Fannie Mae and Freddie Mac: Panic averted?

What happened

Treasury Secretary Henry Paulson on Sunday urged Congress to approve a rescue package for Fannie Mae and Freddie Mac by pumping billions of dollars into the mortgage giants. The proposal would let the federal government buy equity stakes in the companies, and increase their lines of credit to $300 billion. (The New York Times)

What the commentators said

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The trouble at Fannie Mae and Freddie Mac is the “clearest sign yet of the nation’s deep financial troubles,” said John Waggoner, Sue Kirchhoff, and Anna Bahney in USA Today. These blue-chip institutions “exist to keep the mortgage market running smoothly,” and there’s good reason for investors to be panicking now that these giants are “sinking into the same credit crisis that claimed the corporate lives of Countrywide Financial, Bear Stearns, and dozens of other institutions.”

“There is no reason for stock market panic,” said Peter J. Wallison in The Wall Street Journal. These two institutions are so important that the federal government will never let them fail, as the Treasury and Federal Reserve have now confirmed. But that doesn’t mean politicians have recognized the “grave risks” that Fannie Mae and Freddie Mac pose for taxpayers.

The trouble, said Paul Krugman in The New York Times, stems from the fact that Freddie and Fannie are privately owned but publicly sponsored. That encourages them to take bad risks, because their stockholders benefit when they do well, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.”

The solution, then, said Sebastian Mallaby in The Washington Post, is for the government to flat-out buy them. Taxpayers get little for their money by propping up these behemoths. But if authorities “seize the moment” and buy them on the cheap, maybe we’ll all get a little more for our money.