Freddie’s Charm Offensive

July 13, 2008

Freddie Mac’s PR people are fighting back, even as Hank Paulson is floating a bailout plan that would make explicit the implicit taxpayer guarantee backing their debt. Yesterday the company began purchasing keyword-targeted online ads from Google. “Keyword-targeted” ads are pretty simple to understand. Websites that take advertising from Google install Google’s code on their page. Google’s computers read the content of the page, finding key words, and then serve ads by advertisers who wish their pitch to be seen next to those words.

Most articles with the words “Freddie Mac” in them tend to be critical these days. Freddie Mac wants to tell its side of the story. So you may be seeing more of the following ads in the weeks and months to come:

Freddie Mac
The Strength and Reserves To Fulfill our Mission.

The first ad was seen on, next to an article regarding the difficulty some home-borrowers are having renegotiating their mortgages. The second ad was seen on CalculatedRisk, over an article reporting Paulson’s emerging bailout plan.

That these ads appear over a story regarding a bailout is ironic. When you click on the ads, they take you to a web page with a “statement by Freddie Mac.” The statement is full of jargon that suggests the company remains strong, that it has “substantial capital” over its regulator’s “statutory minimum.” The statement concludes with Freddie’s tagline, which you can also see in the second ad: that the company “makes home possible.”

Nonsense. Taxpayers make home possible by guaranteeing Freddie’s debt. That guarantee allows Freddie to borrow at substantially lower rates than it otherwise could, pumping billions of excess capital into home mortgages.

With regard to the statutory minimum capital requirements, Freddie has spent millions lobbying against any increase in those minimums all the while expanding its portfolio of owned and guaranteed mortgages. (see today’s NYT for details, see also this very helpful graphical explanation of the problems at Fan and Fred). They’ve been allowed to expand their portfolios, which increases profits for shareholders, without expanding the capital cushion that protects taxpayers (who bear ultimate responsibility for the implicit government guarantee backing the company’s debt).

Those capital requirements need to rise substantially. And they are likely to if the housing bill passes Congress. That is one redeeming feature of the bill. The bill’s primary feature, which I don’t support, is that it provides a $300 billion lifeline for troubled lenders, allowing them to pawn off their bad loans to the government.

But it also proposes strengthening regulation for Fan and Fred. While I personally believe the two should be abolished, that’s unlikely to happen. The best that can be done, at present, is to give the regulators much stronger teeth.

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