency’s program and budget, or are the agency’s policies the responsibility of the Congress or the President only in some broad ultimate sense?” (The feds have control in every sense.)

The point, of course, is the claim they’re “quasi-governmental” or “private” entities is fiction. They are, in every way, controlled by the federal government and were as involved in the financial melt down as any other institution. In fact, there’s an argument that they were the instututions which made the housing bubble possible and, through their policies, encouraged it.

And if you want to talk about losses and costs to taxpayers, take a gander at these numbers:

Since Hank Paulson placed them in conservatorship in September 2008, Fan and Fred have stopped even pretending to be run for profit. Losses have mounted accordingly: Some $291 billion for taxpayers through 2009, $48 billion for the cost of new business in 2009 alone, and $21 billion more this year. Last August, CBO estimated the 10-year cost to taxpayers of keeping Fannie and Freddie afloat at $389 billion.

And it is now estimated that the two will average losses of 8 billion a year for the next 10 years, assuming the housing market stabalizes soon. Yes, that’s 80 billion over 10 years in addition to the losses above. Why isn’t the president hollering “we want our money back” at them?

The full cost of subsidizing mortgages via Fannie and Freddie, the FHA and Ginnie Mae remains hidden and off the official balance sheet, so there is little political pressure to stop the losses.

As the CBO notes, Fannie and Freddie “purchase mortgages at above-market prices,” driving down interest rates and passing some of the savings to home buyers. That subsidy is felt right away, but the risks in providing it are stored up over time, and their real costs may not be felt for years or even decades—as was the case in the years leading up to their spectacular collapse in 2008.

With the spectacular debt the Obama administration and Congressional Democrats are running up, they’re looking for every creative accounting means available to hide the truth. This is one of those ways. By pretending that Freddie and Fanny are “private” institutions, when it is clear they belong to the government in every conceivable way, they can keep their losses off the second set of government books presented to the public and say “see, it’s really not as bad as you think”.

Of course if a bank or Wall Street institution kept those kind of books, they’d go to jail.

WSJ concludes:

We suspect the real reason the White House wants Fan and Fred off budget is to disguise their real costs to taxpayers. They have become off-the-books subsidy engines for the housing lobby, and it is easier to push off the recognition of their losses to some future Administration and Congress rather than pay for them today. The new age of transparency has once again died aborning.

~McQ

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15 Responses to The Fannie And Freddy “Secret”

  • Another name for it would be  “A  ONE TRILLION DOLLAR slush fund with the tax payers holding all the bad cards.”

  • Once again, I wish I could get away with this sort of thing in my personal life…

    WIFE – “What is this huge credit card bill???”

    SELF [breezily] – “Oh, that’s for the Fanny / Freddy Card.  Don’t worry about it.”

    WIFE [shrieking] – “What do you mean, ‘don’t worry about it’???  We can’t afford this!  And what did you spend that much money on, anyway???”

    SELF – “I didn’t spend any money.  I used the Fanny / Freddy Card.”

    WIFE – “Lemme see the card.” [takes from wallet] “It’s got your name on it.”

    SELF – “Yeah.”

    WIFE – “Did you make the purchases on the bill?”

    SELF – “Yep.”

    WIFE – “And you applied for the card?”

    SELF – “Uh-huh.”

    WIFE [beginning to sound murderous] – “Then how can you say that you didn’t spend the money???”

    SELF [slowly, as if to a backwards child] – “Because it’s on the Fanny / Freddy Card.  I’m not responsible for it.  Look at the bill: somebody else has to actually pay it.”

    WIFE [examines the bill and ponders] – “Oh.  I see.  Well, there’s a pair of shoes I’ve had MY eye on…”

    And the last, incidentally, is why I don’t think the GOP will ever really do anything about Freddy / Fanny even if they have the power to do so.  Quite aside from the fact that they don’t want to bear criticism from MiniTru about denying mortgages to the poor / minorities, they’ll doubtless find their own uses for such a scrutiny-free slush fund.

    • Yep.  The Krugman’s of the world continue to peddle the idea that government can run deficits endlessly and not worry about it.  And Republicans are just as irresponsible as Democrats when it comes to spending, and they’re just as dishonest when it comes to talking about deficits and debt, and they’re just as greedy and short-sighted when they see the trough overflowing with taxpayer dollars.  When the economy falters, they take turns pointing fingers at each other and getting elected to fix a problem that they helped create.  It’s depressing.

  • WASHINGTON (AP) — Barney Frank, the chairman of the House Financial Services Committee, called Friday for a new system for providing money for home loans and the elimination of Fannie Mae and Freddie Mac.

    Now why would Barney Frank want to abolish the current form of Fannie Mae and Freddie Mac ?
    Too many fingerprints ?  Somebody might figure out his game and end the fun.

    His comments show how much the financial crisis has upended the relationship between lawmakers and the two companies. Mr. Frank, a Democrat from Massachusetts, was long one of the staunchest supporters of Fannie Mae and Freddie Mac.

    Well, the NYT has figured it out yet, or at least they aren’t telling their readers.

    • Actually they don’t – it’s about burying the corpses before they begin to stink too much and people feel compelled to investigate.

    • “Now why would Barney Frank want to abolish the current form of Fannie Mae and Freddie Mac ?
      Too many fingerprints ?  Somebody might figure out his game and end the fun.”
       
      Because it’s time to dump the body in the lime vat to destroy any evidence of his culpability, the sooner the better.  Things are not looking rosy for he Democrats, and the shredders and burn bags are being issued just in case (hah) things go badly for them in November.

    • Barney Frank, the chairman of the House Financial Services Committee, called Friday for a new system for providing money for home loans and the elimination of Fannie Mae and Freddie Mac.

      Meet the new boss.  Same as the old boss.

    • Jan. 29 (Bloomberg) — Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.
      Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his memoir, “On The Brink.”
      The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

      Why does this smell of South Ossetia ?  Did the Russian eventually trigger the near financial collapse ?

    • This shows that Fannie Mae and Freddie Mac have foreign policy/national security elements.

  • Obama’s attacks on the banks has worked. No one but the WSJ is talking about Freddie and Fannie anymore.

  • The unemployment rate currently stands at around 10 percent, which Paulson said was “the best possible outcome.” He said he did not like the idea of a bank bailout but considered it crucial to save the economy.

    “What was very hard for me was advocating things that I hated,” he said. “And having to defend them to members of Congress that found it repugnant to have the government have ownership positions or put equity in banks.”

    Congress, however, was not willing to go along with the plan, Paulson said, unless he would be able to sell the idea to the American people.

    “They wanted us to tell the American people how bad things could get,” Paulson said. “I shuddered, because I thought, to the extent we scared people, it was going to make the crisis worse.”

  • Another reason that Republicans also cannot be trusted. Fannie And Freddie have existed long enough that they too have ownership of the problem, not just Obama and the Dem’s. That they are an accessory is attested to by the fact that they are going along with the limitless bailout.