Fair Game: The Fannie and Freddie fallout

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http://www.nytimes.com/2008/07/13/business/13gret.html

IT’S dispiriting indeed to watch the United States financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulant regulators, greedy bank executives and incompetent corporate directors.

This wasn’t the way the “ownership society” was supposed to work. Investors weren’t supposed to watch their financial stocks plummet more than 70 percent in less than a year. And taxpayers weren’t supposed to be left holding defaulted mortgages and abandoned homes while executives who presided over balance sheet implosions walked away with millions.

Over the course of this 18-month financial crisis, we have lurched from land mine to land mine. Last week’s was all about Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing across the nation. By issuing debt, these shareholder-owned companies guarantee or own more than $5 trillion in home mortgages. Got that? $5 trillion.

Because the federal government established the companies, investors view them as backed, at least implicitly, by taxpayers. And that implied guarantee is what drove Fannie and Freddie’s business models.

The advantages the companies gained from this unique arrangement were huge. They had to keep less cash on hand than traditional lenders, for example. They also made more money on their mortgages than lenders because they paid less to borrow money in the bond market. These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies’ executives.

Now it looks as if the bill for that largess is coming due. Of course, it will be borne by the usual bagholders: United States taxpayers. You and me.