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Two Mortgage Giants Stay Afloat But Taxpayers Must Start Bailing
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Published: July 15, 2008
If you ever wondered how so many people with mediocre jobs could buy houses with enormous price tags, now you know.
Investors were bold because taxpayers were unwittingly backing the deals.
It turns out that the two federal companies that helped feed the housing frenzy borrowed far more money than they can afford to repay. Now private stockholders have dumped so many shares in Fannie Mae and Freddie Mac that the U.S. Treasury is asking Congress for permission to buy their stock, and the Federal Reserve is promising an endless supply of low-cost loans.
This action is necessary to try to stop the panic and reassure investors worldwide that the United States will repay its debts. This reassurance benefits everyone.
But we taxpayers have a right to be angry. If we get in personal financial trouble, no one will bail us out.
It's unclear how much it will cost to get the two government-sponsored mortgage companies shipshape again, but it's sure to add to the federal deficit, lower the value of the dollar and add to pressures that are inflating the price of gold, oil, corn and other real products.
The current troubles are no surprise to those who have watched Fannie Mae and Freddie Mac greedily run up their debts by buying huge numbers of risky, high-interest mortgages.
Two years ago, before the housing bubble burst, the Wall Street Journal repeated a joke that editors had heard from financial insiders: "What's the difference between Enron and Fannie Mae? The guys at Enron have been convicted."
We taxpayers have a right to be outraged that a company backed by our hard-earned money was the butt of such jokes - and that no one stepped in to stem the damage. Wherever taxpayers are on the hook, federal officials should ensure that free-market principles pass financial muster.
Fannie Mae was created in 1938 to make mortgage funds available to help the nation escape the Depression. It was a good idea, and in 1968 it was opened to private shareholders. In recent years, the opportunity to make private profits that were protected by a public safety net led to the sort of excessive borrowing and lending that could only be sustained by more borrowing and lending.
The companies became too big to be allowed to fail, notes the Economist magazine, and at the same time, almost too big to save.
Taxpayers can save them, but it will hurt.
A question worth asking is why private investors should continue to get all the dividends and profits while taxpayers cover the losses.
Another irking reality is that many investors have been betting that Fannie Mae and Freddie Mac will lose value. By selling short, they cash in when confidence falls, which gives them an incentive to try to destroy confidence.
The Securities and Exchange Commission warns that it will crack down on traders who spread false rumors to drive down stock prices. With the thousands of Internet sites hosting live discussions among investors in specific companies, investigators will have trouble monitoring even a small part of the investment world's spirited conversation. Another challenge will be how to separate false rumors from legitimate ones.
If the bailout program works, the rumors will lose credibility as more people bet on the future instead of against it.
No matter how it turns out, taxpayers deserve greater accountability and a better stake in the deal. Next year, instead of stimulus checks, we all deserve a few shares of Fannie Mae.
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