Former FDIC chair Sheila Bair devotes a column in the latest Fortune magazine to the topic of getting rid of two of the key players in the housing market collapse.
Washington is renowned for having a short memory, so as Congress considers what to do with Fannie Mae and Freddie Mac, we taxpayers must remind it of the harmful role the duo played in the subprime mortgage meltdown. Congress authorized these government-sponsored entities, or GSEs, to purchase mortgages from banks and other originators and package them into securities with guaranteed payments for investors. That was supposed to expand the amount of investment flowing into mortgage finance, making it easier and cheaper for middle-income families to buy homes. But as for-profit entities, the GSEs discovered they could make big bucks operating essentially like giant hedge funds, issuing cheap debt with implicit government backing and investing the proceeds in high-yield, high-risk mortgage securitizations issued by Wall Street. They made zillions for their shareholders and management until, of course, the housing market turned and mortgage defaults skyrocketed, leaving their highly leveraged operations insolvent and wards of the state.
Taxpayers dumped nearly $190 billion into them to keep them functioning. They have paid back about $146 billion, since they can now easily generate profits through what are effectively government monopolies issuing mortgage securities 100% backed by taxpayers. Indeed, under Uncle Sam’s stewardship, their market share has grown to 75%, compared with less than 50% before the crisis.
There appears to be genuine bipartisan consensus to abolish the GSEs. But with both companies generating healthy profits for our cash-starved government, that consensus might not last.
