Socializing the Risk, Redux

Providence Journal

It took a trifecta of free-market ideology, delusion and corrupt Washington leadership to create the conditions that led to the collapse of confidence in Fannie Mae and Freddie Mac, which hold or guarantee over half of American mortgages.

The dive in their stock prices last week gave the Treasury and Federal Reserve officials little option but to draw up taxpayer rescue plans.

Fannie Mae and Freddie Mac are a strange hybrid ― government-sponsored and -subsidized but privately owned and listed on the New York Stock Exchange. They inject liquidity into the housing market by buying mortgages and repackaging them into securities.

Fannie and Freddie guarantee their mortgages, and what that promise means is at the crux of today's bailout. Their mortgages carry an ``implicit" government guarantee, which is a bit lower than the ``explicit" backing attached to Treasury securities ― that is, by the ``full faith and credit of the United States."

As we can see, Fannie and Freddie are too big and important to fail, so the taxpayers are extending what amounts to an explicit guarantee of mortgages. In other words, the profits have been privatized while the risks are socialized.

That doesn't sound like a wonderful deal for the public. Why let executives and shareholders skim off the big money in the bubble years then ask the public to pick up the pieces when the housing market goes south?

Perhaps to cut short such thoughts, Treasury Secretary Henry Paulson said over the weekend that ``Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies."

Bear in mind that Fannie and Freddie mortgages are not of the very risky subprime variety that are fueling most of the foreclosure crisis. The law requires that their mortgages meet certain standards. But falling house prices and other economic factors are putting pressure on even prime mortgages, and the two companies have been allowed to keep frighteningly small capital requirements.

They have a total capital cushion of $83 billion, a meager sum to back $5 trillion in debt and other obligations. That is the result in part of Fannie's famous army of bi-partisan lobbyists that deterred both Democrats and Republicans from demanding tighter regulation.

As Barron's magazine has characterized the bailout: ``Socialism takes hold in U.S. finances. Get over it."

Yes, the United States can't let Fannie and Freddie go under, and take what's left of the housing market with them. But the taxpayers can sure as heck take back control of the companies. Fannie and Freddie should become the government agencies they once were.

This article is distributed by Scripps Howard News Service (www.shns.com).