U.S. taxpayers to the rescue

Fannie Mae and Freddie Mac, two huge secondary mortgage corporations, were never truly private companies.

Because they were created by Congress, there was always the implicit understanding that the power of U.S. taxpayers was behind the two companies, and they wouldn’t be allowed to fail.

That implicit understanding became reality over the weekend when Treasury Secretary Henry Paulson placed the two companies under a conservatorship, dismissed the CEOs and boards of directors of each one and announced that the U.S. government will purchase $1 billion in preferred stock in the two firms. Much more taxpayer money could go into the companies over time to help them meet their debt obligations.

We certainly aren’t thrilled with the government jumping headlong into the mortgage business. But Fannie and
Freddie together are involved with some $5 trillion worth of mortgages and other financial instruments, most of which are now held by other banking institutions. Allowing the two companies to simply go belly up — as was becoming a likely possibility — could have had catastrophic consequences for the economy.

But, if the two companies aren’t entirely private firms, they aren’t government agencies, either. They’ve been able to engage in risky lending — with the implied backing of taxpayers and the encouragement of some in Congress — but very little federal oversight. Paulson said the two operate under a “flawed model.”

Unfortunately, his bailout plan doesn’t guarantee that model will be changed. Once infused with taxpayer money, Fannie and Freddie could emerge from the conservatorship with the same management models they have been using.

That can’t be allowed to occur. If taxpayers are to be on the hook for billions of dollars, stricter rules must be enacted to dictate how the companies operate and to restrict the political pressure that was applied by some members of Congress to encourage the companies to make risky loans.


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