So, Do We Own Fannie and Freddie or Don't We?

As reported in the WSJ, the assets and liabilities of Fannie (FNM) and Freddie (FRE) will not be placed onto the federal books for now, even after the recent takeover by the government. This decision seems odd given that one of the main reasons for the takeover was to instill confidence that the government was there as a backstop.

Even CBO director Orszag thought that both companies should be incorporated into the federal budget. Given that it is an election year, it is not surprising that Washington would not want to increase the size of government, or at least not give the appearance of doing so.

The reason given for keeping Fannie and Freddie off the budget is apparently the need to take "... into account the degree of federal control of the companies, the economic risk to the taxpayer, and the temporary nature of the government's arrangement with the companies."  Yet, the federal budget has always considered revenue and outlays of various programs and activities that the government has some control over, even if they do not run them directly.

So in the meantime, both Fannie and Freddie will have their combined $1.5 trillion of debt placed in a separate category and not added to U.S. publicly held debt -- kind of like a Special Purpose Vehicle for taxpayers. Now if we can only get the companies moved to the Cayman Islands, maybe we could also reduce our tax burden.

Then again, pledging up to $200 billion of capital for $1 billion in equity may generate a tax loss savings in the future, so maybe we should keep our options open. Of course, with both hands in the cookie jar, this may end up being nothing more than just another case of robbing Peter to pay Paul. I just haven't figured out which one I am yet (but I have a good guess).

Disclosure: None

Comments

[E Nuff Sed:]

The banana republic type seizure of private property from shareholders will be challenged in court and will need to be resolved in court (4th Amendment).

2008 Sep 14 02:00 PM

[Schweizer:]

Next step, mortgage payments to Uncle Sam will be made through your paycheck, just like FICA and withholding taxes, and you will have no say over it. And since Uncle Sam now owns most of the mortgages in the USA, the majority of Americans are living in government owned housing. Hmmm ... no one seems to be broadcasting that FACT.

What a country. Glad my house is paid off!

2008 Sep 14 02:14 PM

[User 245043:]

We can't say much for goverment backing can we. I am sure that congress got their money out a long time ago.

2008 Sep 14 05:03 PM

[Gerry Sullivan:]

The US backstopped Fannie and Freddie with pledges to buy preferred stock. The debt securities of these two companies is not guaranteed like GNMA.
There is still a spread between the Fannie and Freddie debt and US Treasury debt.
I don't know why anyone thought that this debt would be added to the debt of the United States.

2008 Sep 14 05:07 PM

[Roger Knights:]

On pages 225-26 of his book, <i>The Black Swan,</i> published last year, Nassim Taleb foresaw the risk to Fanny Mae:

"Fanny Mae, when I look at their risks, seems to me to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry, their large staff of scientists deemed these events "unlikely."

2008 Sep 15 02:13 AM

[daytrading:]

Thats a good one Schweizer and a very scary FACT very scary. Thats the next stage in their plan for socialism getting people by the balls so we have to submit to their brain washing for lack of a better word.

Regarding to users post, the people in congress, politicians and the big shots who hang out with them have an eye for stocks and uncanny timing for when to get out. For instance, Gore buys google BOOM google flys, aapl, whom i'm pretty sure was on the board, BOOM almost 200 in Jan 08, Pelosi buys clne BOOM stock goes to 19 and of course Bernie, you know the guy Guiliani's pal the police chief, I dont remember his title, is on the board of taser the stock goes up tremendously it swings wildly for a while I hear he made millions leaves the board and then BOOM the stock practically crashes. Geez, I wish I had these people's eye and luck.

2008 Sep 15 11:27 PM

[ohm:]

I believe at the slightest hint of trouble the Feds should require upper management of a Federally backed financial institution be forced to step down and be replaced with new management not previously associated with that institution.

This would force the new management to dig deep into the organization and clean up any problems (and people) which they had no part of creating. The new management would be rated on the performance of the company after a reasonable period of time.

2008 Sep 16 09:03 AM