That noise you heard emanating from your chimney on Christmas Eve wasn’t Santa Claus’s sack full of gifts: it was an unlimited contingent liability, gifted to you, the taxpayer, hitting your hearth when you were sitting down to a holiday feast. Because a $400 billion limit just wasn’t enough.
And no, I’m not talking about the healthcare monstrosity passed by the Senate on Christmas Eve. I’m talking about the Treasury’s stealth, Christmas Eve-post market “announcement” that (a) Fannie Mae (FNM) and Freddie Mac (FRE) would no longer have credit lines of a mere $200 billion each, but would instead have unlimited lines from the Treasury, and (b) they are no longer under any immediate obligation to reduce their massive mortgage security portfolios.
Oh, and the GSE CEOs will receive $6 million each in pay, and other executives will get a bundle too.
It is incredibly ironic that with all of the vitriol directed at Citi (NYSE:C), BofA (NYSE:BAC), Goldman (NYSE:GS), etc. (much of it deserved), the (Barney) Frankenstein’s Monsters (sorry, couldn’t resist), the GSEs, get a blank check and their executives a big payday. This gives new meaning to the term “piggybank.”
A couple of comments. First, although many in the beltway have labored mightily to deflect any allegations that Fannie and Freddie played a central role in the real estate bubble and the subsequent credit crisis, the outsized losses these institutions have suffered, and will suffer yet, make it quite clear that their role was not immaterial.
Second, coverage of the story (and I pity the poor reporters who had to cover this on Christmas) makes it quite plain that this is part of the administration’s continued efforts to prop up the housing sector. That is, rather than trying to accommodate an adjustment of the economy that would correct past distortions in the allocation of resources, the administration (hand in hand with the Fed) is attempting instead to restore what was quite evidently an unsustainable status quo. This will only defer the pain of adjustment, and likely make it worse in the future. (Kicking the can down the road, in the words of one of the people quoted in the article.)
Don’t dare speak to me of “financial regulation reform” while these financial mutants live.
Whatever rhetorical excess Andrew Jackson directed at the Bank of the United States would pale in comparison to what Fannie and Freddie and their political masters richly deserve.
F&F should be wound down, and sooner rather than later. But nooooo. They are too politically valuable. They were political creatures that warped the economy (and the allocation of capital) in years past, and as this story makes plain, will continue to do so in years to come.
Fannie and Freddie. The gifts that keep on giving.