Issue of the week: Nationalizing Fannie and Freddie

Fannie Mae and Freddie Mac started out as creatures of the federal government, and it’s increasingly likely that they’ll end up that way, said Ben Levisohn in BusinessWeek. Both companies were created by acts of Congress, with the mandate to make money available to mortgage lenders and increase national levels of home­ownership. Although the companies later became shareholder-owned corporations, investors assumed that the federal government would bail them out if they ran into financial trouble. That expectation was confirmed in July, when Congress granted Treasury Secretary Henry Paulson the power to supply capital to Fannie and Freddie, either by purchasing their shares or by lending to them. Since then, investors have acted as if “it’s a question of when, not if, the Treasury Department will be forced to use its newly acquired powers to bail out the mortgage giants.” And they’re probably right.

The irony is that Paulson assumed that once he had the power to rescue Fannie and Freddie, said Brendan Murray in Bloomberg.com, an actual bailout wouldn’t be needed. “If you have a bazooka in your pocket and people know it,” Paulson said, “you probably won’t have to use it.” But the price of the companies’ shares has fallen about 85 percent since the first of the year, and the selling in recent days has accelerated. The reason: Equity investors expect that they’ll be wiped out in a federal takeover, so they’re selling now while there’s at least a bit of value left in their shares. So instead of being reassured by the presence of a federal backstop, “investors are betting Fannie and Freddie will have little option but to tap the Treasury.”

The sooner both companies take shelter under the federal umbrella, the better, said Sebastian Mallaby in The Washington Post. The best course would be for the government to buy both companies outright, then sell off their gigantic portfolios of home mortgages. Eventually, Fannie and Freddie would dwindle away, “creating maximum space in the mortgage market for smaller private players.” The Bush administration would rather wait until after the elections to act, but the time for dithering is past. “Authorities should seize the moment: Nationalize—and then dismantle.”

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

That’s not as radical an idea as it might sound, said John Spence in Marketwatch.com. William Seidman, the former chairman of the Federal Deposit Insurance Corp. “who played a key role in healing the U.S. banking system after the savings and loan crisis,” favors a similar approach. “We need a plan for breaking up Fannie and Freddie and selling them to private investors,” he said, “so that the federal government isn’t the biggest backer of the housing market.” The first step is to nationalize both companies, install new management, “and run the companies for the sole benefit” of mortgage borrowers. Hiring the right CEO is key, Seidman said. “The government better get a heck of a good guy” to run the companies, he said. “That’s the biggest financial challenge of the century.”