GSEs: One nationalization, under Paulson

In nationalizing Fannie Mae and Freddie Mac, says The New York Sun in an editorial, Treasury Secretary Paulson and the Bush administration decided that the government’s “interest in low mortgage rates as an artificial boost to housing prices was more important than the property rights” of Fannie and Freddie shareholders, who didn’t even get a vote on the decision. And why nationalize? Fannie and Freddie weren’t lacking in the legally mandated level of capital, and if “sizable losses” is the criteria, why not seize Merrill Lynch instead? This seizure of two companies, without shareholder approval, may be a good deal for homeowners, “but it is a bad deal for America,” and a bad precedent for property rights.

The Fannie and Freddie bailouts actually “stop just short of full nationalization,” says Floyd Norris in The New York Times, but since the two firms are now “virtually the only sources” of significant U.S. home loans, no other bailouts have “seemed more crucial.” At some point, however, the next administration is going to have to figure out which of Fannie and Freddie’s “at least two masters” the mortgage giants are supposed to serve—the government or the private investors who put up the capital. So far, “they failed to serve either one very well.”

That’s why “the Fannie-Freddie bailout is one of the great political scandals of our age,” says The Wall Street Journal in an edtiorial. This bailout was predictable and preventable, and Paulson is missing an opportunity here to finally bury these two unwieldy “financial zombies.” There are good things about this rescue operation, but since Paulson merely propped up these “undead monsters,” their “corpses could still return to haunt us again.”