Thursday, March 4, 2010

Should Fannie Mae and Freddie Mac be Public Utilities? (FNM; FRE)

This is one of the ideas that the American Enterprise Institute for Public Policy Research looked at in our post "REPOST: "The Dead Shall Be Raised: The Future of Fannie and Freddie" (FNM; FRE)". (on page 3 of the 8 page PDF)
From The Real News:


PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I'm Paul Jay, coming to you again from the McClatchy Newspaper offices, where our Washington studio is. And joining us is Kevin Hall. He's the national economics correspondent for the McClatchy Newspaper chain. Thanks for joining us again.

KEVIN HALL, ECONOMICS CORRESPONDENT, MCCLATCHY NEWSPAPERS: Thanks for having me.JAY: So when [Ben] Bernanke a few days ago spoke at Congress, he floated a bit of an idea of turning Fannie Mae and Freddie Mac—which, if I understand correctly, were originally government institutions for loaning money for housing, later turned into private for-profit institutions under a congressional charter, but essentially for-profit companies. And he said, well, maybe make them more like a public utility, very regulated; which raises a whole 'nother question: if that makes some sense, why not go another yard, which is, why not give some of these institutions straightforward public-interest mandates, perhaps make them non-profit? And what about something like AIG, which the government owns, has massive amounts of capital now, all public money? Why not use that to insure all these small business loans instead of insuring Goldman Sachs?

HALL: Well, that's a thought that's been raised in some quarters. I think the first part of the question, on the GSEs, the Fannie Mae and Freddie Mac, it's the 800 pound gorilla in the room. We've had a lot of proposals now in front of Washington for a couple of years about overhauling the financial reform—regulation of finance. It's moved through the House; it's now moving—at a glacial pace, but moving—through the Senate. Nowhere in any of these is what to do about Fannie and Freddie. And they do something called "securitization". They have been the originators of securitization. They basically buy top-rated mortgages, or the safest mortgages, package them together, and sell them as a security to investors. They dominated the market for a long period of time. They've been very successful.

It's a model that proved very successful. Where things went wrong in the housing market was after about 2001. Wall Street, during the boom, began to issue what's called private-label mortgage-backed securities to compete with Fannie and Freddie, and within four years was eating Fannie and Freddie's lunch. So the bad origination of subprime loans, the weakened lending standards, that didn't happen at Fannie and Freddie; it happened with the Wall Street firms. And all the bad actors are gone—Lehman Brothers, Bear Stearns, New Century, what were called non-bank lenders. They also exploited a regulatory loophole, so they weren't regulated by the federal government but just by state governments. So all those bad actors are gone. Fannie and Freddie are the good guys in this story. It's funny that it's been turned on its ear.

JAY: Yeah, 'cause usually if someone raises this idea that I am about using AIG for public-interest purposes and all that, it's, "Oh, look at Fannie and Freddie. Look, that's what happens when you have these publicly engineered companies."

HALL: Yeah, when in fact Fannie and Freddie are the only game in town. If it were not for them, there would be almost no mortgage lending happening, because for the last 15, 20 years, a lender doesn't give you a mortgage and then sit on that loan. That's called a "whole loan". That very seldom happens anymore....MORE