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From: Bart (
Subject:         GOP Welfare: Corporations keep the profits while taxpayers take their losses
Date: July 14, 2008 at 9:37 am PST

Mac, the Knife

Policymakers are taking steps to prevent Fannie Mae and Freddie Mac from collapsing. The Federal Reserve said it would lend money to the two government-sponsored enterprises (GSEs) “should such lending prove necessary,” and Treasury Secretary Hank Paulson asked Congress to increase the line of credit the GSEs have with the Treasury. Paulson also asked for the authority to buy stock in the GSEs to shore up their capital, which many investors think is insufficient compared to their liabilities.

Concern over this imbalance is what drove the stock sell-off last week that cut the GSEs’ share prices in half. Lawmakers fear that the panic will turn into a run on the companies, which would have disastrous consequences for U.S. taxpayers — it is widely assumed that the government would bail out the GSEs rather than allow them to fail.

Fannie and Freddie have around $5 trillion in liabilities coming due over the next few years. The mortgages and mortgage-backed securities on their books constitute about half of the U.S. mortgage market. They were created by the U.S. government, and they can borrow freely at low interest rates because creditors know that the government will not let them collapse. This implicit subsidy has allowed them to grow far too large, and now the taxpayers are in jeopardy of having to make good on all their debt.

Critics of the GSEs have repeatedly called for Congress to impose higher capital requirements on them or cap the amount of mortgages they are able to buy, but their lobbying machine is the envy of Washington. Over the years, Fannie and Freddie have saturated lawmakers with campaign contributions and other favors, and in return Congress has largely ignored warnings that the GSEs were growing “too large to fail.”

The housing bill that passed the Senate Friday would create a new regulator for Fannie and Freddie that could force it to raise capital and could take over the companies if they become insolvent. But the bill would also raise the limits on the size of the mortgages that Fannie and Freddie are permitted to buy, allowing them to buy and securitize much bigger loans. Congress should be winding Fannie and Freddie down, not expanding the scope of their activities.

For its part, the Bush administration appears to be trying to reassure the markets while minimizing the risk to taxpayers. If Fannie and Freddie are not able to raise enough capital to reassure investors, Paulson’s plan would enable the government to buy billions in Fannie and Freddie stock to recapitalize them.

But if the credit markets lose confidence in Fannie and Freddie, even a capital injection of $100 billion or more isn’t likely to save them. In that case, it might be necessary for their new regulator to put them into receivership and restructure them. This could take place without Congress having to pass a resolution explicitly guaranteeing all $5 trillion of the GSEs’ liabilities. That dreaded scenario would double the size of the public debt and drive the dollar to new lows.

This episode demonstrates how stupid and dangerous it is to allow any company to operate under the assumption that it keeps the profits while the taxpayers take the losses. Such thinking breeds arrogance and encourages recklessness, both of which appear to have played key roles in this debacle. For now, the U.S. has to make clear that it is standing behind Fannie and Freddie and will not allow them to fail. But to prevent an even worse catastrophe in the future, Fannie and Freddie should be broken up or dramatically downsized. It may sound strange for conservatives to back a government takeover of any company, but a takeover aimed at restructuring, downsizing, and eventually reprivatizating the GSEs might be the least bad option if a run on them actually materializes.

Source: National Review

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