Fannie, Freddie, Sam

By Dave Fratello | September 6th, 2008

There are few giants bigger than Fannie Mae and Freddie Mac. And now they have stumbled, hard.

Uncle Sam may be the ultimate giant. And now he's going to envelop Fannie and Freddie in one gargantuan embrace. (We considered, and rejected, a plural marriage metaphor.)

By way of the Grey Old Lady (click for story):
Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said. [emphasis added]
According to the WSJ:

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

It is also expected to involve the government injecting capital into Fannie and Freddie. That could happen gradually on a quarter-by-quarter basis, rather than in a single move...
So much for the notion, so prevalent among the "all's well" crowd back in July and August, that the GSEs' troubles were exaggerated.

This being political season, the WSJ treats us to these summaries of the presidential candidates' positions on Fannie and Freddie:

Sen. John McCain, the Republican nominee for president, has said his goal is to make the companies "go away" and to push for regulation that "limits their ability to borrow, shrinks their size until they are no longer a threat to our economy and privatizes and eliminates their links to the government." Sen. McCain supported giving Treasury the authority to backstop the firms but has said any use of taxpayer funds should be combined with an ouster of management and a ban on lobbying by the companies.

Sen. Barack Obama, the Democratic nominee, has said the companies are a "weird blend" and that "if these are public entities, then they've got to get out of the profit-making business, and if they're private entities, then we don't bail them out."

Guys, where's the love?

The current D.C. team appears to be cutting against both candidates' positions.

Fannie and Freddie won't go away, not yet, not under this plan, and they are getting bailed out. The fiction that they are not public entities, or that they are not linked to the government, is all but dead.

Neither candidate supports that general direction, because it puts the U.S. government at the vital center of the mortgage market, and that's just not where you want to be right now.

But here we go.

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