Fannie and Freddie should have been dismantled in 2008. What should have been done was pay off the guaranteed securities (however “ill advised” to put the full faith and credit of FedGov), shut down the entities, and call Franklin Raines and others (including the “Banking Queen”) before a Congressional hearing with possible criminal charges. FedGov should not be setting up such quasi government enterprises.
You’re right, but the problem was, our position was compromised by our “free trade uber alles!” Congress.
See, the ChiCom’s used to hold about $300B in RMBS Fannie/Freddie paper as they were going down in flames. The Chinese talked with the current SecTreas (Paulson) and demanded that Uncle Sugar *explicitly* backstop the issue far enough that they could sell out of their huge position without a large loss.
So we did. We took them (Fannie/Freddie) into a quasi-receivership, owning about 80% of their common stock overnight, but instead of 100%, we kept it about 80 for reasons of not putting the liabilities onto the public books.
The first thing the GOP House should have done, if they had the brains to get into a battle of wits with a cockroach (which they don’t) would have been to fold Fannie or Freddie into the other, tighten FHA lending and eliminate a huge amount of duplication of efforts in the secondary market. But they didn’t.
The smart move now would be to take an incremental approach: Kill the weaker of the two, fold the liabilities into the stronger of the two and eliminate the staff. The only reason why Freddie exists at all was that when Fannie was “spun out” of the government in 1968, the Congress decided that Fannie “needed competition” - and so they created Freddie at the same time. Some competition.
Going forward, the government should not be setting up such enterprises - that’s fully agreed. Greenspan was warning people clear back to 2000 that the liabilities of Fannie/Freddie in the credit markets were such that RMBS buyers were bidding up that paper as tho it had government backing - which it didn’t. Greenspan predicted that the Treasury would be forced to do something, lest the residential mortgage market be locked down when the inevitable came to pass. The truth is that the RMBS paper sold by Fannie/Freddie did NOT carry the FFC of the US Treasury prior to June of 2008. It was given a rating at least two steps in excess of the real risks (ie, it was given a AAA rating when it should have had something like a A1 rating).
This is one of the few areas where Greenspan was right.