Fannie, Freddie bailout plays like Greek tragedy

May 6, 2010

The bailout of America’s failed housing finance giants is taking on Greek proportions. On Wednesday, Freddie Mac said it would tap the Treasury for another $10.6 billion after first-quarter losses. Together, Freddie and its cousin Fannie Mae have drawn $136.5 billion from Treasury’s unlimited equity line since they were seized in September 2008. The European and International Monetary Fund rescue package for Greece – one that was supposed to shock and awe international markets – comes in at the same kind of figure, around $139.7 billion.

The tragedy, as far as U.S. taxpayers are concerned, is that Fannie and Freddie will most likely need much more capital in coming years. High unemployment and the shaky housing market all but ensure more losses for the two agencies responsible for guaranteeing the majority of mortgages.

As wards of the state, it’s even harder for the companies to return to profitability than would otherwise be the case. Loan modification programs and other initiatives to reduce the burdens felt by homeowners are hardly money-making ventures for lenders. Fannie and Freddie also can’t sell assets to stop the hemorrhaging, since unloading too many home loans from their massive investment portfolios would send mortgage rates shooting higher.

Moreover, the housing finance giants are saddled with a 10 percent dividend on any funds drawn from Treasury. That’s more than $13 billion annually and counting. Such a penalty made sense when the government’s conservatorship of the two companies looked temporary. Nearly two years later, it seems more like a troublesome drag on recovery. Greece, by comparison, will pay around 5 percent on its emergency financing.

Despite this, Washington continues to dither. Last month, the government asked for public comment on what to do with Fannie and Freddie. Last year, it had promised to deliver a plan by February 2010. A minimum requirement is a hard deadline for deciding whether to privatize them, nationalize them or wind them down. Setting one is long overdue. In the meantime, Treasury should lower the dividend on its bailout funds. Otherwise it risks forcing its two charges to dig even deeper holes for themselves.


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One thing not to do with Fannie and Freddie would be to go on letting them trade on their pseudo-governmental cachet. Same goes for at least the East Coast divisions of the “federal” Bank. All they are is a funnel of public money into the pockets of failed banks that need shutting down.

Posted by HBC | Report as abusive

When, as he’s about to, Bernanke hands Fannie and Freddie a cool Trillion and a quarter which without hesitation they turn round and give to America’s least creditworthy banks in exchange for some of the most worthless paper on the face of the planet, the last dregs of the so-called “MBS” barrel if you will, whip out your calculators…

Make no mistake: Fannie and Fred would be better off buying Greece and letting almost all major American banks rot in hell. Or in Delaware. Whichever’s closest. Everyone would come out ahead if they did that.

Posted by HBC | Report as abusive

Sounds more like a farce than a tragedy…

Posted by yr2009 | Report as abusive